PREMIER FINANCIAL CORP - Annual Report: 2020 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2020

or

Commission File Number 0-26850

PREMIER FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (419) 782-5015

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The aggregate market value of the voting stock held by non-affiliates of the registrant computed by reference to the closing price of such stock as of June 30, 2020, was approximately $648.8 million.

As of March 4, 2021, there were issued and outstanding 37,273,303 shares of the registrant’s common stock.

Documents Incorporated by Reference

Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive Proxy Statement for the 2021 Annual Meeting of the registrant’s shareholders.

Premier Financial Corp.

Annual Report on Form 10-K

Table of Contents

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PART I

Item 1. Business

Premier Financial Corp. (“Premier” or the “Company”) is a financial holding company that, through its subsidiaries, Premier Bank (the “Bank”), First Insurance Group of the Midwest, Inc. (“First Insurance”),  First Defiance Risk Management Inc. (“First Defiance Risk Management”) and HSB Capital, LLC (HSB Capital”) (collectively, “the Subsidiaries”), focuses on traditional banking and property, casualty, life and group health insurance products. Another subsidiary, HSB Insurance, Inc. (“HSB Insurance”), was dissolved during the quarter ended September 30, 2020.  

On January 31, 2020, Premier completed its previously announced acquisition of United Community Financial Corp., an Ohio corporation (“UCFC”), pursuant to that certain Agreement and Plan of Merger (the “Merger Agreement”), dated as of September 9, 2019, by and between Premier and UCFC. At the effective time of the merger (the “Merger”), UCFC merged with and into Premier, with Premier surviving the Merger.  Simultaneously with the completion of the Merger, Premier converted from a unitary thrift holding company to a bank holding company, making an election to be a financial holding company.

Immediately following the Merger, the Bank acquired UCFC’s wholly-owned bank subsidiary, Home Savings Bank (“Home Savings”).  Immediately prior to the Merger of the banks, the Bank converted from a federal thrift into an Ohio state-chartered bank. In addition, immediately following the merger of the banks, UCFC’s wholly-owned insurance subsidiaries, HSB Insurance, LLC, and United American Financial Services, Inc., each merged into First Insurance, with First Insurance surviving the mergers.  The Company acquired two additional subsidiaries in the Merger, HSB Capital and HSB Insurance.

The Company’s operating objectives include expansion, diversification within its markets, growth of its fee-based income, and growth organically and through acquisitions of financial institutions, branches and financial services businesses. The Company seeks merger or acquisition partners that are culturally similar, have experienced management and possess either significant market area presence or have the potential for improved profitability through financial management, economies of scale and/or expanded services. The Company regularly evaluates merger and acquisition opportunities and conducts due diligence activities related to possible transactions with other financial institutions. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur. Acquisitions typically involve the payment of premiums over book and market values and, therefore, some dilution of the Company’s tangible book value and net income per common share may occur in any future transaction.

On June 22, 2018, the Company announced a stock split in the form of a share distribution of two common shares for each outstanding common share.  The stock split was distributed on July 12, 2018, to shareholders of record as of July 2, 2018.  All share and per share data in this Form 10-K have been adjusted and are reflective of the stock split.

Premier’s website, www.yourpremierfincorp.com, contains a hyperlink under the Investor Relations section to EDGAR, where the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge as soon as reasonably practicable after Premier has filed the report with the U. S. Securities and Exchange Commission (“SEC”).

The Company’s principal executive offices are located at 601 Clinton Street, Defiance, Ohio 43512, and its telephone number is (419) 782-5015.

The Subsidiaries

The Company’s core business operations are conducted through its subsidiaries:

Premier Bank:  The Bank was a federally chartered stock savings bank headquartered in Defiance, Ohio until the effective time of the Merger. At the effective time of the Merger, the Bank converted to an Ohio state-chartered bank headquartered in Youngstown, Ohio.  The Bank conductes operations through 78 full-service banking center offices, 12 loan offices and two wealth offices in Ashland, Belmont, Colmbiana, Cuyahoga, Defiance, Erie, Franklin, Fulton, Geauga, Hancock, Henry, Huron, Lake, Lucas, Mahoning, Marion, Ottawa, Paulding, Portage, Putnam, Richland, Seneca, Stark, Summit, Trumbull, Warren, Williams, Wood, and Wyandot counties in Ohio, Allegheny and Beaver Counties in Pennsylvania, Allen County in northeast Indiana, Mongolia County in West Virginia, Lenawee County in southeast Michigan and Ann Arbor, Michigan.

The Bank is primarily engaged in community banking. It attracts deposits from the general public through its offices and website, and uses those and other available sources of funds to originate residential real estate loans, commercial real estate loans, commercial loans, home improvement and home equity loans and consumer loans. In addition, the Bank invests in U.S. Treasury and federal government agency obligations, obligations of the State of Ohio and its political subdivisions, mortgage-backed securities that are issued by federal agencies, including real estate mortgage investment conduits (“REMICs”) and residential collateralized mortgage obligations (“CMOs”), and corporate bonds. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is a member of the Federal Home Loan Bank (“FHLB”) System.

First Insurance Group of the Midwest:  First Insurance is a wholly-owned subsidiary of Premier that conducts business throughout Premiers’s markets. First Insurance offers property and casualty insurance, life insurance and group health insurance.

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First Defiance Risk Management: First Defiance Risk Management is a wholly-owned insurance company subsidiary of the Company that was formed to insure the Company and its subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace.  First Defiance Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to help minimize the risk allocable to each participating insurer.

HSB Capital: HSB Capital provides mezzanine funding for customers of the Bank. Mezzanine loans are offered by HSB Capital to customers in the Company’s market area and are expected to be repaid from the cash flow from operations of the borrowing businesses.

HSB Insurance: HSB Insurance was a captive insurance company that insured against certain risks that were unique to the operations of UCFC and its subsidiaries.  The Merger and the existence of Premier Risk Management obviated the need for this subsidiary and the subsidiary was dissolved during the quarter ended September 30, 2020, with the remaining funds being returned to Premier, its sole shareholder.

