PREMIER FINANCIAL CORP. 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 ofPremier 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 inU.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 ourSecurities 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 inthe 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. 27 --------------------------------------------------------------------------------
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
Non-GAAP Financial Measures - Net Interest Income on an FTE basis, Net Interest Margin and Efficiency Ratio
Years Ended
December 31, December 31,
(In Thousands) 2022 2021
Net interest income (GAAP) $ 242,921 $ 227,369
Add: FTE adjustment 814 1,013
Net interest income on a FTE basis (1)$ 243,735 $ 228,382 Noninterest income - less securities gains/(losses) (2)$ 62,710 $ 75,785 Noninterest expense (3) 164,511
157,955
Average interest-earning assets (4) 7,237,621
6,732,178
Ratios:
Net interest margin (1) / (4) 3.37 % 3.39 % Efficiency ratio (3) / (1) + (2) 53.68 % 51.93 %
Non-GAAP Financial Measures - Tangible Book Value
Years Ended
December 31, December 31,
(In Thousands, except per share data) 2022 2021
Total Shareholders' Equity (GAAP) $ 887,721 $ 1,023,496
Less: Goodwill (317,988 ) (317,948 )
Intangible assets (19,074 ) (24,129 )
Tangible common equity (1) $ 550,659 $ 681,419
Common shares outstanding (2) 35,591 36,384
Tangible book value per share (1) / (2)
Financial Condition Assets atDecember 31, 2022 totaled$8.46 billion compared to$7.48 billion atDecember 31, 2021 , an increase of$0.97 billion or 13.0%. The increase in assets was primarily due to an increase in loans offset by a decrease in securities. The net increase was primarily the result of an increase in total deposits of$624.7 million and FHLB advances of$428.0 million .
Securities
The securities portfolio decreased$172.4 million , or 14.1%, to$1.0 billion atDecember 31, 2022 . This decrease, along with an increase in deposits of$624.7 million , was used to fund an increase in gross loans including held for sale of$1.1 billion . 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$1.2 billion , or 18.0%, to$6.5 billion atDecember 31, 2022 . 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, including PPP, totaled$3.82 billion and$3.35 billion atDecember 31, 2022 and 2021, respectively, and accounted for approximately 59.1% and 63.3% of Premier's loan portfolio at the end of those respective periods. Premier believes it has been able to establish itself as a leader in its market area in commercial and commercial real estate lending by hiring experienced lenders and providing a high level of customer service to its commercial lending clients. The one-to-four family residential portfolio totaled$1.54 billion atDecember 31, 2022 , compared with$1.17 billion at the end of 2021, with the increase due to an increase in volume of new originations. At the end of 2022, such loans comprised 21.6% of the total loan portfolio, down from 22.1% atDecember 31, 2021 . Construction loans, which include one-to-four residential family and commercial real estate properties, increased to$605.5 million atDecember 31, 2022 , compared to$384.9 million atDecember 31, 2021 . These loans accounted for approximately 9.4% and 7.3% of the total loan portfolio atDecember 31, 2022 and 2021, respectively. 28 --------------------------------------------------------------------------------
Home equity and home improvement loans increased to
Consumer finance loans were$213.4 million atDecember 31, 2022 up from$126.4 million at the end of 2021. These loans accounted for approximately 3.0% and 2.4% of the total loan portfolio atDecember 31, 2022 and 2021, respectively. In order to properly assess the loans secured by real estate included in its loan portfolio, the Company has established policies regarding the monitoring of the collateral underlying such loans. The Company requires an appraisal that is less than one year old for all new secured real estate loans, and all renewed secured real estate loans where significant new money is extended. The appraisal process is handled by the Bank'sCredit Department , which selects the appraiser and orders the appraisal. Premier's loan policy prohibits the account officer from talking or communicating with the appraiser to insure that the appraiser is not influenced by the account officer in any way in making a determination of value. The Bank generally does not require updated appraisals for performing loans unless significant new money is requested by the borrower. When a secured real estate loan is downgraded to classified status, the Bank reviews the most current appraisal on file and, if appropriate, based on the Bank's assessment of the appraisal, such as age, market, etc. the Bank will discount the appraisal amount to a more appropriate current value based on inputs from lenders and realtors. This amount may then be discounted further by the Bank's estimation of the selling costs. In most instances, if the appraisal is more than twelve to fifteen months old, a new appraisal may be required. Finally, the Bank assesses whether there is any collateral short fall, taking into consideration guarantor support and liquidity, and determines if a charge-off is