Q2 2021 Premier Financial Corp (OHIO) Earnings Call
Good day and welcome to the Premier Financial Corp.
Corp, second quarter 2021 earnings conference call on.
Participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Tera Murphy.
If he was president of corporate Communications. Please go ahead.
Thank you good morning, everyone and thank you for joining us for todays second quarter 2021 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 on the Companys strategy and performance day 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 forecast 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.
And now I'll turn the call over to Mr. Small for his comments.
Thank you Tara and good morning to all we appreciate having you with us today.
The Premier team delivered a strong performance in the second quarter, New business activity was very robust cost and credit was managed well and we're taking steps and making the necessary adjustments.
<unk> to deliver on the year, we outlined back in January from a performance perspective.
Earnings came in at 31, 4 million or <unk> 84, a share generating a return on assets of 167% and over 19% on tangible capital.
Quarter saw a continuation of.
Positive drivers, we discussed in our first quarter call.
In each of the 5 markets state.
State markets across our footprint, we are seeing a credit demand on the rise all households are in strong shape and the general economy is expanding.
New business production for all of our lending segments commercial.
Many of them are in residential real estate are strong and we experienced linked quarter total loan growth of 3.6% when you exclude the PPP impact with the commercial and consumer business growing over 4.4% each of those numbers is on an annualized basis.
Given the fact that the commercial line utilization continues.
Consume to be at historically low levels, we're very pleased to turn the corner in Q2 on core loan growth there was a bit sooner than we had anticipated and communicated last quarter.
The loan portfolio quality remains very strong and the economic factors that shape, our loan loss allowance combined with the net recovery position that we're in for the year.
<unk> have resulted in another meaningful release of loan loss reserves for the quarter.
Ended with a 3.9%.
$1 million.
Credit provision.
Our robust expansion of our consumer activities is driving a double digit growth in our.
Consumer related fees so.
So think debit cards account fees ATM fees and the like and we continue to work hard to drive net interest income and maintain margin in this difficult rate environment. The continued strength of our clients' balance sheet, certainly creating excess liquidity for the organization. We in turn are driving growth in our securities portfolio and we've taken some additional meaningful.
Steps to reduce our balance sheet rate sensitivity.
Position net so that we would be favorably affected from a net interest income position going forward.
We managed to trim, our core expenses from run rate from Q2 versus Q1, consistent with our commitments made on the first quarter call and we have actions in place that will provide additional.
Pits for upcoming quarters as well.
The residents from mortgage business Science story is the 1 with the most variation from our first quarter performance.
Overall residential loan generation remained very strong at very strong levels for the quarter right on target.
However, pricing did tightened early in the quarter and our focus turned to the better prices.
Pricing price construction business, which drove more of our actual production into the portfolio less was sold and normal more loans found their way into the portfolio. This assisted in driving our net interest margin.
Positive direction for the quarter.
This obviously affected the mix between saleable in portfolio.
<unk> with our salable percentage falling below 60% for the quarter and that tempered our gain from a gain on sales perspective for the quarter.
The retreat of the 10 year Treasury rate over the course of the quarter also produced an unfavorable effect on our MSR valuation of close to $500000 you might remember it was about 5 million.
Positive in the first quarter, so a lot of volatility.
Between the linked quarters on that factor alone.
The pipeline at quarter end combined with visibility we have as we look at July.
Activity reflects a continuation of really good residential loan production, we've taken steps to improve our.
<unk> level percentage returning to targeted levels.
Pricing is.
<unk> opportunity to jump back on that space.
And while always competitive.
We think we can compete comfortably as we had originally planned.
Rates have stabilized and our hedging costs are a little bit less going forward.
And more the norm than they were during the second quarter.
We expect quarterly mortgage profitability to return to more typical levels over the remainder of the year with the unknown being the effect of the 10 year treasury rate volatility as that really does impact our MSR valuation you may recall as I said in the first quarter very very large benefit.
Benefit and we felt that was a full year benefit that was recognized in the first quarter and that we are likely to give some back and we certainly did in the second quarter.
But at current rates today, we.
We are generally in line with our planning expectations that we had at the beginning of the year for the tenure would be so it would be good to go relative to our.
Plan, if we stayed put as we are.
At this point I'm going to turn it over to Tom Paul and we will come back with some comments at the end with some guidance updates.
Thank you Gary and good morning, everyone I'll review, our second quarter and year to date results, starting with the balance sheet, which was relatively flat with the power.
