Premier Financial Corp (OHIO) (PFC) 2021 Q1 法說會逐字稿

Good morning, and welcome to the Premier Financial Corporation First Quarter 2021 Earnings Conference Call.

(Operator Instructions)

Please note, this event is being recorded.

I would now like to turn the conference over to Tera Murphy, Vice President.

Please go ahead.

Thank you.

Good morning, everyone, and thank you for joining us for today's first quarter 2021 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 leadership's prepared comments on the company's strategy and performance, they 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 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.

And now I'll turn the call over to Mr. Small for his comments.

Thank you, Tera, and good morning to all.

I appreciate having you with us today.

We are very pleased to report record first quarter earnings of $41 million or $1.10 a share.

We delivered well against our traditional earnings elements.

And when combined with some very favorable outcomes on specific income drivers, it made for an outsized performance figure for the quarter.

The 3 topics certainly are merit discussion.

First, the strengthening economic outlook, combined with the benign credit charge-off levels that drove our loan provision downward.

Second, the escalation of the 10-year treasury as of 3/31 led to a meaningful recapture of our MSR.

That was not unexpected for '21 over the course of the year, but certainly, rates moved more quickly than we had anticipated.

The third item, we benefited from a favorable stock valuation move in our bank equity portfolio we're up over 15% for the year.

However, these favorable outcomes should not overshadow the more typical drivers of the financial performance delivered by the business units across the organization.

New commercial loan commitments for the quarter were very strong, closing in on $200 million.

That effect was somewhat masked by the continued decline in commercial line utilization rates due to the superior liquidity positions our clients find, they're experiencing.

Currently, we run -- or historically, I should say, we run a commercial utilization rate of about 50%, and we're currently experiencing a 30% run rate, and that moved downward 5% in the first quarter alone.

Our consumer line utilization is performing in a similar fashion with utilization rates down 10% in absolute terms versus normal levels.

We do see these utilization declines as transitory.

As the economy reopens and consumer and businesses return to their normal, if not more active behaviors, we expect to return to normal utilization levels.

Deposits expanded 5% for the quarter, and we expect to see additional growth over the remainder of the year due to the success of this year's round of PPP funds, combined with continuous stimulus benefits for households and new funding from Washington that's landing in municipal accounts.

The outsized growth in deposits will lead to a larger balance sheet and expanded securities portfolio.

This is favorable in terms of net interest dollars, although it's a drag in terms of the net interest margin.

We'll remain focused on serving our clients, welcoming their deposits and focus on investing those funds to the best balance of yield and duration considerations.

Our clients are handling their personal and business balance sheets very effectively.

We see already historical low delinquency levels actually falling further across the board, and the typical portfolio credit stats remain stable.

Residential mortgage origination continues to excel, a continuation of last year's theme.

March alone was the highest month of origination in our history, with an equal mix of purchased new construction and refinance activity.

Volume is strong.

Gain on sale margin is still running ahead of historical levels, although moderating somewhat from the extremely favorable performance in 2021.

And the servicing valuation allowance for the quarter is favorable as expected.

We see fees related to consumer behavior on the rise, so I think debit card income, et cetera, and certainly a good omen for the remainder of the year.

Expenses ran a bit hot for the quarter for some understood reasons.

Paul will share more details, but I would say that there was an increase related to 2020 performance payout true-ups that occurred in the first quarter.

And a portion is just timing between quarters.

There is an amount that we see as run rate related, and we expect to address that over the remainder of the year and have it offset by year's end.

At this point, I'll turn it over to Paul for more comments, and I'll come back and close with some thoughts on guidance toward the end of the call.

Thank you, Gary.

Good morning, everyone.

I'll summarize our first quarter results and focus on certain areas of impact.

Speaking with the balance sheet that expanded due to continued high deposits growth, which were up 5% from year-end and continued to outpace expectations.

We improved mix and continued to reduce our all-in costs, which fell 7 basis points to 0.27% this quarter.

For assets, loans were down in all categories except PPP due to continued line paydowns that Matt will discuss more shortly.

While we await a loan growth rebound, we focused on securities to drive net interest income growth.

During 1Q, we added $195 million of securities, including some bank equities that saw a nice gain in the quarter.

