Premier Financial Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 25, 2023

There are 4 speakers on the call.

Operator

Good morning and thank you for joining today's Premier Financial Corp. 3rd Quarter 2023 Earnings Conference Call. We are just pausing for a moment or 2 to allow a few more participants to connect. So thank you very much for your patience. During the presentation, if you'd like to ask a question, please press star followed by 1 on your telephone keypad to register a question.

Operator

We'll be getting underway momentarily. So thank you again for your patience. Please stand by. Good morning and welcome to today's Premier Financial Corp. 3rd Quarter 2023 Earnings Conference Call.

Operator

My name is Ellen and I'll be the operator for today's call. During the presentation, all participants will be in listen only mode. After today's presentation, there will be an opportunity to ask a question. Please note that this event is being recorded. I would now like to turn the call over to Paul Nenekver with Premier Financial Corp.

Operator

Paul, please go ahead whenever you're ready.

Speaker 1

Thank you. Good morning, everyone, and thank you for joining us for today's Q3 2023 earnings conference call. This call is also being webcast and the audio replay will be available at the Premier Financial Corp. Website at premierfincorp.com. Following our prepared comments on the company's strategy and performance, we will be available to take your questions.

Speaker 1

Before we begin, I'd like to remind you that during the conference call today, including during the question and answer period, you may hear forward looking statements related to future financial results and business operations for Premier Financial Corp. Actual results may differ materially from current management forecasts 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.

Speaker 2

Thank you, Paul, and good morning. Thank you all for joining us. On behalf of the Premier team, I'm pleased to announce 3rd quarter earnings of $24,700,000 Or $0.69 per share. Results were in line with our expectations for the quarter and represents favorable performance versus consensus expectations. Core net income was up $500,000 or 2% on a linked quarter basis.

Speaker 2

We posted an ROA of 1.14 percent And our return on average tangible equity came in at 15.6% for the quarter. EPS topped quarter 2 results With net interest income up 2% on an annualized basis and net interest margin improving slightly versus the prior quarter. Year to date loan growth stands at 4% and our average loan growth for the quarter was up 2.9% on an annualized basis and that was a bit better than our We had anticipated. C and I originations were 40% of the Q3 commercial commitments. Commercial line utilization rate is at a 2 year low Our clients are using their excess cash to pay down their loan positions.

Speaker 2

Customer deposits closed at 5.6% for the quarter on an annualized basis with business deposit growth leading the way climbing 11% annualized for the quarter. From a credit perspective, loan delinquency declined on a linked quarter basis and we finished the quarter in a net recovery position of $300 plus 1,000 The non accrual category was up slightly due to a single commercial C and I credit, nothing systemic to report. We did see an increase in the special mention category driven by 2 loans, 1 a C and I loan, the other multifamily. Each loan is performing and the required adjustments expected are expected to be achievable. We have strong guarantors in each situation.

Speaker 2

Non owner occupied office exposure was down 7.5% on a linked quarter basis coming in at just under $208,000,000 Premier benefits from relatively low concentration in this category and the portfolio has low release and repricing risk. We had a strong Q3 fee income. We were up $334,000 or 2.6 percent on a linked quarter basis When adjusting for insurance revenue, wealth management and deposit related fee income was up 11.3% and 6.1% respectively Versus Q3 of the prior year. Residents from mortgage fee income totaled $3,300,000 and that was up 14% on a linked quarter basis. The gain on sale margin improved and hedges in place to support the construction commitments benefited from the rising rate environment.

Speaker 2

Our cost reduction efforts continue to pay off. Our efficiency ratio improved to 56.5% for the quarter. Premier has always maintained a very low cost basis per earning asset ratio. And as a result, we are about 30% 30 basis points, I should say, lower than our peers on that factor and that's really helping to offset our current margin challenges. Our low cost structure will serve as a springboard for performance when combined with a more typical yield curve in the future.