necessary. All loans 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. When a collateral dependent loan moves to non-performing status, the Bank generally gets a new third party appraisal and charges the loan down appropriately based upon the new appraisal and an estimate of costs to liquidate the collateral. All properties that are moved into the Other Real Estate Owned ("OREO") category are supported by current appraisals, and the OREO is carried at the lower of cost or fair value, which is determined based on appraised value less the Bank's estimate of the liquidation costs. The Bank does not adjust any appraisals upward without written documentation of this valuation change from the appraiser. When setting reserves and charge-offs on classified loans, appraisal values may be discounted downward based upon the Bank's experience with liquidating similar properties. Appraisals are received within approximately 60 days after they are requested. The Bank's Special Assets Committee reviews the amount of each new appraisal and makes any necessary charge-off decisions at its meeting prior to the end of each quarter. Any partially charged-off collateral dependent loans are considered non-performing, and as such, would need to show an extended period of time with satisfactory payment performance as well as cash flow coverage capability supported by current financial statements before the Bank will consider an upgrade to performing status. The Bank may consider moving the loan to accruing status after approximately six months of satisfactory payment performance. The Bank monitors and tracks its loan to value quarterly to determine accuracy and any necessary charge-offs. Based on these results, changes may occur in the processes used. Loan modifications constitute a troubled debt restructuring ("TDR") if the Bank, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. For loans that are considered TDRs and the balance is over$500,000 , the Bank either computes the present value of expected future cash flows discounted at the original loan's effective interest rate or it may measure impairment based on the fair value of the collateral. For those loans individually evaluated utilizing the present value of future cash flows method, any discount is carried as a specific reserve in the allowance for credit losses. For those loans individually evaluated utilizing the fair value of the collateral, any shortfall is charged-off or held as a specific reserve. For loans that are considered TDRs and the balance is under$500,000 a general reserve is carried in the allowance for credit losses based on a general reserve analysis. Loan modifications made as a result of COVID-19 may not be deemed TDR if certain criteria are met based on regulatory guidance. As ofDecember 31, 2022 , andDecember 31, 2021 , the Bank had$6.6 million and$7.8 million , respectively, of loans that were still performing and which were classified as TDRs.
Allowance for Credit Losses ("ACL")
The Company adopted ASU 2016-13, the Current Expected Credit Loss ("CECL") model
on January 1, 2020 . Under CECL, a valuation reserve was established in the ACL
and maintained through expense in the provision for credit losses. Upon adoption
of CECL, the Company made a one-time adjustment, net of taxes, to retained
earnings for $1.9 million . The ACL represents management's assessment of the
estimated credit losses the Company will 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.
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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 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 $2.4 million at
December 31, 2022 , and $7.1 million at December 31, 2021 .
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 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 split out into
construction residential and construction other. Consumer is further segregated
in to consumer direct and consumer indirect. 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 TDR; or •
Is partially or wholly charged-off.
The default rate is measured on the current life of the loan segment using a weighted average of the four most recent quarters. PD/LGD is determined on a dollar-ratio basis, measuring the ratio of net charged off principal to defaulted principal. The consumer portfolio contains loans with many different payment structures, payment streams and collateral. The remaining life method was deemed most appropriate for 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$15.0 million atDecember 31, 2022 , from$12.3 million atDecember 31, 2021 , primarily due to the increase in loan volume in the portfolio and the impact of forecasted unemployment rate. 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.
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Changes in lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices.
6)
Changes in the quality and breadth of the loan review process.
7)
Changes in the experience, ability and depth of lending management and staff.
RISK
8)
Changes in the trends of the volume and severity of delinquent and classified loans, and changes in the volume of non-accrual loans, TDRs, and other loan modifications.
9)
Changes in the political and regulatory environment.
