Q2 2023 Premier Financial Corp Earnings Call
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Good morning, and welcome to the Premier Financial Corp, second quarter 2020 spray earnings conference call.
All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask a question.
Star followed by one on your telephone keypad to register your question. Please.
Please note. This event is being recorded I would now like to turn the call I thought two Oh, no Castor with financial Corp. Please go ahead.
Thank you good morning, everyone and thank you for joining us for todays second quarter 2023 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 able 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 the 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.
I'll now turn the call over to Gary for his opening comments.
Thank you Paul and good morning to all thank you for joining us.
On behalf of the Premier team I'm pleased to announce second quarter earnings of $1 35 per share was <unk> 68 of the earnings falling into the core operating category and another 67 cents a share resulting from a well executed the sale of our person insurance group agency coming out of our first quarter call. We.
Third our expectations for a more normalized quarterly core earnings range and our team worked very hard to deliver on that expectation over the quarter.
First the comment on the person insurance group transaction for Genesis for the sale emanated from a strategic assessment of each of Premier's core business segments, taking into account earnings growth trajectory effective capital utilization and operating execution management, while the agency's financial performance has been consistently strong.
Currently on par with the industry from a strategic perspective, we felt it would be we could achieve a higher return on capital and better position the agency to achieve its potential by pursuing alternatives in today's very dynamic agency valuation environment.
The net result, and excellent bump in Premier's reported current earnings for the quarter of $1 37 increase in tangible book value per share and all with no.
EPS dilution effect on a go forward basis we.
We improved capital and liquidity and we're well positioned to support future growth in our core banking businesses a win on all fronts.
I'll now move to Premier's banking performance highlights for the quarter, we continue to see commercial opportunities in the market, but are being very selective with stay focused on supporting our existing clients along with targeted C&I opportunities.
Annualized loan growth totaled in excess of 8% for the quarter on it in the commercial loan growth was 7% on the same annualized pace.
With C&I, representing 49% of our new business origination during the quarter.
Total deposits grew 3% in absolute terms with a slight drop in customer deposits over the course of the quarter. We continue to see migration of deposits to higher earning products consistent with the industry.
We are having success in neutralizing the effect of prior deposit premium offers upon repricing while at the same time, attracting new money with higher rate offers primarily in the time deposit category.
The core noninterest income category was up nine 4% versus the second quarter of last year with wealth and deposit related fee income reporting high single digit increases.
Targeted expense reduction initiatives are on track with full quarter effects on the reductions to be felt over the remainder of the year.
Loan portfolios continue to perform.
<unk> performed well.
And delinquency numbers are in check.
Very much solid with the four quarter averages and we are in a net recovery position for <unk>.
Net charge offs perspective for the quarter.
Consistent with expectations, we set on our call last quarter, we engaged in hedging activity in early June .
Which will provides near to a near term boost to net interest income while also protecting margin from unfavorable impacts of future fed funds rate increases.
We've also taken additional steps in right sizing our residential mortgage operation given the continued softness of the business and doing so terms our expectations for balance sheet growth in the President's portfolio segment, our unfunded construction commitments are down 70% versus this time last year.
And with that I'm going to turn it over to Paul for some more details.
Thank you Gary.
I'll begin by describing a couple of important transactions during the quarter.
First on June 30th as Gary said, we completed the sale of first insurance group to risk strategies Corporation.
This sale generated a significant gain of $36 3 million before transaction costs of $3 7 million in taxes of $8 $5 million, representing 67 of EPS.
The transaction strengthening capital by increasing tangible equity $48 8 million through the net gain in recovery of $24 7 million of goodwill and intangibles, which added 54 basis points or $1 37, a tangible value.
We had a full quarter of operations into Q and going forward. The utilization of proceeds will effectively offset the agency's pretax earnings then become accretive as they are deployed into loans.
Separately, we completed a series of balance sheet hedges during June to improve asset sensitivity and provide some protection against additional rate increases.
