Q1 2024 Premier Financial Corp (OHIO) Earnings Call

Participants

Paul Nungester; Chief Financial Officer, Executive Vice President; Premier Financial Corp (OHIO)

Gary Small; President, Chief Executive Officer; Premier Financial Corp (OHIO)

Brendan Nosal; Analyst; Hovde Group

Christopher Marinac; Analyst; Janney Montgomery Scott

[Peter Hasbay]; Analyst; Piper Sandler

Presentation

Operator

Good morning and welcome to the Premier Financial Corp. First Quarter 2024 earnings conference call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. If you would like to ask a question, press star one on your telephone keypad. Please note this event is being recorded. I would now like to turn the conference over to Paul non Gastar with Premier Financial Corp. Please go ahead.

Paul Nungester

Thank you. Good morning, everyone, and thank you for joining us for today's first quarter 2024 Earnings Conference Call. This call is also being webcast and the audio replay will be available at the Premier Financial Corp. website at Premier Bancorp.com. Following our prepared comments on the Company's strategy and performance, we 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 I'll turn the call over to Gary for his opening comments.

Gary Small

Thank you, Paul, and good morning to everyone, and thanks again for joining us today quickly for the quarter, we reported net income of 17.8 million or 50%, a $0.5 per share. And I'll begin with comments on our most significant topic in the quarter, our average annual deposit growth was a respectable 2.6% for the quarter. Consumer deposits were once again the strong strength of the story line average outstandings were up 7.5% annualized, and that's a continuation of being up 6.7% annualized during the second half of 23. Slots, three very strong quarters on the consumer side, public funds grew $66 million from point-to-point over the course of the quarter, which was about 4%. Commercial deposits provided the unfavorable surprise for the quarter with commercial noninterest bearing deposit balances down $86 million. That's about 8% in the month of January, and that's far in excess of the typical post year end balance decline that you're accustomed to for tax payments and distributions and so forth. We performed a detailed client relationship review and it revealed the elevated use of the deposit liquidity to fund a more typical CapEx financings and other financeable working capital borrowing needs of clients are making efficient use of their capital. And the NIB. balances balance movement did stabilize over February and March and balances were beginning to replenish in April, Premier secured higher cost funding to replace those than IV balances, and we expect to recover the majority of those lost in IB balances over the course of the next two quarters has businesses refill their coffers. The a typical January event resulted in a six to seven basis point hit to Premier's net interest margin for the quarter was a bit more of an episode in a sort of systemic decline. I will add that beginning in early March, we began a repricing program to get ahead of the Fed, selectively reducing deposit rates, testing elasticity of our deposit portfolios, et cetera. Early results are encouraging, and we expect more forward of march forward pricing movement in advance of any reductions that would be triggered by the Fed move to reduce rates down the road.
Switching gears, loan balances for the quarter were essentially flat on a linked quarter basis with commercial payoffs occurring per plan and the pace of new business funding coming onboard a bit more slowly than anticipated back at the beginning of the year. March saw a return to more typical commercial loan business activity, and we have no change in our full year growth expectations that we expressed in January. We experienced excellent expense management during the quarter. And our noninterest income benefited from a resurgence in residential mortgage volume and better unit gain on sale related to those mortgages. But we also saw a continuation of strong wealth management fee income and it actually outperformed our expectations for the quarter.
On the credit front, the consumer residential loan portfolio saw the delinquency declines. Total NPLs are well in check and net charge-off levels remain at a very modest level. Capital is in great shape, which Paul will have a couple of numbers on and I'm going to turn to Paul for his perspective.

