Q1 2023 Premier Financial Corp. Earnings Call
In the first quarter, we expected a cyclical decline in the book and Thats. What we received it's isolated to a handful of clients and it's not a systemic issue. However March events change the story a bit balances did remained steady over the months, but the mix was less favorable as.
<unk> clients looked for more protection given the circumstances.
We're more costly solutions, such as Ics and so forth.
We have details to share regarding liquidity capital uninsured deposits all the issues of the day I'm going to turn it over back to Paul to provide more specifics. Thank you Gary I'll first discuss some of the unique items that impacted quarterly results as.
As noted in our release first quarter 2023 earnings included the impact of the following pre tax items.
$1 $4 million of equity investment losses due to the downturn in bank stocks. The last couple of weeks of March.
A $1 $5 million negative mortgage pipeline hedge adjustment that should revert in 2023.
Our commercial charge off of $1 5 million related to an annual appraisal update that will not recur in 2023.
And $1 $5 million of timing related expenses that only occur in the first quarter.
Excluding the impact of these items that were <unk> first quarter 2023 earnings would have been 63 per share.
Separately, we are implementing cost cuts that represent an estimated $3 million pre tax per quarter, beginning in the second quarter.
And last we currently estimate that each 25 basis point change in the federal funds rate could impact.
Net interest income by approximately $1 5 million annualized pre tax based on our $3 31, 23 balance sheet and assuming we didn't take any actions such as hedges.
Now regarding the balance sheet capital 11 capital levels remained solid and improved during the quarter.
Tangible equity increased 5% in dollar terms and our TCE ratio improved by 25 basis points to seven 3%, including a OCI or eight 9% excluding <unk>.
Our regulatory ratios also increased during the quarter. It is important to note that they all exceed well capitalized guidelines.
When including the impact of AOS Ci.
During the first quarter total deposits did decline about 2% due to a decrease in noninterest bearing deposits, which was offset partly by an increase in interest bearing deposits is.
It's critical to note. This happened prior to the industry turmoil that occurred in March following the two large bank failures.
In fact total consumer deposits increased $14 million during the month of March.
The runoff we experienced early in the quarter was more anomalous in nature with a $107 million related to commercial clients using our moving funds related to their business dispositions and acquisitions.
As well as the repayment of funds drawn on commercial lines of credit prior to year end.
We also experienced a mixed migration during the quarter with $67 million of noninterest bearing deposits transferring into Ics and other interest bearing deposits or investments as customers sought out a combination of deposit insurance protection and yield.
Speaking of deposit insurance or level of uninsured deposits declined to 32, 3% or 19, 6% when adjusting for collateralized deposits such as <unk>.
Other insured deposits such as the Indiana, PD eyes and internal accounts.
Our press release provided a detailed list of quantifiable liquidity sources at $3, 31, which exceeded $2 45 billion, including $1 $3 6 billion of borrowing capacity with the <unk>.
We are also in the process of expanding our capacity at the federal reserve and expect to increase that by at least $300 million in the second quarter.
Primarily due to deposit runoff, increasing our reliance on higher cost FH lb, and an accelerated deposit beta we experience NIM compression during <unk>.
Interest bearing deposit costs increased 62 basis points to 169% from <unk> 23.
This increase was primarily due to public Ics Cedars accounts.
Money market accounts and time deposits as customers migrated for insurance protection and yield.
However, as a result of actions we took the velocity of increased slowed during the quarter, resulting in average interest bearing deposit costs only increasing by two basis points to 179% during the month of March.
This represents a cumulative beta of 35% compared to the change in the monthly average effective federal funds rate, which increased 457 basis points to 465% from December 2021.
Net interest margin was positively impacted by the combination of previous loan growth and higher loan yields.
Each were $4 six 6% up 12 basis points from <unk> to 'twenty two.
Excluding the impact of <unk> loan yields were 476% in March 2023 for an increase of 94 basis points. Since December 2021, which represents a cumulative beta of about 21% compared to the change in the monthly average effective federal funds rate for the same period.
However, the combination of deposit costs outpacing loan yields and a heavier reliance on <unk> from deposit runoff led to the compression of net interest income and margin during the first quarter.
Next noninterest income of $12 5 million for <unk> was down $1 8 million from the prior quarter, primarily due to $1 $4 million of security losses from the decreased valuations on equity securities compared to a gain of $1 2 million in <unk>, primarily from $1 3 million of gains on the sale of $8.
$7 million of equity Securities.
Separately noninterest income declined $4 4 million from the first quarter of 2022 due to mortgage banking as a result of a $3 $4 million declining gains from a decrease in hedge valuation and lower production.
Plus a.
$1 million MSR valuation loss, and <unk> 23, compared to a $1 $2 million gain and $1 22.
As previously discussed hedge valuations even out over time, but individual quarters can be volatile depending on changes in market rates and pricing.
And less volatile rate environment short term results have less sensitivity to rate movements. However, due to the wide dispersion of interest rates within the pipeline and limited liquidity and hedge markets.
