Premier Financial Q1 2023 Earnings Call Transcript

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Provided by Quartr
April 26, 2023

There are 5 speakers on the call.

Operator

Good morning, and welcome to the Premier Financial Corp. First Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

Operator

I would now like to turn the call over to Paul Mungester with Primary Financial Corp. Please go ahead.

Speaker 1

Thank you. Good morning, everyone, and thank you for joining us for today's Q1 2023 earnings conference call. This call is also being webcast and the audio replay will be available at the Premier Financial Corp. Website atpremierfincorp.com. Following our prepared comments on the company's strategy and performance, we will be available to take your questions.

Speaker 1

Before we begin, I'd like to remind you that during the conference call today, including during the question and answer period, you may hear forward looking statements and projections as a result of factors over which the company has no control. Information on these risk factors and additional information on forward looking statements are included in the news release and in the company's reports on file with the Securities and Exchange Commission. And now I'll turn the call over to Gary for his comments.

Speaker 2

Thank you, Paul, and good morning, everyone. Last evening, we reported net income for the quarter of $18,100,000 or $0.51 per share. The results reflected expected challenges related to margin management, funding repricing and mix changes and we also included a number of unfavorable Non recurring items that we highlighted in the release, we wanted to provide our path to a more recognizable quarterly performance figure. While our call will focus on ALCO elements of our performance for the most part, we'll be happy to share more color on the non recurring and timing items that were outlined in the release. Before moving to the balance sheet management topics, I'll touch on a few Q1 business performance highlights.

Speaker 2

Commercial loans were up 6.5% on an annualized basis for the 1st period and 41% was C and I oriented, which is consistent with the progress that we've made in prior quarters and that's our main focus of the day. Wealth and Asset Management team growth So new business growth in the Q1 was the best that we've had in 2 years of any quarter, very strong. Our insurance business saw Property and casualty premium driven revenue up $300,000 for the quarter versus our expectations and we expect a Continuation of that theme over the remainder of the year. Credit remains well in check. We're steady on our NPAs, lower delinquency And an ongoing commercial credit review process, it's rigorous review, stress testing and all that goes with that.

Speaker 2

At this point, our clients are handling the new environment very 1st quarter margin landed at 290 basis points for the quarter. Results reflected that full quarter impact Margin deterioration that we began to experience toward the end of Q4 of last year. Our January efforts focused on addressing deposit repricing velocity, product mix movement and adjusting promotional programs to stabilize our margin. February March margin did stabilize. They were separated by just 2 basis points.

Speaker 2

Although the headline grabbing industry events in March drove more unfavorable mix activity in the commercial and public fund sectors. Going forward, we're focused on addressing the needs of the most elastic components of our funding And to continue to attract new money in all business segments, we need to grow our deposit base. Ultimately, looking to improve Our loan to deposit ratio as well, we're going to work both sides of that equation. We'll improve balance sheet efficiency, net interest income, margin and capital utilization. To give a little history, beginning in the mid November 2022 timeframe, we came out very strong With the consumer deposit offering to drive new business and retain our great existing book, our promotions generated new business activity And a bit too much velocity of movement within our existing book, we see that in our deposit betas.

Speaker 2

We're running a touch higher than the industry based data that we have available. And that's an opportunity for us to recalibrate as we come to the end of promotional periods over the next few months. Business deposits, certainly a strength for Premier over the last 2 years, experienced a pause in the Q1. We expected a cyclical decline in the book And that's what we received. It's isolated to a handful of clients and it's not a systemic issue.

Speaker 2

However, March events Changed the story a bit, balances did remain steady over the month, but the mix was less favorable as commercial clients look for more protection given the all the issues of the day. I'm going to turn it back to Paul to provide more specifics.

Speaker 1

Thank you, Gary. I'll first discuss some of the unique items that impacted quarterly results. As noted in our release, Q1 2023 earnings included the impact of the following pre tax items: $1,400,000 of equity investment losses due to the downturn in bank stocks the last couple of weeks in March, a $1,500,000 Negative mortgage pipeline hedge adjustment that should revert in 2023, a commercial charge off of $1,500,000 related to an annual appraisal update that will not recur in 2023 and $1,500,000 of timing related expenses that only occur in the Q1. Excluding the impact of these items that were $0.03 each, Q1 2023 earnings would have been $0.63 per share. Separately, we are implementing cost cuts that represent an estimated $3,000,000 pre tax per quarter beginning in the second quarter.