Business Strategy

Premier’s primary objective is to be a high-performing, community-focused financial institution, well regarded in its market areas. Premier accomplishes this through emphasis on local decision making and empowering its employees with tools and knowledge to serve its customers’ needs. Premier believes in a “Customer First” philosophy that is strengthened by its Mission & Vision and Core Values initiatives. Premier also has a tagline of “Powered by People” as an indication of its commitment to local, responsive, personalized service. Premier believes this strategy results in greater customer loyalty and profitability through core relationships. Premier is focused on diversification of revenue sources and increased market penetration in areas where the growth potential exists for a balance between acquisition and organic growth. The primary elements of Premier’s business strategy are commercial banking, consumer banking, the origination and sale of single-family residential loans, enhancement of fee income, wealth management and insurance sales, each united by a strong customer service culture throughout the organization.  The Company previously recognized the need to adapt its organization structure to meet certain future strategic objectives and to continue its past success.  The Company believes that fully utilizing the strengths of its leadership team and a structure that supports strategic initiatives will enhance its ability to achieve even more objectives in the future.  As such, the Company previously redefined its market areas designed to support strategies to enhance processes and efficiencies to support overall growth.  That structure included three metro markets in Toledo, Ohio, Fort Wayne, Indiana, and Columbus, Ohio in addition to its two legacy markets (Southern Market Area and Northern Market Area).  As a result of the Merger, the Company has added three new metro markets: the Mahoning Valley, Akron/Canton and Cleveland markets.

Commercial and Commercial Real Estate Lending - Commercial and commercial real estate lending have been an ongoing focus and a major component of the Bank’s success. The Bank primarily provides commercial real estate and commercial business loans with an emphasis on owner-occupied commercial real estate and commercial business lending, including a focus on the deposit balances that accompany these relationships. The Bank’s client base tends to be small to middle market customers with annual gross revenues generally between $1 million and $50 million. The Bank’s focus is also on securing multiple guarantors in addition to collateral where possible.  These customers require the Bank to have a high degree of knowledge and understanding of their business in order to provide them with solutions for their financial needs. The Bank’s “Customer First” philosophy and culture complement the needs of its clients. The Bank believes this personal service model differentiates the Bank from its competitors, particularly the larger regional institutions. The Bank offers a wide variety of products to support commercial clients including remote deposit capture and other cash management services. The Bank also believes that the small business customer is a strong market for the Bank. The Bank participates in many of the Small Business Administration lending programs. Maintaining a diversified portfolio with an emphasis on monitoring industry concentrations and reacting to changes in the credit characteristics of industries is an ongoing focus.

Consumer Banking - The Bank offers customers a full range of deposit and investment products including demand, checking, money market, certificates of deposits, Certificate of Deposit Account Registry Service (“CDARS”) and savings accounts. The Bank offers a full range of investment products through the wealth management department and a wide variety of consumer loan products, including residential mortgage loans, home equity loans, and installment loans. The Bank also offers online banking services, which include mobile banking, People Pay (“P2P”), online bill pay, and online account opening as well as the MoneyPass ATM Network offering access to our customers to over 32,000 ATMs nationwide without a surcharge fee.

Fee Income Development - Generation of fee income and the diversification of revenue sources are accomplished primarily through the mortgage banking operation, First Insurance and the wealth management department as Premier seeks to reduce reliance on retail transaction fee income.

Deposit Growth - The Bank’s focus has been to grow core deposits with an emphasis on total relationship banking for both our retail and commercial customers. The Bank’s pricing strategy considers the whole relationship of the customer. The Bank continues to focus on increasing its market share in the communities it serves by providing quality products with extraordinary customer service, business development strategies and branch expansion. The Bank will look to grow its footprint in areas believed to further complement its overall market share and complement its strategy of being a high-performing community bank.

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Asset Quality - Maintaining a strong credit culture is of the utmost importance to the Bank. The Bank has maintained a strong credit approval and review process that has allowed the Company to maintain a credit quality standard that balances the return with the risks of industry concentrations and loan types. The Bank is primarily a collateral lender with an emphasis on cash flow performance, while obtaining additional support from personal guarantees and secondary sources of repayment. The Bank has directed its attention to loan types and markets that it knows well and in which it has historically been successful. The Bank strives to have loan relationships that are well diversified in both size and industry, and monitors the overall trends in the portfolio to maintain its industry and loan type concentration targets. The Bank maintains a problem loan remediation process that focuses on detection and resolution. The Bank maintains a strong process of internal control that subjects the loan portfolio to periodic internal reviews as well as independent third-party loan review.    

Expansion Opportunities - Premier believes it is well positioned to take advantage of acquisitions or other business expansion opportunities in its market areas, as evidenced by the Merger. Premier believes it has a track record of successfully accomplishing both acquisitions and de novo branching in its market area. This track record puts the Company in a solid position to enter or expand its business. Premier will continue to be disciplined as well as opportunistic in its approach to future acquisitions and de novo branching with a focus on its primary geographic market area, which it knows well, and has been competing in for a long period of time, as well as surrounding market areas.

Securities

During 2020, Premier’s securities portfolio was managed in accordance with a written policy adopted by the Board of Directors and administered by the Investment Committee. The Chief Financial Officer, Treasurer, President and the Chief Executive Officer can each approve transactions up to $3.0 million. Two of the three officers are required to approve transactions between $3.0 million and $25.0 million. All transactions in excess of $25.0 million must be approved by the Bank’s Asset Liability Committee (“ALCO”).

Premier’s securities portfolio is classified as either “available-for-sale” or “held-to-maturity.”  In addition, Premier did hold equity securities totaling $1.0 million at December 31, 2020 which must be marked to market through the income statement.  Securities classified as “available-for-sale” may be sold prior to maturity due to changes in interest rates, prepayment risks, and availability of alternative investments, or to meet the Company’s liquidity needs.

The carrying value of securities at December 31, 2020, by contractual maturity is shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

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The carrying value of investment securities is as follows:

For additional information regarding Premier’s investment portfolio, refer to Note 5 – Investment Securities in the Consolidated Financial Statements.

Residential Loan Servicing Activities

Servicing mortgage loans for investors involves a contractual right to receive a fee for processing and administering loan payments on mortgage loans that are not owned by the Company and are not included on the Company’s balance sheet. This processing involves collecting monthly mortgage payments on behalf of investors, reporting information to those investors on a monthly basis and maintaining custodial escrow accounts for the payment of principal and interest to investors and property taxes and insurance premiums on behalf of borrowers. At December 31, 2020, the Company serviced loans totaling $2.9 billion in principal. The vast majority of the loans serviced for others are fixed rate conventional mortgage loans. The Company primarily sells its loans to, and then services for, Freddie Mac, Fannie Mae and the FHLB.  

