Q1 2021 Premier Financial Corp (OHIO) Earnings Call
In this current one day in and out.
The biggest for interest.
We're staying in zone.
And welcome to the Premier Financial Corporation first quarter 2021 earnings Conference call.
All participants will be in listen only mode.
Do you need assistance, please signal a conference specialist by pressing star zero.
After todays presentation, there will be an opportunity to ask a question.
To ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note. This event is being recorded I would now like to turn the conference over to Tara Murphy Vice President. Please go ahead.
Thank you good morning, everyone and thank you for joining us for today's first quarter 'twenty 'twenty. One earnings conference call. This call is also being webcast and the audio replay will be available at the Premier Financial Corp website at Premier Fin Corp. Dotcom following leadership's prepared comments from the company's strategy.
And performance they will be available to take your questions 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 related to future financial results and business operations for Premier Financial Corp. Actual results may differ materially from current management for.
Our cast and projections as a result 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 Mr. Small for his comments.
Thank you Tara and good morning to all I appreciate having you with us today.
We are very pleased to report record first quarter earnings from $41 million or $1 10, a share.
We delivered well against our traditional earnings elements and when combined with some very favorable outcomes on specific income drivers that made for an outsized performance figure for the quarter.
Three topics certainly merit discussion.
First the strengthening economic outlook combined with the benign credit charge off levels drove our loan provision downward.
Second the escalation of the 10 year Treasury is up $3 31 led to a meaningful recapture of our MSR that was not unexpected for 'twenty one over the course of the year, but certainly rates moving more quickly than we had anticipated.
Third item, we benefited from a favorable stock valuation moving or a bank equity portfolio were up over 15% for the year.
However, these favorable outcome should not overshadow the more typical drivers of the financial performance delivered by the business units across the organization.
New commercial loan commitments for the quarter were very strong closing in on $200 million.
Net effect with somewhat masked by the continued decline in commercial line utilization rates.
Superior liquidity positions our clients find they are experiencing.
Currently rerun or historically I should say, we run a commercial utilization rate of about 50%.
And we're currently experiencing a 30% run rate.
And that move downward 5% in the first quarter alone.
For our consumer line utilization is performing in a similar fashion with utilization rates down 10% in absolute terms versus normal levels. We.
We do see these utilization declines as transitory as the economy reopens and consumer and businesses return for their normal if not more active behaviors, we expect to return to normal utilization levels.
Deposits expanded 5% for the quarter and we expect to see additional growth over the remainder of the year due to the success of this year's round of PPP funds combined with continued stimulus benefits for households, and.
The new funding from Washington is landing in municipal accounts.
The outsized growth in deposits will lead to a larger balance sheet and expanded securities portfolio.
As a favorable in terms of net interest dollars, although it's a drag in terms of the net interest margin will remain focused on serving our clients welcoming their deposits and focus on investing those funds to the best balance of yield and duration considerations.
Our clients are handling their personal and business balance sheets very effectively we see already historical low delinquency levels actually falling further across the board and the typical portfolio of credit stats remained stable.
Residential mortgage origination continues to itself the continuation of last year's theme.
March alone was the highest month of origination in our history with an equal mix of purchased new construction in refinance activity.
Volume a strong gain on sale margin is still running ahead of historical levels, although moderating somewhat from the extremely favorable performance in 2021, and the servicing valuation allowance for the quarter as favorable as expected.
We see fees related to consumer behavior on the rise so think debit card income et cetera, and certainly a good omen for the remainder of the year.
Expenses ran a bit hot for the quarter for some understood reasons, Paul will share more details, but I would say that there was an increase related to 2020 performance pay out true ups that occurred in the first quarter and a portion of it is just timing between quarters.
There is an amount that we see as run rate related and we expect to address debt over the remainder of the year offset by year's end.
At this point I'll turn it over to Paul for more comments and I'll come back and close with some thoughts on guidance towards the end of the call.
Thank you Gary good morning, everyone.
Summarize our first quarter results and focus on certain areas of impact.
Let's begin with our balance sheet that expanded due to continued high deposits growth, which were up 5% from yearend and continue to outpace expectations.
We improved mix and continued to reduce our all in costs, which fell seven basis points to 0.27% this quarter.
For assets loans were down in all categories, except PPP due to continued line pay downs that Matt will discuss more shortly.