Overall down slightly point to point.
The mix declined a bit as businesses began using liquidity, but we did continue to reduce our all in cost of funds, which fell 5 basis points to <unk>, 6% this quarter.
For assets, we are pleased to report $45 million on loan growth this quarter, excluding PPP led by commercial.
<unk>, which was up $36 million or 4.4% annualized.
During <unk>, we also added $360 million of securities from our excess liquidity position until loans began to rebound in June.
We remain focused on net interest income growth and will continue to act prudently as loan and deposit trends.
Dictate.
Next is the allowance, which decreased $3.4 million due to a provision credit for loans of $3.6 million and net recoveries of 244000.
This decrease is primarily related to a further improvement in economic forecasts offset slightly by an increase in non PPP.
<unk> balances plus a lack of charge offs that helped expense by over $3 million.
At June 30, our allowance coverage, excluding PPP loans, and including acquisition marks was 157% down from 169% at $3.31, but still not back to pre pandemic levels.
Finishing the balance sheet as capital, where we ended <unk> with over $1 billion of equity.
With the increase primarily due to net earnings in excess of dividends.
We also completed about 126000 of share buybacks for $3.7 million in the quarter.
At June 30, our tangible equity ratio was 9.8.
Excluding PPP loans.
And our total risk based capital was about 13, 7%.
Next I'll turn to the income statement, starting with net interest income of $57 million, which is up 1% on a linked quarter basis excluding.
Excluding the impact of marks on PPP, our net interest margin was 3.2.
8% Sun down from $3.2 5% in the first quarter.
This is consistent with expectations, given our focus on investing excess liquidity, while awaiting loan growth.
NIM could possibly see a little more pressure, depending on how fast loan growth rebounds, and whether or not deposits were to revert back to high growth.
And.
Zero executed on a swap during 2 Q that reduces our asset sensitivity and is expected to improve our net interest income by approximately $3 million annually.
Noninterest income was $17.5 million for <unk>, which is down from prior quarter and prior year, primarily due to mortgage banking.
Mortgage.
We also had $2.7 million into Q, which is down $3 million from <unk> and almost $9 million from second quarter 2020.
Matt will provide more color on a moment, but this was generally due to lower margins as well as a decline in salable mix with total mortgage production meeting expectations.
Additionally, we saw retreat in the tenure.
Gains, which dropped from 1.74, 74% at $3, 31% to 1.45% at 630. So we had to give back about a half million of the MSR valuation after the big $5.3 million recovery in <unk>, when the 10 year spiked.
Separately, we had a net.
So your.
Year 11 million dollar security gains with $1.5 million of gain from where we took advantage of pricing.
To realize those gains and reinvest to generate higher income over the next 3 years.
This was offset by 1.8 million loss related to our bank equities.
Which was down due to the market downturn for these into Q.
<unk> insurance commissions of $4.1 million was down from <unk> due to the $1.1 million of contingent commissions that are earned in the first quarter of each year.
And last other income included a $1.3 million nonrecurring settlement payment this quarter.
Next is expenses, which were $38.4 million down 1% on a linked quarter.
Order basis.
As mentioned last quarter, we'd be we began addressing run rate items, starting in the latter half of 2 Q, which helped lead to the decline.
But there are also some items such as costs related to ATM and debit card usage that have good guys up in revenues as seen by the strong performance and service fees.
We still Kirk.
To make full year expenses to end around 153 million as previously noted.
Further our year to date efficiency ratio remains below 50% and we still expect a 50% or better for the full year.
Additionally, our first or second quarter pre tax pre provision income was 36 million.
Currently yes.
Which led to a strong 1.9% ROA for second quarter and $2, 1.6% year to date.
Bottom line, we reported net income of $31 million or <unk> 84 per share for second quarter 2021, which is ahead of expectations due to the good guys in provision and security gains offset partly by.
Mortgage banking income.
That completes my financial review non now I'll turn the call over to Matt for a discussion on lending and credit.
Thanks, Paul I'll be providing an update on our commercial and residential mortgage areas as well as an update on asset quality.
In our commercial business, we're encouraged by the increased.
<unk> levels of loan production and a return to balance growth when excluding the impact of PPP during the second quarter.
Commercial loan production increased approximately 19% when comparing the second quarter of 2021 to the first quarter of 2021.
We're encouraged by the pace of lending activity as we exited the quarter.
Lower from head into the second half of the year.
We're also encouraged by our improvement in C&I originations, which has been a focus for us.