Next is the allowance, which decreased $7.3 million due to a provision of credit for loans of $7.5 million and net recoveries of $189,000.

This decrease is primarily related to another improvement in quantitative factors as well as a decline in non-PPP balances.

And a welcome lack of charge-offs that helped expense by approximately $4 million.

Quantitative factors improved again due to an even better national unemployment forecast, but we did have some risk migration that partly offset this.

At 3/31, our allowance coverage, excluding PPP loans and including acquisition marks, was 1.69%, down from 1.84% at 12/31, and we are comfortable with this given the current economic outlook.

To finish the balance sheet at capital where we ended 1Q with almost $1 billion of equity.

The increase from year-end is due to net earnings in excess of dividends offset by a decline in unrealized securities gains.

We briefly did some stock buybacks before the stock price accelerated for no real impact.

At 3/31, our tangible equity ratio was 9.1%, we're 9.7% excluding PPP loans, and our total risk-based capital is estimated to be about 13.5%.

Next, I'll turn to the income statement, starting with net interest income of $57 million, which is up 3% on a linked quarter basis.

Excluding the impact of marks and PPP, our net interest margin was 3.25%, down from 3.36% on a linked quarter basis.

This is a bit lower than projected due to the larger-than-expected deposit growth, which lowered margin by approximately 6 to 9 basis points.

NIM will remain challenged for the rest of the year and continue to contract.

especially in light of the recently enacted stimulus act that will see public fund deposits climb significantly starting in 2Q.

We remain focused on net interest income growth and we'll continue to invest prudently in securities in the interim until loan growth picks up.

Noninterest income was $26 million for 1Q, and represented 30% of total revenues.

Several key items impacted this.

First, mortgage banking income was strong again, including a shift in MSR valuation to a positive $5.3 million this quarter due to the upswing in rates and slower prepay speeds compared to the major drop in rates and accelerated prepay speeds last year.

Second, we had a $2.1 million securities gain with $0.5 million from where we took advantage of Fed pricing to realize a gain and reinvested to generate the same income over the next 3 years.

The other $1.6 million related to unrealized gains on our bank equities due to the improved market.

For insurance commissions, the first quarter is the period each year when we generate contingent commissions, and we earned $1.1 million for those, down from $1.3 million last year.

Last, BOLI income included a debt benefit of $0.3 million this quarter.

Next is expenses, which were $38.8 million, down 1% on a linked-quarter basis, excluding merger costs.

Rather than discuss specifics, I will note that we did have some onetime items impacting the quarter, primarily in compensation, such that expenses would have been about $37.5 million.

And we also had a few run rate items that, as Gary mentioned, are under review.

But we would currently estimate full year expenses to end closer to $153 million versus our prior $150 million estimate.

However, despite the somewhat-elevated costs, we did produce an efficiency ratio of just under 48% this quarter and still expect 50% or better for the full year.

Additionally, our first quarter pretax pre-provision income was $44 million, which generated a strong 2.43% return on average assets.

Bottom line, we reported net income of $41 million or $1.10 per share for the first quarter 2021, which is well ahead of expectations.

due to the good guidance and provision, mortgage and security gains, offset partly by some elevated costs.

Factoring in these results and what we can see go forward, we would estimate net income ending about 5% higher than prior expectation, assuming those good guys don't reverse if the economy were to turn on us.

That completes my financial review, and I'll now turn the call over to Matt for a discussion of mortgage and credit.

Matt?

Thanks, Paul.

This morning, I will be providing an update on our commercial and residential mortgage areas as well as comments on asset quality.

In our commercial business, when excluding PPP activity, originations were solid in the first quarter, in line with our overall expectations, although we did see a balanced decline for the quarter.

The decline was largely a result of approximately $53 million of line of credit paydowns along with some payoff activity that drifted into the first quarter from the fourth quarter.

We believe that the 2021 round of PPP had an impact on line balances.

And while timing is still unclear, we are optimistic that utilizations will begin to pick up as economic conditions continue to improve.

I would note that commercial line balances have fallen approximately $157 million over the past 4 quarters, which represents about a 4.6% impact to the portfolio.

Adjusting year-over-year portfolio growth without the line balance decline, loan growth was approximately 6.7%.

On the deposit side, we experienced commercial deposit growth in excess of 8.5% for the quarter.

