Q2 2022 Premier Financial Corp (OHIO) Earnings Call
Good morning, welcome to the Premier Financial Corporation second quarter, 2020, <unk> earnings Conference call.
All participants will be in listen only mode.
After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded I would now.
I would like to turn the call conference over to Paul <unk> with Premier Financial Corporation. Please go ahead.
Thank you good morning, everyone and thank you for joining us for todays second quarter 2022 earnings conference call.
This call is also being webcast and the audio replay will be available at the Premier Financial Corp website at Premier <unk> Dot com.
Following our prepared comments on the Companys 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.
May hear forward looking statements related to future financial results and business operations for Premier financial fourth.
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.
Now I'll turn the call over to Gary for his comments.
Okay.
Thank you Paul and good morning to all thank you for joining US today, we've got a lot to cover and I'll get right to the highlights.
It was just an outstanding loan growth quarter for Q2, we had growth across the broad base with each business line commercial consumer and residential.
<unk> growth of at least eight 5% in real terms for the quarter on a point to point basis in all the markets in which we operate in contributed to that growth. So it was broad and deep.
We built a really great revenue generation team and we're in a very good position to capture the new business and we certainly saw our share of it.
In the quarter, C&I, CRE and multifamily business each experienced good activity on the commercial front, so again very balanced.
Paul will outline the strong moves made in the net interest income and margin front for the quarter.
I want to highlight that we have excellent momentum heading into Q3 and expect to see meaningful average loan balance movement from Q3 to Q over.
Over Q2.
With the kind of accelerated growth we have.
The average is really matter here.
Our mortgage application activity for the quarter was very good versus the industry. However, as we all have seen margin compression does moving the financial contribution for the year and that's going to be a continuing story, Matt will cover.
Excellent quarter in the auto financing business is the strongest production quarter in our history and as we looked at July it seems to continue to be continuing in the third quarter as well.
Loss provision for the quarter was higher than normal obviously and it was 100% driven by the loan growth activity of the quarter. We grew $500 million from the end of March till the end of June and with Stifel. You provide for that day, one and that's really driving the number we did have a large single credit that we're all familiar with.
From last year's conversations.
That drove a net charge off for the quarter. It did not affect provision for the quarter as we had set aside a specific reserve for this credit at the end of 'twenty one.
I'll be coming back with some guidance comments at the towards the end of the call and now I'll turn it over to Paul for performance discussion.
Thank you Gary I'll review, our second quarter results and start by highlighting our strong growth for the quarter.
Total loans, including those held for sale increased by $494 million during the quarter for 35, 7% annualized growth or eight 8% year over year growth.
Strong growth in all categories, including commercial residential and consumer.
And we also had a good quarter in deposit growth, which increased $199 million or 12, 6% annualized.
Both noninterest bearing and interest bearing deposits each had strong double digit growth.
This growth in concert with the rising rate environment drove improved net interest income and core margin expansion.
Net interest income increased two 1% on a linked quarter basis, and four 3% from the prior year, while core margin, excluding PPP and acquisition marked accretion increased 12 basis points from both first quarter 'twenty, two and second quarter 'twenty one.
This was primarily due to loan growth as well as higher loan yields, which rose 14 basis points from <unk> to 394%, excluding PPP and acquisition market accretion.
Partially offsetting this was an increase in average cost of funds, which rose six basis points on a linked quarter basis zero to 4%.
This was primarily due to increased utilization of higher cost <unk> funds as well a small increase in average cost of deposits.
Which rose only three basis points on a linked quarter basis the 0.17%.
Looking forward, we have tremendous velocity coming from our loans, which ended the quarter about $300 million higher than our <unk> average balances.
That in combination with rising rate, helping yields while we manage our deposit betas will drive continued growth in net interest income and margin.
Noninterest income of $14 4 million for QQ was down $2 5 million from the prior quarter, primarily due to mortgage banking and security losses.
Mortgage banking income decreased $2 3 million on a linked quarter basis due to a $1 $4 million decrease in gain primarily from lower saleable mix and compress margins.
In a 0.9 million lower MSR valuation gain.
Security losses were $1 2 million in Q2.
Solely from decreased valuations on our equity securities compared to zero point $6 million of similar losses in <unk>.
Partially offsetting these decreases was an 11% linked quarter increase of zero point $7 million in service fees from higher consumer activity for interchange and NSF ATM fees.
Insurance commissions were down <unk> 3 million from last quarter due to contingent commissions, which occurred in the first quarter.
Expenses of $39 million were down 5% on a linked quarter basis Pri.
Primarily due to lower compensation and benefits.
