Q3 2022 Premier Financial Corp (OHIO) Earnings Call
Yes.
Good morning, and welcome to the Premier Financial Corp, Third quarter 2022 earnings Conference call. At this time, all participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. If you'd like to ask a question. Please press star one on your telephone keypad at any time. Please note. This is.
Is being recorded.
I would now like to turn the conference over to Paul None get start with Premier Financial Corp. Please go ahead Sir.
Thank you good morning, everyone and thank you for joining us for today's third 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, you may hear forward looking statements related to future financial results and business operations for Premier financial quarter.
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 opening comments.
Thank you Paul and good morning, I appreciate your joining us today I'm very pleased to report premieres third quarter earnings of $28 $2 million or <unk> 79 per share. That's a good outcome from our perspective over a difficult operating environment.
Pretax provision income was up 13% over the prior quarter and total revenue growth for the quarter was eight 9%, which enabled us to post a very strong positive operating leverage figure and that's a key metric for our organization.
The team posted another quarter of strong loan and deposit growth as has been the case over the course of the year.
So again good growth in all three categories commercial consumer and residential.
We are extremely pleased with our quarterly commercial growth of 4%.
It follows an extremely strong second quarter very encouraged and it really reflects the organization's ability to expand its client base and as Matt will share with us or mix of C&I business continues to climb.
Our customer deposit growth for the quarter was 9% of annualized and I assure you, we're working hard to keep pace with the loan growth.
Deposits continue to grow with our commercial Treasury and branch teams did an excellent job on the deposit acquisition front.
September noninterest bearing deposits for the year were up 10% over September of the prior year.
Moving on to the consumer side consumer spending is feeding our noninterest income for the quarter deposit and interchange fees were up seven 8% over the same period last year and it is helping to offset the continued difficulty that we are experiencing in the residential mortgage market where gain on sale is under pressure with the secondary market sales.
To a lag in volume and pricing challenges.
Our insurance business is benefiting from the inflationary environment from a renewal revenue perspective, and our wealth team, having more value added conversations with its clients than ever before they're really leading through again, a turbulent market environment.
Expenses are right on expectations and that's while we deal are also absorbing any mid year compensation adjustment that we made again too.
To mitigate to some degree some of the inflationary pressures we see.
In summary, it was an excellent asset growth period. Good strong net interest income growth with deposit gathering of data management being the issues of the day and Paul and Matt will share some more details Paul.
Gary I'll review, our second quarter results, sorry, third quarter results and start by highlighting another strong quarter of growth.
Total loans, including those held for sale increased by $301 million during the quarter, representing 20% annualized growth or 16% year over year growth.
Once again, we saw growth in all categories, including commercial residential and consumer.
We also had another good quarter in deposit growth, which increased $146 million or 9% annualized.
Excluding the $70 million of broker deposits.
Both noninterest bearing and interest bearing deposits each had strong 9% annualized growth.
Our loans to deposits ratio was approximately 92% at 930, and we expect to remain in the low nineties near term.
This growth in concert with the rising rate environment drove improved net interest income and margin expansion.
Net interest income increased 7% on a linked quarter basis and 11% from the prior year.
While core margin, excluding PPP and acquisition market accretion increased four basis points from second quarter, 2022, and nine basis points from third quarter 2021.
This was primarily due to loan growth and higher loan yields, which increased 30 basis points from <unk> to $4, two 4%, excluding PPP and acquisition marks accretion.
Largely offsetting this was an increase in average cost of funds, which rose 31 basis points on a linked quarter basis to <unk>, 55%.
This was primarily due to an increase in average deposit costs, which grew at 24 basis points on a linked quarter basis to <unk>, three 9%, excluding acquisition, Mark accretion and broker deposits.
As well as continued increased costs on <unk> borrowings.
Our loan yield expansion in <unk> represented a 21% beta compared to the change in the average effective federal funds rate for the quarter.
While our total deposit beta excluding marks and broker deposits was 17%.
We would expect this general trend to continue in <unk> and early 2023.
And that in combination with utilization of higher cost high beta of <unk> borrowings that have supported our recent loan growth in excess of deposit growth means.
Means we would expect our near term NIM trend to be generally consistent with <unk>.