Have experienced larger volatility in monthly and quarterly results.
Expenses of $42 8 million were down 1% on a linked quarter basis.
And included about $2 million of nonrecurring or timing related items, such as payroll taxes and benefits for annual incentive payouts.
As mentioned earlier, we are implementing $9 million in cost savings plan cost saving plans over the remainder of the year, bringing our full year expenses to approximately $163 million versus our original $170 million estimate.
Overall credit quality was stable during the quarter with a significant decrease in delinquencies and no meaningful increases in NPA or criticized loans.
Net charge offs of $2 5 million were primarily due to an annual appraisal update for our commercial relationship that will not recur during the remainder of 2023.
At March 31, our allowance coverage was one 3% of total loans and 216% of nonperforming loans.
That completes my financial review now I'll now turn the call back over to Gary for some closing remarks.
Thank you, Paul and I'll share some thoughts for the remainder of 'twenty three.
Our 12 30.
<unk> 31 point to point, earning asset growth, we're still looking at 3% to 4% for the year.
Focus on loan and deposit ratio reduction over the remainder of the year key element for us first quarter growth in loans was more reflective of funding of 22 commitments. The 23, new business effort is really zeroed in on some very focused and contained growth.
Credit indicators remained strong as Paul mentioned lower portfolio expectations will help us on the provision side.
There still are uncertainties around.
Macro factors, such as unemployment recession pacing in severity and so forth, but of what we control we feel very good about our provision prospects.
Margin was stable in February and March as we've discussed and we're targeting a funded beta improvement.
By the end of the year on the deposit side loan betas lag, but youll see some improvement over there all things being equal.
Theres continued evaluation of Alco toolbox options.
<unk> would be a hedge to lower the cost of our near term embedded funding costs.
Second item would be to position to provide partial installation from the impact of potential future fed increases and.
And we have opportunities to trim, the balance sheet and the corresponding wholesale funding components supported.
The list could go on but you get the idea we are we and I'm sure. Many in the industry are looking at many of the tools that can help maintain.
To maintain that stable environment and earnings stability as well.
We have a path to an improved net interest income and margin performance, although the full earnings power of the balance sheet will not be realized until we see some progress on the unwinding of the inverted curve.
Can expect continued strong fee income performance in the insurance and asset management businesses.
<unk> for mortgage the volume and the gain on sale realization is expected to remain challenging for the remainder of 'twenty three and on the expense front as Paul mentioned, we've got commitments made we are well underway and will continue to assess as we go forward.
And with that operator, I'll turn it over for questions.
Perfect. Thank you.
Ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your telephone keypad.
That star followed by one on the telephone keypad.
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I'm pleased to also remember to and mutual microphone when he should turn to speak.
Our first question comes from Brendan Nosal from Piper Sandler Brendan Your line is now open. Please go ahead.
Hey, good morning, guys hope you're doing well.
Good morning.
Just just to start off here on maybe kind of deposit and margin on the.
One hand turnpike year, Youre trying to grow deposits and lower loan to deposit ratio, which can be costly in this environment.
On the other hand, you saw some flattening of <unk>.
Pricing increases in March can you kind of maybe help us understand the balance of those two factors and what that means for the margin over the next couple of quarters. Thanks.
I'll, let Paul follow up with.
Better detail, but I would break the book into a couple of portions Brendan on the consumer and the private banking side I think youll see the typical growth initiatives relative to deposit growth that you would come to expect I think on the business side, where we're feeling more velocity is the movement, whether it's from noninterest bearing to interest bearing or lesser.
Interest bearing two more interest bearing and a basket of volatility is.
<unk>.
Probably provides the most uncertainty relative to us.
Margin growth relative to that segment.
Yes, yes, that's right Brian .
We're not looking to disturb the piles that are performing well.
Your basic consumer stuff.
Checking savings, even some money markets things like that those are holding steady.
Frankly haven't moved from a beta perspective this whole cycle.
In terms of where we can help the margin as Gerry alluded to in his comments earlier, we have some opportunities coming up near term.
To recoup some of that cost from promotions and we're going to look to do some of that now part of that will depend on additional fed fund rate movement of course, so we're keeping a close eye on that and we'll factor that into our <unk>.
Pricing abilities.
That could lead to some runoff in those piles, but overall would be a benefit to our deposit betas.
And then separately continuing to focus on trying to grow the overall book.
Some of that will come in and it's chunky from public bonds is there.
Seasonality comes into play, but Cds time deposits things like that to lockup.
Lock them in before additional fed fund increases things like that will help grow the book.
And then ultimately that.
Somewhat of a push at the top end.
Given where <unk> costs are so from all in perspective on our interest bearing liabilities, our total cost of funds.
The intention is to try and maintain and stabilize where we're at.
Pick our spots too.
Make some improvements.
And then the last piece would be the strategy that we kind of alluded to looking for the.
The benefit potentially of maybe some hedging or other ideas that are that are out there. So we're taking a look pretty much at all options at this point.
One other comment on that I mentioned in my comments, we came out of the gate pretty fast in Q4, and we were probably ahead of the pack relative to repricing of our existing book and the more price sensitive.