The qualitative analysis indicated a general reserve of$55.4 million atDecember 31, 2022 , compared to$47.1 million atDecember 31, 2021 . The increase 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 0.67% for construction loans to 1.39% for home equity/improvement loans atDecember 31, 2022 . 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. OnJanuary 31, 2020 , as a result of the merger ofUnited Community Federal Corp. ("UCFC") with and into Premier (the "Merger"), the Company acquired PCD loans with a fair value of$79.1 million , a recorded adjustment on yield of$4.1 million and an increase to the ACL of$7.7 million . As a result of the quantitative and qualitative analyses, along with the change in specific reserves and the increase in net charge-offs during the year, the Company's provision for credit losses for the year endedDecember 31, 2022 was an expense of$12.5 million . This is compared to a recovery of$6.7 million for the year endedDecember 31, 2021 . The ACL was$72.8 million atDecember 31, 2022 , and$66.5 million atDecember 31, 2021 . The ACL represented 1.13% of loans, net of undisbursed loan funds and deferred fees and costs atDecember 31, 2022 , and 1.26% atDecember 31, 2021 . In management's opinion, the overall ACL of$72.8 million as ofDecember 31, 2022 , 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 endedDecember 31, 2022 , there were$8,600 in write-downs of real estate held for sale. Management believes that the values recorded atDecember 31, 2022 , for OREO and repossessed assets represent the realizable value of such assets. Total classified loans decreased to$43.8 million atDecember 31, 2022 , compared to$69.5 million atDecember 31, 2021 , a decrease of$25.7 million , primarily due to improved asset quality. The Company's ratio of ACL to non-performing loans was 215.3% atDecember 31, 2022 , compared to 138.4% atDecember 31, 2021 . Management monitors collateral values of all loans included on the watch list that are collateral dependent and believes that allowances for such loans atDecember 31, 2022 , were appropriate. Of the$33.8 million in non-accrual loans atDecember 31, 2022 ,$4.9 million , or 14.4%, are less than 90 days past due. AtDecember 31, 2022 , the Company had total non-performing assets of$34.4 million , compared to$48.2 million atDecember 31, 2021 . Non-performing assets include loans that are on non-accrual, OREO and other assets held for sale. The OREO balance was$619,000 and$171,000 as ofDecember 31, 2022 and 2021, respectively.
The net charge-offs and non-accrual loan balances as a percentage of total are
presented in the table below at
For the Year Ended As of December 31,
December 31, 2022 2022
Net % of Total Net
Charge-offs Charge-offs Non-accrual % of Total Non-
(Recoveries) (Recoveries) Loans Accrual Loans
(Dollars In Thousands)
Residential real estate $ 202 3.28 % $ 7,724 22.84 %
Commercial real estate (159 ) -2.58 % 13,396 39.61 %
Construction 13 0.21 % - 0.00 %
Commercial 4,945 80.34 % 4,862 14.38 %
Home equity and improvement 12 0.19 % 1,637 4.84 %
Consumer finance 790 12.84 % 2,401 7.10 %
PCD 352 5.72 % 3,802 11.24 %
Total $ 6,155 100.00 % $ 33,822 100.00 %
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For the Year Ended As of December 31,
December 31, 2021 2021
Net % of Total Net
% of Total
Charge-offs Charge-offs Non-accrual Non-
Accrual
(Recoveries) (Recoveries) Loans Loans
(Dollars In Thousands)
Residential $ (151 ) -1.70 % $ 9,034 19.00 %
Commercial real estate 3,338 37.60 % 14,621 30.00 %
Construction - 0.00 % - 0.00 %
Commercial 5,637 63.49 % 11,531 24.00 %
Home equity and improvement (185 ) -2.08 % 2,051 4.00 %
Consumer finance 237 2.67 % 1,873 4.00 %
PCD 2 0.02 % 8,904 19.00 %
Total $ 8,878 100.00 % $ 48,014 100.00 %
The following table sets forth information concerning the allocation of
Premier's allowance for credit losses by loan categories at December 31, 2022
and 2021.
December 31, 2022 December 31, 2021
Percent of Percent of
total loans total loans
Amount by category Amount by category
(Dollars inThousands)
Residential real estate$ 16,711 21.6 %$ 12,029 20.2 % Commercial real estate 34,218 38.8 % 32,399 42.5 % Construction 4,025 17.9 % 3,004 15.0 % Commercial loans 11,769 14.8 % 13,410 15.5 % Home equity and improvement loans 4,044 3.9 % 4,221 4.6 % Consumer loans 2,049 3.0 % 1,405 2.2 %$ 72,816 100.0 %$ 66,468 100.0 %
Loans Acquired with Impairment
Under ASU Topic 326, when loans are purchased with evidence of more than insignificant deterioration of credit, they are accounted for as PCD. PCD loans acquired in a transaction are marked to fair value and a mark on yield is recorded. In addition, an adjustment is made to the ACL for the expected loss on the acquisition date. These loans are assessed on a regular basis and subsequent adjustments to the ACL are recorded on the income statement.