Speaker 2

We've recently launched a new digital banking platform, improving our mobile and online banking capabilities. Has great new features and services, provides a better omnichannel experience for our clients. The consumer platform is in place And a new small business banking digital platform is coming on board in early 2024. Each adds a great deal of ease and flexibility relative to future digital enhancements, Additional middleware, etcetera. Our consumer clients have been clamoring for digital improvements and the new product has been well received.

Speaker 2

88% of our active users converted in just the 1st week. The system really delivers. In combination with our recent enhancements To our treasury management integrated payment product set, we're really well positioned to drive additional deposit growth going forward. Consumer clients as a whole are working deposits down, although balances are still above 2019 levels and we see no issues at this time on the Consumer credit front. Commercial clients are maintaining a conservative position, some slowing on expansion thoughts as rate and economic conditions fast light.

Speaker 2

We have little to no exposure in the challenge to the challenges facing the Big 3 Auto Group or significant suppliers. There are plants within our markets that have been affected, but each market tends to be well diversified industry wise and we all look forward to an amicable contract resolution. We have good commercial opportunities throughout our markets and a number of regional and community banks are on the sidelines. We are expecting to capitalize on these opportunities selectively. And now I'll turn it over to Paul for more details.

Speaker 1

Thank you, Gary. I'll begin with the balance sheet where total deposits increased by 4.1 percent point to point annualized, primarily due to customer deposits that increased 5.6 Percent annualized. We did continue to experience an impactful mix migration during the quarter, including decreases in savings, demand and non interest bearing deposits, Which were more than offset by increases in time and public fund deposits as customers keep seeking higher yields. On the other side, total earning assets declined primarily as we allowed securities and other earning assets to roll off. Our loan to deposit ratio improved by 110 basis points and we were able to reduce higher cost wholesale fundings By $137,000,000 due to the combination of strong customer deposit growth and modest earning asset contraction.

Speaker 1

As a result of these balance sheet changes, plus having a full quarter benefit from the swaps we executed in June, Net interest margin stabilized and actually eked out a 1 basis point increase for 3Q. Total interest bearing deposit costs increased 47 basis Points to 2.54 percent for 3Q, which was primarily due to the mix migration I mentioned earlier. Total average customer deposit costs in September, including non interest, but excluding broker deposits and mark secretion were 1.85%. This represents a cumulative beta of 32%, up from 28% in June. Compared to the change in the monthly average effect federal funds rate, which increased 525 basis points from December 2021 to 5.33%.

Speaker 1

Net interest margin was positively impacted by the combination of previous loan growth and higher loan yields, which were 5.12%, up 26 basis points from the prior quarter. Excluding the impact of PPP and Marks, loan yields were 5.07% in September 2023 For an increase of 126 basis points since December 2021. This represents a cumulative beta of 24% compared to the change in the monthly average effective federal funds rate for the same period. Next, excluding insurance commissions and the insurance agency gain on sale last quarter, Non interest income increased 2.6 percent to $13,300,000 in 3Q. This increase was primarily due to mortgage banking income Our gains increased $342,000 from last quarter primarily due to better margins.

Speaker 1

Excluding transaction costs for the insurance agency sale last quarter. Expenses of $38,100,000 were down $2,800,000 or 7% on a linked quarter basis. Through the combination of successful cost saving initiatives implemented to date and the insurance agency sale, we have already reduced our expense run rate by 11% to $152,000,000 annualized from our beginning of the year estimate of $170,000,000 Provision for the Q3 was a net benefit of 700 $73,000 which was comprised of a $1,000,000 benefit on a $75,000,000 linked quarter decrease in unfunded commitments And a $245,000 expense for loans. Provision expense for loans was the net result of a $12,000,000 decrease in balances, Net recoveries of $347,000 and a one basis point increase in the allowance coverage ratio to 1.14% or 1.17 percent including unaccreted acquisition marks. We are pleased with our performance in the Q3, including core deposit growth and a stabilized interest margin.

Speaker 1

Excluding the impact of the fixed sale in 2Q, net income increased $500,000 or 2% on a linked quarter basis For a 1.14% return on average assets and core EPS increased a penny to $0.69 That completes my financial review and I'll turn the call back over to Gary for some closing remarks.