As compensation for its mortgage servicing activities, the Company receives servicing fees, usually approximating 0.25% per annum of the loan balances serviced, plus any late charges collected from delinquent borrowers and other fees incidental to the services provided. In the event of a default by the borrower, the Company receives no servicing fees until the default is cured.  Loan servicing fees decrease as the principal balance on the outstanding loan decreases and as the remaining time to maturity of the loan shortens.

Lending Activities

General – Financial institutions are limited in the amount of loans they may make to one borrower.  At December 31, 2020, the Bank’s limit on loans-to-one borrower was $106.9 million.

Loan Portfolio Composition – The net increase in net loans receivable over the prior year was $2.7 billion for 2020, mainly due to the Merger, $234.6 million for 2019 and $189.7 million for 2018. The loan portfolio contains no foreign loans. The Company’s loan portfolio is concentrated geographically in the northwest, northeast and central Ohio, northeast Indiana, northeast West Virginia, western Pennsylvania and southeast Michigan market areas. Management has identified lending for income-generating rental properties within commercial real estate as an industry concentration. Total loans for income-generating rental property totaled $1.9 billion at December 31, 2020, which represents 33.1% of the Company’s loan portfolio.

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The following table sets forth the composition of the Company’s loan portfolio by type of loan at the dates indicated.

In addition to the loans reported above, Premier had $221.6 million, $18.0 million, $6.6 million, $10.4 million, and $9.6 million in loans classified as held for sale at December 31, 2020, 2019, 2018, 2017 and 2016, respectively. The fair value of such loans, which are all single-family residential mortgage loans, approximated their carrying value for all years presented.

Contractual Principal, Repayments and Interest Rates – The following table sets forth the dollar amount of gross loans due more than one year from December 31, 2020, which have fixed interest rates or which have floating or adjustable interest rates.

Originations, Purchases and Sales of Loans – The lending activities of Premier are subject to the written, non-discriminatory underwriting standards and loan origination procedures established by the Board of Directors and management. Loan originations are obtained from a variety of sources, including referrals from existing customers, real estate brokers, developers and builders, newspaper, internet and radio advertising and walk-in customers.

The Bank’s loan approval process for all types of loans is intended to assess the borrower’s ability to repay the loan, the viability of the loan and the adequacy of the value of the collateral that will secure the loan.

A commercial loan application is first reviewed by a commercial lender and underwritten by a commercial credit analyst.   All loan requests must be presented for review or approval to a Credit Officer.  Credit Officers have loan authority that ranges from $3,000,000 to $10,000,000 depending on experience and relevant skill sets.  Requests in excess of $10,000,000 are adjudicated by Executive Loan Committee.  Market Area Presidents have lending authority of up to $1,000,000 but those loans are not permitted to be approved with exceptions.  

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Residential mortgage applications are accepted by Mortgage Loan Officers or Sales Managers, who utilize an automated underwriting system to review the loan request. The Bank also receives mortgage applications via an online residential mortgage origination system. A final approval of all residential mortgage applications is made by a member of a centralized underwriting staff within their designated lending limits. Loan requests in excess or outside an individual underwriter’s limit are approved by a Regional or Chief Credit Officer and, if necessary, by the Executive Loan Committee.

Retail loan applications are accepted by sales managers, branch managers, retail bankers, and a select group of indirect auto dealers, who utilize an automated underwriting system to submit and review the loan request.  A final approval of all retail loan applications is made by a member of a centralized underwriting staff within their designated lending limits. Loan requests in excess or outside an individual underwriter’s limit are approved by the Director of Consumer Lending or Chief Credit Officer and, if necessary, by the Executive Loan Committee.

The Bank offers adjustable-rate loans in order to decrease the vulnerability of its operations to changes in interest rates. The demand for adjustable-rate loans in the Bank’s primary market area has been a function of several factors, including customer preference, the level of interest rates, the expectations of future changes in the level of interest rates and the difference between the interest rates offered for fixed-rate loans and adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate residential loans that can be originated at any time is largely determined by the demand for each in a competitive environment.

Adjustable-rate loans decrease the risks associated with changes in interest rates, but involve other risks, primarily because as interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates.

The following table shows total loans originated, loan reductions, and the net increase in the Company’s total loans and loans held for sale during the periods indicated:

Asset Quality

Premier’s credit policy establishes guidelines to manage credit risk and asset quality. These guidelines include loan review and early identification of problem loans to ensure sound credit decisions. Premier’s credit policies and review procedures are meant to minimize the risks and uncertainties inherent in lending. In following the policies and procedures, management must rely on estimates, appraisals and evaluations of loans and the possibility that changes in these could occur because of changing economic conditions.

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Delinquent Loans — The following table sets forth information concerning delinquent loans at December 31, 2020, in dollar amount and as a percentage of Premier’s total loan portfolio. The amounts presented represent the total outstanding principal balances of the related loans, rather than the actual payment amounts that are past due.

Overall, the level of delinquencies at December 31, 2020, increased from the levels at December 31, 2019, when Premier reported that 0.37% of its outstanding loans were at least 30 days delinquent. The level of total loans 90 or more days delinquent has increased to 0.50% at December 31, 2020, up from 0.21% at December 31, 2019. The level of total loans 60-89 days delinquent increased to 0.24% at December 31, 2020, up from 0.05% at December 31, 2019.  The level of loans that were 30 to 59 days past due increased to 0.13% at December 31, 2020, up from 0.11% at December 31, 2019.  Management has assessed the collectability of all loans that are 90 days or more delinquent as part of its procedures in establishing the allowance for credit losses.  Management believes the global pandemic plays a role in the increase seen in 2020.  

Non-performing Assets – All loans are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, the collectability of additional interest is not expected. Generally, Premier places all loans more than 90 days past due on non-accrual status. Premier also places loans on non-accrual status when the loan is paying as agreed but the Company believes the financial condition of the borrower is such that this classification is warranted. When a loan is placed on non-accrual status, total unpaid interest accrued to date is reversed. Subsequent payments are generally applied to the outstanding principal balance but may be recorded as interest income, depending on the assessment of the ultimate collectability of the loan. Premier considers a loan is individually evaluated when, based on current information and events, it is probable that it will be unable to collect all amounts due (both principal and interest) according to the contractual terms of the loan agreement. Premier measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral, if collateral dependent. If the estimated recoverability of the individually evaluated loan is less than the recorded investment, Premier will recognize impairment by allocating a portion of the allowance for credit losses on cash flow dependent loans and by charging off the deficiency on collateral dependent loans.  See Note 7 of the Notes to the Consolidated Financial Statements for additional information.