High Loan-to-Value Mortgage Loans
The majority of Premier's mortgage loans are collateralized by
one-to-four-family residential real estate, have loan-to-value ratios of 80% or
less, and are made to borrowers in good credit standing. The Bank usually
requires residential mortgage loan borrowers whose loan-to-value is greater than
80% to purchase private mortgage insurance ("PMI"). Management also periodically
reviews and monitors the financial viability of its PMI providers.
The Bank originates and retains a limited number of residential mortgage loans
with loan-to-value ratios that exceed 80% where PMI is not required if the
borrower possesses other demonstrable strengths. The loan-to-value ratios on
these loans are generally limited to 85% and exceptions must be approved by the
Bank's Chief Credit Officer . Management monitors the balance of one-to-four
family residential loans, including home equity loans and committed lines of
credit that exceed certain loan to value standards (90% for owner occupied
residences, 85% for non-owner occupied residences and one-to-four family
construction loans, 75% for developed land and 65% for raw land). These loans
are generally paying as agreed.
Premier does not make interest-only, first-mortgage residential loans, nor does
it have residential mortgage loan products or other consumer products that allow
negative amortization.
Goodwill was$318.0 million atDecember 31, 2022 compared to$317.9 million atDecember 31, 2021 . This increase is a result ofFirst Insurance acquiringBenham Insurance Associates, Inc. ("BIA"). Core deposit intangibles and other intangible assets decreased to$19.1 million atDecember 31, 2022 , compared to$24.1 million atDecember 31, 2021 , due to the recognition of$5.4 million of 32 --------------------------------------------------------------------------------
amortization partially offset by intangibles recorded as a part of the BIA acquisition. No impairment of goodwill was recorded in 2022 or 2021.
Deposits
Total deposits atDecember 31, 2022 , were$6.9 billion compared to$6.3 billion atDecember 31, 2021 , an increase of$624.7 million , or 9.9%. Noninterest-bearing checking accounts grew by$144.7 million , interest-bearing checking accounts and money markets grew by$232.7 million , savings decreased by$6.4 million and retail certificates of deposit decreased by$109.9 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$428.0 million in FHLB advances or securities sold with agreements to repurchase atDecember 31, 2022 compared to no outstanding advances atDecember 31, 2021 . This increase, along with an increase in deposits and a decrease in security balances, was used to fund the increase in loan balances in 2022. Subordinated Debentures Subordinated debentures were$85.1 million atDecember 31, 2022 , compared to$85.0 million atDecember 31, 2021 . 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 onSeptember 30, 2025 . The net proceeds of the sale were approximately$48.8 million , after deducting the offering expenses.
Equity
Total stockholders' equity decreased$135.8 million to$887.7 million atDecember 31, 2022 , compared to$1.02 billion atDecember 31, 2021 . The decrease in stockholders' equity was primarily the result of a decrease in accumulated other comprehensive income, which was primarily related to a$138.2 million negative valuation adjustment on the available-for-sale securities portfolio. Also contributing to the decline was the payment of$42.8 million of common stock dividends and the repurchase of 884,000 shares of common stock totaling$26.9 million . This was partially offset by the recording net income of$102.2 million . Results of Operations Summary Premier reported net income of$102.2 million for the year endedDecember 31, 2022 , compared to$126.1 million and$63.1 million for the years endedDecember 31, 2021 and 2020, respectively. On a diluted per common share basis, Premier earned$2.85 in 2022,$3.39 in 2021 and$1.75 in 2020. The results for 2020 include eleven months of income and expenses from UCFC compared to twelve months in 2021 as well as$1.01 in Merger-related expense and additional provision cost as a result of the Merger and the adoption of CECL.