We continue to support our customers with PPP loans.

We originated 1,645 loans during the first quarter in support of our customer base for a total of $171.7 million.

Looking forward, we expect loan growth to resume during the second quarter as activity remains solid.

While demand is not on par with pre-pandemic levels, we are beginning to see some green shoots coming up as client conversations around investment are happening with greater frequency, creating potential for an acceleration of demand in the second half of 2021.

We continue to look for opportunities to invest in the commercial business.

And through April, we were successful in bringing in 2 additional bankers to the team, with more additions expected during the quarter.

In our residential mortgage business, we started the year off well in what we expect to be a more challenging environment in mortgage.

Mortgage banking gain on sale for the first quarter was consistent with our expectations in comparison to the fourth quarter.

As we have discussed previously, we expected margin to begin to normalize to pre-pandemic levels during 2021.

And in the first quarter, we started to see evidence of this.

We expect this compression to continue into the second quarter.

The biggest mover for mortgage banking revenue was the MSR adjustments, which brought back over $5.3 million into income for the first quarter.

As we talked about on last quarter's call, we expected the bring back of MSR to occur in 2021 as part of maintaining mortgage banking contribution consistent overall with 2020 performance.

While the MSR bring back for the first quarter was more than anticipated, it is in line with what we expected to happen during the year.

Our outlook for the second quarter is positive in terms of application and production activity as we begin to enter, but is normally a more active period for the business.

And we remain on track for delivering on our full year expectations for mortgage.

In terms of asset quality, we saw improvement in payment delinquency, nonperforming loan levels, while we had a net recovery in terms of charge-offs.

In addition, we experienced another meaningful reduction in COVID-related payment deferrals, consistent with our expectations.

We did see an increase in classified loans of approximately $24.2 million during the first quarter, which is due primarily by the classification of a $26 million C&I loan.

A portion of the borrowers business is impacted by the moratorium on student loan collections as part of the CARES Act legislation.

We believe the business will improve with the restart of this collection activity, which is expected to return, and we continue to work with the client closely.

In terms of outlook, while the economic stimulus and liquidity in the market has affected loan demand, it has been instrumental in providing what increasingly looks like a sufficient bridge to an improved economic environment for our clients.

While we will have individual credit issues, from time to time, it remains more episodic in nature, and is not indicative of any portfolio Y or portfolio segment-related concerns.

We remain diligent in monitoring the performance of the portfolio and working with our clients as we continue to navigate our economic environment.

I would now like to turn the call back over to Gary Small.

Gary?

Thank you, Matt.

Now I'll provide a few comments on the guidance we provided in January.

Select comments on items of note.

As Matt was saying, the end-of-period commercial loan expectations were affirming for the year with our original guidance in January.

We do expect to see the growth more so in Q3 and Q4 for all the reasons noted.

New business activity remains strong.

It's just tempered with -- by some uncertainty as to how long it's going to take for the clients to burn through their built-up cash reserves.

From a credit perspective, we certainly expect net charge-offs to beat the low end of our original range provided in January.

The continued macro environment improvements expected in the economy will create additional favorable allowance movement, although an unexpected turn in the pandemic progress would have the opposite effect.

Relative to fee income, we affirm our expectations on the mortgage income generation for the year.

The MSR is favorable as expected, but we do feel that as it tempers over the remainder of the year, it still meets our expectations that we have in the plan.

Balance sheet growth, $7.75 billion would not be an unreasonable expectation for the end of the year, driving up net interest income, driving NIM down.

That's the right approach for us in '21.

In summary, we're off to a good start.

In '21, we expect favorable contributions in the areas of loss provision and MSR valuation over the entirety of '21.

A meaningful portion of these obviously have already been accelerated into Q1.

Having acknowledged that acceleration, we did post strong normalized earnings.

For additional perspective or to put a wrap on that comment, if we'd have known in January what we understand now, we would have projected our '21 earnings run rate to be about 4% to 5% higher for the entire year than what we were thinking back in January.

So that's sort of the high-level umbrella statement on expectations.

And with that, operator, we'll turn it over for questions.

(Operator Instructions)

And the first question comes from Michael Perito of KBW.

I had a few things I wanted to hit.

I appreciate the commentary on loan growth.

It sounds like it's going to be back half loaded.

