Q3 2021 Premier Financial Corp (OHIO) Earnings Call
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Good day and welcome to the Premier Financial Corporation third quarter 2021 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone.
And 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 Paul None guests. Their CFO. Please go ahead Sir.
Thank you Jack good morning, everyone and thank you for joining us for today's third 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 and core dotcom.
Following our prepared comments on the company's strategy and performance, we 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 now I'll turn the call over to Gary for his comments.
Thank you Paul and good morning to all we appreciate you joining us today.
Start off by stating that macroeconomic indicators across our market continue to be positive order boards are in good shape for our clients and supply chain issues are not proving to be overwhelming or at least unsolvable for the majority of the folks we do business with.
We maintain a very positive outlook only tempered by the typical uncertainties coming out of Washington, lingering COVID-19 impacts and a tough employment environment.
Mike and current costs are certainly real but not a detriment to the business at this point.
We at Premier are pleased with our third quarter performance and we had many strengths that were reflected in the numbers for the quarter.
We reported $28 four nor a net income 76 per share which for US are from our perspective gave us a strong $1, 49% return on assets.
$16 seven return on tangible capital and we'll be fine with each of those numbers strong pre tax pre provision return at 1.91 return on assets as well.
We had solid core loan growth north of 5% our core margin was up seven basis points and we returned to a more typical residential mortgage contribution for the quarter as we telegraphed on our last quarter's earnings call.
Commercial activity is very robust new business booked for the quarter in the commercial loan pipeline. Each remains very strong the existing commercial line draw down right. So a slight improvement versus the second quarter, but it remains well off normal levels.
Expenses for the quarter were a bit higher than expectation driven by healthcare benefit costs. We are self insured. So we feel the impact of cyclicality and any high impact incidences as incurred and it makes for more uneven figures from quarter to quarter no trends should be inferred from Q3s numbers.
The loan portfolio as a whole continues to perform well low delinquencies continued.
Two experienced low npls in general however.
However, during the quarter, we did move a single relationship to nonaccrual status, returning our non performing store.
Stats back to a range that we experienced at the end of 2020. The relationship had moved to classified status earlier in this year.
Our portfolio quality indicators remain strong and we're in familiar and very manageable territory.
This particular relationship is current and it did not participate in Covid deferral programs that were available over the last 18 months they.
They faced challenges due to an interruption of business insignificant government contracts that remain affected by Covid related policy decisions Mcgarrity will touch on this more in his comments.
This point I'll turn it back over to Paul to cover a few more performance details. Thank you.
Gary will review, our third quarter and year to date results beginning with the balance sheet deposits for less than one were down less than one quick 1% point to point as customers have begun using funds with the end of stimulus programs.
It makes also declining businesses continued using liquidity, but we still managed to reduce our all in cost of funds, which dropped another two basis points, 0.24% this quarter.
Largely due to further reducing our total deposit costs down to only 20 basis points.
For assets, we generated over $64 million of core loan growth or five 1% annualized this quarter led by commercial which Matt will discuss shortly.
In addition, we are very pleased by our NIM expansion, which rose four basis points on a reported basis or seven basis points to three 7% when excluding PPP and purchase accounting marks amortization.
Next is the allowance, which increased $1 8 million due to a provision expense for loans of $1 6 million and net recoveries of 256000.
This increase is primarily related to an increase in specific reserves for one commercial relationship that turned nonperforming during the quarter.
Plus growth in non PPP balances.
Mostly offset by further improvement in economic forecasts and a lack of charge offs.
At September 30, our allowance coverage, excluding PPP loans, and including acquisition Mark with 157%.
From 630, but still not back to pre pandemic levels yet.
Which were $1 two 1% under Cecil prepay NAMIC and excluding marks from the ECS the merger.
Finishing the balance sheet as capital, where we ended <unk> with over $1 billion of equity with a quarterly increase primarily due to net earnings in excess of dividends.
We also completed about 206000 of share buybacks for $6 million in the quarter.
At September 30, our tangible equity ratio was nine 9%, excluding PPP loans and 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 the impact of marks in PPP, our net interest margin was three 7% up from $3 two zero percent in the second quarter.