Real estate acquired by foreclosure is classified as real estate owned until such time as it is sold. Premier also repossesses other assets securing loans, consisting primarily of automobiles. When such property is acquired it is recorded at fair value less cost to sell. Costs relating to development and improvement of property are capitalized, whereas costs relating to holding the property are expensed. Valuations are periodically performed by management and a write-down of the value is recorded with a corresponding charge to operations if it is determined that the carrying value of property exceeds its estimated net realizable value. During 2020, Premier did not recognize any expense related to write-downs in value of real estate acquired by foreclosure or acquisition. The balance of real estate owned at December 31, 2020, was $343,000.  During 2019, there was $264,000 of expense related to write-downs in fair value of real estate acquired by foreclosure or acquisition.  The balance of real estate owned at December 31, 2019 was $100,000.  The increase in real estate owned is a result of the Merger.  

As of December 31, 2020, Premier’s total non-performing loans amounted to $51.7 million or 0.96% of total loans (net of undisbursed loan funds and deferred fees and costs), compared to $13.4 million or 0.49% of total loans, at December 31, 2019.  Non-performing loans are loans which are more than 90 days past due or on non-accrual.

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The following table sets forth the amounts and categories of Premier’s non-performing assets (excluding individually evaluated loans not considered non-performing) and troubled debt restructurings at the dates indicated.

Allowance for credit losses – Premier maintains an allowance for credit losses to absorb probable current expected losses in the loan portfolio. The allowance for credit loss is made up of two components.  The first is a general reserve, which is used to record credit loss reserves for groups of homogenous loans in which the Company estimates the current expected credit losses in the portfolio based on quantitative and qualitative factors.  Premier adopted the current expected credit losses (“CECL”) accounting standard in 2020.  As a result current year credit loss and provision is not comparable to prior year allowance for loan loss data.  

The second component of the allowance for credit losses is the specific reserve in which the Company sets aside reserves based on the analysis of individual credits.  In evaluating the adequacy of its allowance each quarter, management grades all loans in the commercial portfolio.  See “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations – Allowance for credit losses” for further discussion on management’s evaluation of the allowance for credit losses.

Loans are charged against the allowance when such loans meet the Company’s established policy on loan charge-offs and the allowance itself is adjusted quarterly by recording a provision for credit losses. As such, actual losses and losses provided for should be approximately the same if the overall quality, composition and size of the portfolio remained static along with a static economic environment. To the extent that the portfolio grows at a rapid rate or overall quality or the economic environment deteriorates, the provision generally will exceed charge-offs. However, in certain circumstances, net charge-offs may exceed the provision for credit losses when management determines that loans previously provided for in the allowance for credit losses are uncollectible and should be charged-off or as overall credit or the economic environment improves. Although management believes that it uses the best information available to make such determinations, future adjustments to the allowance may be necessary, and net earnings could be significantly affected, if circumstances differ substantially from the assumptions used in making the initial determinations.

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At December 31, 2020, Premier’s allowance for credit losses totaled $82.0 million compared to $31.2 million at December 31, 2019. The following table sets forth the activity in Premier’s allowance for credit losses during the periods indicated.

The provision for credit losses increased in 2020 due to the Merger and the adoption of ASU 2016-13 (Topic 326 – Credit Losses).  Refer to Notes 2 and 7 to the Consolidated Financial Statements for additional information.  Management feels that the level of the allowance for credit losses at December 31, 2020, is sufficient to cover losses that may be incurred over the lifetime of the loan.

The following table sets forth information concerning the allocation of Premier’s allowance for credit losses by loan categories at the dates indicated. For information about the percent of total loans in each category to total loans, see “Lending Activities-Loan Portfolio Composition” above.

Sources of Funds

General – Deposits are the primary source of Premier’s funds for lending and other investment purposes. In addition to deposits, Premier derives funds from loan principal repayments. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings from the FHLB may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. They may also be used on a longer-term basis for general business purposes.

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Deposits – Premier’s deposits are attracted principally from within Premier’s primary market area through the offering of a broad selection of deposit instruments, including checking accounts, money market accounts, savings accounts, and term certificate accounts. Deposit account terms vary, with the principal differences being the minimum balance required, the time periods the funds must remain on deposit, and the interest rate.

To supplement its funding needs, Premier also has the ability to utilize the national market for certificates of deposit. Premier has used these deposits in the past and could in the future if necessary.  Premier had no national market certificates of deposit as of December 31, 2020 or 2019.

Average balances and average rates paid on deposits are as follows:

The following table sets forth the maturities of Premier’s retail certificates of deposit having principal amounts $250,000 or greater at December 31, 2020 (in thousands):

For additional information regarding Premier’s deposits see Note 11 to the Consolidated Financial Statements.

Borrowings – The FHLB system functions as a central reserve bank providing credit for its member institutions and certain other financial institutions.  As a member in good standing of the FHLB, Premier is authorized to apply for advances, provided certain standards of creditworthiness have been met.  At December 31, 2020, Premier could borrow up to $1.4 billion.  The Bank had no advances outstanding at December 31, 2020.

For additional information regarding Premier’s FHLB advances and other debt, see Notes 12 and 14 to the Consolidated Financial Statements.

Subordinated Debentures – For additional information regarding the Company’s subordinated debentures see Note 13 to the Consolidated Financial Statements.

Effect of Environmental Regulation - Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings or competitive position of Premier or its subsidiaries. Premier believes the nature of the operations of its subsidiaries has little, if any, environmental impact. As a result, Premier anticipates no material capital expenditures for environmental control facilities for Premier’s current fiscal year or for the foreseeable future.

Premier believes its primary exposure to environmental risk is through the lending activities of the Bank. In cases where management believes environmental risk potentially exists, the Bank mitigates environmental risk exposures by requiring environmental site assessments at the time of loan origination to confirm collateral quality as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites. In addition, environmental assessments are typically required prior to any foreclosure activity involving non-residential real estate collateral.