C&I originations as a percentage of total originations were 35, 6% in the second quarter as we continue to build this segment of our business.
<unk> in terms of balance growth, we delivered growth at an annualized rate of 4.4% exclusive exclusive of PPP.
While this level of growth is less than our historical performance. It's a solid improvement over the first quarter of 2021, and we believe it is a precursor for more normalized growth.
During the second half of this year.
For the remainder of the year, we foresee increasing levels of loan production and balance growth reflective of the increased activity in our markets.
In our residential mortgage business, we were pleased with our overall level of loan production in light of the operating environment.
<unk> on our refinance activity as return to more normalized levels across the industry or construction Perm business has helped provide a degree of buffer to the impact of lower refinance volume.
Mortgage banking gain on sale softened during the second quarter as Paul mentioned as we experienced a reduction in our mix of salable volume.
Volume as well as continued margin compression, which we had mentioned on our call last quarter.
At the industry level, we've experienced this race to the bottom during previous mortgage cycles, and it's a reflection of the overcapacity that has come into our industry over the past year.
Overall mortgage banking revenue for the first half of 2021.
He is running approximately 18% ahead of the first half of 2020, driven by the MSR valuation adjustments.
Looking ahead, we expect the operating environment to be with us throughout the second half of the year, Although we do expect to see improvement in sale mix in the coming quarters in comparison to <unk>.
Long term.
We believe our mortgage business is positioned for continued success and it's a business line that we will continue to invest in and grow.
With respect to asset quality, our story for the second quarter remains largely consistent with prior quarters. We're very pleased with the overall performance of the portfolio now.
Nonperforming loan levels.
Improved over 16% when comparing the second quarter of 2021 to the first quarter.
On the classified loan levels declined approximately 12% in the second quarter in comparison to the first quarter.
And we have another quarter of net recoveries in the charge offs category.
We're also happy to report that the remaining.
Covid deferrals have largely returned to their scheduled payments.
We're pleased by the performance of the portfolio during what has been a challenging 18 month period, we remain focused on our portfolio and working proactively with our clients.
I'd now like to turn the call over to Gary small Gary.
Thank you, Matt and I'll quickly give.
A few thoughts on guidance.
From a loan balance perspective, we affirm our commitment to achieving our end of year loan growth targets that we communicated back in January and that we'd be roughly just north of 5% for the total portfolio.
And mid single digits to mid.
Higher.
Single digit.
On the commercial book.
While we may benefit from line utilization improvement by year end, we believe we can hit our targets regardless of that improvement.
From a credit perspective continue.
Loan loss reserve recapture will be the same for the day, although not nearly to the same extent, perhaps as we saw on the first.
Give you a we continue to expect net charge offs for the full year to significantly outperform our initial expectations.
<unk> with what we expressed at the first quarter call.
Noninterest income, we expect to achieve the original targets for the category as strength in the consumer deposit.
Half are helping to offset any potential shortfall, we may experience on mortgage banking.
And our balance sheet growth $775 billion remains a reasonable expectation the continuation of unemployment benefits on the enhanced childcare credit program combined with some municipal dollars that are still on the way.
Our driving.
Fees interest income up in our NIM down, but again, that's the right answer for us here in 'twenty 1.
And from a capital perspective, I would just acknowledge that we are authorized well on the buybacks, Dan and I would expect to see more activity on that front as we move.
And with that operator, I'll turn it over for questions.
Thank you we will now begin the question and answer session to ask a question you May press stores and 1 on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then 2 at this time, we will pause momentarily to assemble our roster.
Our net on our first question comes from Scott Cyphers from Piper Sandler. Please go ahead.
Good morning, guys. Thanks for taking the question.
I guess first question is just on the the tactics regarding the available for sale portfolio or just the overall securities build so you've got a portfolio of about $1.3 billion.
Now.
And I think Paul on your comments you had noted that you had been increasing the debt.
Until the loan growth resumed I mean, what are the plans for that $1.3 billion from here does it.
To grow or have we sort of level that out.
Yes for the most part Scott it's leveled.
We're now back into loan growth mode, having hit that especially in June.
For the quarter as a whole.
So our intent now going forward is generally to maintain that level of the securities book will always look for the right opportunities if we.
See something in there to maybe do some reposition.
<unk>, but really we plan on deploying our funds into the loan growth side now having said that if deposits were to skyrocket again like they did it on the first quarter in excess of loans, then we will look if.
We should.