That kind of a bigger picture question for you guys.

Now I mean, obviously, last year and the majority of this year are going to be heavily impacted by the pandemic.

But when I think about the 2 legacy institutions that combined, right?

I mean they were both kind of high single-digit growth net institutions.

And I'm curious, a year into the merger, obviously, the environment hasn't helped.

But how do you think about the long-term growth rate for this company as you see kind of the market share disruption?

And I'm just curious if you have any updated thoughts that you're willing to offer on that.

Mike, this is Gary.

I'll take the first swing at that.

And Matt, feel free to jump in.

Overall, when you take commercial and the consumer and the residential book combined, we would still target ourselves at that 7% to 8% growth company over a longer period of time.

The wildcard this year and last year as well, has been on the residential side with all the refi activity.

That's a meaningful size book on our balance sheet, and it's been in decline as we're an originate and sell sort of shop.

And we were rolling off some of our existing book into Fannie and Freddie.

When it's performing normally, it will pick off at 5% to 7% increase a year.

Commercial will do closer to 8-plus percent a year.

and consumer, which is a little bit tied to your actual household effects would be less than 5% a year.

And on average, that will get you to that starting point that I mentioned.

What's not counted in there is inordinate organic growth that we are always on the lookout for relative to entering new markets via commercial lift-outs and so forth.

we'll count those when we get those, but that's icing on the cake relative to how we think about our targeted number.

Yes.

Mike, it's Matt.

And just to kind of piggyback off to Gary's comments.

I would agree with you that the last year has been -- it creates a little bit more difficult comparison, the effects of the pandemic on both institutions coming together in a merger.

But after experiencing what we've seen for the past year.

I'm actually a little more optimistic than I would have been initially.

I think to Gary's point, on the commercial front, I'm absolutely believing 8-plus percent organic growth paddling our own boat is in the cards for us.

And I see expansion opportunities as there's disruption, as you mentioned.

I also think in our mortgage business, we really saw the benefit of scale in 2020 and how that business performed.

And we're also hearing a lot of positive impact within the industry on our model and how we go to market in our client experience, and we're increasingly seeing people reach out to us for more conversations, which provides us an opportunity to expand our business.

So I'm very optimistic long term on what the expansion opportunities are for our businesses.

Got it.

Very helpful.

And then maybe a quick follow-up.

So the -- Gary, the $7.75 billion, was that an earning asset number for the end of the year?

I think it was more as an end of period, Mike.

But when we project, it's a pretty steady climb.

Okay.

And then just you mentioned, Gary, that the right play this year is to grow loans at the expense of margin per se.

And I imagine a lot of that has to do with the liquidity on the balance sheet and the system, right?

But I guess when do you see that dynamic shifting?

Is it just a liquidity element?

Is it -- are there more considerations we should be mindful of in terms of when the loan growth at the expense of the margin dynamic could potentially change as you see it?

Mike, there's a few dynamics there relative to PPP and the burn off on those 2 tranches.

The renormalization of between Matt and Vincent both on consumer, probably $200 million of line draws that we'll experience.

And that's probably more of a 24-month cycle for that in its entirety.

I think what you'll see, we'll manage -- if we were to hit that number, we'll manage out of securities and let the loan growth that we start to develop over the remainder of this year and next year, fill the bucket.

So you might actually see a little less growth in absolute balance sheet terms in '22 as we swap out loans for securities.

And we're keeping the securities positioned very purposefully.

There's liquidity there, and we're doing that with that in mind.

We -- there's no glory in having 7%, too big of a balance sheet at 100 basis points.

You make more money but every other metric that you respect and work for from an RO, anything, is worse.

So we're going to -- for this year, as I mentioned on the customer deposits, we're not turning any one away.

We're going to be there for them as we should be.

We'll take the lump on some of those performance metrics.

We'll make a little more money while we're doing it.

But the long term would not have us holding $500 million to $700 million of extra balance sheet just because we have the capital to do it.

We've never played that way, and we wouldn't start now.

Right.

That makes sense.

And then just lastly for me.

I mean you mentioned the return metrics, Gary.

I mean if we just do the quick math, I mean a sub-50% efficiency ratio should keep that pretax pre-provision ROA north of 200 basis points.