Speaker 2

Thank you, Paul and I'll share some guidance thoughts for the remainder of the year. Earning assets, we'll see loan growth offset by securities roll downs and I would expect about 1%, but with an improved yield on the average earning assets. Expect moderate deposit growth throughout year end in the 1% to 1.5% category. Margin perspective, expect continued stability. We've been very good for 6 months in a row at keeping a small Bandwidth on that.

Speaker 2

Loan repricing and new business originations offsetting deposit mix movement. There was a small Q3 tailwind And we could see Q4 down 2 to 4 basis points, no absolute certainty around that. Expect a continuation of fee income trajectory, strong wealth and deposit fees consistent with the 3rd quarter results. 4th quarter mortgage income is likely to be more in keeping with the forecast we provided on our last call somewhere in the $1,500,000 range. The expense run rate will be similar to Q3 at $38,000,000 From a credit perspective, no projected change, although we see the Potential for a moderate favorable movement in NPLs.

Speaker 2

4th quarter provision will benefit or continue to benefit from the lower level of unfunded Construction commitments. We are nearing the more normalized run rate for the unfunded position. Still see full year net charge offs contained to a 5 to 8 basis point range and we consider this keeping it conservative. I would like to add a comment on the performance of the organization over the past 7 quarters. Premier has delivered an average quarterly EPS over the past 7 quarters of $0.68 a share, And that's excluding the favorable impact of the First Insurance Group sales in the 2nd quarter.

Speaker 2

This consistent delivery of earnings and capital over a tumultuous period for the banking Industry performance is a direct reflection of Premier's team's determination and commitment to making adjustments as needed, making difficult decisions And balancing near term performance and long term value creation objectives for our shareholders. That performance commitment runs through this organization It's part of our DNA and we're driven to positioning Premier to return to being a top quartile performing organization And you can count on it. And with that said, I'll be happy to take all questions.

Operator

Thank you. We will now enter our Q and A session. Our first question today comes from Michael Perito from KBW. Michael, your line is now open. Please proceed.

Speaker 3

Hey, Gary. Hey, Paul. How are you guys doing?

Speaker 2

Good morning, Mike. Good to hear from you.

Speaker 3

Good. Yes, same. Just a couple of margin questions I wanted to spend a minute on. Obviously, Good to see the stabilization again. I guess, two questions.

Speaker 3

Number 1, So like pure incremental here, like incremental blended loan yield, incremental blended deposit costs. What's kind of the spread that you're putting new stuff on today? Is it above the 2.70 3 level and do you expect that to change up or down kind of near term here? And then second question, just As we think about 2024, I realize you're not providing guide yet, but just curious about kind of what the fixed rate asset maturation Schedule looks like for next year and if there's maybe some tailwind for some kind of CRE type stuff and maybe some investments to Kind of reprice higher that have been lagging the funding costs over the balance of this year? Thank you.

Speaker 2

Mike, I'll take the first part of the question and Paul will have the second. You mentioned the $275,000,000 number, new business going on Or the business is repricing as it comes around, adjustable rate stuff, is on at 275 or north of our most expensive incremental funding base, which we would view as the 530 sort of figure. If you were to look at our commercial book, generally everything is starting with an 8. If you look at our retail book, we have things that have 9s and 10s on them relative to So it is repricing higher and new business going on is going higher and there's more floating rate going on, which kind of Again, floater plus 300 gets you north of 8. That would be the story.

Speaker 1

Yes, Mike. And I'll take the second one there in terms of the repricing that we're looking to get in 2024, I I believe it was your question there. We don't have a lot coming up. We've got a kind of modest level. Between the adjustable book, which comes up on their normal 5 year kind of cycle and then the true fixed stuff with Schedule maturities and bullets coming up.

Speaker 1

We've probably got maybe up to 10% in total that would be rolling next year between those two buckets. So we're not expecting a lot of lift out of that. We'll get some obviously and that could Accelerate if customers are for whatever reason looking for some refi or what have you. But we're not anticipating a major lift from that. So similar trends to what you've been seeing here recently, Mike, should continue On that piece of it.

