Premier Financial Corp.
Q4 2020 Earnings Call Transcript

Published: 27 Jan 2021

[Operator:]

Good day and welcome to the Premier Financial Corporation Fourth Quarter and Year-end 2020 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Tera Murphy. Please go ahead.

[Tera Murphy:]

Thank you. Good morning, everyone. And thank you for joining us for today's fourth quarter and full year 2020 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 able to take your questions.

[Don Hileman:]

Thank you. Good morning and welcome to our call. Joining me on the call this morning with prepared remarks on our financial performance is our CFO Paul Nungester; as well as Gary Small, Bank President and Matt Garrity, Chief Lending Officer. Vince Liuzzi, Chief Banking Officer will also be available for questions. Last night we issued our fourth quarter and full year 2020 earnings release. And now we would like to discuss that release and provide some insight into 2021. At the conclusion of our remarks, the team will take any questions you might have. While 2020 was very challenging year for the company on many fronts. With the merger of equals, the pandemic, our system conversion and the branding change, we were able to successfully navigate through the challenges and so and show strong core operating results for the quarter in the full year. I'm pleased with our results in the momentum in the balance sheet growth, financial strength, credit quality and strategic performance that carries us into '21. The fourth quarter 2020 net income on a GAAP basis was $30.8 million or $0.80 per diluted common share compared to $12.5 million and $0.63 per diluted common share in the fourth quarter of 2019. Net income excluding merger costs for the quarter was $32.6 million or $0.87 per share, compared with $13.2 or $0.66 per diluted common share in the fourth quarter of '19. For the year-ended, December 31, 2020 Premier financial earns $63.1 million or $1.75 per diluted common share compared to $49.4 or $2.48 per diluted common share for '19. Net income for the full year excluding merger costs and provision was $99.3 million or $2.76 per diluted common share with $50.7 million or $2.54 per diluted common share in 2019. At the quarter end, our total assets were $7.2 billion. Loan growth, exclusive of the impact of PPP loans and the deposit growth trends in the fourth quarter were healthy in this environment. Deposit growth continues to outpace loan growth as customer deposit activity remains strong. Our core efficiency ratio ended the year at 50% compared to 59% for 2019. For the fourth quarter our ROE was strong at 1.73 and 1.83 on a core basis. This represents continued financial strength and improving credit profile at year-end. Our ROE for the full year was 0.96 compared to 1.5 for '19. Core ROE was 1.5 for 2020 compared to 1.54 for 2019.

[Paul Nungester:]

Thank you, Don and good morning, everyone. I'll summarize our fourth quarter and full year financial performance. Beginning with the balance sheet; total loan growth may appear somewhat muted due to the beginning of PPP extinguishment. However, we generated almost $100 million of normal commercial loan growth, which would be an 11.5% annualized growth rate. Offsetting this was $56.4 million a PPP extinguishment, which began as a part of the forgiveness program. Residential loans again had good origination volumes, but continued prepayments and re-financings resulted in a $9.7 million net portfolio reduction, although we did have a $13.6 million increase in loans held for sale and consumer loans declined again by $12.7 million this quarter. For deposits, we grew another $252 million from September 30 for an annualized growth rate of 17%. Non-interest deposits increased as businesses retained cash at year-end and represented about 26% of total deposits at December 31 versus 25% at September 30. Due to excess liquidity, we added $158.5 million of security investments during the quarter as we focused on net interest income dollar growth.

[Matt Garrity:]