Put some more on the securities are just park it temporarily for additional.
On a loans Scott at this point, we've ladder the duration of that match, what we expect to be the loan growth. So that we can comfortably move from 1 to the other as we know the environment now.
Okay Alright.
Alright, great. Thank you and then just on.
Mortgage fee income when you talk about going back to a normal mortgage profitability.
Ability in the second half.
Are you speaking dollars of revenues, there and then I guess.
If so you know what does normal mortgage look like these day.
And I guess, it's sort of off the $2.6 million ish base.
Just had such extraordinary swings.
Over the course of the last year or so.
Good morning, Scott. This is Matt I think for the second half of the year you should pencil on your expectations between that 4 and $5 million range on a quarterly basis in the second half for gains yes perfect.
Excellent and then just.
1 final sort of ticket that question do you guys have the remaining under PPP fees, and just sort of a thought on.
The sort of cadence of how those get recognized.
Well yeah. So those are getting recognized now on an accelerated basis through the forgiveness program right. So.
At this point things are moving a little quicker than we had originally anticipated for the round 1 stuff that we originated last year in 2020 and high adds that if the rest of the $2 million because we saw little movement start in the 2 million bucket.
If those were to continue that could all be gone.
On certainly by the end of the year.
And then round 2 which we just brought on here in the second quarter.
We need to wait and see when that will start it could start later this year, most likely will have some still trickle over into next year, but in both cases, when we put them on we have to amortize.
That fee over the duration, which in the case of the round..2 is 5 years and then at the point of forgiveness, we can bring it all forward at that at that time.
Yes.
The amount of the remaining 100 G.
Yeah.
Yes, but I don't want to misspeak.
I don't have it on top of my head, so I can get that tier Scott.
Okay.
B, Yeah, we will be posting on our normal quarterly investor deck here soon it'll probably be Monday or Tuesday.
But.
And then it'll be in there so.
Okay perfect Alright, Thank you guys very much.
Thank you. Thank you Scott.
Again, if you have a question. Please press Star then 1.
Our next question comes from 30 strictly on from Janney Montgomery Scott. Please go ahead.
Hi, good morning.
Good morning.
I was just wondering kind of a broader question.
From your prepared comments it sounds like things are going pretty well across your footprint and I was just wondering what you are hearing.
From your customers has there been any kind of incremental positive or negative.
And business sentiment lately.
No I would say generally is scary and I'll have Matt.
Provide color as well.
It feels like.
2019, with the addition of some commodity and in the normal noise that you're hearing about.
Distribution blockage.
Labor is the biggest constraint.
On activity going on.
There are full books of business and it's a very very active really across the industries and the constraint is labor and then if you are in a particular industry like earlier in the year when construction costs were really spiked up.
For materials and so forth there were some.
Moderation there.
Forward that's passed for the most part.
I would concur. This is Matt I would say the labor and supply chain issues have impacted activity more in the first half of the year on the first quarter I would say 92019 is a fair comparison I think theres a lot of bottled up demand over.
But in the past 12 months to 18 months that we're starting to see come on.
On to the plate now in our bank, our customers, having conversations with our bankers about active.
Expansion.
And a lot of deal activity, there's a lot of M&A activity going on as well so.
Certainly encouraged.
For the second half.
Over and really heading into next year.
Got it and then kind of along those same lines do you expect that you could maybe see better core fees, just like service charges and whatnot.
Kind of as a natural outcropping of some of the improving economic activity.
Absolutely.
For the year, we've seen that trend now very steadily over the first 6 months.
And while we might not be back to the starting point.
We certainly have.
Every expectation that we're heading in that direction and it's material the difference between prior year on current year on that consumer fees.
But their activity.
And thats fees and folks are out and about anything.
Anything that goes on with the newest sphere.
Variation on Covid.
Could have.
And the impact on that it's a little too early to tell.
Got it alright, thanks, so much for taking my questions.
Thank you.
Again, if you have a question. Please press Star then 1.
Our next question comes from Tim Switzer from K B W. Please go ahead.
Hey, Good morning. This is Tim Switzer on for Mike Perito.
I had 1 quick follow up on mortgage if we go back to that real quick.
If we kind of saw another increase.
Interest rates sometime in the second half of this year would you expect mortgage fees to kind of go back towards these Q2 levels.
Excluding anything like MSR changes or were there. Some other factors this quarter that won't repeat like the salable volume.
Hi, Good morning. This is Matt I'll answer that by saying no even with an increase in rates.