Net Interest Income
Premier's net interest income is determined by its interest rate spread (i.e., the difference between the yields on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of average interest-earning assets and interest-bearing liabilities. Net interest income was$242.9 million for the year endedDecember 31, 2022 , compared to$227.4 million and$208.0 million for the years endedDecember 31, 2021 and 2020, respectively. The tax-equivalent net interest margin was 3.37%, 3.39% and 3.52% for the years endedDecember 31, 2022 , 2021 and 2020, respectively. The margin decreased 2 basis points between 2022 and 2021 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 22 basis points (to 3.85% in 2022 from 3.63% in 2021) while the cost of interest- bearing liabilities between the two periods increased 34 basis points (to 0.68% in 2022 from 0.34% in 2021). Total interest income increased by$34.1 million , or 14.0%, to$277.7 million for the year endedDecember 31, 2022 , from$243.6 million for the year endedDecember 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 endedDecember 31, 2021 . Interest income from investment securities increased to$26.1 million in 2022 compared to$19.4 million in 2021. 33 -------------------------------------------------------------------------------- Interest expense increased by$18.6 million to$34.8 million in 2022 compared to$16.2 million 2021. This increase 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 advance 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. Total interest income increased by$5.6 million , or 2.4%, to$243.6 million for the year endedDecember 31, 2021 , from$237.9 million for the year endedDecember 31, 2020 . This increase was primarily due to an increase in securities income offset partly by a decrease in loans income. Interest income from loans decreased to$223.8 million for 2021 compared to$225.1 million in 2020, which represents a decrease of 0.6%. The average balance of loans receivable increased$249.3 million to$5.47 billion for 2021, from$5.22 billion for 2020. However, the average yield on loans decreased 0.22% to 4.09% in 2021 from 4.31% in 2020. During the same period, the average balance of investment securities increased to$1.14 billion in 2021 from$0.54 billion for the year endedDecember 31, 2020 , primarily as a result of increasing deposits and decreasing loans. Interest income from investment securities increased to$19.4 million in 2021 compared to$11.5 million in 2020. Interest expense decreased by$13.7 million to$16.2 million in 2021 compared to$19.9 million 2020. This decrease was mainly due to a 28 basis point decrease in the average cost of funds in 2021 offset by a$0.42 billion increase in the average balance of interest-bearing liabilities. The average balance of interest-bearing deposits increased$0.56 billion to$4.61 billion in 2021, from$40.5 billion in 2020. Interest expense related to interest-bearing deposits was$13.5 million in 2021 compared to$26.9 million in 2020. Interest expense on FHLB advances was$23,000 in 2021 and$1.7 million in 2020. The decrease in FHLB advance expense was due to lower utilization in 2021 as a result of increased deposits. Interest expense recognized by the Company related to subordinated debentures was$2.7 million in 2021 and$1.3 million in 2020, with the increase primarily due to the recognition of a full year of expense in 2021 compared to a partial year in 2020. 34 --------------------------------------------------------------------------------
The following table shows an analysis of net interest margin on a tax equivalent
basis for the years ended
Year Ended December 31,
(Dollars In Thousands)
2022 2021 2020
Average Yield/ Average Yield/ Average Yield/
Balance Interest(1) Rate Balance Interest(1) Rate Balance Interest(1) Rate
Interest-Earning Assets:
Loans receivable (4) $ 5,885,969 $ 249,586 4.24
%
1,258,901 26,884 2.14 % 1,135,434 20,346 1.79 % 544,643 12,393 2.28 %
Interest-earning deposits 70,917 831 1.17 % 111,433 198 0.18 % 124,011 435 0.35 %
FHLB stock 21,834 1,225 5.61 % 11,643 233 2.00 % 38,954 958 2.46 %
Total interest-earning assets 7,237,621 278,526 3.85 % 6,732,178 244,600 3.63 % 5,931,965 238,965 4.03 %
Noninterest-earning assets 694,777 750,400 660,668
Total Assets $ 7,932,398 $ 7,482,578 $ 6,592,633
Interest-Bearing Liabilities:
Interest-bearing deposits $ 4,741,827 $ 24,909 0.53%$ 4,611,525 $ 13,482 0.29 %$ 4,050,958 $ 26,918 0.66 % FHLB advances 263,551 6,550 2.49 % 12,586 23 0.18 % 187,745 1,691 0.90 % Subordinated debentures 85,036 3,327 3.91 % 84,911 2,713 3.20 % 48,471 1,300 2.68 % Other borrowings 183 5 2.73 % 52 - 0.75 % 6,047 32 0.53 % Total interest-bearing liabilities 5,090,597 34,791 0.68 % 4,709,074 16,218 0.34 % 4,293,221 29,941 0.70 % Noninterest-bearing demand deposits 1,791,712 - - 1,676,006 - - 1,311,478 - - Total including non- interest- bearing demand deposits 6,882,309 34,791 0.51 % 6,385,080 16,218 0.25 % 5,604,699 29,941 0.53 % Other noninterest liabilities 122,555 88,461 89,842 Total Liabilities 7,004,864 6,473,541 5,694,541 Stockholders' equity 927,534 1,009,037 898,092 Total liabilities and stockholders' equity$ 7,932,398 $ 7,482,578 $ 6,592,633 Net interest income; interest rate spread (2)$ 243,735 3.17
%$ 228,382 3.29 %$ 209,024 3.33 % Net interest margin (3) 3.37 % 3.39 % 3.52 % Average interest-earning
assets to average interest-
bearing liabilities 142.2 % 143.0 % 138.2 % (1) Interest on certain tax exempt loans and tax-exempt securities in 2022, 2021 and 2020 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.