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Human Capital

Premier is focused on engagement and retention of its team.  The annual retention rate for 2020 was approximately 75.8%. Turnover is managed closely with accountability and awareness at all levels. For 2020, turnover was 18.57%, with an annual voluntary turnover rate of 17.2%. Salary expense continues to be one of the largest company expenses with an annual salary expense of approximately $66.2 million. Premier is focused on being a high performance institution and drives performance through incentive plans, which paid out at approximately $8.2 million for the organization in 2020.  Our workforce is comprised of 90.5% full-time employees and 9.5% part-time employees. Premier had 1,195 employees at December 31, 2020. None of these employees are represented by a collective bargaining agent, and Premier believes that it maintains good relationships with its personnel.  Ensuring our employees are prepared for retirement is important as evidenced by the Company funding the 401k retirement plan approximately $2.4 million for 2020. Diversity and inclusiveness as an organization is important too, with 7% of minorities in leadership positions and 64% of leadership female.  Of the senior/executive leadership teams, there are 8.3% minorities. Employee growth and development is a key to our success with a 14.8% internal promotion rate.  Having access to internal and external training is also important for our employees’ forward progression.  In 2020, each employee spent an average of 34.7 hours in training.

Competition

Competition in originating commercial real estate and commercial loans comes mainly from commercial banks with banking center offices in the Company’s market area. Competition for the origination of mortgage loans arises mainly from savings associations, commercial banks, and mortgage companies. The distinction among market participants is based on a combination of price, the quality of customer service and name recognition. The Company competes for loans by offering competitive interest rates and product types and by seeking to provide a higher level of personal service to borrowers than is furnished by competitors.

Management believes that the Bank’s most direct competition for deposits comes from local financial institutions. The distinction among market participants is based on price and the quality of customer service and name recognition. The Bank’s cost of funds fluctuates with general market interest rates. During certain interest rate environments, additional significant competition for deposits may be expected from corporate and governmental debt securities, as well as from money market mutual funds. The Bank competes for conventional deposits by emphasizing quality of service, extensive product lines and competitive pricing.

Regulation

General – Premier is subject to regulation examination and oversight by the Federal Reserve Board (“Federal Reserve”).  At December 31, 2019, the Bank was subject to regulation, examination and oversight by the Office of the Comptroller of the Currency (“OCC”). As a result of the Merger, the Bank converted to an Ohio state-chartered bank and became subject to regulation, examination and oversight by the Ohio Division of Financial Institutions (“ODFI”) instead of the OCC.  Its primary federal regulator is the FDIC.  In addition, the Bank is subject to regulations of the Consumer Financial Protection Bureau (the “CFPB”) which was established by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended (“Dodd-Frank Act”) and has broad powers to adopt and enforce consumer protection regulations.  Prior to the Merger, Premier and the Bank were required to file periodic reports with the Federal Reserve and the OCC (OCC filings ceased at the time of the Merger) and examinations were conducted periodically by the Federal Reserve, the OCC and the FDIC to determine whether Premier and the Bank were in compliance with various regulatory requirements and were operating in a safe and sound manner. As a result of the Merger, the Bank will be subject to examination by the ODFI in lieu of the OCC.

Holding Company Regulation – At December 31, 2019, Premier was a unitary thrift holding company.  In connection with the Merger, Premier converted to a bank holding company and elected to become a financial holding company. Premier is subject to the requirements of the Bank Holding Company Act of 1956, as amended (“BHC Act”), and examination and regulation by the Federal Reserve. The Federal Reserve has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, issue cease and desist or removal orders, and require that a bank holding company divest subsidiaries (including its banking subsidiaries). In general, the Federal Reserve may initiate enforcement action for violations of laws and regulations and unsafe or unsound practices.

A bank holding company is required by law and Federal Reserve policy to serve as a source of financial strength to each subsidiary bank and to commit resources to support those subsidiary banks.  The Federal Reserve may require a bank holding company to contribute additional capital to an undercapitalized subsidiary bank and may disapprove of the payment of dividends to the shareholders of the bank holding company if the Federal Reserve believes the payment would be an unsafe or unsound practice. The Federal Reserve also requires bank holding companies to provide advance notification of planned dividends under certain circumstances.

The BHC Act requires the prior approval of the Federal Reserve in any case where a bank holding company proposes to: acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority-owned by the bank holding company; acquire all or substantially all of the assets of another bank or bank holding company; or merge or consolidate with any other bank holding company.

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In order to become a financial holding company, all of a bank holding company’s subsidiary depository institutions must be well capitalized and well managed under federal banking regulations, and such depository institutions must have received a rating of at least satisfactory under the Community Reinvestment Act (“CRA”).  In addition, the holding company must be well managed and must be well capitalized.    

Financial holding companies may engage in a wide variety of financial activities, including any activity that the Federal Reserve and the Treasury Department consider financial in nature or incidental to financial activities, and any activity that the Federal Reserve determines to be complementary to a financial activity and which does not pose a substantial safety and soundness risk.  These activities include securities underwriting and dealing activities, insurance and underwriting activities and merchant banking/equity investment activities.  Because it has authority to engage in a broad array of financial activities, a financial holding company may have several affiliates that are functionally regulated by financial regulators other than the Federal Reserve, such as the SEC and state insurance regulators.  

If a financial holding company or a subsidiary bank fails to meet the requirements for the holding company to remain a financial holding company, the financial holding company must enter into a written agreement with the Federal Reserve within 45 days to comply with all applicable capital and management requirements. Until the Federal Reserve determines that the holding company and its subsidiary banks meet the requirements, the Federal Reserve may impose additional limitations or conditions on the conduct or activities of the financial holding company or any affiliate that the Federal Reserve finds to be appropriate or consistent with federal banking laws. If the deficiencies are not corrected within 180 days, the financial holding company may be required to divest ownership or control of all subsidiary banks. If restrictions are imposed on the activities of the holding company, such restrictions may not be made publicly available pursuant to confidentiality regulations of the banking regulators.

In April 2020, the Federal Reserve adopted a final rule to revise its regulations related to determinations of whether a company has the ability to exercise a controlling influence over another company for purposes of the BHC Act. The final rule expands and codifies the presumptions for use in such determinations. By codifying the presumptions, the final rule provides greater transparency on the types of relationships that the Federal Reserve generally views as supporting a facts-and-circumstances determination that one company controls another company. The Federal Reserve’s final rule applies to questions of control under the BHC Act, but does not extend to the Change in Bank Control Act.