This is consistent with our slightly better than our expectations driven by the rebound in loan growth.
Also having a full quarter benefit of the swap we executed in the middle of two two.
We expect NIM to generally remain at this level and hopefully continue to tick up slightly as loan growth continues.
Noninterest income was $18 3 million for <unk>, which is up from prior quarter, but down from prior year, primarily due to mortgage banking.
Mortgage gains were $5 4 million in <unk>, which is up $2 7 million from Q2, but down $8 5 million from third quarter 2020.
As discussed last quarter total mortgage production continues to meet expectations and the increase from last quarter was due to our expected improvement and favorable mix.
Additionally, we saw a slight rise in the tenure, which increased from $1 four 5% at June 30 to $1 five 2% at 930.
So we had a zero point $8 million gain in the MSR evaluation after the zero point $5 million loss in Q, when the 10 year dropped.
Overall, we had a $4 million improvement in mortgage banking on a linked quarter basis.
How much of that was offset by some declines in other lines of business, including insurance and wealth.
Plus we had that $1 $3 million nonrecurring item in other income last quarter.
Next is expenses, which were up.
We're up to $39 million, a one 7% on a linked quarter basis.
As mentioned last quarter, we began addressing run rate items, starting in the latter half of two Q, which continue to help in <unk> there.
There are also some items like costs related to ATM and debit card usage that had benefits up in revenue as seen by the strong performance and service fees.
However, this quarter, we again saw a spike in medical benefit costs similar to what we experienced in the first quarter, which led to the overall increase in expenses for this quarter.
Given this trend we now estimate full year expenses.
At higher than previously expected.
Or around $155 million.
Our year to date efficiency ratio is now slightly above 50% at 55%.
And could potentially be around that level for the full year.
Separately, our third quarter pre tax pre provision income was 30 was over $37 million, which again led to a strong one 9% ROA for three two and two 1% year to date.
Bottom line, we reported net income of $28 million or <unk> 76 per share for third quarter 2021.
This is generally consistent with our expectations given the good guys in provision and NIM offset partly by higher expenses.
That completes my financial review and I'll now turn the call over to Matt for a discussion of 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 were able to achieve balanced growth in the third quarter consistent with second quarter growth levels. While overall loan production activity showed continued momentum.
Loan production for the third quarter improved by over 25% compared to the second quarter driven by continued improvement in our C&I lending category.
C&I loan production as a percentage of total loan production was 48, 8% in the third quarter and while production mix will vary from quarter to quarter. We are starting to see more consistent performance in the C&I category.
In terms of loan growth when excluding the effects of P. P. P. Commercial balanced growth continued at a four 4% annualized pace in the third quarter growth for the quarter was impacted somewhat with the timing of loan payoffs. In addition, we continue to see relatively low levels of line utilization and we will benefit when more normal.
Low levels of utilization return.
As we look forward pipeline levels are at their highest level since the merger.
With strong activity in all of our markets and we expect commercial loan growth for the fourth quarter to be more robust than what we have seen the last two quarters.
In our residential mortgage business, we were pleased with our improved performance in terms of mortgage banking revenue with loan production levels remaining solid and a very competitive operating environment.
Mortgage banking gain on sale rebounded solidly in the third quarter of 2021, when compared to the prior quarter as we were able to improve our saleable mix as Paul mentioned earlier.
Maintaining our margin expectations.
Looking ahead, we expect the current competitive operating environment to be with us during the fourth quarter and into the first half of 2022.
As we've stated on previous calls we view residential mortgage is a business, we will continue to invest in and steadily grow.
With respect to asset quality, we saw improvement in several asset quality indicators, while nonperforming loan levels increased during the third quarter.
Criticized and classified loan levels improved by nine 8% and 11, 1%, respectively. When comparing the third quarter of 2021 to the prior quarter.
While we experienced another quarter of net recoveries with respect to charge offs.
Nonperforming loans increased by approximately $18 $6 million in the third quarter.
Driven primarily by the designation of a previously classified single C&I relationship into nonperforming status.
While we continue to work with the client and although the client remains current on their contractual payments current circumstances warranted. The nonperforming designation and we are properly reserved for the credit at this time.