The decreased $3 2 million, partly from higher deferred costs related to the strong quarterly loan production as well as lower healthcare cost.
Lower expenses helped improve our efficiency ratio, which declined to 52, 2% for <unk> from 54, 6% in <unk>.
The net effect of lower expenses and higher net interest income offset partially by lower noninterest income led to a 3% linked quarter increase in pre tax pre provision income $34 $4 million.
178% return on average assets.
The allowance was essentially flat in <unk> with a $5 2 million provision expense for loan growth.
Offset by a $5 3 million charge offs.
Charge off was due to the previously disclosed student loan servicer credit and we were fully reserved for that such that it did not have an impact on provision expense and we would have had net recoveries but for that.
To be clear <unk> expense was related specifically to our big quarter of loan growth, while the charge off was already reserved for.
Our asset quality stats improved again during the quarter with decreases in both nonperforming assets and classified loans.
And at June 30, our allowance coverage of nonperforming loans was 193%.
Finishing the balance sheet and capital with a quarterly decrease primarily due to a $42 million negative valuation adjustment on the available for sale securities portfolio, plus a few buybacks.
During the quarter, we completed 91000 of share buybacks for a total of $2 6 million.
At June 30, our tangible equity ratio was seven 3%.
However, excluding a OCI.
Tangible equity would be 9.1% at June 30, compared to nine 4% at March 31.
That completes my financial review and now I'll turn the call over to Matt for a discussion of London and credit.
Yep.
Thanks, Paul.
Excited to report total loan growth net of PPP in excess of $494 million or $8, 93% for the second quarter.
Growth came from all segments of our lending businesses with strong commercial growth of eight 6% excluding PPP.
Mortgage loan growth of 945% in consumer loan growth of 13, five 3% our commercial business had an outstanding quarter of loan growth with second quarter growth of approximately $315 million for the first half of 2022.
Commercial loan growth was very strong at 11, 6% year to date or approximately $412 million.
We're proud of our teams' efforts this year, which has resulted in solid growth across all of our markets.
The factors that drove such a strong performance for the second quarter were largely two categories.
Second quarter loan production increased by approximately 75% from a very good first quarter.
We had a strong pipeline going into the second quarter and our team did an excellent job of capitalizing on the opportunity.
To some extent, we believe the volatility of the interest rate environment pulled forward some activity into the second quarter that otherwise might have dragged out into the third or fourth quarters.
The second factor, although to a lesser extent with some delay unexpected pay offs. We may see this trend continue throughout the balance of the year as our borrowers who utilize the permanent market consider deferring those transactions until the rate environment becomes more favorable.
C&I production for the second quarter was good.
Approximately 12% over the prior quarter.
C&I production was approximately 33% of total originations in the first half of 2022.
We're pleased with the progress we're making here.
Line utilization for the second quarter improved up a few percentage points, but still under 40%.
As we look ahead to the second half of 2022, we're pleased to report that we have delivered on the commercial loan growth for the full year that we said we would.
While we don't expect the same pace of loan growth in the second half of 2022 that we did in the first our pipeline levels remain strong and our expectations for the third quarter are similar to what we achieved in the first.
This would move our full year loan growth for 2022 into the low to mid teens above our original guidance.
When comparing the second quarter of 2022 to the first quarter, our residential mortgage business experienced solid seasonal growth in terms of originations while mortgage banking income remains under pressure consistent with the industry.
Originations increased 41% in the second quarter, when compared to the first quarter and originations are down 10% when comparing the second quarter of 2022 to the second quarter of 2020 and 21.
We have largely filled the gap left by declining refinance business with increased purchase activity.
Our total originations for the first six months of 2022.
We're within 91% of our original expectations.
As we discussed on last quarter's call as expected we continue to face challenges with mortgage banking income both in terms of margin and saleable mix.
We saw better execution, and putting a larger percentage of our production into the portfolio in the second quarter, which impacted gain on sale revenue.
As a result gain on sale revenue fell by approximately $1 $4 million on a linked quarter basis, and approximately $1 $5 million on a year over year basis.
Going forward, we expect our saleable mix to migrate more towards our historical norms, while our margin expectations will remain more modest given the current mortgage environment.
With respect to asset quality, we had another quarter of improvement as levels of classified and criticized loans declined by 18, 96% and $15 three 2%, respectively on a linked quarter basis.
When comparing the second quarter of 2022 to the second quarter of 2021, the levels of classified and criticized loans have improved by 50, 181% and 46, 3% respectively.
Net charge offs for the second quarter were $5 $272000 <unk>.