Thanks, Paul. This morning, I will be providing an update on COVID-19 related deferral activity, along with us on portfolio performance for the quarter and our outlook for asset quality moving forward. With respect to payment deferral activity, we're very pleased by the high rate of return to pay activity we experienced during the fourth quarter. As total deferrals are now down to 1% of total loans or approximately $53.5 million, compared to 8.8% of total loans were $482.7 million at September 30. Return to pay activity during the quarter was approximately 94%. And we're at high levels in all other categories, including our high sensitivity portfolio, which declined by over 80% during fourth quarter. These loans have a return payment have also been paying as agreed, as evidenced by our payment delinquency performance during the quarter. In terms of asset quality performance being stabilized during the fourth quarter. Levels of criticized loans remain relatively steady and overall there was not significant amount of migration into the classified loan category. Non-performing assets as a percentage of total assets remain relatively stable when comparing the fourth quarter to the third quarter, as did overall payment delinquency. Our outlook for asset quality at this point is more optimistic than we have expressed in our previous quarterly calls. While we still expect some level of credit weakening, it is likely to be more episodic in nature at the individual loan level and not a large migration across the portfolio, or portfolio segment. We see the beginning stages of Corona virus vaccination programs, and another round of economic stimulus is positive developments. With that said, we remain diligent in monitoring and managing the portfolio while working with our clients through what is still a very challenging environment.

[Gary Small:]

Thank you, Matt. Excellent commentary on 2020. Now I'll provide some color on our performance expectations for '21. From a balance sheet perspective, we expect year-over-year commercial growth excluding the impact of PPP. In the mid-single digit range very similar to our 2020 experience. The loan growth will fall to in total will be 3% to 4%, excluding PPP, as we continue to project little to no growth in the combined residential real estate and consumer loan portfolios. We would typically expect mid-single digit growth in the residential category. But with the low interest rates still driving refi activity we're taking a conservative approach when forecasting for '21. We do anticipate expanded securities portfolio on '21 versus '20, larger balance sheet driven by the excess liquidity we're experiencing. Core net interest income excluding the impact of marks and PPP is really reaching a low point or at least a low plateau at this point. And we would expect '21 to be consistent with poor results if maybe just a tick lower. From a net interest income perspective will be up 7% to 8% in dollar terms versus 2020. And that's 5% to 7% excluded the expected PPP impact. Fee income, we're really looking for a flattish '21 versus '20. Residential mortgage income is projected to be down slightly versus a tremendous 2020. Terms revenue will be flat again versus a very strong contingent income component in the 2020 numbers. Asset Management and trusts income will experience growth in the low to mid-teens. And our bank service fees and interchange fees are projected as flat as household deposit growth continues to favor our clients. Interchange fees are conservatively projected to run at the same pace as '20 as we're not certain of the customer behavior as we head into second year of COVID. From an expense standpoint, expect low single digit less than 3% when adjusting for the '20 merger and acquisition related expenses. Generally speaking, this reflects the addition of one month of the old home savings expense category that would have reflected January '20, offset by reduced duplicate costs associated with running to backroom portion of '20. Within that same modest figure, we do plan to expand our commercial and residential mortgage teams in '21, and are already off to a good start to that end. From a credit perspective, the assumption for '21 will include moderate level of charge offs have been the 20 to 35 basis point range. We anticipate improvement in qualitative factors relative to our CECL calculation, we already are seeing that benefit we'd like to see another quarter before and understand a little bit about COVID before making the adjustment, and we expect a more favorable core provision figure in '21 versus '20. In summary, the '21 plan delivers positive operating leverage with revenue growth exceeding expenses by about 2% when you adjust for M&A expenses. The annual earnings improvement coupled with buybacks should provide the 8% to 10% EPS range of year-over-year growth that's consistent with our three-year planning horizon. With that, I'll turn it back to Don.

[Don Hileman:]