These hedges were all pay fixed received variables swaps, including $250 million of two year and $250 million of three year.
These swaps carrying averaged $4, one 2% pay rate in there.
<unk> to generate $4 7 million of annualized pre tax net interest income as of June 30.
Going forward, each 25 basis point increase in sulfur is expected to generate an additional 625000 of annualized pre tax net interest income, including the net impact of these new swaps in our prior $250 million notional receive fixed pay variable swap.
Including the impact of all swaps, we now estimate that each 25 basis point increase in the federal funds rate could reduce annualized pre tax net interest income by approximately half a million based on our June 30 balance sheet compared to $1 5 million as of March 31.
For the balance sheet capital levels improved significantly during the quarter in part because of the fixed sale.
Tangible equity increased eight 4% in dollar terms and our <unk> ratio improved by 52 basis points to 755%, including OCI or nine 6% excluding OCI.
Our regulatory ratio has also increased and they all continue to exceed well capitalized guidelines, including the impact of ACI.
Credit quality was steady, including a net decrease in criticized loans and net recoveries for the quarter.
Total deposits increased by three 5%, primarily due to an increase in broker deposits.
We also experienced an impactful mixed migration during the quarter, including a $155 million net decrease in savings demand and noninterest bearing deposits, mostly offset by a $117 million increase in money market time, and public fund deposits as customers look for higher deposit yields.
Total liquidity improved during two Q with quantifiable sources, increasing more than $360 million to $2 8 billion, including $1 5 billion of <unk> borrowing capacity at June 30.
The increase was primarily due to successfully expanding our capacity at the federal reserve and more than $300 million in the second quarter via the borrower borrower in custody program.
Separately, our level of uninsured deposits declined to 31, 5% or 17, 3% when adjusting for collateralized deposits such as <unk> and other insured deposits such as the Indiana PDI.
As a result, our total liquidity was 235% of adjusted uninsured deposits at June 30.
Primarily due to the deposit mix migration I previously mentioned, we experienced additional NIM compression during <unk>.
Interest bearing deposit cost increased 38 basis points to 169% for QQ, which was primarily due to higher utilization of broker deposits and increased rates for public Acs Cedars accounts money market accounts and time deposits as customers migrated for yield.
Excluding brokered deposits and Mark secretion.
Average interest bearing customer deposit costs were 2.08% during June for a cumulative beta of 37%.
Up from 35% in March compared to the change in the monthly average effective federal funds rate, which increased 500 basis points to five 8% from December 2021.
Net interest margin was positively impacted by the combination of previous loan growth and higher loan yields which were $4 eight 6% up 20 basis points from first quarter.
Excluding the impact of PPP and marks loan yields were $4 eight 9% in June 2023.
For an increase of 108 basis points since December 2021.
This represents a cumulative beta of 22% compared to the change in the monthly average effective federal funds rate for the same period.
However, deposit costs outpacing loan yields led to the compression of net interest income and margin during the second quarter.
Next excluding the $36 million gain.
Noninterest income was $17 1 million for <unk> up 36, 8% or $4 6 million from <unk>.
This increase was primarily due to a lack of security losses, and a $3 $2 million increase in mortgage banking income primarily due to an increase in hedge valuations.
Excluding $3 7 million of transaction costs for the fixed sale expenses were $40 8 million down $2 million or four 6% on a linked quarter basis, primarily due to cost saving initiatives, we began implementing during the second quarter.
For the full year, we now expect total core expenses of approximately $158 million.
Around $5 million from our prior estimate including $6 million from Fig.
All set by $1 million of other costs like higher FDIC premiums.
Overall, we are pleased with our core performance in the second quarter excluding the.
The impact of the fixed sale pre tax pre provision income increased $4 2 million or 16% on a linked quarter basis for a one for 1% return on average assets.
Net income increased $6 1 million or 33, 5% or one 3% return on average assets.
And EPS increased <unk> 17.
Our 33% to 68.