35
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Year Ended
(In Thousands)
2022 vs. 2021 2021 vs. 2020
Increase Increase Total Increase Increase Total
(decrease) (decrease) increase (decrease) (decrease) increase
due to rate due to volume (decrease) due to rate due to volume (decrease) Interest-Earning Assets Loans
$ 8,829 $ 16,934
4,406 2,132 6,538 (5,564 ) 13,517 7,953
Interest-earning deposits 702 (69 ) 633 (189 ) (48 ) (237 )
FHLB stock 788 204 992 (54 ) (671 ) (725 )
Total interest-earning assets
$ 11,380 $ 47$ 11,427 $ (17,063 ) $ 3,627$ (13,436 ) FHLB advances 6,088 439 6,527 (91 ) (1,578 ) (1,669 ) Subordinated Debentures 604 10 614 442 971 1,413 Notes Payable 4 1 5 - (32 ) (32 ) Total interest- bearing liabilities$ 18,076 $ 497
$ 15,353 $ 19,359 (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$14.3 million , a recovery of$7.1 million and an expense of$44.3 million for the years endedDecember 31, 2022 , 2021, and 2020, respectively. The increase in provision for 2020 included$25.9 million related to acquisition accounting under CECL for the Merger with the remaining increase generally due to the larger loan portfolio post-Merger and the impact of the COVID-19 pandemic. The decrease for 2021 is primarily due to improved conditions as the economy and credit environment recovers from the COVID-19 pandemic. The increase in 2022 was mainly due to the increase in volume in loans. 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 decreased by$17.2 million , or 21.6%, to$62.2 million in 2022 primarily due to a decrease in mortgage banking income and losses on securities. Noninterest income decreased by$465,000 , or 0.6%, in 2021 to$79.3 million down from$79.8 million for the year endedDecember 31, 2020 . Service fees and other charges increased to$25.9 million for the year endedDecember 31, 2022 , from$24.2 million for 2021 and from$22.1 million in 2020. The increase in service fees and other charges in 2022 is primarily due to increased customer activity for interchange and ATM/NSF charges.
Noninterest income also includes gains, losses and impairment on investment
securities. In 2022, Premier recognized
Mortgage banking income includes gains from the sale of mortgage loans, fees for servicing mortgage loans for others, an offset for amortization of mortgage servicing rights, and adjustments for impairment in the value of mortgage servicing rights. Mortgage banking income totaled$9.9 million ,$21.9 million and$28.2 million in 2022, 2021 and 2020, respectively. 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. The$6.3 million decrease in mortgage banking income in 2021 from 2020 was primarily attributable to a decrease in the gain on sale of loans of$19.9 million offset partly by a$13.8 million positive change in the valuation adjustments on mortgage servicing rights. Premier originated less residential mortgages for sale into the secondary market in 2021 compared with 2020 as long term interest 36 --------------------------------------------------------------------------------
rates stabilized resulting in less refinance activity. The balance of the
mortgage servicing right valuation allowance was
Gains on the sale of non-mortgage loans, which include SBA and FSA loans, totaled$0 in 2022 compared to$0 in 2021 and$324,000 in 2020. Fluctuations in the volume of eligible SBA loans were the reasons for the difference in income year to year to year. 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. Insurance commission income decreased to$15.8 million in 2021, down$1.0 million from$16.8 million in 2020 primarily due to lower contingent commissions. Income from bank owned life insurance ("BOLI") decreased$1.2 million in 2022 to$3.9 million down from$5.1 million in 2021 primarily due to$1.1 million of claim gains recognized in 2021. Income in 2020 was$3.3 million . Wealth income decreased$199,000 to$5.8 million in 2022 from$6.0 million in 2021. Wealth income decreased$132,000 to$6.0 million in 2021 from$6.2 million in 2020. 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. Other noninterest income increased to$2.1 million in 2021 compared to$1.9 million in 2020 .