Regulation of Ohio State-Chartered Banks – As an Ohio state-chartered bank, the Bank is supervised and regulated primarily by the ODFI and the FDIC.  In addition, the Bank’s deposits are insured up to applicable limits by the FDIC, and the Bank will be subject to the applicable provisions of the Federal Deposit Insurance Act, as amended, and certain other regulations of the FDIC.  

Various requirements and restrictions under the laws of the United States and the State of Ohio will affect the operations of the Bank, including requirements to maintain reserves against deposits, restrictions on the nature and amount of loans that may be made and the interest that may be charged thereon, restrictions relating to investments and other activities, limitations on credit exposure to correspondent banks, limitations on activities based on capital and surplus, limitations on payment of dividends, limitations on branching and increasingly extensive consumer protection laws and regulations.  

Economic Growth, Regulatory Relief and Consumer Protection Act - On May 25, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Regulatory Relief Act”) was enacted, which repealed or modified certain provisions of the Dodd-Frank Act and eased regulations on all but the largest banks (those with consolidated assets in excess of $250 billion). Bank holding companies with consolidated assets of less than $100 billion, including Premier, are no longer subject to enhanced prudential standards. The Regulatory Relief Act also relieves bank holding companies and banks with consolidated assets of less than $100 billion, including Premier, from certain record-keeping, reporting and disclosure requirements. Certain other regulatory requirements applied only to banks with consolidated assets in excess of $50 billion and so did not apply to the Company even before the enactment of the Regulatory Relief Act.

Regulatory Capital Requirements and Prompt Corrective Action – The federal banking regulators have adopted risk-based capital guidelines for financial institutions and their holding companies, as well as state member banks. The guidelines provide a systematic analytical framework, which makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy and incentivizes holding liquid, low-risk assets. Capital levels as measured by these standards are also used to categorize financial institutions for purposes of certain prompt corrective action regulatory provisions.

The risk-based capital guidelines adopted by the federal banking agencies are based on the “International Convergence of Capital Measurement and Capital Standard,” published by the Basel Committee on Banking Supervision.  New capital rules applicable to smaller banking organizations (the “Basel III Capital Rules”) which also implement certain of the provisions of the Dodd-Frank Act became effective commencing on January 1, 2015.  Compliance with the new minimum capital requirements was required effective January 1, 2015, whereas a new capital conservation buffer and deductions from common equity capital phased in from January 1, 2016, through January 1, 2019, and most deductions from common equity tier 1 capital phased in from January 1, 2015 through January 1, 2019.  

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The Basel III Capital Rules include (i) a minimum common equity tier 1 (“CET1”) capital ratio of 4.5%, (ii) a minimum tier 1 capital ratio of 6.0%, (iii) a minimum total capital ratio of 8.0%, and (iv) a minimum leverage ratio of 4%.

Common equity for the CET1 capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions.        

Tier 1 capital includes common equity as defined for the CET1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus, trust preferred securities that have been grandfathered (but which are not otherwise permitted), and limited amounts of minority interests in the form of additional tier 1 capital instruments, less certain deductions.

Tier 2 capital, which can be included in the total capital ratio, includes certain capital instruments (such as subordinated debentures) and limited amounts of the allowance for credit losses, subject to specified eligibility criteria, less applicable deductions.

The deductions from CET1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels).  

Under the guidelines, capital is compared to the relative risk included in the balance sheet.  To derive the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty.  The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.  

The Basel III Capital Rules also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the company does not hold a capital conservation buffer of greater than 2.5% composed of CET1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter.  

The federal banking agencies have established a system of “prompt corrective action” to resolve certain problems of undercapitalized banks. This system is based on five capital level categories for insured depository institutions: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.”  The federal banking agencies may (or in some cases must) take certain supervisory actions depending upon a bank's capital level. For example, the banking agencies must appoint a receiver or conservator for a bank within 90 days after it becomes "critically undercapitalized" unless the bank's primary regulator determines, with the concurrence of the FDIC, that other action would better achieve regulatory purposes.  Banking operations otherwise may be significantly affected depending on a bank's capital category.  For example, a bank that is not "well capitalized" generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market, and the holding company of any undercapitalized depository institution must guarantee, in part, specific aspects of the bank's capital plan for the plan to be acceptable.

In accordance with the Basel III Capital Rules, in order to be “well-capitalized” under the prompt corrective action guidelines, a financial institution must have a CET1 capital ratio of 6.5%, a total risk-based capital ratio of at least 10.0%, a tier 1 risk-based capital of at least 8.0% and a leverage ratio of at least 5.0%, and the institution must not be subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure.  As of December 31, 2020, the Bank met the capital ratio requirements to be deemed "well-capitalized" according to the guidelines described above. See Note 17 of the Notes to the Consolidated Financial Statements for additional information.

In December 2019, the federal banking agencies issued a final rule to address regulatory treatment of credit loss allowances under the CECL accounting standard.  The rule revised the federal banking agencies’ regulatory capital rules to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over three years the day‑one adverse effects on regulatory capital that may result from the adoption of the CECL model.  Concurrent with the enactment of the Coronavirus Aid, Relief, and Economic Security Act of 2020, as amended (the “CARES Act”), discussed below, federal banking agencies issued an interim final rule that delayed the estimated impact on regulatory capital resulting from the adoption of CECL. The interim final rule provided banking organizations that implemented CECL prior to the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. On August 26, 2020, the federal banking agencies issued a final rule that made certain technical changes to the interim final rule, including expanding the pool of eligible institutions. The changes in the final rule applied only to those banking organizations that elected the CECL transition relief provided for under the rule. Premier adopted CECL on January 1, 2020.