Downside risk here would most likely come from deposit runoff <unk> the deposit beta exceeded our loan beta.
Next noninterest income of $16 7 million for <unk> was up $2 3 million from the prior quarter, primarily due to mortgage banking and security gains.
Mortgage banking income increased $2 million on a linked quarter basis due to a $2 $2 million increase in gains offset by <unk> 2 million lower MSR valuation gain.
Security gains were 43000 in <unk> from increased valuations on equity securities compared to $1 2 million of losses in Tokyo.
These increases were partially offset by seasonal <unk> 8 million decrease in insurance commissions.
Yes.
Expenses of $41 million were up 5% on a linked quarter basis as expected, primarily due to higher compensation and benefits.
These increased $2 2 million, partly from lower deferred costs related to lower quarterly loan production as well as higher base compensation for midyear adjustments, we made related to our recent market compensation analysis.
Higher revenues helped improve our efficiency ratio, which declined to 51, 3% for <unk> from 52, 2% into Q.
The net effect of higher revenue offset partially by higher expenses led to a 13% linked quarter increase in pre tax pre provision income.
$39 million and a one 9% return on average assets.
The allowance increased $3 6 million in <unk> due to $3 7 million of provision expand all for loan growth offset slightly by only 154000 of charge offs.
Our asset quality stats improved again during the quarter with decreases for nonperforming assets and classified loans of 5% and 8% respectively.
At September 30, our allowance coverage of nonperforming loans was 213%.
Finishing the balance sheet as capital with our quarterly decrease primarily due to a $44 million negative valuation adjustment on the available for sale securities portfolio.
At September 30, our tangible equity ratio was six 7% down from seven 3% at 630 <unk>.
However, excluding OCI tangible equity would be 9.0% at 930 consistent with June 30.
Additionally, our regulatory ratios are comfortably in excess of well capitalized guidelines with tier one capital at approximately 10, 1% and total capital at approximately 11, 9% on a consolidated basis at 930.
That completes my financial review and I'll now turn the call over to Matt.
Thanks, Paul we're pleased to report our total loan growth net of PPP in excess of $316 million or 544% for the third quarter.
Our commercial business experienced another strong quarter of loan growth with third quarter growth of approximately three 8% or $151 million.
Commercial loan growth was outstanding at 15, 9% or approximately $563 million on a year to date basis.
C&I loan growth has been a significant contributor to our overall loan growth as C&I balances grew during the third quarter by 548% or approximately $54 $2 million compared to the second quarter.
On a trailing four quarter basis, C&I balanced growth was 28, 77% or approximately $232 6 million.
Line utilization for the third quarter remained relatively unchanged from the second quarter as utilization remains under 40%.
For the fourth quarter, we expect commercial balance growth to be flat or in the low single digit range based on a combination of anticipated pay offs and lower pipeline levels caused by a higher rate environment and ongoing general economic uncertainty.
In our residential mortgage business, we saw we saw meaningful improvement in total mortgage banking revenue during the third quarter of 2022 compared to the second quarter overall industry conditions remain challenging due to the combination of increasing rates and declining demand, resulting in third quarter 2022.
Mortgage banking income was 36% lower than the third quarter of 2021.
Origination activity decreased approximately 15% in the third quarter of 2022 compared to the second quarter, a reflection of a softer overall market and our decision to increase pricing of our non salable products in an effort to tamper our use of the portfolio.
Given the rate and demand challenges as well as the fact that the fourth quarter is typically a seasonal period of lower demand our outlook for the fourth quarters origination activity is for a relatively soft quarter.
Consumer loan activity was very good in the third quarter with balances growing 861% or $38 5 million compared to the second quarter.
On a trailing four quarter basis, our consumer portfolio has grown by $24, 62% or approximately $95 $9 million.
With respect to asset quality, we had another quarter of improvement as third quarter levels of classified and criticized loans declined by 783% and 10, 63% respectively on a linked quarter basis.
When comparing the third quarter of 2022 to the third quarter of 2021 levels of classified and criticized loans improved by 50.0% to 2% and 46, 49% respectively.
Nonperforming loan levels improved during the third quarter by four 6% compared to the prior quarter, while net charge offs for the third quarter were $154000.