As we look forward positive momentum includes the deployment of fixed sale proceeds in the earning assets the full impact of the swaps completed in June and the continued execution of our cost savings initiatives.
Headwinds include the continued inverted curve environment with the potential for further rate increases.
Additional deposit mixed migration or runoff and possible changes in the regular front regulator front that could lead to increased costs, such as even higher FDIC premiums.
That completes my financial review and I'll now turn the call back over to Gerry for his closing remarks.
Thank you Paul I will share some thoughts for the remainder of the year that will hopefully be helpful. In your modeling work.
I would stick with the average earning asset growth of 4%, which we set earlier in the year I do expect the second half will be much less robust than the first half.
Customer deposit growth, 2% range plus for the remainder of the year.
We do expect some additional margin compression driven by our deposit mix movement, but much more moderate quarter to quarter movement than we saw in Q2.
Revised non interest income figures adjusted quarter, three and four downward by $4 million seats to reflect the big transaction.
And revised expense expectations downwards by.
$5 million in total for the remainder of the year for the same rationale I will note that without the big of a part of the organization our efficiency ratio improved about 240 basis points.
From a loss provision perspective, we're expecting no more than 5% to eight basis points in net charge offs for the remainder of the year.
And with that said operator, we will turn it over for questions.
Thanks, Keith if you'd like to ask a question. Please press star followed by one on your telephone keypad.
Any reason you wish to withdraw your question to staff followed by Jay.
A reminder, if you are using a speaker phone. Please pick up your handset before can you question.
So our first question comes from the line of Michael <unk>. Your line is now open. Please go ahead.
Hey, guys how are you.
Good morning, Mike and Mike.
Thanks for taking my questions.
I wanted to start off.
On.
Just the.
Kind of the incremental spread or margin Gerry or Paul whoever wants to take a stab at it but just kind of curious you mentioned it doesn't sound like the balance sheet to grow autonomy in the back half of the year, Gary based on the earning asset guidance of.
Up 4% for the full year that kind of suggests.
My rough math was pretty flat from here. So just wondering I'm sure you're still gonna be originating loans and trying to bring on new customer deposits, which is how do we think about kind of the incremental spread of what youre targeting for the back half of the year and then how does that kind of trickle down to the NIM, which it sounds like you guys expect compression to moderate relative to the first half of the year.
On what Youre seeing in the first few weeks of the third quarter.
At the end of last quarter I should say.
Yes, Mike you got that.
Right. There. So we are projecting minimal additional growth on the asset side through loans and.
A good portion of that as we've seen in the last couple of quarters even.
Comes from the existing commitments on construction lines and things like that but those are slowing down as they have been burning down right.
But we've been cutting back on production and mortgage, especially and even.
Even to some extent on the commercial front, although we're always looking for the best deals there. So.
We definitely.
And the commercial teams, especially understanding.
The environment in terms of pricing loans right to get the appropriate spreads.
So thinking about our incremental cost of borrowing between our kind of base. These days and the definitely starting with a five there and then the spread on top of that so.
New loans coming in the front door.
708, <unk> to some extent.
But.
Also trying to focus a lot on the C&I piece of it.
Setup.
Either fixed or adjustable so we've been making good progress on that I think it's 40.
It's in the 40% for the origination front on our commercial in terms of the C&I business, there and obviously those would continue to float out there if rates were to continue to increase from here as well.
In terms of overall NIM then Mike.
If it's.
We maintain what we just added in terms of the asset growth and bring those in at an appropriate spread.
As well as.
Succeed on some of our initiatives on the deposit front.
And most importantly.
The recent trends, while we had a lot of mix migration in the quarter. It is predominantly early in the quarter.
Our.
Monthly NIM was within a few basis points of each other April may and June .
No.
Net migration had an early impact and then kind of settled down and if that were to continue that would help.
With some stabilization to NIM.
Our expectation would be that some of that will continue so we could see a few more bits out of it.
But absent major movements.