Paul Nungester

Thanks, Gary. Beginning with the balance sheet, we had another quarter of deposits growth, including 2.3% point annualized in 2.6% annualized for average balances mix migration continued with decreases in non-interest bearing savings and checking deposits, while CDs, money market and public fund deposits all increased. On the other side, total earning assets increased primarily as a result of security investments. While loans declined slightly for the quarter, our loan to deposit ratio improved by 110 basis points, and we were able to keep wholesale fundings flat. The combination of a slight decrease in loans, a larger than expected decrease in non-interest bearing deposits and additional interest bearing deposits. Disintermediation led to further net interest margin compression for 1Q. Excluding the impact of PPP balance sheet hedges and acquisition marks, accretion loan yields were 5.29% in March, which is an increase of five basis points from 5.24% in December 2023. This is also an increase of 153 basis points since December 2021, which represents a cumulative beta of 29% compared to the 525 basis point increase in the monthly average effective federal funds rate for the same period. Also excluding the impact of PPP balance sheet hedges and acquisition marks accretion. Total earning asset yields were 4.95% in March for a cumulative beta of 31% on the other side, excluding acquisition marks accretion, total deposits were 2.45% in March for a cumulative beta of 43%. And excluding acquisition marks, accretion and balance sheet hedges total cost of funds were 2.59% in March for a cumulative beta of 45%. Net non-interest income increased 0.7 million to 12.5 million in 1Q, primarily due to mortgage banking income or gains increased $0.8 million from last quarter as a result of higher margins, including hedge gains related to the increase in 10-year treasury rates. The increase in treasury rates, along with continued slowing of prepay speeds, also led to a $0.5 million MSR valuation gain compared to a 0.2 million loss last quarter. This was partially offset by security losses of 37,000 compared to gains of 665,000 last quarter. Expenses of 39.9 million were up 2 million on a linked quarter basis due to annual merit increases and the seasonality for items that occur in the first quarter only of each year, such as taxes and benefits on annual incentive payouts. On a year-over-year basis, expenses are down 7% or essentially flat, excluding expenses for the insurance agency sold in June 2023. We also improved our expense to average assets ratio by 19 basis points to 1.87% compared to the first quarter of 2023. Provision for the quarter was a benefit benefit of $133,000, comprised of a $560,000 expense for loans and a 693,000 benefit on a linked quarter decrease in unfunded commitment. Provision expense for loans was primarily due to 393,000 of net charge-offs, which were only two basis points of average loans. The allowance coverage ratio did increase one basis points to 1.15% of loans. And I'll close by mentioning our continued improvements to capital. Our key ratio remain north of 8% and our regulatory ratios at further strengthened, including CET. one at 12% and total capital at 14.35%. These enhancements represent a solid foundation as we continue to weather the near-term uncertainty.
It completes my financial review, and I'll turn the call back over to Gary.

Gary Small

Thanks again, Paul, I'll take a moment to provide some adjustments to the 24 guidance that we provided in January, incorporating the Q1 results in the adjustments to our assumptions for the remainder of the year to begin with, I expect earning asset growth to come to 4% on a point-to-point basis, which affirms our guidance in January. Total loan growth. We're expecting a 2% movement with commercial being up 3%, offset by a decline in our lower yielding residential mortgage portfolio. And so there's no change there. It's what we expressed in January as well. Deposit growth remains in line with the expected earning asset growth, consistent with our initial projections on the front of net interest margin, our forecast now calls for just two turns from the Fed and 24. We eliminated a turn in May and now just have one sitting in the middle of the third quarter in the middle of the fourth quarter combining the expectation of one less Fed turn with the elements of the unfavorable Q1 margin results, plus the effect of the favorable pricing adjustments that were initiated in March, our revised full year forecast margin falls in the range of the low to 60s to probably a topping out of about two 65. All things being equal, that's a 10% downward adjust our 10 basis point downward adjustment from our original guidance. Full year net interest income in January was forecasted to be up 2% with the changes that I just mentioned we are now forecasting us to be down 2% from where we were in 2023.
From a provision standpoint, net charge-off expectations remain tough. It's very favorable for the year from where we are forecasting to be at a level of five basis points versus the 10 basis points that we would have directive in January. And we still expect our coverage ratio to be a couple of bps higher for the year.
On the non-interest income front, I would adjust the full year estimate. We originally gave you $48 million for looking at 49 million plus based an awful lot on the strength of the first quarter and what we see coming down the road expenses, we do have a run rate reduction there, solid Q1 and we are adjusting spending levels down across the remaining quarters and our full year guidance, that would be at the one 56 range versus the one, 60 that we would have provided in January, we'll be deferring some select projects and related FTE additions, consulting fees and so forth that go with that Premier's earnings progression with one less Fed cut anticipated and the hockey stick that I mentioned back in the first quarter on a relative to a quarterly earnings progression has flattened out a bit with Q2 more flattened and a more of an upward slope for Q3 and Q4. We do still expect to perform on plan for just winning in a slightly different way, less on the margin and more on the other factors that we mentioned. So reflecting the lower interest income, offset by stronger noninterest income, lower expenses and continued solid credit performance. We still are on target with our full year expectations from earnings that we were thinking about back in January.
And with that, operator, we're ready for questions.