We continue to monitor our portfolio closely for signs of stress given the ongoing volatility in interest rates continued inflationary pressures and overall economic uncertainty.
Our outlook for asset quality remains stable.
I'd now like to turn the call back over to Gary small Gary.
Thanks, Matt and now I'll give you some thoughts relative to our performance expectations through the end of the year.
From a balance sheet perspective.
We're looking at modest earning asset growth for.
For the fourth quarter somewhere in the 2% range the commercial new business generation will continue to be strong, but a bit more moderate than it has.
It's been over the last two quarters and these will be offset by some specific exits of client companies, who had been recently required we always have paydowns in the fourth quarter and so forth so more modest growth.
And on the consumer side expect the portfolio to be relatively flat versus Q3 up 24% as Matt mentioned for the year to date number we're very pleased with our position as we stand right now.
Margin improvement will be leveling off as we remain very much.
On deposit acquisition, and our tactics and strategies on closing out our wholesale funding.
Physician and that will have some impact on our <unk>.
<unk> margin.
From a fee business perspective, consumer banking fees will remain ahead of the original targets the mortgage fee.
Income will continue to be under stress and be hard pressed to match the third quarter.
That we posted.
Expenses were going to stick with our original guidance.
We updated.
Last quarter at $6 $163 million for the year and.
And we would see an efficiency ratio is still in the 52% range for the full year.
From a credit perspective, as Paul was mentioning provisions driven primarily by portfolio growth.
<unk>.
That's very much consistent with the seasonal methodology.
Would be some potential additional movement of the unemployment forecast move substantially as thats another seasonal variable so some unknowns there.
But generally speaking pretax.
Pre tax pre provision income for Q4.
Plus or minus a couple percent look very much the same as what we saw in Q3.
From an equity standpoint, we have no specific plans regarding additional repurchase activity through the end of the year.
With that I'll turn it back over to Sam our operator to take questions.
Thank you Gary we will now begin the Q&A session, if you'd like to ask a question again. It is star one on your telephone keypad. If for any reason you would like to remove that question. You May Press Star two as a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
Our first question comes from the line of Michael Perito with <unk>, Michael Your line is now open.
Hey, guys. Thanks for taking my questions.
Good morning, Mike.
I appreciate you're obviously pretty specific commentary for next quarter, which is which I'm sure. We all appreciate just.
As we look out to next year, though understanding the environments difficult im not going to ask you too.
Do you have any type of like growth targets or anything like that it's more of just like I guess.
A strategic question, which is if we are in an environment where.
Moody's current Moody's forecast is accurate and fed funds remains in the pretty elevated right relative to where it's been historically.
What are you guys, what's your appetite to grow beyond your ability to fund with deposits or maybe asked another way.
We're thinking about our growth rate for next year I mean is it a growth rate that will likely have to be funded by your deposit growth or will you take on borrowings maybe just some refresh there would be helpful. Because it does seem like you guys have some pretty good momentum on the loan side, but obviously the deposit marketing continues to get more challenging.
I'll take a swing at that good question and you're right.
From a visibility standpoint, we can't be too specific but I will say this.
Our loan growth next year will be very much in line and supported by our expected deposit growth in support of that growth.
And you wouldn't have as I wouldn't expect as big a disconnect. If you will as we have experienced this year for all the right reasons, we're very pleased with.
The year that we posted and that was purposeful.
At the same time, we have some other levers we're pulling.
That we would expect to work our way in a favorable position relative to our existing federal home loan bank position.
Typically it's.
Not quite as punitive to be in that position on the portfolio as it is currently and with the upside being unlimited.
We share your enthusiasm for reducing that number.
In the near term and it's one of the reasons are.
Deposit margin.
Overall margin aspirations for more moderate because we are going to be out as we have been.
Gathering new funds.
<unk> rates are part of that equation, but it's going to be such a more beneficial rates and the rate we are experiencing with the federal home loan bank.
No.
Long answer to your question, but.
No no. That's helpful Fund are cool blend ourselves next year and we'll work off some of what we've got.
Yeah, and then as a follow up to that Paul I mean, it's like a 335 margin year, plus or minus kind of where you think you will trend over the next quarter or two and then it sounds like.
You guys are going to grow continue to grow theres, probably not a ton of room to expand beyond that.