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In September 2019, consistent with Section 201 of the Regulatory Relief Act, the Federal Reserve, along with the other federal bank regulatory agencies, issued a final rule, effective January 1, 2020, that gave community banks, including the Bank, the option to calculate a simple leverage ratio to measure capital adequacy if the community banks met certain requirements.  Under the rule, a community bank was eligible to elect the Community Bank Leverage Ratio (“CBLR”) framework if it had less than $10 billion in total consolidated assets, limited amounts of certain trading assets and liabilities, limited amounts of off-balance sheet exposures and a leverage ratio greater than 9.0%. The final rule adopted tier 1 capital and the existing leverage ratio into the CBLR framework.  The tier 1 numerator took into account the modifications made in relation to the capital simplifications and CECL methodology transition rules as of the compliance dates of those rules.  Qualifying institutions that elected to use the CBLR framework (each, a “CBLR Bank”) and that maintained a leverage ratio of greater than 9.0% were considered to have satisfied the risk‑based and leverage capital requirements in the regulatory agencies’ generally applicable capital rules and to have met the well‑capitalized ratio requirements.  A CBLR Bank was required to calculate or report risk‑based capital and each CBLR Bank could opt out of the framework at any time, without restriction, by reverting to the generally applicable risk‑based capital rule.  Pursuant to the CARES Act, on August 26, 2020, the federal banking agencies adopted a final rule that temporarily lowered the CBLR threshold and provides a gradual transition back to the prior level. Specifically, the CBLR threshold was reduced to 8.0% for the remainder of 2020, increased to 8.5% for 2021, and will return to 9.0% beginning January 1, 2022. This final rule became effective on October 1, 2020.  Premier does not intend to elect utilization of the CBLR in assessing capital adequacy.

Dividends – There are various legal limitations on the extent to which a subsidiary bank may finance or otherwise supply funds to its parent holding company. Under applicable federal and state laws, a subsidiary bank may not, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, its parent holding company. A subsidiary bank is also subject to collateral security requirements for any loan or extension of credit permitted by such exceptions. The Bank paid $24.0 million in dividends to Premier in 2020 and $36.0 million in 2019.  First Insurance paid $400,000 in dividends to Premier in 2020 and $1.2 million in dividends in 2019.  Premier Risk Management paid $1.5 million in dividends to Premier in 2020 and $1.4 million in dividends in 2019.

Premier’s ability to pay dividends to its shareholders is primarily dependent on its receipt of dividends from the Subsidiaries.  The Federal Reserve expects Premier to serve as a source of strength for the Bank and may require Premier to retain capital for further investment in the Bank, rather than pay dividends to Premier shareholders. Payment of dividends by Premier or the Bank may be restricted at any time at the discretion of its applicable regulatory authorities if they deem such dividends to constitute an unsafe or unsound practice.  These provisions could have the effect of limiting Premier's ability to pay dividends on its common shares.

Deposit Insurance – The FDIC maintains the Deposit Insurance Fund (“DIF’), which insures the deposit accounts of the Bank to the maximum amount provided by law.  The general insurance limit is $250,000 per separately insured depositor.  This insurance is backed by the full faith and credit of the U. S. government.

As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, federally-insured institutions.  It also may prohibit any federally-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the DIF and it has the authority to take enforcement actions against insured institutions.  Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or written agreement entered into with the FDIC.

The FDIC assesses a quarterly deposit insurance premium on each insured institution quarterly based on risk characteristics of the institution.  The FDIC may also impose a special assessment in an emergency situation.  Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio (“DRR”), which is the amount in the DIF as a percentage of all DIF insured deposits. In March 2016, the FDIC adopted final rules designed to meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act.  The Dodd-Frank Act requires the FDIC to offset the effect on insured institutions with assets of less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%.  Although the FDIC's rules reduced assessment rates on all banks, they imposed a surcharge on banks with assets of $10 billion or more to be paid until the DRR reached 1.35%. The DRR reached 1.35% on September 30, 2018. As a result, the previous surcharge imposed on banks with assets of $10 billion or more was lifted. In addition, preliminary assessment credits were determined by the FDIC for banks with assets of less than $10 billion for the portion of their assessments that contributed to the increase of the DRR to 1.35%. On June 30, 2019, the DRR reached 1.40%, and the FDIC applied credits for banks with assets of less than $10 billion ("small bank credits") beginning September 30, 2019. The FDIC will continue to apply small bank credits so long as the DRR is at least 1.35%. The FDIC rules further changed the method of determining risk-based assessment rates for established banks with less than $10 billion in assets to better ensure that banks taking on greater risks pay more for deposit insurance than banks that take on less risk.

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Consumer Protection Laws and Regulations – Banks are subject to regular examination to ensure compliance with federal statutes and regulations applicable to their business, including consumer protection statutes and implementing regulations.  The Dodd-Frank Act established the CFPB, which has extensive regulatory and enforcement powers over consumer financial products and services.  The CFPB has adopted numerous rules with respect to consumer protection laws and has commenced related enforcement actions.  The following are just a few of the consumer protection laws applicable to the Bank:

The banking regulators also use their authority under the Federal Trade Commission Act to take supervisory or enforcement action with respect to unfair or deceptive acts or practices by banks that may not necessarily fall within the scope of specific banking or consumer finance law.  

On July 22, 2020, the CFPB issued a final small dollar loan rule related to payday, vehicle title and certain high cost installment loans (the “Small Dollar Rule”) that modified a former rule that was issued in November 2013. Specifically, the Small Dollar Rule revokes provisions contained in the 2013 rule that: (i) provide that it is an unfair and abusive practice for a lender to make a covered short-term or longer-term balloon-payment loan, including payday and vehicle title loans, without reasonably determining that consumers have the ability to repay those loans according to their terms; (ii) prescribe mandatory underwriting requirements for making the ability-to-repay determination; (iii) exempt certain loans from mandatory underwriting requirements; and (iv) establish related definitions, reporting, and recordkeeping requirements.

Further, the federal bank regulatory agencies issued interagency guidance on May 20, 2020, to encourage banks, savings associations, and credit unions to offer responsible small-dollar loans to customers for consumer and small business purposes. The Small Dollar Rule did not have a material effect on Premier’s financial condition or results of operations on a consolidated basis in 2020.

CRA - Under the CRA, every FDIC-insured institution is obligated, consistent with safe and sound banking practices, to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods.  The CRA requires the appropriate federal banking regulator, in connection with the examination of an insured institution, to assess the institution’s record of meeting the credit needs of its community and to consider this record in its evaluation of certain applications to banking regulators, such as an application for approval of a merger or the establishment of a branch.  An unsatisfactory rating may be used as the basis for the denial of an application to acquire another financial institution or open a new branch.  As of its last examination, the Bank received a CRA rating of “satisfactory.”