Thank you, Gary. As I reflect on 2020 and the challenges that have brought, I'm very proud of all that we have accomplished as a team while achieving our eighth consecutive year of record core earnings performance. We brought together two very successful organizations to build a stronger and more competitive organization that remains committed to being in high performing community banking organization. For premier as a company and as a community bank, our definition of success goes well beyond the numbers on our financial statements. Our employees have consistently risen to the challenge of finding smart solutions for our clients and communities and our shareholders. The synergies between our employees, both internally and within the communities we serve, have taken us to higher levels of performance, and also have allowed us to demonstrate our ongoing commitment to our local communities have provided us with the opportunity to reaffirm our commitment to an elevated our customer experience. During the fourth quarter, we launched a new campaign called powered by kind people fueled by you. The bank will use this branding for all community outreach efforts going forward, powered by kind people presents the strong sense of passion that the banks associates have for supporting our communities and the bank's commitment to giving back. Fueled by you represents the inspiration that the bank's clients and communities give to them to give back and spread kindness in the places we call home. As part of our kindness movement, we committed 535,000 more than 75 organizations bringing total donations to $1.7 million for the company and the foundation as a whole. We are honored to support our community partners and making our local commitment stronger, especially in the time when COVID is having such a great impact and the need has never been greater. And just as we have remained dedicated our communities as a company, our leadership and staff composed of experienced employees for both legacy organizations have shown tremendous dedication to each other and our clients. I'm impressed with their commitment and the ability during the difficult operating environment, especially a working remotely for a significant part of the year. We will continue to address key issues concerning people processes and technology as we look to the future. We are confident we will build upon our collective strengths and continued to adapt our operating environment based on the lessons we have learned throughout our conversion in this pandemic. In addition to heightened focus on our digital strategy which will help us further enhance the customer experience in person through our digital channels and within our internal operations. Our customer's expectation especially pertaining to digital delivery methods are changing at an accelerated pace, and we are committed to providing our clients quality products and services within our environment they prefer. We will rely on our customers and employees that help us identify ways to improve our customer experience through outreach and be part of implementing innovative solutions to reduce friction. As announced last night in our release, I will be retiring as CEO of Premier Financial Corp and Premier Bank at the end of March. At that time, I will become Executive Chairman of the Board and Gary will transition into CEO for both companies. Since this transition was planned as part of the merger, Gary and I have been working extensively together for quite some time, so that transition will be smooth and provide continuity and leadership for the company. I want to personally thank John Bookmyer, our Chairman for all his support and leadership through the merger of equals and transition planning. John will remain an active board member. We appreciate the trust you have placed in us and your interest in premier financial Corp. We will now be glad to take any other questions.

[Operator:]

The first question comes from Scott Siefers with Piper Sandler. Please go ahead.

[Scott Siefers:]

Good morning, guys. Thanks for taking the question. Before we get started congrats Don and Gary both of you on the official position changes coming up in the next few months. So look forward to working in a new capacity. I was hoping maybe Gary for a little color on the expense trajectory into 2021. If I've done the math correctly, you know, if we just sort of hop on a small bit of growth to the core 2020 expense base, basically what it implies is a run rate less than the $39.1 million of core expenses in the fourth quarter. So is there I guess if I've done it correctly, which I hope I have is, is there a point where expenses come down from the fourth quarters base before grinding backed up?

[Gary Small:]

Scott your math is always good. And I think the direction of your question is right. Paul, you've got the exact answer. But I know that for the full year, we're looking at a 150-ish kind of number for the full year by quarter.

[Paul Nungester:]

Yes, it'll bounce around a little bit with the quarters. But that's right. Scott, it'll be we're expecting about 150, which is around the three percentage growth off of the core 2020 results. And Gary kind of talked through some of the pieces of that earlier, you know, 12 months versus 11 due to the timing of the merger close and adding some to the portfolio.

[Scott Siefers:]

Okay, perfect, thank you. And then maybe just on the fee side, so the downdraft in mortgage sequentially was maybe a little more than we've seen it at some of your peers, just curious how the quarter sort of shaped up relative to what you guys had been hoping for and then just maybe a little additional color on the outlook for 2021. I know you said down slightly off the strong 2020 in your prepared remarks, but would just be curious for any additional thoughts and expectations into the New Year?

[Paul Nungester:]

Yes, sure. I'll give you a little high level, this is Paul and I'll hand it over to Matt for some more color there. But in the fourth quarter, part of that seasonality with fourth quarter is usually lower than summer/fall type stuff. But we also proactively started to retain some balances where we could, where it made sense to try and grow the balance sheet, we continue to have deposit growth. And as I mentioned in my remarks, looking ahead to '21 and forward, we're looking to focus and grow net interest income dollars, to the detriment of margin in the interim until loan growth really rebounds. So those are a couple of the main pieces and Matt can get some more.