During the quarter, we charged down the non real estate secured portion of our C&I relationship that had a portion of its business in student loan servicing that we have discussed on prior calls.
In anticipation of an expected resolution concerning the outstanding loan servicing contract between the customer and the department of education the.
The charge, we took was for the non real estate secured portion of the relationship with the remaining amount representing the expected department of education resolution.
We were properly reserved for this charged down so there was no incremental impact to expense.
With this charge down our remaining relationship balance is approximately $8 $8 million and when the funds from the expected resolution has received all remaining exposure will be approximately $5 million secured by commercial real estate for which we are appropriately reserved for.
We continue to look for signs of stress in the portfolio given the ongoing volatility in interest rates continued inflationary pressures and overall economic uncertainty.
While we continue to monitor for the impacts of these challenges our portfolio continues to perform well and our outlook for the third quarter remained stable.
I'd now like to turn the call back over to Gary small Gary.
Thank you, Matt and I will provide some color on our expectations for the remainder of the year.
From a balance sheet perspective, when you exclude the impacts of PPP.
Do you expect the second half of the year to see total loan growth of two 5% to 3% through year end.
Q3 visibility now looks very favorable but similar to the first quarter, we remain relatively cautious about the outcomes for Q4 too much uncertainty regarding the effect of the fed activity in the economy and so forth.
We'll play a conservative.
From our seat.
Those numbers do include an improvement on the commercial expectation as Matt mentioned, we're looking at low to mid <unk> mid teen growth for the year, which is our guidance up for that category.
Full guidance our loan growth guidance for the full portfolio was originally set at 10% and we are guiding that up to 14%. If you went from 12% to 31% to 12 31.
Net interest income.
Obviously, we will.
Expand along with that balance sheet movement.
We continue to expect to see margin improvement not dissimilar from what we saw in the second quarter.
In the third.
The full quarter impact of the second quarter yield movement.
And the additional fed action that we would expect similar to what you will hear this week will just add to that.
However, our deposit betas remain in check.
Fee income wise.
<unk> bank fees continue to plot along strongly the consumer's busy debit card credit card overdraft activity, but we would expect to see the typical of.
Q3 seasonal above all good there.
Mortgage fee income as Matt.
Outlined will continue to be under pressure for all the.
Issues noted and we really don't anticipate or we're not planning on an improved fee income projection in the second half of the year versus what we saw in the first welcome.
Wealth management fees I would say this we've had an excellent first six months on new business activity.
The completed our remarks, but again the equity market valuations keep fee income suppressed in the near term in that business.
<unk> expenses look very good in the second quarter.
We are bumping up our expectations to $163 million for the year, but it's relative to the success that we're having on the loan side there is variable comp to be paid and so forth. So.
That's a that's a check we're happy to stroke.
The efficiency ratio for the organization, we've set a target of 52% and will affirm that thats, where we expect to be.
At the end of the year.
From a credit perspective going forward, it's a benign environment from a net charge off charge off expectation over the remainder of the year. The loss provision is expected to grow with loan growth.
And that overall for the year.
Including the experience that we had in the second quarter, we would expect net charge offs to come in favorable to what was in our original plan.
There is some potential for additional movement in provision.
Pending on what happens with the unemployment rate.
<unk> economy, that's a big variable in the seasonal calculation.
So we will leave that caveat in there.
From an equity perspective, there is no specific plans regarding additional repurchase activity in the near term.
I will say this relative to our P&L performance for the year, we still expect to hit our earnings objectives that we set for our self in 'twenty. One it would have been guiding you too.
We entered the year, we have obvious positives on loan growth and margin expectations that are going to help offset the difficult residential mortgage environment right now.
Along with the Crimson as I mentioned on wealth business and the bank equity portfolio and so forth.
So we will.
We continue to expect to deliver ads.
As we originally felt stood a little different way this year.
With that we'll turn it over for questions.
Okay. Thank you.
We will now start our Q&A session.
To ask a question. Please press star one on your telephone keypad.
I would like to withdraw your question please crush staci.
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And our first question comes from Michael <unk> at Keybanc. Please go ahead. Your line is open.
Hi, good morning, guys.
Good morning, Mike.
On the loan growth side.
So.
To get to that 14% level for the full year I think you said, Gary you expected the growth rate to drop in the back half of the year, but how much of that.
As you guys, just having limited visibility, particularly in the fourth quarter versus <unk>.
Actual pipeline changes or line utilization changes.
I guess, the perception kind of versus the near term reality.
So hey, Mike This is Matt.
So we have a tendency to under promise and over deliver when it comes to this kind of stuff. So we are naturally conservative I'll tell you that our pipeline entering the third quarter in our commercial business is about 90% of what it was when we were entering the second quarter. So on the surface.