Noninterest Expense - Total noninterest expense for 2022 was
Compensation and benefits increased$6.8 million , or 7.5%, to$97.4 million in 2022 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. Compensation and benefits increased$13.4 million , or 17.4%, to$90.6 million in 2021 up from$77.2 million in 2020. The increase is mainly related to increased staffing, merit increases and increases in health care. Occupancy expense decreased$819,000 to$15.5 million in 2021 compared to$16.3 million in 2020 and data processing expense decreased$1.1 million to$13.6 million in 2021 from$14.7 million in 2020. Other noninterest expenses increased$1.8 million to$25.1 million in 2021 from$23.3 million in 2020. Income Taxes - Income taxes totaled$24.1 million in 2022 compared to$30.4 million in 2021 and$16.2 million in 2020. The effective tax rates for those years were 19.1%, 19.4%, and 20.4%, 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 tax-exempt securities 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 ofDecember 31, 2022 . Premier's loan portfolio was concentrated geographically in its northeast, northwest and centralOhio , northeastIndiana , and southeastMichigan market areas. Management has also identified lending for income-generating rental properties within commercial real estate as an industry concentration. Total loans for income-generating rental property totaled$2.4 billion atDecember 31, 2022 , which represents 33.4% of the Company's loan portfolio. Management believes it has the skill and experience to manage any risks associated with this type of lending. Loans in this category are generally paying as agreed without any unusual or unexpected levels of delinquency. The delinquency rate in this category, which is any loan 30 days or more past due, was 0.01% atDecember 31, 2022 . 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.
37
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Cash (used in) generated from operating activities was $180.1 million , $165.9
million and ($55.6) million in 2022, 2021 and 2020, respectively. The
adjustments to reconcile net income to cash provided by or used in operations
during the periods presented consist primarily of proceeds from the sale of
loans (less the origination of loans held for sale), the provision for credit
losses, depreciation expense, the origination, amortization and impairment of
mortgage servicing rights and increases and decreases in other assets and
liabilities. The negative cash from operating activities in 2020 was primarily
due to the Company's decision to originate and sell construction loans held for
sale for the first time. Due to the time it takes to complete the construction
and sell the loans, the cash used in the origination of loans held for sale
greatly exceeded the proceeds from the sale of loans held for sale. Since this
is strictly a timing difference, the Company was comfortable paying out
dividends on its common stock in 2020 even with the negative cash provided by
operating activities.
The primary investing activity of Premier is lending and the purchase of
available-for-sale securities, which are funded with cash provided from
operating and financing activities, as well as proceeds from payment on existing
loans and proceeds from maturities of investment securities. The net cash used
for investing activities was $1.2 billion , $333.5 million and $541.9 million in
2022, 2021 and 2020, respectively.
Principal financing activities include the gathering of deposits, the
utilization of FHLB advances, and the sale of securities under agreements to
repurchase such securities and borrowings from other banks. The net cash
provided by financing activities was $993.4 million , $169.9 million and $625.5
million in 2022, 2021 and 2020, respectively. For additional information about
cash flows from Premier's operating, investing and financing activities, see the
Consolidated Statements of Cash Flows and related Notes included in the
Consolidated Financial Statements.