Speaker 1

And last, we currently estimate that each 25 basis point change in the federal funds rate could impact net interest income by approximately 1,500,000 Now regarding the balance sheet, capital levels remained solid and improved during the quarter. Tangible Equity increased 5% in dollar terms and our TE ratio improved by 25 basis points to 7.03 percent, including AOCI or 8.9 percent excluding AOCI. Our regulatory ratios also increased during the quarter. It is important to note that they all exceed well capitalized guidelines, even when including the impact of AOCI. During the Q1, total deposits did decline about 2% due to a decrease in non interest bearing deposits, which was offset partly by an increase in interest bearing deposits.

Speaker 1

It's critical to note this happened prior to the industry turmoil that occurred in March following the 2 large bank failures. In fact, total consumer deposits increased $14,000,000 during the month of March. The runoff we experienced early in the quarter was more anomalous in nature with $107,000,000 related to commercial clients using or moving funds related to their business dispositions and acquisitions as well as the repayment of funds drawn on commercial lines of credit prior to year end. We also experienced a mixed migration during the quarter with $67,000,000 of non interest bearing deposits transferring into ICS and other interest bearing deposits Core investments as customers sought out a combination of deposit insurance protection and yield. Speaking of deposit insurance, Our level of uninsured deposits declined to 32.3 percent or 19.6 percent when adjusting for collateralized deposits such as OPCS, other insured deposits such as the Indiana PDIF and internal accounts.

Speaker 1

Our press release provided a detailed list of quantifiable liquidity sources at threethirty 1, which exceeded $2,450,000,000 including $1,360,000,000 of borrowing capacity with the FHLB. We are also in the process of expanding our capacity at the Federal Reserve and expect to increase that by at least $300,000,000 in the second quarter, primarily due to deposit runoff, Increasing our reliance on higher cost FHLB and an accelerated deposit beta, we experienced NIM compression during 1Q. Interest bearing deposit costs increased 62 basis points to 1.69% for 1Q 2023. This increase was primarily due to public ICS Cedar's accounts, money market accounts and time deposits as customers migrated for insurance protection and yield. However, as a result of actions we took, the velocity of increase slowed during the quarter, resulting in average interest bearing deposit costs only increasing by 2 basis points to 1.79% during the month of March.

Speaker 1

This represents a cumulative beta of 35% compared to the change in the monthly average effective federal funds rate, which increased 4 57 basis points to 4.65 percent from December 2021. Net interest margin was positively impacted by the combination of previous loan growth and higher loan yields, which were 4.66%, up 12 basis points from 4Q 2022. Excluding the impact of PPP and Marks, loan yields were 4.76% in March 2023 for an increase of 94 basis points since December 2021, which represents a cumulative beta of about 21% compared to the change in the monthly average effective federal funds rate for the same period. However, the combination of deposit costs outpacing loan yields and a heavier reliance on FHLB from deposit runoff led to the compression of net interest income and margin during the Q1. Next, non interest income of $12,500,000 for 1Q was down $1,800,000 from the prior quarter, primarily due to $1,400,000 of security losses from the decreased valuations on equity securities compared to a gain of $1,200,000 in 4Q, primarily from $1,300,000 of gains on the sale of $8,700,000 of equity securities.

Speaker 1

Separately, non interest income declined $4,400,000 from the Q1 of 2022 Due to mortgage banking, as a result of a $3,400,000 decline in gains from a decrease in hedge valuations and lower production, plus a $100,000 MSR valuation loss in 1Q 'twenty three compared to a $1,200,000 gain in 1Q 'twenty two. As previously discussed, hedge valuations even out over time, but individual quarters can be volatile depending on changes in market rates and pricing. In less volatile rate environments, short term results have less sensitivity to rate movements. However, due to the wide dispersion of interest rates within the pipeline and limited liquidity in hedge markets, We have experienced larger volatility in monthly and quarterly results. Expenses of $42,800,000 were down 1% on a linked quarter basis and included about $2,000,000 of non recurring or timing related items such as payroll taxes and benefits for annual incentive payouts.

Speaker 1

As mentioned earlier, we are implementing $9,000,000 in cost savings plans over the remainder of the year, bringing our full year expenses to approximately 160 $3,000,000 versus our original $170,000,000 estimate. Overall credit quality was stable during the quarter with a significant Decrease in delinquencies and no meaningful increases in NPAs or criticized loans. Net charge offs of 2 point $5,000,000 were primarily due to an annual appraisal update for a commercial relationship that will not recur during the remainder of 2023. At March 31, our allowance coverage was 1.13% of total loans and 2 16% of non performing loans. That completes my financial review.

Speaker 1

And I'll now turn the call back over to Gary for some closing remarks.