Patriot Act – In response to the terrorist events of September 11, 2001, the Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as amended (the “Patriot Act”) was signed into law in October 2001.  The Patriot Act gives the U. S. government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements.  Title III of the Patriot Act and related regulations require regulated financial institutions to establish a program specifying procedures for obtaining identifying information from customers seeking to open new accounts and establish enhanced due diligence policies, procedures and controls designed to detect and report suspicious activity.  The Bank has established policies and procedures that it considers to be in compliance with the requirements of the Patriot Act.

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Volcker Rule – The Volcker Rule, which became effective under the Dodd-Frank Act in 2015, prohibits banks and their affiliates from engaging in proprietary trading and investing in and sponsoring hedge funds, otherwise known as “covered funds.”  On July 9, 2019, the five federal agencies that adopted the Volcker Rule issued a final rule to exempt certain community banks, including the Bank, from such rule, consistent with the Regulatory Relief Act. Under the final rule, community banks with $10 billion or less in total consolidated assets and total trading assets and liabilities of 5.0% or less of total consolidated assets were excluded from the restrictions of the Volcker Rule. On June 25, 2020, the federal bank regulatory agencies also finalized a rule modifying the Volcker Rule’s prohibition on banking entities investing in or sponsoring covered funds. Such rule permits certain banking entities to offer financial services and engage in other activities that do not raise concerns that the Volcker Rule was originally intended to address. To the extent that the Bank engages in any of the trading activities or has any ownership interest in or relationship with any of the types of funds regulated by the Volcker Rule, Premier believes that its activities and relationships comply with such rule, as amended.

Office of Foreign Assets Control Regulation – The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. Premier is responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious financial, legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.  The Bank has established policies and procedures that it considers to be in compliance with OFAC requirements.  

Cybersecurity – In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish several lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing Internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the financial institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the financial institution or its critical service providers fall victim to this type of cyber-attack. If Premier fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial penalties.

In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.

State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements. Premier expects this trend of state-level activity in those areas to continue and is continually monitoring developments in the states in which its customers are located.

In the ordinary course of business, Premier relies on electronic communications and information systems to conduct its operations and to store sensitive data. Premier employs an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. Premier employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of Premier’s defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date, Premier has not detected a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, Premier’s systems and those of its customers and third-party service providers are under constant threat and it is possible that Premier could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers.  

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The Coronavirus Aid, Relief, and Economic Security Act of 2020 – In response to the novel COVID-19 pandemic (“COVID-19”), the CARES Act was signed into law on March 27, 2020, to provide national emergency economic relief measures. Many of the CARES Act’s programs are dependent upon the direct involvement of U.S. financial institutions, such as Premier and the Bank, and have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve and other federal banking agencies, including those with direct supervisory jurisdiction over Premier and the Bank. Furthermore, as COVID-19 evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including amendments to the CARES Act or new bills comparable in scope to the CARES Act. For example, on December 27, 2020, the Consolidated Appropriations Act, 2021 (the “CAA”), was signed into law, which, among other things, allowed certain banks to temporarily postpone implementation of CECL. Premier is continuing to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to COVID-19.

The CARES Act amended the loan program of the Small Business Administration (the “SBA”), in which the Bank participates, to create a guaranteed, unsecured loan program known as the Paycheck Protection Program (the “PPP”) to fund operational costs of eligible businesses, organizations and self-employed persons during COVID-19. In June 2020, the Paycheck Protection Program Flexibility Act was enacted, which, among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. Shortly thereafter, and due to the evolving impact of COVID-19, additional legislation was enacted authorizing the SBA to resume accepting PPP applications on July 6, 2020, and extending the PPP application deadline to August 8, 2020. As a participating lender in the PPP, the Bank continues to monitor legislative, regulatory, and supervisory developments related thereto. On September 29, 2020, the federal bank regulatory agencies issued a final rule that neutralizes the regulatory capital and liquidity coverage ratio effects of participating in certain COVID-19 liquidity facilities due to the fact there is no credit or market risk in association with exposures pledged to such facilities. As a result, the final rule supports the flow of credit to households and businesses affected by COVID-19.

Item 1A. Risk Factors

The risks listed below present risks that could have a material impact on the Company’s financial condition, results of operations, or business. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or that management currently deems immaterial may also impair the Company’s business operations.  

Economic and Market Risks

The economic impact of COVID-19 or any other pandemic could adversely affect the Company’s business, financial condition, liquidity, cash flows, and results of operations.

In March 2020, the World Health Organization declared COVID-19 a pandemic and the President of the United States declared COVID-19 a national emergency. COVID-19 has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal bank regulatory agencies have encouraged financial institutions to prudently work with affected borrowers, and new legislation has provided relief from reporting loan classifications due to modifications related to COVID-19.

Given the ongoing and dynamic nature of COVID-19, it is difficult to predict the full impact of the outbreak on Premier’s business. The extent of such impact will depend on future developments, which are highly uncertain, including when COVID-19 can be controlled and abated and when and how the economy may be reopened. As of December 31, 2020, Premier holds and services PPP loans. These PPP loans are subject to the provisions of the CARES Act and to complex and evolving rules and guidance issued by the SBA and other government agencies. We expect that the great majority of our PPP borrowers will seek full or partial forgiveness of their loan obligations. Premier has credit risk on the PPP loans if the SBA determines that there is a deficiency in the manner in which the Bank originates, funds or services loans, including any issue with the eligibility of a borrower to receive a PPP loan. We could face additional risks in our administrative capabilities to service our PPP loans and risk with respect to the determination of loan forgiveness. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which we originated, funded or serviced the PPP loan, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if the SBA has already paid under the guaranty, seek recovery of any loss related to the deficiency.

The spread of COVID-19 has also caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. Further, technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to such employees to be more limited or less reliable. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk from phishing, malware, and other cybersecurity attacks, all of which could expose us to risks of data or financial loss and could seriously disrupt our operations and the operations of any impacted customers.

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COVID-19 or a new pandemic could subject us to any of the following risks, any of which could, individually or in the aggregate, have a material adverse effect on our business, financial condition, liquidity, and results of operations:

Moreover, our future success and profitability substantially depend on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to COVID-19 or any similar pandemic could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

Even after the COVID-19 pandemic subsides, the U.S. economy will likely require time to recover, the length of which is unknown and during which the United States may experience a recession. Our business could be materially and adversely affected by such recession.

To the extent the effects of COVID-19 adversely impact our business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described in this section.