At
Maturity Dates by
Period at
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
(In Thousands)
Certificates of deposit $ 910,059 $ 588,723 $ 292,585 $ 28,618 133
Subordinated debentures 85,103 - - - 85,103
Lease obligations 20,675 2,436 3,700 2,687 11,852
Post-retirement benefits 1,797 193 415 383 806
Total contractual obligations
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, theFederal Reserve , and brokered certificates of deposit. AtDecember 31, 2022 , Premier had additional borrowing capacity of$1.1 billion under its agreements with the FHLB. The Bank is subject to various capital requirements. AtDecember 31, 2022 , 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 theU.S. as a whole and the economies of the areas in which the Company does business. 38 -------------------------------------------------------------------------------- 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,
In addition to the identification of specific customers who may be potential credit problems, management considers its historical losses, the results of independent loan reviews, an assessment of the adherence to underwriting standards, and other factors in providing for credit losses that have not been specifically classified. Management believes that the level of its allowance for credit losses is sufficient to cover the current expected credit losses. Refer to Allowance for credit losses in this Management's Discussion and Analysis and Note 2 - Statement of Accounting Policies for a further description of the Company's estimation process and methodology related to the allowance for credit losses.Goodwill and Intangibles - Premier has two reporting units: the Bank andFirst Insurance . AtDecember 31, 2022 , Premier had goodwill of$318.0 million , including$295.6 million in the Bank and$22.4 million inFirst Insurance . The carrying value of goodwill is tested annually for impairment or more frequently if it is determined appropriate. The evaluation for impairment involves comparing the current estimated fair value of each reporting unit to its carrying value, including goodwill. If the current estimated fair value of a reporting unit exceeds its carrying value, no additional testing is required and impairment loss is not recorded. If the estimated fair value of a reporting unit is less than the carrying value, further valuation procedures are performed and could result in impairment of goodwill being recorded. Further valuation procedures would include allocating the estimated fair value to all assets and liabilities of the reporting unit to determine an implied goodwill value. If the implied value of goodwill of a reporting unit is less than the carrying amount of that goodwill, an impairment loss is recognized in an amount equal to that excess. Premier evaluated goodwill as ofDecember 31, 2022 and resulted in no additional testing or impairment. If, for any future period Premier determines that there has been impairment in the carrying value of goodwill balances, Premier will record a charge to earnings, which could have a material adverse effect on net income, but not risk-based capital ratios. Premier has core deposit and other intangible assets resulting from acquisitions which are subject to amortization. Premier determines the amount of identifiable intangible assets based upon independent core deposit and customer relationship analyses at the time of the acquisition. Intangible assets with finite useful lives are evaluated for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. No events or changes in circumstances that would indicate that the carrying amount of any identifiable intangible assets may not be recoverable had occurred during the years endedDecember 31, 2022 and 2021.
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 toDecember 31, 2022 , andDecember 31, 2021 , an estimate of the change in net interest income that would result from an immediate, parallel change in interest rates over the entire yield curve, relative to the measured base case scenario of a static balance sheet. The Company did not complete an earnings at risk analysis for the down 300 basis point or down 400 basis point scenarios atDecember 31, 2021 due to the level of interest rates. 39 --------------------------------------------------------------------------------
Impact on Future Annual Net Interest Income
December 31,
(dollars in thousands) December 31, 2022 2021
Immediate Change in Interest Rates
+400 -0.22 % 3.87 %
+300 0.07 % 3.16 %
+200 0.12 % 2.16 %
+100 0.10 % 1.10 %
-100 1.44 % (3.21 )%
-200 2.12 % (5.36 )%
-300 0.66 % N/A
-400 (1.63 )% N/A
The results of all the simulation scenarios are within the Board mandated
guidelines as of December 31, 2022 . Management reviews the Board policy limits
in all scenarios to determine if they are adequate and if any changes should be
made to Board mandated guidelines.
In addition to the simulation analysis, the Bank also prepares an economic value
of equity ("EVE") analysis. This analysis generally calculates the net present
value of the Bank's assets and liabilities in rate shock environments that range
from -400 basis points to +400 basis points. The results of this analysis are
reflected in the following table.
December 31, 2022 December 31, 2021
Economic Value of Equity Economic Value of Equity
Change in Rates % Change % Change
+ 400 bp (5.39 )% 7.01 %
+ 300 bp (3.39 )% 6.61 %
+ 200 bp (2.32 )% 5.39 %
+ 100 bp (1.25 )% 3.10 %
0 bp - -
- 100 bp 0.39 % (6.83 )%
- 200 bp 0.49 % N/A
- 300 bp (1.46 )% N/A
- 400 bp (5.98 )% N/A
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.
40--------------------------------------------------------------------------------
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