While we await alone growth rebound, we focused on securities to drive net interest income growth.
During <unk>, we added $195 million of securities, including some bank equities that saw a nice gain in the quarter.
Next day.
The allowance, which decreased $7 3 million due to a provision credit for loans of $7 5 million and net recoveries of 189000.
This decrease is primarily related to another improvement quantitative factors as well as the decline in non PPP balances.
Welcome lack of charge offs that helped expense by approximately $4 million.
Quantitative factors improved again due to an even better national unemployment forecast, but we did have some risk migration that partly offset this.
At $3 31, our allowance coverage, excluding PPP loans, and including acquisition marks was $1 six 9% down from 181, 84% at 12 31, and we are comfortable with that given the current economic outlook.
The finished the balance sheet as capital, where we ended <unk> with almost $1 billion of equity.
The increase from year end is due to net earnings in excess of dividend offset by a decline in unrealized securities gains.
We briefly did some stock buybacks before the stock price has accelerated for no real impact.
At $3 31, our tangible equity ratio was nine 1% or nine 7%, excluding PPP loans and our total risk based capital is estimated to be about 13, 5%.
Next I'll turn to the income statement, starting with net interest income of $57 million, which is up 3% on a linked quarter basis.
Excluding the impact of marks in PPP, our net interest margin was $3 two 5% down from 336% on a linked quarter basis.
This is a bit lower than projected due to the larger than expected deposit growth, which lowered margin by approximately six to nine basis points.
NIM will remain challenged the rest of the year and continue to contract, especially in light of the recently enacted stimulus act that will see public funds deposits climbed significantly starting into Q.
We remain focused on net interest income growth and we will continue to invest prudently in securities in the interim until loan growth picks up.
Noninterest income was $26 million for <unk> and represented 30% of total revenues.
Several key items impacted us.
First mortgage banking income was strong again, including a shift in MSR valuation to a positive $5 3 million this quarter due to the upswing in rates and slower prepay speeds compared to the major drop in rates and accelerated prepay speeds last year.
Second we had a $2 1 million.
Securities gain with <unk>.
$5 million from where we took advantage of fed pricing to realize a gain and reinvested to generate the same income over the next three years.
The other $1 6 million related to unrealized gains on our bank equities due to the improved market.
For insurance commissions, the first quarters the period each year, when we generate contingent commissions and we earned $1 1 million for those down from $1 3 million last year.
Last volley income included a death benefit of <unk> 3 million this quarter.
Next is expenses, which were $38 8 million down 1% on a linked quarter basis, excluding merger costs.
Rather than discuss specifics I will note that we did have some one time items impacting the quarter, primarily in compensation such debt expenses would've been about $37 5 million and.
We also had a few run rate items that as Gary mentioned are under review.
But we would currently estimate full year expenses and closer to a $153 million versus our prior 150 million estimate.
However, despite the somewhat elevated cost we did produce an efficiency ratio of just under 48% this quarter and still expect 50% or better for the full year.
Additionally, our first quarter pre tax pre provision income was $44 million, which generated a strong to 43% return on average assets.
Bottom line, we reported net income of $41 million or <unk> 10 per share for the first quarter 2021, which is well ahead of expectations due to the good guys and provision mortgage and security gains.
Net partly by some elevated costs.
Factoring in these results and what we can see go forward, we would estimate net income, adding about 5% higher than prior expectation assuming that's good guys don't reverse if the economy were to turn on us.
That completes my financial review and I'll now turn the call over to Matt for a discussion of mortgage and credit Matt.
Thanks, Paul This morning, I will be providing an update on our commercial and residential mortgage areas as well as comments on asset quality.
In our commercial business when excluding PPP activity originations were solid in the first quarter in line with our overall expectations. Although we did see a balanced decline for the quarter. The decline was largely a result of approximately $53 million of line of credit pay downs, along with some payoff activity that shifted into the first.
From the fourth quarter.
We believe that the 2021 round of PPP had an impact on line balances and while timing is still unclear. We are optimistic that utilizations will begin to pick up as economic conditions continue to improve I would note that commercial line balances have fallen approximately $157 million.
Over the past four quarters, which represents about a four 6% impact to the portfolio.
Adjusting year over year portfolio growth without the line balance decline loan growth is approximately six 7%.