It's teed up for a very good quarter, we do expect more payoff activity this quarter.
And those are things that we're aware of and it's not just permanent market activity. Its still a very frothy market for the sale of companies. So we have got a couple of clients that are selling at very high multiples and wrapping for them.
So that will impact our business in the back half of the year, but I think the short answer is we're comfortable with the kind of growth we achieved in Q1 in our commercial space.
Is there upside there absolutely there could be but it's just not something that were comfortable.
Comfortable putting a stake in the ground up.
Got it.
And are you guys.
The kind of the lack of visibility in the fourth quarter are you seeing uncertainty I guess, maybe is a better way to put it is that you guys.
And just your observation of the macro and rates and what the fed's doing or are you guys actually hearing customers start to cite that concerns about their lack of visibility.
<unk>.
The three month period.
I think right now it's anecdotal in terms of the client conversations and what we're seeing.
So there is a little bit of a healthy view.
The one bill how much of that pipeline.
Pulls through into closed business, there may be a higher percentage of business that.
Goes away declined the sites for example, not to move forward those rates continue to climb in the return hurdles get harder and things like that.
Got it and then just lastly.
Some of them.
Or just to work backwards a bit here just first I want to make sure I heard you correctly, Gary on the efficiency ratio you said, 52%.
Full year was still achievable correct.
Yes.
Yes, and then working backwards from that.
The noninterest income line will be down year on year because of the mortgage environment and expenses are drifting higher because of the high growth, but you expect the top line to offset if not more than offset.
Those those two other items.
We do.
Got it.
And then just last for me and I'll step back just on capital.
Obviously, there's a few dynamics ongoing you had a huge you added.
Half a billion dollars on the balance sheet.
Yes.
The TCE at seven three here.
My guess is you guys are anticipating that to kind of increase going forward potentially particularly once you realize the full earnings benefit of all the growth you put on this quarter, but just any thoughts around that capital level near term expectations, and where you'd like to get back to over time.
Well, Mike before the yield for the whole <unk> issue kind of reared its head we were sitting in the high nines and we really wanted to get down to a 99% to five kind of number so.
We always felt we were a bit overcapitalized.
Certainly the second quarter growth, we didn't sit down and play out of $500 or $500 million move in that quarter, but over the course of a longer period of time is something that we can easily absorb.
The current ratio that we're running at.
We're fine with we're not trying to make any adjustments to that or making any change in plans to our business that we have enough.
Regulatory capital to continue to move and as you said, we're going to earn our way back into excess capital.
It may not be visible until a OCI kind of works its way out over time.
But.
We still have that same high quality problem of what to do with all the capital that stacks up.
But in the near term will lead to replenish what <unk> taken away.
Again.
The movement to the rest of this week.
And that we expect to see in September we will do nothing to help us on the OCI front.
So I think there is there is still a negative chapter to be written there before we turned around and started to go in the other direction and earnings will be the only contributor going in the near term.
Okay.
Yes.
Helpful. Thank you guys appreciate the color.
Thanks, Mike.
Thank you for your question. Our next question comes from Scott <unk> of Piper Sandler. Please go ahead. Your line is open.
Good morning, guys. Thanks for taking the question.
Paul I was hoping you might be able to speak more.
More specifically about the NII trajectory from this quarter's roughly $59 $5 million.
Presumably it goes a lot higher and I know you guys had talked about it.
NII and the margin expanding from here.
Just asking just given the number of moving parts and because you've got this.
Sort of odd dynamic of it you had such awesome loan growth.
$6 million in the provision, but NII was only up $1 million right. So presumably you haven't gotten any of the or very much of the NII benefit of that stuff. So just curious your thoughts on order of magnitude of NII celebration.
Yes, yes, no you're exactly right there Scott so the growth game.
Throughout the quarter, especially towards the end of the quarter, there and like I mentioned earlier, our ending balances were already starting <unk>.
<unk> $300 million higher any balance versus <unk> average balances. So youll see the full quarter impact of that here in <unk>.
As well as on the rates, Brian right with the movements that happened during the quarter, we will get full year benefit starting full quarter benefit here in <unk>.
And then we will get some partial benefits from whatever happens today.
Primarily with the September meeting probably none.
Really going to impact much by the time that hits.
So youre right. So NII will continue to increase we will see you should see a big spike here in <unk>.
And then <unk> I guess, we'll talk about that in three months, but we'll see how loan growth.
Happens here during the quarter as well as what the actual fed movements may be but you're definitely going of see us getting into the <unk>.