As we have discussed on previous calls we believe any credit challenges, we see in the portfolio are going to be more episodic in nature, just as the CNI loan. We just mentioned to you.
We continue to work with all of our clients to navigate the current economic environment, while monitoring our portfolio closely.
I'd now like to turn the call back over to Gary small Gary.
Thank you, Matt as we look forward to full year performance given that we only have a few weeks to go I'll limit my comments to a few items.
As Matt noted loan balances for the fourth quarter will be continue to be strong, particularly on the commercial side.
Residential mortgage activity enters into what we would think of as a seasonal period and are.
Typically or in Q4 at least versus Q2 and Q3 business levels.
For Q4, the volume is good pricing, obviously remains very competitive.
And if I were working the model I guess I would expect the total mortgage related fee income to come in more in the $4 million range than what we experienced in the prior quarter.
From an expense standpoint run rate for Q4, I think we guide to 39 ish.
We may experience something better than that but let's wait and see.
From a capital standpoint, I would expect that you all should expect us to be continue to be in the market from a repurchase activity perspective.
We were.
Fine with the level of activity, we had in the third quarter, we would not be disappointed to have more on a per quarter basis going forward.
And with that I'll turn it back over to Chuck and we will take calls.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
Anytime you question has been addressed and you would like to withdraw your question. Please press Star then two and at this time, we will pause momentarily to assemble our roster.
And the first question will come from Scott <unk> with Piper Sandler. Please go ahead.
Good morning, guys. Thanks for taking the question.
Good morning, Scott.
Hey.
First question I wanted to ask was just on the credit that moved to non accrual I guess to the extent possible.
Maybe.
If you could discuss sort of what changed.
To make it I think he said the circumstances marked it at which I can totally appreciate but sort of what changed in your mind to take it from them.
Thank you said criticized to nonaccrual.
And then I guess more importantly, just maybe any thoughts you can share with what gives you confidence that the the reserve you guys have established is.
Sufficient and any thoughts on will there be sort of an exit strategy for this or will it just sort of work out overtime.
Sure. Scott This is Matt I'll give you a couple of points here and hopefully that touch on your topics.
The business as a student loan servicer I think we've disclosed that previously.
You had noted we have we had classified this phone earlier in the year and the business has certainly been impacted by a cause by a pause in our government contract as a result of the Covid measures.
And Theres always expectations on when that pause was going to get lifted during the year.
So again circumstances warrant it as the year went on and if circumstances continue to change that we thought it was prudent during Q3 to move that loan into nonperforming status.
Not atypical of a lending relationship in terms of how it would migrate.
In terms of the reserve.
Without getting into forward looking type of statements regarding this individual credit.
Are comfortable with the reserve levels that we have today, we continue to work with the client.
<unk>.
We're certainly partnering with declined as they think about next steps and what what exit strategies look like so we will continue to monitor and continue to work with the client and <unk>.
And just stay on top of the details as they evolve.
Okay perfect. Thank you and then switching gears a little.
Maybe Paul when you talked about the margin being flat to up you're talking about.
Sort of that core core $3 27.
P. P. P M P H right.
Correct Yep.
Okay perfect alright, thank you.
Thank you Scott.
Next question will come from Tim Switzer with VW. Please go ahead.
Hey, good morning, I'm on for Mike Perito, Thanks for taking my question.
Good morning, Tim.
I had a follow up kind of on the core NIM you guys are talking about you had pretty good expansion this quarter. It looks like it should be able to at least sustain these levels could you talk about kind of.
The primary drivers behind this it seems like both asset yields and deposit costs are helping so I was just curious on.
Or what the drivers are behind all of those and then it seems like youre expecting even more deposit cost reduction next quarter can you talk about where that's coming from and I guess, if you're able to quantify maybe how low deposit cost could go that would be great.
Yeah sure thing so the change for this quarter is a combination of a few things one we have a full quarter benefit of the swap that we talked about last quarter, we only had a little bit of lift last quarter. So we got.
Couple more benefit out of that here on a quarter over quarter basis, which is nice.
Two.
With loan growth and bringing on those assets at yields.