Wealth management private banking book.
When we got into <unk>.
January started our adjustments if you will.
One of the decisions, we made with will sit on our hands for the next couple of rounds of fed movement, and we really did.
And we did not feel.
Feel any dimension in that consumer and that wealth management business the mix moved around a little bit but the balances stood so that's all just one or two things we've moved.
Pretty well.
Of the gate in December and late November .
That was supporting us well in that January February timeframe, or theres still more or less <unk> in the <unk>.
Book than you might suspect.
Either way we didn't.
Harm ourselves in any way by not being very active with those latest moves but it is a matter of degree said comes out onesie Twosies here and there we could be very diligent in how we go about it.
The pace or.
The actual size of movements.
Turn to the sort of movements that were in the fourth quarter, that's a different discussion.
Yes understood. Thanks for all of those comments and the detailed in the release on kind of the monthly trends as well.
Perhaps one more from me just on on the mortgage line, obviously, a lot of adjustments over the past couple of quarters on MSR and the hedging noise can you just give us a sense of what you view as the run rate for that line item and where do you see it heading over the next several quarters.
Brendan I think than.
We were setting out our guidance on that as we were in January we were sitting on about $8 million.
Fee income out of the mortgage side a couple of that was on servicing income net of amortization and that's coming in stronger than ever and the remaining $6 six and changes in the regular gain on sale.
And.
It's going to take everything we've got to get to that six five for the gain on sale, but will stand with that number right now, but it is a challenging environment.
And.
What I can say about the hedge activity I think Paul.
Gave you the pieces that make that.
I understand the Lumpiness, we will look at it over the last five quarters were a net 1 million $5 ahead in that which is what we should be but in any one quarter.
As Paul mentioned, I can be up $1 million or down $2 million.
But we do track.
It's about a six quarter cycle because of the construction period on houses.
Check the overall effectiveness of our hedge programs and not take it for granted.
But there are.
Last two quarters.
Example, we had a downstroke in the fourth quarter and we had another one in the first quarter as rates were falling.
But that was falling.
Big uptick in the third quarter of last year so as.
That's lumpiness that used to be hidden a bit.
In the larger mortgage gain on sale number.
But with volume down the external sales I think we're running at about 40% to 50%.
Our pace as an industry in the first quarter of last year. So you see just a lot more visibility and the lumpiness of what standard.
Mark to market activity for those hedges, yes, yes reality of this was always kind of going on and that we eat in the background. It just didn't stick out and nowadays it does partly for the.
A little bit bigger on the volatility side, but as Gary said, just less air cover from normal production activity.
Okay.
Quite helpful. Thank you for taking the questions.
Thank you.
As a reminder, if you'd like to ask a question. Please press star followed by one on the telephone keypad.
Star followed by one on your telephone keypad.
Our next question comes from Andrew Frankel from K B W. Andrew Your line is now open. Please go ahead.
Hi, This is Andrew <unk> filling in for Mike. Thank you for taking my questions.
Okay. So good morning, Andrew I was just wondering if we could touch on the loan book here for a minute I know you've talked about the C&I and new business growth in the prepared remarks, but can you just provide some more color. There on where you are seeing good opportunities in regards to that focused and contain growth you mentioned.
Mhm I'll break it down into the portfolio segments. If you will we are purposely constraining ourselves on residential.
Real estate is.
As far as portfolio growth and on consumers, So think indirect lending into auto home equity books, and so forth keeping those flat to down going forward, leaving our capacity for the commercial book to expand we.
We do have commitments from 'twenty two both in commercial construction and residential real estate construction funding commitments that are part of the balanced growth that you see particularly in the first half of 'twenty three but generally speaking I think our guidance back in January was that the commercial book.
It was targeted to grow perhaps 5% or so on our way to an earning asset growth that was closer to five.
We would say now we're looking at 4% or so.
At Max perhaps less than that on the commercial side.
And it brought our earning asset side down as well and it's more about.
Our containment.
Growing the left side of the balance sheet, because we want to get.
Take some action to get a better handle on the balance between our asset and liability.
Situation and so there is business there.
Being very selective.
And we're working with our existing clients.
Always.
<unk>.
And Thats.
There are exceptions to that but thats, where were spending our capacity right now is to fulfill the need of existing clients.
Great I appreciate all the color there and then lastly for me just a quick one any M&A discussions happening today or anything you guys are excited about on that front.
Nothing to share at this point.
Okay, Great. That's all for me. Thank you for taking my questions.
Thanks, Andrew Thanks.
Okay.
We currently have no further questions I would like to hand, the call back to go small for final remarks. Please go ahead.
Well again, thanks to everyone for joining us this morning.
Turbulent quarter for the industry and.
I think we all have.
Good challenges ahead of us and I'm very confident in our squad ability to us to deliver a good year. So.
Forward to talking to you in the future.
Okay.
Ladies and gentlemen. This concludes today's call you may now disconnect your lines. Thank you.
Yeah.
Yeah.