Speaker 2

Thank you, Paul. And I'll share some thoughts for the remainder of 2023. Our twelvethirty one point to point earning asset growth, We're still looking at 3% to 4% for the year. Focus on loan and deposit ratio reduction over the remainder of the year is a key element for us. 1st quarter growth in loans was more reflective of funding of 'twenty two commitments.

Speaker 2

The 'twenty three new business effort It's really zeroed in on some very focused and contained growth. Credit indicators remain strong as Paul mentioned. Lower portfolio expectations will help us on the provision side. And there still are uncertainties around Macro factors such as unemployment, recession, pacing and severity and so forth, but of what we control, We feel very good about our provision prospects. Margin was stable in February March as we've discussed And we're targeting a funded beta improvement by the end of the year on the deposit side.

Speaker 2

Loan beta lag, But you'll see some improvement over there, all things being equal. There's continued evaluation of Alto toolbox options. Examples would be a hedge to lower the cost of our near term embedded funding costs. A second item would be to position To provide partial insulation from the impact of potential future Fed increases and we have opportunities to trim the balance sheet and the corresponding wholesale funding components that Support it. The list could go on, but you get the idea.

Speaker 2

We are we and I'm sure many in the industry are looking at many of the tools that can help Maintain that stable environment and earnings stability as well. We have a path to an improved net interest income and margin performance. Although the full earnings power of the balance sheet will not be realized until we see some progress on the unwinding of the inverted curve, Can expect continued strong fee income performance in the Insurance and Asset Management businesses, residential mortgage, The volume and the gain on sale realization is expected to remain challenging for the remainder of 2023. And on the expense front, as Paul mentioned, we've got commitments made that were well underway and we'll continue to assess as we go forward. And with that, operator, I'll turn it over for questions.

Operator

Perfect. Thank you. Our first question comes from Brandon Nosal from Piper Sandler. Brandon, your line is now open. Please go ahead.

Speaker 3

Hey, good morning guys. Hope you're doing well.

Speaker 2

Good morning. Just

Speaker 3

to start off here on maybe kind of deposits And margin, on the one hand, it sounds like you're trying to grow deposits and lower loan to deposit ratio, which can be costly in this environment. But on the other hand, you Awesome. Flattening of pricing increases in March.

Speaker 1

Can you

Speaker 3

kind of maybe help us understand the balance of those two factors and what that means for the margin over the next

Speaker 2

I'll let Paul follow-up with Better detail, but I would break the book into a couple of portions, Brendan. On the consumer and the private banking side, I think you'll see the typical growth initiatives relative to deposit growth that you have come to expect. I think on the business side where we're feeling More velocity is the movement, whether it's from non interest bearing to interest bearing or lesser interest bearing to more interest bearing. And that bit of volatility is probably provides the most uncertainty relative to Margin growth relative to that segment.

Speaker 1

Yes. That's right, Brennan. We're not Looking to disturb the piles that are performing well. I think your basic consumer stuff, Checking, savings, even some money markets, things like that, those are holding steady and frankly haven't moved from a beta perspective this whole cycle. In terms of where we can help the margin, as Gary alluded to in his comments earlier, we have some opportunities coming up near term To recoup some of the costs from promotions and we're going to look to do some of that.

Speaker 1

Now part of that will depend on Additional Fed fund rate movements, of course. So we're keeping a close eye on that and we'll factor that into our Repricing abilities that could lead to some runoff in those piles, but overall would be a benefit to Our deposit betas and then separately continuing to focus on trying to grow the overall book. Some of that will come and it's chunky from public bonds as their seasonality comes into play. But CDs, time deposits, things like that to Lock them in before additional Fed fund increases, things like that will help grow the book. And then ultimately, that's Somewhat of a push at the top end, given where FHLB costs are.

Speaker 1

So from a all in perspective on our Interest bearing liabilities or total cost of funds, the intention is to try and maintain and stabilize where we're at And pick our spots to make some improvements. And then the last piece would be the strategies that we kind of alluded to Looking for the benefits potentially of maybe some hedging or other ideas that are out there. So we're taking a look Pretty much at all options at this point.

Speaker 2

One other comment on that. I mentioned in my comments, we came out of the gate pretty fast in Q4, And we were probably ahead of the pack relative to repricing of our existing book and the more price sensitive Wealth Management Private Banking book. When we got into January and started our adjustments, if you will, one of the decisions we made was we'll sit on our hands for the next couple of rounds Fed movement. And we really did. And we did not feel any demission in that consumer and that wealth management business.