Better than the existing average yields in the book, including Rolling out of the securities that we had been.
Doing earlier in the year before loan growth came back that helped provide some left and then you're right. We did make some more progress on our cost of funds I got that down again, primarily on the deposit costs.
Front there.
And I think we've kind of set up before we're pretty much at the bottom on those we keep looking for pockets and if we find another <unk> or so out of the out of that book that'd be great.
Pretty much found what we got on that front, so asset yields should start driving those back up at this point.
Okay, and then improvement on asset yields just can be driven by loan growth rate and could you talk about kind of a loan pricing is it you said there they're coming on higher than what's actually on the book right now.
Above that yes. This is Matt it's coming on at rate and rates and yields above the NIM.
And I would say from a pricing perspective.
It's always a very very competitive environment and really in all our businesses, but I would say it's staying.
Stabilized I would say is the rate of decline on the rate side is tended to flatten out a little bit and it's still ultra competitive.
But it seems like it's flattened out a little bit right right.
Were referring overall.
Either now or the.
Average asset yields because we are rolling out of securities now so that's part of the lift too by.
By design, we ladder those securities so.
We'd be able to exit.
The loan portfolio has picked up so we're swapping.
100 basis point 80 basis points step four through loan yields.
Okay that makes sense. Thank you and then can I ask one real quick on your return of capital you seem pretty focused on it with the buyback and increasing the dividend as well.
With your share price being a little bit higher than when you started the buyback. This year are you get would you are you price sensitive at all I guess this quarter you know maybe the share price continues to go.
Wiley higher and then I believe last quarter. You guys said, you were kind of hoping to glide down to like a nine 9.25% TCE ratio X P. P. P. Over time is that still kind of a good target for you and I guess, how quickly would you like to get there.
This is Gary I'll make a general comment in reverse there, yes, nine in a quarter for the way our balance sheet is constructed right now as far as mixed fields. We feel very good I think without P. P. P O Paul we're running close to 10.
And our projections would say if we don't.
Vantage our capital well.
Deep into 10 as we go through 'twenty two.
<unk> always been a part of the game along with good dividend and keeping capital there for growth and acquisition opportunities and will continue to play that balanced game, rather than overcommit, one direction or the other.
I think over the course of this year.
We're always quite sensitive back to where you started we wake up that way.
And but having said that that can't overrun our ability to redeploy the capital back to the shareholder who work in the shareholders' best interest as long as it's a reasonable.
Earn back right.
So we're cognizant of that and we're flexible on what those earn back rates need to be in a reasonable way that match whats going on in the market at the end of the day, we just will not let capital stack up and go underutilized.
Got it alright very clear thank you.
Again, if you have a question. Please press Star then one our next question will come from Freddie Strickland with Janney Montgomery Scott. Please go ahead.
Thanks, Good morning.
Good morning, appreciate the color on expenses with respect to the healthcare benefit costs.
Just curious as you're out there looking to hire new talent.
You see incrementally.
More competition from either a wage perspective or.
I guess, just what youre having to offer.
Okay, let's say any I call it the $22 and under entry level or newer entry level. There is so much competition for those.
Okay.
All of these that those folks have we might have been the path back to pre COVID-19.
Bit of an edge relative to benefits work environment professionalism of the environment versus just a regular retail shop wherever it might be.
Certainly what we've all experienced across our.
Our marketing across I think a broader set.
Yes.
The fact that jobs that might have.
Right at lower on those qualities in the past.
Our throwing dollars at folks to fill the gap.
And so you do have to be cognizant of that having said that we're not doing wholesale changes across the board.
To address.
And any way that would be noteworthy, but we're very cognizant of our upfront.
And I wouldn't be surprised if.
If we didn't see the industry as a whole and we'd be included in that make some small movement.
Relative to P&L impact on the entry level roles, but we really have to find.
Ways to pull the other levers.
<unk>.
Make us attractive.
Two potential candidates as well, we've just can't throw money at it and one of those levers that we're working real hard is our approach on return to office.
I don't know that its wholly unique but I think we work harder ore as hard as any of my peers that I've talked to.
Customize our return to office cancers by department by role.
The impact on customer service.