Mid <unk>.
During <unk> or into <unk>, there for that growth pattern.
Rob can I ask feels like it if there's $300 million in difference between the starting point and you just took that at.
350 basis points, it's like $10 million difference between the end of period count versus the.
The average is increase.
Yes perfect.
Then maybe Paul can you sort of update us with where you are on rate sensitivity at this point just given.
Any changes that all of that growth might have.
Might've gotten here because it sounds like betas arent really a concern right now.
But just given what you put on any changes to your rate sensitivity vis vis 90 days ago.
Nothing significant no were consistent.
Came in a little bit just percentage wise, partly from now.
Bigger numbers, but our most recent analysis I think we've talked about it in this context before is.
The 100 basis point shock.
Analysis.
We were 15 or 17 million before we're at 19 million annualized impact from that so we continue to go up we added a good amount.
C&I.
Variable rate loan kind of stopped during the quarter and all of our portfolio is over Florida essentially for what was there. So now we're getting full benefits across the board.
The fed keeps moving as LIBOR moves et cetera.
That is helping to lift that portfolio and obviously we've been.
Increasing our rack rates for new loan originations those are going on.
Mid fives, roughly plus or minus depending on the type. So that continues to go up we're still asset sensitive.
As we've talked about in the past, we don't want to be too far out on the asset sensitivity range that we try and manage that not neutral, but leaning towards the asset sensitivity. So it's still fairly consistent with where it was previously.
Okay, Perfect and then I guess final final question just so.
Unclear presumably.
All the heavy lifting on the provision was done in the second quarter and I would Matt.
<unk> back down to something meaningfully below this.
Else equal going forward, yes, so something like the one.
$1 million to $2 million range, a quarter or is that a fair presumption.
Yes, yes, Thats fair presumption and as Gary described we are looking at about two 2% to 3% growth here in the back half of the year. So you would take that against our current provision level.
The $114 20 level.
That can kind of get you there, but it <unk> exactly right is in the 1% to two.
Tenant on actual loan growth.
Okay perfect. Thank you guys appreciate the color.
Yes, Thanks Scott.
Thank you Scott for your question and as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Christopher Merwin at Janney Montgomery Scott. Please go ahead.
Hey, Thanks, Good morning could you talk about new deposit gathering in the next couple of quarters about how you think about that as you manage liquidity and kind of access to liquidity on the balance sheet.
Yes.
I'll take this is Gary I'll make the first comment and Paul feel free to join in.
As I mentioned, we didn't plan on a $500 million jump in one quarter. So as that was happening we got started a little bit earlier.
Perhaps versus our peers on thinking about what we want to do and when we want to start to affect our core deposit repricing to go out and take new money in our first move though was on the commercial side and on the public fund side and the initial larger dollar.
Movements that we will see it have seen and we will see in the first half of this quarter or in that space, So a little bit more expensive than our run rate to be sure.
But preferable to the federal home loan bank.
And we will be.
We will be there.
Diligent, but cautious as to how we reprice, our consumer book, we'd still like to solve our funding situation.
Relative to the balance sheet growth.
And keep in check the betas on our consumer deposit.
Situation.
But.
We do expect to grow that book to solve the issue.
We haven't seen in the marketplace any unusual movement relative to promotional dollars or so forth across our markets.
Sure.
Either beef with the demand or the way the balance sheets are built.
No episodes right now in the marketplace to rise to raise consumer deposits in any meaningful way.
Great. That's helpful. I guess just a quick follow up is just the star, Ohio Fund create any competition for you I mean, you worked with that for years. So I don't know if there's anything different about this environment than in the past.
No. It doesn't really we have a few clients where.
We kind of we have a product set up the <unk>.
Mirrors at a percentage of the whole movement relative to Star, Ohio.
So when appropriate we have a product that we can use to be right in step with that but our primary product obviously is to target more traditional.
Pricing and on noninterest bearing deposits and so forth.
But no change.
Sounds good Gary Thank you for answering that and thanks for all the information this morning.
Thank you.
Thank you so much Chris for your question. This concludes our Q&A session and now I'd like to pass back over to Gary small for any final remarks.
Well I want to thank you all again for joining us I know, it's a busy time of the earnings season, we really feel like we have an outstanding story for the quarter.
The provision issue that pops up as a little confusion to the.
From a high level, but I think when you Peel it back.
It's a little bit more digestible and understandable and you can feel the momentum of the business going forward.
I. Thank you for your support and your interest and look forward to talking to you next quarter.
Bye bye.
Thank you everyone for joining today's conference call you may now disconnect.
Yeah.