Mike will have two unique items that are true for third and fourth quarter that werent true. So much for the first two quarters, one will youll see some margin movement just based on the big transaction converting all of that to cash and what it does relative to our.
Liquidity in the 5% borrowing that Paul mentioned.
And also the hedging activity that we got into.
Certainly we're looking at.
In today's environment, meaning this month with rates as they are and so forth.
$400000, plus a month sort of improvement to.
The numbers so when we looked at the second half the combination of those two probably $4 million more in net.
Net interest income it hasnt got so much to do with.
Portfolio loan balances and the mix changes of the deposit base.
Little tailwind there alright, great.
No. That's all really helpful guys, I guess, just as a kind of a high level follow up Gary I mean at what point does it make sense I mean does.
Does the balance sheet growth not turned back on until you guys can comfortably be generating kind of 3% incremental spreads like to get that margin back up to three and above I mean does it make sense to just hold flat until the environment is supportive of that or or how do you guys think about that that nature. Because I mean, you guys are still you still have the same team of lenders right. There there is still opportunity to take share I mean, I imagine that.
Hasnt changed its just you guys being a little bit more deliberate and what you're willing to look at sorry, it's when does that switch or why would that switch is it just the incremental spreads is it macro with a credit or like what are some of the considerations you guys take as we think about that moving forward.
The spreads are a little bit more of the results of the activity. We do have other constraints that we put on ourselves like our loan to deposit ratio and so forth.
We've got.
A reasonable amount of borrowed money right now through a federal home loan bank and we were using brokered and we're trying to be <unk>.
<unk>, if you will relative to how much we would move the balance sheet.
Four we were feeling stabilized in those categories as well so.
It's more about capacity that will free ourselves up with them. We mentioned, we're stepping have stepped away from the mortgage business and so forth that will create capacity for the commercial group.
Retail indirect auto and so forth those are the things you step away from it at a time like this and we we have and you see that in the consumer numbers trend.
Trending slightly down.
And Thats the way, we will create capacity I think as Paul was mentioning that the loans are going on at 8%. So even at the worst borrowing rate, we're still making 3% on it it's more about some of those other balance sheet factors that we want to make sure we get it.
Nice.
Predictable and safe position or maintain that position.
That's probably our first first thing on our mind, when we're thinking about growth.
We had 20% growth last year, so we really got to digest and get the right side of the balance sheet and as good a shape as we got the left side of the balance sheet.
No.
It makes sense just two last quick ones from me just can you guys kind of talked around a little bit but are you willing to share any kind of budgeting expectations around mortgage gain on sale for the back half of the year and then just secondly, I know that the insurance sale impacted the tax rate this quarter.
Paul do you have kind of an accrual rate for the back half of the year that you guys are running that that we should be using thank you.
Yes.
So that last one there first real quick Mike So.
When you exclude the impact of the big transactions, our effective tax rate is around the 19% level.
System.
Our historical patterns right.
Yes that was an incremental rate on the <unk> transaction because of the difference in tax bases and so forth like 25%.
How we back into the 68 since normalized.
And then on the mortgage piece like you had another versus the back book.
Mortgage.
Mike I think if you took the.
The two quarters just reported.
And split them in half that would be about your expectation going forward.
Following two quarters show about three so about 3 million bucks in the back half of the year give or take.
Give or take.
Alright.
I really appreciate it guys. Thanks for all the color and for taking my questions.
Yes, yes, yes, yes, yes.
Thank you guys.
Thank you thanks, Mike.
Thank you.
As a reminder, if you'd like to ask a question. Please press star one on your <unk>.
Thank you. Our next question comes from the line of Brian <unk>.
Nigel.
Your line is open. Please go ahead.
Hey, good morning, guys hope you're doing well.
Good morning Brendan.
Yes.
Just wanted to.
Walk us through your thought process behind adding.