Internally and externally in development, so that we can offer the very.
Best mix of something that would be appreciated by the individual and still be a good thing for our customers and the shareholder.
The easy answer would be everybody back in the office and we've got competitors have done that everybody back yet we didnt feel like that was reflective of where the world's at and going to be.
And we would miss the mark on being attractive.
Two new candidates coming down the road so.
But there are folks out there, they're desperate goalposts I think we're a little closer to the other goalpost. So that's just one of the things that you can do as an organization.
Other than just.
Dollars.
Yeah.
Got it so just kind of the intangibles are being a little bit more flexible.
It was kind of hoping you can add incrementally.
To make you more attractive as an employer is what you're saying.
It's pretty specific we don't guarantee.
Mario we let folks know this is all subject to change as the business needs change, we got you've got to be able to flex. So don't plan your life around always being able to have three days away from the office, but if it's a job that's well performed two days in in three days off.
And this was by Department by Management group as to how this is evaluated.
We will offer that opportunity.
So it's a little more certain than just flexible.
It's not like Friday afternoon off if you like it it's a little more specific than that.
Got it that makes sense and you actually answered my follow up and Youre in your answer there. So thanks, so much for taking my questions.
You bet. Good question. Thanks, Eddie.
The next question will come from David Long with Raymond James. Please go ahead.
Good morning, everyone.
Good morning, David Good morning.
I wanted to ask specifically about the utilization rate on the commercial side of things it sounds like it's picked up a little bit.
Did you give any numbers, how where it stands and where it may have stood on June 30th and then where were you pre pandemic did you give the actual numbers there.
Today, it's in the mid Thirty's I'll say, it's about 35% utilization today, and we were closer to more of a 50%.
Utilization pre pandemic.
The other thing I would say, we did see an increase in.
Line balance.
Seven or 8 million bucks for the quarter.
But part of that was driven by some of the new C&I origination that I mentioned in my comments, so some new.
New C&I relationships.
Relationships coming on the headlines of credit that got utilized at closing.
It's more of that activity than it would have been our existing.
Business, just continuing to drop more.
It's just not moving a whole heck of a lot right now it may be moved 2% from Q2 I think when we did the math.
For an earlier call Matt.
For those existing relationships, if we returned to our normal level of 130 $135.
$135 million difference and outstanding.
Got it okay.
And when you are talking about then.
Loan growth decent here in the quarter for on the commercial side. It seems like the pipeline is very good and that number is poised to accelerate is that going to come from that new relationships is it with.
With new relationships with your current bankers is it have you added people as their market disruption that you are taking advantage of it.
Really what does premier benefiting from and how are you driving that growth on the commercial side, yes. Great question, It's really from all of those things. We've mentioned on prior calls we've been very successful in bringing in some good talent. Some good regional bank talent in our markets.
Somewhat from the disruption in the industry. So if you think about the Tcf Huntington transaction, that's been very beneficial for us.
On the client side that really on the lender side too so we've seen benefit there.
<unk> seen our existing clients as well who have been on the sideline through COVID-19, but it performed very well feeling more comfortable in expanding their business and investing in their business and borrowing again, so we've seen some of that.
But I think the bigger part of it is the talent that we're bringing in.
And then the relationships that they are attracting and bringing into the bank. That's that's been really beneficial for us.
And that will continue as I mentioned, our pipeline levels are.
Really really strong right now.
It really in all stages and across our markets. So we do feel like we're well poised.
The fourth quarter on the growth side, but its momentum that's really going to.
Kick into 2022 as well.
It's got some legs to it.
Got it no I appreciate the I appreciate the additional color there thanks guys.
This concludes our question and answer session I would like to turn the conference back over to Gary small for any closing remarks. Please go ahead Sir.
Well I'll just say thank you all for joining us today, and if you have any follow up questions and so forth.
As youre working through your <unk>.
Your days don't hesitate to reach out to Paul or myself.
We feel very good momentum wise as we move through fourth quarter and into 'twenty, two and I think the planning horizon.
Which was positive when we looked at it six months ago three months ago, we still feel just as positive.
For 'twenty, two and beyond as we did that so I'll leave you with that.
Very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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