We really feel like QQ from AR.
Call It saleable mix perspective, and real gain on sale activity.
<unk> is probably more of a low point for us this year.
Here, we've made some adjustments in our mix we've been very disciplined on the pricing side of this because we again we've seen this story play out before and we've made the strategic we made the strategic decision earlier in the quarter to put a little bit more on the portfolio, we like the outcome for us over a longer term there.
But with some.
Some stabilization in the pricing and our adjustments are saleable mix, it's back to more of our expectations.
To the extent, where if there is a bump in price I think we're still well positioned overall to deliver.
A better saleable mix outcome and gain on sale of outcome for the balance of the year it would be an impact certainly but.
I wouldn't you shouldn't expect it to retreat back to <unk>.
Q2 levels.
Our business in general is a little bit more construction perm as a percentage of total business than our peers would be as.
As most of the times is 50% that product is of great value to the client and we price.
Meaningfully differently higher.
And then if you were all just doing purchase activity, but the value is there.
So, perhaps it's a little bit less of a price sensitive position to be on because of the overall product that we offer and I think that helps support us with our pricing discipline.
Okay, yes that makes sense.
What is kind of your typical sale sales on a percentage. If you were under 60 this quarter, what what is it normally.
Our expectation is to really break that 70% barrier. That's how we want our business model to be adjusted so.
As Gary mentioned Q2, we were south of that 60%.
I mean remember.
So that was again there was a lot of.
Strategic decision around our choices and we thought that putting it in the portfolio was a better value for us long term.
But with that said, we see our mix here to get it.
We're only about 30 days into the quarter, but with the adjustments we've made.
We're running at our targets now and our expectations on saleable. So.
It's a fluid situation, but we feel like we're kind of dialed in where we want to be right now.
Okay, Great and I've got 1 more on.
On your buybacks you guys stepped up buyback a little bit in Q2 and talked about continuing the program with your strong capital levels is there room for an acceleration in the back half of the year.
Trying to determine.
How are you guys on a push on this and then is there kind of a target capital level you guys are.
I want to achieve.
I'll start with the latter question first if you adjusted for PPP, we're running on on our most key ratio is close to if not over 10% and if we were in the 9 on a quarter.
9.1 to 9 and a quarter, we'd be we'd be.
Just fine. So you can do the math on tangible capital as to how much we might be inclined to.
Take off the top.
We've got substantial room relative to our authorization and what might be a second authorization. If we if we run through this in due time.
Yeah in terms of the acceleration certainly obviously market conditions permitting.
At current levels it is attractive.
Things were to take.
For whatever reason then we've got our bumpers and placed to manage accordingly.
Great. Thanks for the color.
Okay.
The next question is a follow on with Scott Cyphers from Piper Sandler. Please go ahead.
Hey, guys. Thanks, Gary.
Chris to hear your thoughts on not on M&A.
M&A sort of following on debt capital discussion a lot more activity nationwide and then some activity in your guy's backyard as well so just curious to your carrier updated thoughts.
Scott through the first quarter I would've said everybody is talking except the Midwest and then in the second quarter that cured itself.
I think it's the normal discussion flow that we would have been expecting in a normal 2018.2019 environment. It feels like it's a lot more because last year there were zero.
It's your normal discussions I think the prompts are.
<unk>.
Banks that are looking at a flattish revenue look even adjusted.
Kipp for PPP.
Because of margin compression and so forth some of the same old.
Bugger boos.
And we've got 2 years' worth of pent up activity relative to that so there is more discussion than we were seeing in the first quarter.
But it's rational discussion I think folks are doing with.
Adjusted doing as they do the strategic planning going forward.
Okay.
Alright.
Any.
No I think thats that sufficiently covers that so okay. Thank you Scott Scott welcome back to the call is Paul I got your Pvp numbers.
Oh terrific. Thank you very much share at the end of June.
They should total of $9 million of unrecognized fees.
But most of that is from round to a 1.
750 of that relates to round, 1 which has gone through forgiveness right now.
So that's the potential that could still come in this year of that 400 ish as it related to those $2 million on overloads and that they're.
We had a a question mark.
Yes.
Okay terrific, that's exactly what I needed. Thank you for following up on that no problem.
There are no more questions in the queue. This concludes our question and answer session I would now.
To turn the conference back over to Tera Murphy for any closing remarks.
Thank.
Little bit of thank you for joining us today as we discussed 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.
You may now disconnect.
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Yes.
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