On the deposit side, we experienced commercial deposit growth in excess of eight 5% for the quarter.
We continue to support our customers with PPP loans.
We originated 1645 loans during the first quarter in support of our customer base for a total of $171 $7 million.
Looking forward, we expect loan growth to resume during the second quarter as activity remains solid.
While demand is not on par with pre pandemic levels. We are beginning to see some green shoots coming up as client conversations around investment are happening with greater frequency, creating potential for an acceleration of demand in the second half of 2021.
We continue to look for opportunities to invest in the commercial business and through April we were successful in bringing in two additional bankers to the team with more additions expected during the quarter.
In our residential mortgage business, we started the year off well and what we expect to be a more challenging environment and mortgage more.
<unk> banking gain on sales for the first quarter was consistent with our expectations in comparison to the fourth quarter.
As we have discussed previously we expected margin to begin to normalize to pre pandemic levels during 2021 and in the first quarter. We started to see evidence of this we expect this compression to continue into the second quarter.
The biggest mover for mortgage banking revenue was the MSR adjustments, which brought back over $5 $3 million into income for the first quarter as we talked about on last quarter's call. We expected to bring back of MSR to occur in 2021 as part of maintaining mortgage banking contribution consistent overall with 2020 performance.
While the MSR bring back for the first quarter was more than anticipated. It is in line with what we expected to happen during the year.
Our outlook for the second quarter is positive in terms of application in production activity as we begin to enter what is normally a more active period for the business and we remain on track for delivering on our full year expectations for mortgage.
In terms of asset quality, we saw improvement in payment delinquency nonperforming loan levels, while we had a net recovery in terms of charge offs. In addition, we experienced in other meaningful reduction in COVID-19 related payment deferrals consistent with our expectations.
We did see an increase in classified loans of approximately $24 $2 million during the first quarter, which is due primarily by the classification of a $26 million C&I loan.
A portion of the borrower's business is impacted by the moratorium on student loan collections as part of the cares Act legislation.
We believe the business will improve with the restart of this collection activity, which is expected to return and we continue to work with the client closely.
In terms of outlook, while the economic stimulus and liquidity in the market has affected loan demand. It has been instrumental in providing from what increasingly it looks like a sufficient bridge to an improved economic environment for our clients.
While we will have individual credit issues from time to time it remains more episodic in nature and is not indicative of any portfolio why are portfolio segment related concerns.
We remain diligent in monitoring the performance of the portfolio and working with our clients as we continue to navigate our economic environment.
I would now like to turn the call back over to Gary small Gary.
Thank you, Matt now I'll provide a few comments.
The guidance we provided in January.
Select comments on items of note.
That was saying the end of period commercial loan expectations, we're affirming for the year with our original guidance in January we do expect to see the growth more so in Q3 and Q4 for all the reasons noted.
New business activity remains strong it's just tempered by some uncertainty as to how long it's going to take for the clients to burn through their built up cash reserves.
From a credit perspective, we certainly expect net charge offs to beat the low end of our original range provided in January.
Continued macro environment improvements.
<unk>.
And the economy.
We will create additional favorable allowance movement.
Unexpected turn in the pandemic progress would have the opposite effect.
Relative to fee income, we affirm our expectations on the mortgage income generation for the year the MSR.
Favorable as expected, but we do feel that as it tempers over the remainder of the year is still meets our expectations that we have in the plan.
Balance sheet growth $775 billion would not be an unreasonable expectation for the end of the year driving up net interest income driving NIM down.
It's the right approach for us in 'twenty one.
In summary, we're off to a good start 'twenty, one we expect favorable contributions in the areas of the law.
Provision in MSR valuation over the entirety of 'twenty, one a meaningful portion of these obviously have already been accelerated into Q1.
Having acknowledged that acceleration, we did post strong normalized earnings for.
For additional perspective or to put a wrap on that comment if we would have known in January what we understand now we would've projected our 'twenty one earnings run rate to be about 4% to 5% higher for the entire year than what we were thinking back in January.
So that's sort of the high level umbrella statement on expectations.
And with that operator, we'll turn it over for questions.
We will now begin the question and answer session.
I ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And the first question comes from Michael Perito of K VW. Please go ahead.
Hey, guys how is everybody.
Good morning, Mike and doing well.