[Matt Garrity:]

I would add on that on the fourth quarter activity, that was a tactical adjustment that was specific in duration and it equated to maybe about one months of activity that we were able to portfolio rather than sell. And then we move right back into sales mode.

[Gary Small:]

The only other comment is because '20 is always a tough compare when you have just sort of an out of the park, Q2, and Q3, and I think we've tried to, on these calls communicated, this was really rarefied air, and then we were playing in during those quarters. And the fourth quarter is actually on balance, a very good quarter in mortgage banking activity, all things considered. As we look at '21. You know, winning is going to be a little bit different . Our expectation is that refi activity will lag a little bit compared to 2020, which you know, is safe call, given the record amount of refi activity we saw in the industry. But we've done a really good job as an organization growing our team. And growing our approach, there's opportunities within our markets for some additional product penetration into our Western markets, which we think will assist us greatly. So as we look at that, and the expansion of our team, we've always had a really good construction and purchase business. So we think with those factors together, we're going to win a little bit differently in 2021. So we think we can really maintain the level of performance overall and mortgage that we saw in 2020.

[Scott Siefers:]

Wonderful. All right, thank you guys very much.

[Operator:]

Next question comes from Michael Perito with KBW. Please go ahead.

[Michael Perito:]

Guys, Happy New Year. Thanks for taking my questions. I wanted to start, the balance pieces, it was even 2021, you know, between, kind of the accelerating, not just sustained commercial growth, but the PTC balance is falling down. And I was wondering, you gave some guidance around the pieces. But as we look at kind of the overall size of the asset base and the earning assets based. Any thoughts, Gary or, Paul, in terms of how that should track in 2021? I mean, do you think the balance sheet will be sustained, kind of in the $7.2 billion range and liquidity and stuff will just remake? So do you think there's a chance that it could shrink modestly, if there's some normalization of liquidity after PPP balances are forgiven? Or any thoughts around that would be helpful?

[Paul Nungester:]

Yes, sure. Yes, you're right. PPP is a bit of a variable there, so kind of setting that to the side for just a moment. As Gary laid out, we are planning for growth in '21. With conditions improving, we will be focusing on our commercial loan growth, as well as hopefully getting residential loan to the consumer to at least kind of net each other out to some extent, and maybe rebound. PPP will move things around but even with that, we're going to have the current portfolio, go through this forgiveness process. And we expect most of that will go away here in '21. And we'll get some fees off of that. But PPP round two has started up and we're participating in that. So we'll get some new growth off of that, it won't fully offset everything that's going away on round one. But net, net, we're looking for low single digit growth on the overall loan portfolio as Gary laid out there earlier, with the intention to grow the securities book with a liquidity that we've got. We continue to get deposits; they continue to grow with PPP two. If that plays out the way PPP one played out, those deposits will come in, and so will park them in securities, we'll get our net interest income growth. And then as the normal loan patterns start to come back into play, hopefully by the back half of '21 and into '22, will continue to grow at a normal, true normal pace from there.

[Michael Perito:]

So it doesn't sound like it's unreasonable to think that, you know, the $6.4 billion give or take billion of average earning assets. I mean, that should probably grow low single digits in 2021. You know, even if we include the impact of PPP that seems like a reasonable.

[Paul Nungester:]

Yes, absolutely. Yes. That's our intent.

[Michael Perito:]

And I wonder if we could talk about capital for a minute. Obviously, the ratios are pretty strong and getting stronger. I mean, once who knows when the PPP stuff will normalize. But you know, x PPP that the TC ratio will probably eclipse 10% at some point this year. Any updated thoughts? You know about, the group had a nice little movement here, buybacks still in play M&A any updated thoughts there would be helpful?

[Paul Nungester:]

Yes, we signaled, we raised our dividend, we think there's more opportunity for that, as we go through and see the strength of our performance here in the next quarter. You know, we authorize the buyback last night. So that's a signal of our desire to continue to utilize some of the excess capital. And as we position ourselves throughout the year, M&A is clearly on our strategic list of things to consider. And as that market starts to improve, we want to be a player and look at those opportunities as well, Mike.

