Premier Financial Corp.
Q1 2021 Earnings Call Transcript

Published: 21 Apr 2021

[Operator:]

Good morning and welcome to the Premier Financial Corporation First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Tera Murphy, Vice President. Please go ahead.

[Tera Murphy:]

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.

[Gary Small:]

Thank you, Tera, and good morning to all, appreciate having you with us today. We are very pleased to report record first quarter earnings of $41 million or a $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. Three topics certainly on my discussion. First the strengthening economic outlook combined with the benign credit charge-off levels 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 2021 over the course of the year, but certainly rates moved more quickly than we had anticipated. The third item we've benefited from a favorable stock valuation move in our bank equity portfolio. We're up over 15% for the year. Our received 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 finally are experiencing. Currently, we run our stores I should say we run a commercial utilization rate of about 50% and we're currently experiencing a 30% run rate and that move 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.

[Paul Nungester:]

Thank you, Gary. Good morning, everyone. I'll summarize our first quarter results and focus on certain areas of impact. Let’s begin 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 pay downs 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.

[Matt Garrity:]

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 although we did see a balanced decline for the quarter. The decline was largely a result of approximately $53 million of line of credit pay downs 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 the commercial line balances have fallen approximately $157 million over the past four quarters which represents about a 4.6% impact to the portfolio. Adjusting year-over-year portfolio growth without the line balanced decline, loan growth is 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.

[Gary Small:]

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 at the tempers over the remainder of the year it still meets our expectations that we have in the plant. Balance sheet growth, $7.75 billion would not be an unreasonable expectations for the end of the year, driving up net interest income, driving NIM down. That's the right approach for us in 2021. In summary, we’re off to a good start of 2021. We expect favorable contributions in the areas of lost provision and MSR valuation over the entirety of 2021, 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 2021 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 will turn it over for questions.

[Operator:]

We will now begin the question-and-answer session. And the first question comes from Michael Perito of KBW. Please go ahead.

[Michael Perito:]

Hey, guys. How is everybody?

[Gary Small:]

Good morning, Mike.

[Paul Nungester:]

Good morning.

[Gary Small:]

Doing well, surviving the snowstorm.

[Michael Perito:]

Thanks for taking - yes, sorry, thanks for taking my questions. I had a few things I want to hit. I appreciate the commentary on loan growth. It sounds like it's going to be back-offloaded. I’ve kind of had a bigger picture question for you guys. So, 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 two 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 you're willing to offer on that.

[Gary Small:]

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 as that 7% to 8% growth company over a longer period of time. The wild card this year and last year as well has been on the residential side with all the refi activity. That’s a meaningful sized book on our balance sheet and it's been in decline as we're in 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 take 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 in ordinate organic growth that we are always on the lookout for relative to entering new markets via commercial lift out 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.

[Matt Garrity:]

Yeah. Mike, good morning. It's Matt. And just to kind of piggyback off the 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 a 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 and 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.

[Michael Perito:]

Got it, very helpful. And then maybe a quick follow-up. So the Gary the $7.75 billion was that earning assets number for the end of the year?

[Gary Small:]

I think of it more as end of period Mike, but when we project, it's a pretty steady climb.

[Michael Perito:]

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 in the system right. But you know I guess when do you see that dynamic shifting? Is it just a liquidity element? Is it 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?

[Gary Small:]

Mike, there's a few dynamics there relative to PPP and the burn off on those two tranches the renormalization of between Matt and Vince’s book on consumer probably $200 million of line drawers that will 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 2022 as we swap out loans for securities. And we’re keeping the securities position 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 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 anyone 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 $700 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.

[Michael Perito:]

Right. Now it makes sense. And then just lastly for me, I mean, you mentioned the return metrics, Gary, I mean, if we just did the quick math, I mean, a sub 50% efficiency ratio should keep that pre-tax pre-provision ROI north of 200 basis points, obviously there's been good fall through or at least better follow through on the multiple for you guys and 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 that three 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 are about a year plus removed from the closing of the merger?

[Paul Nungester:]

I'll give you on those two plus the dividends. So we've popped another $0.02 that’s two quarters of $0.02 increase at the back, unusual for our 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 continuation of that. On the buyback front, we just had a board meeting yesterday and we affirmed we're authorized to do quite a bit and we affirm the levels of which we're comfortable in moving in. And you should expect that we will be opportunistic and watch for the moments and try not to buy the top of the market and that sort of thing. But that we are as enthusiastic on that front as we were three months ago when we mentioned the system markets 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 other acquisition opportunities. Obviously the market's 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.

[Michael Perito:]

Very helpful guys. Thank you for taking my questions. Appreciate it.

[Gary Small:]

Thank you, Mike.

[Paul Nungester:]

Thanks, Mike.

[Operator:]

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

[Scott Siefers:]

Good morning, guys. Thank you for taking my questions. So Gary, just given their crosscurrents in the NII outlook meaning sort of bigger security 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 and I think that had been sort of 7% to 8% NII growth this year or like 5% to 7% ex-PPP. Is that something you guys are still comfortable with?

[Paul Nungester:]

Yeah. 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.

[Scott Siefers:]

Okay. Perfect. Thank you. And then just so I'm clear the base that we’d be talking off of is just the fourth quarter 2020 kind of annualized basis. Is that right as well?

[Paul Nungester:]

Yeah. Yeah.

[Scott Siefers:]

Yeah. Perfect. Okay. Thank you. And then 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 one loans and those from round two as well. How are you kind of guessing those will ebb and flow?

[Gary Small:]

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 one 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 two, I think we had said $180 million I think was the number we threw out there, which was essentially half of the original round one loans that were less than $2 million and we’re at $172 million at the end of March.

[Matt Garrity:]

Yeah. And there is enough in the pipeline that’s not to close, that’ll get us just to touch over that number. So, that’s a pretty good number.

[Gary Small:]

And then cuts off here soon.

[Matt Garrity:]

That's going to - the expectation is going to run out of money, sure.

[Gary Small:]

Yeah. Yeah. And so, sure, Scott, yeah. We're still good with that original guidance.

[Scott Siefers:]

Okay.

[Gary Small:]

We've got one in our hip pockets, Scott. We don't have a very aggressive assumption on prepayment of the over $2 million on round one.

[Scott Siefers:]

Got it.

[Gary Small:]

And then zero assuming for this year with just because of the uncertainty of how folks will move. So that's a potential good guy.

[Matt Garrity:]

That could be a good guy. Yeah.

[Scott Siefers:]

Okay. Perfect. And then that round two, are we thinking that the stuff under $2 million sorry done by the end of this year for the most part?

[Gary Small:]

No. No. We see it being on the balance sheet at the end of the year.

[Scott Siefers:]

Okay. Okay. Perfect. All right. Thank you guys very much.

[Gary Small:]

Thanks, Scott.

[Paul Nungester:]

Thanks.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Tera Murphy for any closing remarks.

[Tera Murphy:]

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.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.