The hedges this quarter after rates have already weakened <unk> I guess on the one hand, you get an immediate interest in competitor today with more upside should rates move higher but on the other hand stands to reason that if rates fall, you're kind of giving up a little bit of the recapture on the margin with rates down as well. So just kind of walk through the puts and takes and why now is the right time to.
These hedges.
Okay.
I'll, let Paul comment on that and then printed I may have a follow up.
Thanks, Brian Yeah. It's a fair question couple of things there as you noted, yes, we get the immediate accretion right out of that trade, which is.
A benefit to NIM.
PNR there plus.
It is.
Stabilize NIM as we were alluding to earlier it does give us some protection as rates continue to rise here.
We're expecting.
Here at 25 bps from.
From the fed here soon.
And we will see if there is any more from there if they truly southland.
But.
Stepping back from it Brandon.
The issue with it is.
If youre going to do what you Gotta do it when you've got that benefit so the opportunity. While you can always do a swap trade right. The spreads weren't there the differences between the current and the expected future curve.
Arent, where they were when we did the execution.
We could have done it.
Certainly quarters earlier or or even a year earlier, but the benefits were there at that time. It wasn't until there was a spread between what the market was expecting in terms of.
Near term rates, possibly dropping.
And what the fed continues to talk about in terms of higher for longer.
That created the opportunity that's when we stopped and we got the.
Immediate benefit which is almost $5 million annualized here, which will be a near term benefit and then.
If it does continue to rise, we'll just continue to benefit from that even more and then in terms of our exposure. That's why we kept them sure alright. So we didn't go out too long on this we kept them in the two to three year range for now to.
Deal with the near term horizon that we foresee these rates being at the elevated levels.
And.
Those will roll off and then.
If rates have fallen by that point, which is certainly long term expectation for US then we will just have the old one which will be back into a positive position at that point and continue to benefit on that side.
I think when we look at.
The tea leaves now we do believe in higher for longer.
Physician and in this first year will be in the money and to the extent.
The swap markets and the <unk>.
<unk> expectations of what it looks like in year, two or three come to bear the swap itself will lose it.
Positive aspect, but.
The rest of our portfolio will benefit in such a great way from that.
<unk>, if you will of that it will neutralize it and then by the.
End of the second year.
<unk> all just be left with the lower.
The lower rates that come from that high beta.
So.
Puts and takes on that in a perfect World. If I had my Wizard head on back in first quarter of 'twenty, two I would've gone underwater and paid in.
And pay for 500 basis points of protection, but to Paul's point, as we were going through the year.
Wap curve versus our balance sheet at the time.
It's never seemed advantageous enough to do it I will also say that we were probably about six weeks later on the trade than we initially planned to be we were ready to move when we lost our price window waited. Another couple three weeks before we have to see if it would come back but it was never going to be before the beginning of April .
For us.
Okay really.
I appreciate the thoughts there on a more complicated.
Maybe one more follow up.
The same topic it does.
Does this hedge materially change how fast you would recapture.
Hey, OCI.
On the Securities book in every scenario, presumably rate rates down the fair value of these hedges would decline.
How much of.
Securities you captured is that counter.
Yes, no the swaps themselves don't make a big.
Big difference to the potential OCI accretion thats predominantly from the Securities book.
We've run some numbers and we're looking at if rates stay where theyre at if the curve plays out as of the June 30 curve, we've got potential accretion of 23% of the OCI Paul most of that from securities and that would be another $1 eight of tangible coming in over the next <unk>.
Quarters by the end of next year.
Okay perfect.
That equation and our debt to reflect that.
Yeah.
Got it I'll take it thanks for taking my questions and congrats on the quarter.
Thank you. Thank you very much Brendan.
Thank you Asher with no additional questions at this time I would like to turn the call back over to Gary small closing remarks.
Well again, thank you all it's been another interesting quarter for seasonal results.
I appreciate your interest in the organization and look forward to more good news next quarter. Thank you very much.
Ladies and gentlemen.
Today's premise financial second quarter 2020 earnings conference call. Thank you for joining you may now disconnect your line.
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