[Michael Perito:]

Paul, go ahead.

[Paul Nungester:]

I was going to say, consistent with the history you would have with our organizations, we're not going to let capital stack up and go on utilized.

[Michael Perito:]

Right, I was going to say, I mean, is it fair to think that, obviously, the focus out of the gate was going to be on combining the organizations and making sure a lot of the strengths of each were preserved. But it does position you as a larger player in an Ohio marketplace that was seemingly, you know; need to consolidate quite a bit. I mean, is that something that you think could start to come to fruition later this year? I mean, do you think there's any kind of roadblocks that could slow consolidation in that marketplace? And, and can you just remind us geographically, how you view your footprint, and what areas you know, might be more focused than others?

[Don Hileman:]

Sure, clearly, that M&A is on our interest list, if you will, for the remainder of the year. And I think there's a good opportunity as things start to accelerate. We saw a deal announced this morning, we expect that there'll be other opportunities for us to consider if they fit with our strategy. And we probably, as we talked about, we want to finish out the quarter some things we still need to get accomplished as far as the integration, and get a solid base there, but we feel we will be ready in the second half, for sure. Our footprint - we're going to look at right now we're across the top of the state of Ohio, in the Pennsylvania, Southern Michigan and Indiana. I think any of those states and particularly some of the opportunities in Ohio are going to be strong, Indiana, Michigan, I think will be stronger than some other locations. In general, we're going to look at contiguous opportunities within our footprint to grow the franchise; you're not going to see us jump multiple states or anything like that.

[Michael Perito:]

Very helpful. Thank you, guys. And then just lastly, you know, appreciate Gary, all that outlook commentary for 2021. But if we could kind of summarize it a bit. Paul, you mentioned, the core efficiency rate for 2020 was just under 50%. I mean, obviously, with the positive operating leverage you guys are targeting, it would seem like you expect to remain below 50% in 2021. I'm just curious, what would be or what could be some of the impediment to that occurring you expect, in terms of what the risks of kind of the budget and potentially seeing some upward pressure and the efficiency ratio. What are some of the things we should be mindful of?

[Paul Nungester:]

Sure, yes. You know the things that come to mind on that there, Mike would be, if the economy doesn't turn the way we expect, and that we start to get back to the growth patterns that we're forecasting, we will have to be very quick to pivot and focus on cost containment at that point. We have built the structure in the organization to support growth, including adding some lenders for continuing to build that book there. So if those things aren't going to pan out, then we'll have to pivot like we always would in such environments and focus on the expense side, to catch up to our bottom-line expectations.

[Michael Perito:]

Helpful, but the budget does incorporate already some hiring activities. Is that safe to assume?

[Don Hileman:]

Yes. In those tires already in. Mike, probably the biggest factor that could -- impactwise would be this residential mortgage. And within that revenue number, there's a number of moving pieces you've got the margin, you make on the gain on sale. The extra volume you produce, MSR offsets. So when we put in the number as Matt was saying, to stay consistent with a very strong '20 and overall residential mortgage. There's three good guys and a potential tough guy in there, and on balance, it makes us feel confident that we can hit that number to the extent the market might move against us on any one of those. To Paul's point, we've got plenty of oars in the water, that we can make adjustments.

[Michael Perito:]

Great. Thank you, guys, for answering all my questions. For all the color, I appreciate it.

[Operator:]

The next question comes from Christopher Marinac with Janney. Please go ahead.

[Christopher Marinac:]

Hey, thanks. Good morning, everybody. I just wanted to scroll back on a couple of the points from the last question. So, first on the mortgage margin, do you think that's going to be less than what you've recently experienced this fourth quarter? Give us a window into the budget for this year? Just kind of curious on how that compares?