Driving a snowstorm for taking them.
Okay.
Thanks for taking my questions I had a few things I wanted to hit I. Appreciate the commentary on loan growth sounds like it is going to be back half loaded I kind of a bigger picture question for you guys for R&D.
Obviously last year and the majority of this year are going to be heavily impacted by the pandemic, but you know when I think about the two legacy institutions that combined right. I mean, they were both kind of high single digit growth net institutions and I'm curious.
A year into the merger.
Obviously, the environment hasn't helped but how do you think about the long term growth rate for this company as you see kind of the market share disruption and I'm. Just curious if you have any updated thoughts youre willing to offer on that.
Okay.
Mike This is Gary.
Ill take the first swing at that and Matt feel free to jump in overall, when you take commercial and the consumer and the residential book combined we would still.
Target ourselves is that 7% to 8% growth company over our norm over a longer period of time, the wildcard this year and last year as well it's been on the residential side with all the refi activity that's.
That's a meaningful sized book on our balance sheet and it's been in decline as we are an originate and sell sort of shop.
And we were rolling off some of our existing book into a Fannie and Freddie when it's performing normally it will take off that 5% to 7% increase the year commercial we'll do closer to eight plus percent a year in consumer which is a little bit tied to your actual household effects.
Would be less than five year on average that would get you to that.
<unk> point that I mentioned, what's not counted in there is.
In ordinary organic growth that we are always on the lookout for relative to entering new markets via commercial lift outs and so forth, we will count those when we get those but that's icing on the cake.
Relative to how we think about our targeted number.
Yeah, Mike Good morning, its Matt and just to kind of piggyback off of Gary's comments.
I would agree with you that the last year has been a it creates a little bit more difficult comparison in the effects of the <unk>.
The endemic on both institutions coming together in a merger for after experiencing what we've seen for the past year and actually a little more optimistic than I would have been initially I think to Gary's point on the commercial front.
Absolutely believing.
8% organic growth paddling, our own boat is in the cards for us and I see expansion opportunities is there is a disruption as you mentioned.
I also think in our mortgage business we.
We really saw the benefit of scale in 2020, and how that business performed and we're also hearing.
A lot of positive impact within the industry on our model and how we go to and how we go to market and our client experience and we're increasingly seeing people reach us reach out to us for more conversations which provides us an opportunity to expand our business. So.
I am very optimistic long term on what the what the expansion opportunities are for our businesses.
Got it.
Very helpful and then.
Maybe a quick follow up follow ups.
Gary that 277 5 billion was that are earning assets number for the end of the year.
I would think of it more as an end of period, Mike, but when we project, it's a pretty steady climb.
Okay.
And then just you mentioned Gary the right play this year is to grow loans at do you expect the margin per se and I imagine a lot of that has to do with the liquidity on the balance sheet and in the system right but.
I guess when do you see that dynamic shifting.
Is it just the liquidity element is it is there more considerations, we should be mindful of in terms of.
The loan growth.
<unk> expense for the margin dynamic could could potentially change as you see it.
No Mike.
There's a few dynamics there relative to PPP and the burn off on those two tranches.
Re normalization.
Between Matt and Vince's book on consumer probably $200 million of line draws that will experience and that's probably more of a 24 month cycle for that in its entirety I think what youll see we will manage.
If we were to hit that number we will manage out of securities and let the loan growth that we start to develop over the remainder of this year and next year fill the bucket. So you might actually see a little less growth in absolute balance sheet terms in 'twenty two as we swap out loans for securities and we're keeping the securities positioned very per.
Specifically there is liquidity there.
Doing that with that in mind.
We.
There is no glory, and having 7% have too big of a balance sheet at a 100 basis points you make more money, but every other metric that you respect.
From an ROE on ROE anything because worse so.
For this year as I mentioned on the customer deposits were not turning any one away we're going to be there for them as we should be we'll take the lump on some of those performance metrics will make little more money, while doing it but the long term would not have us holding 5% to $700 million.
Extra balance sheet, just because we have the capital to do it we've never played that way and we wouldn't start now right.
No that makes sense.
And then just lastly for me you mentioned the return metrics Gary if we just do the quick math I mean, a sub 50% efficiency ratio should keep that pre tax pre provision Roy north of 200 basis points. Obviously, this big could fall through or at least better follow through on the multiple for you guys now trading at almost 190 <unk> tangible book.