Without locking you and do you think that's generally a fair way to be thinking about it at this point, just given where the forecast the consensus forecast is for rates.
Okay.
Good question Mike.
I would say is going to reiterate what we.
During the call that where we're at today is around where we expect to be at least near term as we work through this deposit gathering strategy. So.
Plus or minus a few bps from <unk> Q is where you can think at least for the next quarter or two and from there well.
Reassess as we finalize our plans coming out of <unk> and how successful we are on the deposit front.
Got it.
Helpful. And then just lastly for me and I'll step back.
D.
The 52% efficiency ratio range for the full year that kind of puts you generally flat with where you were this quarter next quarter right around 51% as we exit 'twenty, two and look to 'twenty three.
I guess just.
As we think about next year.
Investment right.
Gary.
Obviously, there is some inflationary pressures that might be a bit more than normal but beyond that I mean are there any.
Technology related or $10 billion in asset related investments on the regulatory compliance or infrastructure side.
Could potentially impact the growth greater than all SaaS, just how you're kind of thinking about that as I'm. Sure. You guys are starting the budgeting process around that for next year as we speak.
Well, Mike there's always there's always things that are added to the plate and there are things that fall away is completed.
Next year, we will start to spend a little bit more on the.
Some of the features that need some time.
To mature.
We head into the Houlton 10 billion territory, there are initiatives that we will.
Be a little bit more active on than we have in the past.
And we do foresee.
This is a good effort from a customer experience standpoint, as we go to work on one of our systems there, but that's not inconsistent with the sort of activity that we would have every year.
Theres other activity that we were engaged with this year. That's completed we'll just redeploy those funds to that so.
There are those elements.
But I wouldn't look for them to necessarily change the dynamic of our efficiency ratio.
Yes, so I was curious theoretically right.
<unk> 52 for the full year, but you are 51 on the exit so I mean, you should.
And today you guys are seeing some modest to moderate rather operating leverage is now on the question from 'twenty right.
Yes.
Okay, Yes.
Great guys. Thank you very much I appreciate it.
Thanks, Mike.
Thank you Mr <unk>.
The next question comes from the line of Brendan Nosal with Piper Sandler Brendan Your line is now open.
Hey, good morning, guys How're you doing.
Good morning.
Maybe just to start off here on kind of deposit pricing.
What's kind of hoping you can give us an updated data outlook shoot through the cycle.
I guess this quarter was around the $23 24 ish percent sequential data it sounds like youre going to be actively gathering deposits to help fund your loan growth and that could come at an expense. So just kind of curious how you think about that.
Yes, I can take that one Brian .
Excuse me, yes third quarter.
Obviously, you picked up pace as we thought and the low twenty's there for deposits.
We see that continuing.
Maybe ticking up as we focus even more on deposit gathering area was.
Just saying to help with.
Cutting into RF, hlv position and things like that.
It stands now we are still looking to come in around once the full cycles through around that low 30% beta.
We've previously talked about right now too.
To date.
And you can think of that go back to <unk>.
Before any <unk>.
I'd movement started in first quarter.
Comparing the third quarter were in the mid teens low teens on total deposits from a beta perspective, So we've got a little room from the from the get go from the lags as everybody was kind of Dragon heels on the deposit side, but now it's going to start picking up.
And we will start feeling.
Most likely some more competitive pressure as everybody is starting to post loan growth.
Like we have for the past two quarters so yes.
Yes, it will pick up on the deposit beta specifically for the next quarter or two for sure but.
But still once we get through all of that should come in and on an average.
Around the.
30, low 30 there.
Okay.
That's super helpful color I appreciate it.
Turning to fee income for a moment just kind of looking at the mortgage banking income line. It was.
Even though it's down year over year was up quite substantially from the second quarter, which feels like more of an aberration. This earning season, maybe just kind of discuss.
What a lot of that line item to improve so much sequentially and near term expectations as we move through the balance of the year.
Brendan This is Matt and I will answer that question.
Youre spot on it is a little bit of an aberration that was a little bit of a timing issue regarding the recognition of that revenue and our expectations.
For Q4 would be I think relatively flat and a little bit certainly down from the performance you saw in Q3.
Okay Fantastic one more from me before I step back.
Just kind of curious.
Yeah.