[Matt Garrity:]

Sure, Christopher, this is Matt. Our expectations for 2021 on the margin side for mortgage is overall -- it's overall -- it’s going to be a little bit more challenging environment than 2020. I think the entire industry enjoyed a really nice margin year on mortgage banking. We think with a decline in refinance activity over the year at an industry level, and the amount of capacity that has come into the industry, that that’s going to eventually put pressure on margins, as people tend to dive a little deeper to keep their engines running and keep their staffs busy. As we model it out, we still think Q1 is going to be a good quarter, above expectation for margin as we would set our own expectations. We then think as the year goes on, we revert more back to what our baseline expectations are for margin and some of that largest that we enjoyed in 2020, probably if not available for us in 2021.

[Christopher Marinac:]

Got it, that's helpful. And I guess it's still in the big picture. I mean, as a function of the merger from a year ago, you're still in a better place in terms of being able to have a better margin overall, man. I think as a smaller company, you may have had less margin than you now do. Is that fair?

[Matt Garrity:]

Yes. I would agree with that.

[Christopher Marinac:]

Okay. And so just to follow-up…

[Don Hileman:]

With margin offset, we still see production dollars being as high as they were this year, not necessarily the number of units because the per unit funding is going up; so that's a bit of a cushion. And we're just going to have a better MSR experience in '21 than we did in '20, which is also a good guy. So we'll do it in a different fashion, but we still think we can deliver to Matt's point with very similar to what we got out in '20.

[Christopher Marinac:]

Okay, that's all for Gary. Thanks. And just a final point on expenses; are there any sort of new investments in digital or other things beyond just the mortgage, commercial and residential hires that you talked about? And can you sort of pivot from those if need be back to the point about cost containment, possibly?

[Don Hileman:]

Matt, you could share just in the mortgage business because we've just came up in - it was in '18 when things got tightened, and we had to make some adjustments. How quickly we can pivot within that group?

[Matt Garrity:]

Sure. I would say Christopher, we absolutely have the ability to sit on the expense side. We have added capacity across our organization, not just in mortgage, deliver higher levels of sales activity and lending activities; not only on the front-end side on the sales side, but on the support side as well. So, we're constantly monitoring if that activity is meeting our expectations, and - meeting what we've staffed for, and I think we're pretty aggressive about having the right balance between letting things play out versus calling it as we see it and making that change. So it's something we monitor pretty closely and pretty comfortable that we would know what we need to do there.

[Christopher Marinac:]

Great, thanks for the additional color. I appreciate it.

[Operator:]

The next question is a follow-up from Scott Siefers with Piper Sandler. Please go ahead.

[Scott Siefers:]

Hey, guys, thanks for taking the follow-up. I guess maybe just a question of where do you see the net interest margin heading? I think Paul, you had suggested a couple of times that the preference is for NII dollars rather than rate. Just curious, maybe even a broad sense for order of magnitude of pressure that you might have kind of embedded into your core NII?

[Paul Nungester:]

Yes, I think Gary mentioned it earlier. We think we're pretty much near the bottom or very close to it. There will probably be a little bit of compression, yet to experience here in '21, mainly due to the dynamics of what we talked about - about focusing on securities growth for dollar income, while loan start to rebound and grow from there. So a little bit more, and we think of it mainly in that core contacts; excluding marks and PPP, because depending on what happens with the PPP program with extinguishment and the new round two and things like that, they can kind of move it around quite a bit. But we're down in the 33 - 336 for fourth quarter; so a few more bips down from there isn't unreasonable for '21. But we really think we're at an inflection point where we're starting to - we'll plateau and once we get back into the back half of the year of loan growth really does come through as we expect, there is opportunity to start potentially grow from there.

[Don Hileman:]

Okay. Within the quarter, the trend through the month was declining. So we finished let's say with a better than the quarter as a whole. And while those securities will chip away at core margin, I think slight is the right word to put on it.

[Scott Siefers:]

Terrific. Okay, good. Thank you very much.

[Operator:]

This concludes the 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 and full year results. We appreciate your time and interest in Premier Financial Corp. Have a great day.

[Don Hileman:]

Thank you.

[Operator:]

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