Strong currency would love any updated thoughts on capital here with that being said right I mean very different conversation than three months ago. When you guys for we're trading at a much lower multiple can you give us some updated thoughts around buyback and then maybe on the M&A pipeline too as you guys know about a year plus removed from from the closing of the merger.
So I'll give you on that.
Two plus the dividend so we pumped in other <unk>, that's two quarters of two sales increase at the back of unusual for our organization, but showing our commitment to getting to our <unk>.
Sustainable earnings dividend payout ratio, that's in keeping with the.
With our objectives and you'll see continuation of that.
On the buyback front, we set a board meeting yesterday, and we affirm we're authorized to do quite a bit.
And we affirm the levels of which were comfortable in moving in.
And you should expect that we will be opportunistic and what for the moment.
And try not to buy at the top of the market net sort of thing, but we are as enthusiastic on that front as we as we were three months ago. When we mentioned the system market for Scott a little hotter, we thought we've got time debt to execute but that's still there on the M&A front.
We've got enough capital to weather, we see fee business cash opportunities to buy and so forth easily do that in our ratios hold up nicely.
Whether we've done buybacks or not as we enter into and model out other acquisition opportunities.
Obviously, the market's heating up nationally on the M&A front, and we're starting to feel a little bit more here in the upper Midwest.
It will be in those discussions as we go.
Very helpful guys. Thank you for taking my questions I appreciate it.
Thank you Mike.
Once again, we would like to ask a question. Please press Star then one.
And the next question will come from Scott Cyphers from Piper Sandler. Please go ahead.
Good morning, guys. Thank you for taking the question.
So Gary just given their cross currents in the NII outlook, meaning sort of bigger securities portfolio less.
A less robust net interest margin percentage.
Are you still comfortable with the NII guide that you guys had given in other words it while there are some some cross current so we're still getting to the same place basically I think that had been sort of 7% to 8% NII growth this year or like 5% to 7% X P. P is that something you guys are still comfortable with.
Yes, Scott this fall, we're still comfortable with that if anything we've got a little upside on that because of the continued growth in deposits.
Coming in so.
Continue to put those out on the securities front those will keep drone those dollars just not at a very high rate.
Efficient basis, there so we're definitely comfortable with that prior.
Would hedge it up if anything.
Okay perfect. Thank you and then just just so I'm clear the base that we'd be talking off of is just the fourth quarter 'twenty kind of annualized basis that right as well, yes, yes, yes perfect. Okay. Thank you and then separate question on PPP.
Overall, maybe if you could let us know sort of your expert expectations for the pace of forgiveness, both for the remaining round one loans and those from round two as well.
Are you kind of guessing those will ebb and flow share I'll start with that one and then Matt can fill in any blind share but.
Very consistent with what we had said before so we are still on pace for the round one forgiveness.
<unk>.
What we're targeting is about 80% of those original which represented basically everything under $2 million going through.
Essentially in the first half for the year or so.
Still on pace for that so those are coming through and then on round two.
I think we had said.
100, <unk> I think was the number we threw out there which was essentially.
Essentially half.
The original round, one loans that were less than $2 million.
And we're at 172 at the end of March.
There is enough in the pipeline debt.
To close that will get us just to touch over that number so that's a pretty good number and it cuts off here soon.
The expectation is going to run out of Nigeria, Libya. So.
So in short Scott, Yes, we're still.
Good with that original guidance.
Okay.
One in our hip pocket Scott, It's we don't have a very aggressive assumption on prepayment of the over $2 million underground one.
Okay.
<unk> assumed for this year, just because of the uncertainty of how folks will move so that's a potential there could be a good guy.
Okay, perfect and then that debt round, two or are we thinking that the stuff under $2 million sort of gone by the end of this year for the for the most part.
No no I don't see it being on the balance sheet at the end of the year.
Okay. Okay.
Perfect Alright, Thank you guys very much.
Thanks, Scott Thanks.
Okay.
This concludes our question and answer session I would now like to turn the conference back over to Tera Murphy for any closing remarks.
Thank you for joining us today as we discuss our quarterly results. We appreciate your time and interest in Premier Financial Corp have a great day.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Yeah.
[music].
Yes.
[music].
Yes.