Organic growth returning to probably a more typical pace next year and that being less of a call on capital just would love to hear your updated thoughts on the M&A environment and your appetite and based on some VLCC recently, obviously, great arcs are highly punitive.
Love to just hear year your updated thoughts.
Okay.
So what I would say Brian is that.
It makes the conversation for an interesting obviously with the OCI, where it's at you haven't touched.
On a GAAP.
Book dilution on a deal and you have a ton of accretion coming back in over the short end.
Academically you should say it doesn't matter.
But it surely does and I think it slowed the discussions.
From where they were in the first half of the year as the realization of the magnitude of the year LCI Sir.
Thought through we may feel differently about it.
Two or three quarters down the road, but I think.
Both sides of the table, there's a little less activity now than there was coming into the summer months and.
Right.
I think with certainty or familiarity things will return back to their normal pace, but the numbers are.
Out of out of the normal relative range and I think has folks.
Touching the breaks a little bit on the topic.
Yes, yes makes sense all right great. Thank you for taking my questions.
Thank you Mr Nashville.
The next question comes from the line of Christopher <unk> with Janney Montgomery Scott Christopher Your line is now open.
Hey, Thanks. Good morning, just wanted to go back to the deposit gathering comments you made on the call and in the Q&A do you have to or can you in suspense.
Your team to do more deposit gathering do you have to do anything different than you may have done in the past I'm just kind of curious on your experience even before this.
Ross.
With deposits over the last few years.
Chris I'll take a swing at that since we got together and became Premier Bank two years ago, we have not had to be in the deposit gathering mode.
Once the.
Poland was upon us, but all the program started in place all the banking industry.
Benefiting from the remaining businesses in the households.
So this is the first time as an organization of our combined size that we're flexing our muscles to see.
To see how our eight or nine relative markets.
Compete more of the pressures are.
In our pre combination world, we had experience of being able to sit down and raised 5% deposits in our marketplace and we knew the levers that work and we knew the magnitude.
Betas that went with us each organization to that but this is our first time flexing as a combined organization.
Pretty dynamic environment.
So.
We will.
Change the expectations and the goal setting and so relative to that is it's always a dynamic issue out with your team in the field and pricing will help open that conversation and we will make adjustments.
As we see what's working well what's working well.
Combination of pricing marketing and the team in the field.
And as we look toward the next year.
You would see more swings relative to how we reward the team.
Could be the same scorecard, but just with the higher weighting on deposit gathering perhaps that on loan generation as those are designed to flex with the needs of the organization.
Great. That's really helpful feedback thanks, a lot for that and I guess just to switch gears on credit quality.
Do you see anything in the horizon that changes that sort of ongoing positive trends in the special mention and substandard classified numbers that you disclosed.
This is Matt we don't.
We are looking at.
Credits robustly by sector looking for for some systemic issues and we're not seeing it.
It doesn't mean that something won't pop up as a result of the recession, but.
We feel pretty good about where our portfolio is positioned.
And how we will perform.
Through a recession and I think we got a a quick peak of that during COVID-19 and how that how well our portfolio performed.
So is it fair that Martha and charge offs could rise a little bit during a recession, but still be relatively low compared to past history.
Oh of course, yes.
Okay, great. Thanks, again for hosting us this morning.
Thanks, Chris.
Thank you Mr Mann.
We have no further questions waiting at this time, so as a final reminder to ask a question. It is star one we'll pause here very briefly.
And we have no further questions waiting at this time, so I'd like to hand, the call back over to Gary for any closing remarks.
Thank you Sam.
Just close in saying is.
Yes.
I think I open the call strong growth, but our focus is 100% on deposit gathering and managing our beta through that process and that's going to continue to be the theme for I think the next handful of quarters.
For all our newness as an organization as far as having to go out.
Understand our markets, who wouldn't want to lose sight of the actual performance of the year, we've had 7% year to date deposit growth, we're not an unchartered territory relative to what we need to do.
And as is typically the case once we focus on an issue we usually get it resolved and this is just the next issue that is on.
That is in front of us and we will get it resolved.
So thank you all for joining us today.
That concludes the Premier Financial Corp, third quarter 2022 earnings Conference call. Thank you all for your participation you may now disconnect your lines.
Okay.
Yes.