Speaker 3

Okay. So I mean all else equal, if rates Kind of stay where they are. It doesn't sound like there should be much more compression. Yes. I mean, obviously, quarter to quarter things always bounce around a little bit.

Speaker 3

But over like a multi quarter period, it would sound like you guys think most of the compression is behind you based on where incremental spreads are And some maybe additional, although modest maturities next year that should reprice higher. Do you think that's fair? Or do

Speaker 2

you think it still pays

Speaker 3

to be more Conservative on that on the outlook.

Speaker 2

Well, we cautioned ourselves not To say we're at the trough, yes, we'd like to see it for a couple of quarters, but I think your characterization is about right. It's certainly, if we're not there, we can see it from here. But that combination of what will reprice and what we also have booked that amortizes off. And from the commercial side, that's about $400,000,000 a year. What it's going to be replaced with the new business again is with 8.

Speaker 2

So between the repricing of the what's staying on the book And the new stuff coming on, it will have a favorable impact versus this year where we've had less coming on purposefully At the newer rate because we were a 20% grower last year. So we did pull in our sales a little bit. We'll be letting it out a bit next year, back to the comment, but there's market there and we'll be back in the market in a more normal way. So I think if it's going to be in a different direction, they will be favorable.

Speaker 3

Sorry, ahead.

Speaker 2

That's fine. It will be favorable.

Speaker 3

Great. Thanks. And that dovetails in my next question and I'll step back. Just on you mentioned kind of north of 8 on incremental blended commercial loan yields. I guess as we look in the pipeline here and maybe just the early part of next year because who knows what the latter part will look like.

Speaker 3

But I guess, 2 part question. I guess, how what's your appetite for growth here? I mean, we've seen a lot of banks kind of pull back a bit With the liquidity environment being what it is, and so curious, I mean, it sounds like you expect a little earning asset remix based on your guide in the Q4. So it sounds like some positive loan growth, Curious if

Speaker 1

you can go layer deeper there.

Speaker 3

And then secondly, like within your customer base, I mean, I think in your prepared remarks On the release, Gary, you might have mentioned some C and I utilization going down. I mean, how much appetite is there for north of 8% commercial credit in the current market Today from the customer perspective.

Speaker 2

I hesitate to use the word pricing power, but there's enough folks on the sidelines that If the deal works and the pricing is reasonable, you can get the terms you're looking for. So I think at this point, that's very achievable.

Speaker 3

Okay. All right, guys. Well, I appreciate it. I'll let someone else jump in. Thanks.

Speaker 1

Thanks, Mike.

Operator

Okay. There are no further questions on the line. So Gary, I'll hand back to you for any closing remarks.

Speaker 2

Again, I thank you all for your interest And feel free to reach out with any additional questions that might develop and look forward to having a great conversation next quarter. Thank you all.

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Key Takeaways

  • Third quarter earnings of $24.7 million ($0.69 per share) delivered a 1.14% ROA and 15.6% return on average tangible equity, with core net income up 2% sequentially.
  • Loan growth remained solid with year-to-date growth of 4% and Q3 growth of 2.9% annualized, while customer deposits rose 5.6% annualized, led by 11% growth in business deposits.
  • Credit quality improved as delinquencies declined into a net recovery position of over $300,000, non-accruals rose slightly due to one commercial file, and non-owner-occupied office exposure fell 7.5% sequentially.
  • Efficiency gains drove the efficiency ratio down to 56.5%, and expense run rate was cut by 11% (to $152 million annualized) through cost‐saving initiatives and an insurance agency sale.
  • Premier launched a new digital banking platform with 88% conversion in the first week and will roll out a small business digital solution in early 2024 to drive deposit growth, while management expects Q4 NIM stability, 1–1.5% deposit growth, and continued fee income momentum.
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Earnings Conference Call
Premier Financial Q3 2023
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