Speaker 2

The mix moved around a little bit, but the balance has stood. So that's all just one of 2 things. We had moved pretty well out of the gate in December late November, And that was supporting us well in that January, February timeframe or there's still just more elasticity in the book That you might suspect, either way, we didn't harm ourselves in any way by not being very active with those latest moves. But it's a matter of degree. The Fed comes out onesie, twosie here and there.

Speaker 2

We can be very diligent in how we go about it. If The pace or the actual size of movements return to the sort of movements they were in the Q4, that's a different discussion.

Speaker 3

Yes, understood. Thanks for all those comments and the detail in the release on kind of The monthly trends as well. Perhaps one more from me just on the mortgage line. Obviously, a lot of adjustments over the past Couple of quarters on MSR and the hedging noise. Can you just give us a sense of what you view as the run rate for that line item and where you see it heading over the next several quarters?

Speaker 2

Brendan, I think when we were setting out our guidance on that as we were in January, we were sitting on about $8,000,000 of Fee income out of the mortgage side, a couple of that was on servicing income, net of amortization, and that's coming in stronger than ever. And the remaining 6 or 6 and change was in the regular gain on sale. And we're it's going to take everything we've got It's about 6.5% for the gain on sale, but we'll stand with that number right now. But this is a challenging environment. And What I can say about the hedge activity, I think Paul gave you the pieces that make that easy to understand the lumpiness.

Speaker 2

When we look at it over the last 5 quarters, we're a net $1,500,000 ahead in that, which is what we should be. But in any one quarter, As Paul mentioned, I can be up $1,000,000 or down $2,000,000 But we do track about a 6 quarter cycle because of the construction period on houses To check the overall effectiveness of our hedge program, to not take it for granted. But there are these last two quarters are a good example. We had a down stroke in the Q4 and we had another one in the Q1 as rates were falling. But that was falling a big Uptick in the Q3 of last year.

Speaker 2

So, it's lumpiness that used to be hidden a bit in the larger Mortgage gain on sale number, but with volume down, the external sales, I think we're running at about 40% to 50% Of our pace as an industry in the Q1 of last year. So you see just a lot more visibility in the lumpiness of what standard Mark to market activity for those hedges.

Speaker 1

Yes. Reality is this was always kind of going on in the weeds in the background. It just didn't stick out and Nowadays, it does, partly for the little bit bigger on the volatility side, but as Gary said, just less Air cover from normal production and activity.

Speaker 3

Okay. That's quite helpful. Thank you for taking the questions.

Speaker 1

Thank you.

Operator

Our next question comes from Andrew DeFranco from KBW. Andrew, your line is now open. Please go ahead.

Speaker 4

Hi. This is Andrew filling in for Mike. Thank you for taking my questions.

Speaker 2

Good morning, Andrew.

Speaker 4

I was just wondering if we could touch on the loan book here for a minute. I know you talked about The C and I and new business growth in the prepared remarks, but can you just provide some more color there on where you're seeing good opportunities in regards to that focused and contained growth you mentioned?

Speaker 2

I'll break it down into the portfolio segments, if you will. We are Purposefully constraining ourselves on residential real estate as far as portfolio growth And on consumer, so think indirect lending into auto, the home equity books and so forth, keeping those flat Going forward, leaving our capacity for the commercial boat to expand. We do have commitments 2022 both in commercial construction and residential real estate construction funding commitments that are part of the balanced growth that you see, Particularly in the first half of twenty twenty three. But generally speaking, I think our guidance back in January was that the commercial book It was targeted to grow perhaps 5% or so on our way to an earning asset growth that was closer to 5%. We would say now we're looking at 4% or so At max, perhaps less than that on the commercial side.

Speaker 2

And it brought our earning asset side down as well. And it's more about Our containment of growing the left side of the balance sheet because we want to get take some action and get a better handle on the balance between our asset liability situation. And so there's business there. We're being very selective. And we're working with our existing clients Always.

Speaker 2

And that's the There are exceptions to that, but that's where we're spending our capacity right now is to fulfill the need of existing clients.

Speaker 4

Great. Appreciate all the color there. And then lastly for me, just a quick one. Any M and A discussions happening today or anything you guys are excited about on that front?

Speaker 2

Nothing to share at this point.

Operator

We currently have no further questions. I would like to hand the call back to Gary Small for final remarks. Please go ahead.

Speaker 2

Well, again, thanks everyone for joining us this morning. Turbulent quarter for the industry and I think we all have Good challenge ahead of us and I'm very confident in our squad's ability to deliver a good year. So Look forward to talking to you in the future.

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Earnings Conference Call
Premier Financial Q1 2023
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