Obviously, there's good follow-through, or at least better follow-through on the multiple for you guys now trading at almost 190 in tangible book.

Strong currency.

Would love any updated thoughts on capital here with that being said, right?

I mean very different conversation like 3 months ago when you guys were trading at a much lower multiple.

Can you give us some updated thoughts around buyback?

And then maybe on the M&A pipeline, too, as you guys now or about a year plus removed from the closing of the merger?

I'll give you on those 2 plus the dividends.

So we popped another $0.02.

That's 2 quarters of $0.02 increase, back-to-back, unusual for organization, but showing our commitment to getting to a sustainable earnings dividend payout ratio that's in keeping with our objective and you'll see a continuation of that.

On the buyback front, we had a Board meeting yesterday, and we affirmed -- we're authorized to do quite a bit.

And we have affirm the levels of which we're comfortable in moving in.

And you should expect that we will be opportunistic and watch for the moment and try not to buy at the top of the market that sort of thing.

But we are as enthusiastic on that front as we were 3 months ago when we mentioned it's just the market just got a little hotter.

We thought we've got time to execute, but that's still there.

On the M&A front, we've got enough capital to whether we see fee business cash opportunities to buy and so forth.

We can easily do that.

And our ratios hold up nicely, whether we've done buybacks or not as we enter into and model out of other acquisition opportunities.

Obviously, the market is heating up nationally on the M&A front.

And we're starting to feel a little bit more here in the upper Midwest, and we'll be in those discussions as we go.

(Operator Instructions)

And the next question will come from Scott Siefers of Piper Sandler.

So Gary, just given the cross currents in the NII outlook, meaning sort of bigger securities portfolio, less robust net interest margin percentage.

Are you still comfortable with the NII guide that you guys have given?

In other words, that while there are some crosscurrents we're still getting to the same place basically.

I mean I think that had been sort of 7% to 8% NII growth this year and -- or like 5% to 7% ex PP.

Is that something you guys are still comfortable with?

Yes.

Scott, this is Paul.

We're still comfortable with that.

If anything, we've got a little upside on that because of the continued growth in deposits coming in.

So we continue to put those out.

On the securities front, those will keep growing, those dollars, just not at a very high rate or on an efficient basis there.

So we're definitely comfortable with that prior and would hedge it up, if anything.

Okay.

Perfect.

And then just so I'm clear, the base that we'd be talking off of is just the fourth quarter '20 kind of annualized base.

Is that right as well?

Yes.

Yes.

Yes.

Perfect.

Okay.

And then a separate question on PPP overall.

Maybe if you could let us know sort of your expectations for the pace of forgiveness both for the remaining round 1 loans, and those from round 2 as well.

How are you kind of guessing those will ebb and flow?

Sure.

I'll start with that one and then Matt can fill in any blanks here.

But very consistent with what we had said before.

So we're still on pace for the round 1 forgiveness.

And what we are targeting is about 80% of those originals, which represent basically everything under $2 million going through essentially in the first half of the year or so, and we're still on pace for that.

So those are coming through.

And then on round 2, I think we had said 180, I think, was the number we threw out there, which was essentially half of the original round 1 loans that were less than $2 million.

And we're at 172 at the end of March.

We're through...

Yes.

And there's enough in the pipeline that's not to close that will get us just to touch over that number.

So that's a pretty good number.

Yes.

And it cuts off here soon.

And then...

It's going to run - with the expectation it's going to run out of money.

Surely.

Yes.

So in short, Scott, yes, we're still good with that original guidance.

It's not one in our hip pocket, Scott.

It's -- we don't have a very aggressive assumption on prepayment of the over $2 million of round 1 as in 0 assumed for this year with -- just because of the uncertainty of how folks will move.

So that's a potential of good guy I can be to get here.

Okay.

Perfect.

And then that round 2, are we thinking that the stuff under $2 million sort of gone by the end of this year for the most part?

No.

No.

No.

We see it being on the balance sheet at the end of the year.

This concludes our question-and-answer session.

I would like to turn the conference back over to Tera Murphy for any closing remarks.

Thank you for joining us today as we discussed our quarterly results.

We appreciate your time and interest in Premier Financial Corp.

Have a great day.

The conference has now concluded.

Thank you for attending today's presentation, and you may now disconnect.