Question and Answer Session

Operator

(Operator Instructions) Brendan Nosal, Hovde Group.

Brendan Nosal

You want to also be doing well or timberland rather than just us and maybe just to start off here on kind of the liability mix moving through the year and nice to see wholesale funds pretty much flat for the quarter and the improvement in the loan-to-deposit ratio, I guess just given the unchanged outlook for loan and earning asset growth, can you just comment on the potential need to further draw wholesale sources as we move through the year?

Paul Nungester

Brendan, as Gary was saying in the call, we intend and are continuing to work ourselves toward keeping our deposit growth to match our earning asset growth, though for the remainder of the year, we would not expect to have to lean into a wholesale fundings. We're changing the mix between FHLB broker dependent on relative pricing and taking advantage when we can. But in terms of levels, we would look to keep that flat for the year.

Brendan Nosal

Okay, great. And maybe one more for me. I'm just turning to credit. Most numbers were fantastic for the quarter. And I did notice some migration from special mention into substandard and any color you can provide on the credits that may have driven that move and kind of how you're positioned.

Gary Small

Sure, Vernon, if Gary could I there really was just a movement from one category to the other as the same credit card we have, it's an accruing credit and we have a clear path forward for the group. But I think it'll take us the next couple of quarters for them to make the adjustments that we make to there.
Capex scheduling and so forth where we would see it reverting back or but it is not a new credit. It is just a movement of one Crédito.

Brendan Nosal

Understood. Okay. That's super helpful. Thank you. For taking the questions.

Gary Small

Thank you.

Operator

And our next question comes from the line of Christopher Marinac with Tanium. Scott CHRISTOPHER, your line is now open.

Christopher Marinac

Thanks.
Good morning, Gary or Paul, can you talk about deposits from the commercial side? Was there excess liquidity for those accounts? Or was that just again an anomaly given what you had said earlier about taxes, et cetera.

Paul Nungester

As you know, when we looked at over 100 relationships that had the biggest movements, if you will, from point-to-point perspective over a markets and there was the normal thing that you would see of expenditures for getting inventory in place and all the normal day-to-day things that began about that time of year, along with the normal distribution, as you would expect once numbers are settled and folks know what they can to come out of it. So where we saw, as I mentioned on the comments, we did see a absolutely folks are saying I would normally finance at 3 million or 2 million or 1 million of rolling stock or whatever that might be and rather than defending my 0.5% line or ask for fixed credit on that, I'll just pay with cash, keep our leverage down. And if that would have been once or twice out of all those relationships review that the one thing, it was a pretty consistent theme as to where the money went this year. That was a little bit different than at the last call. We did have two credits in that whole stack where the money moved from excess liquidity and non-interest bearing in became swept into a money market account earning obviously at a much higher rate. So they just again, got a little bit more efficient with where their money was placed on the balance sheet. We had one client that moved to have enough excess liquidity and with the pre-crisis pricing, the way it is now went ahead and moved that into investment portfolio of those two would be outliers, but they were not small balances, but it was mostly just yes, using cash on hand and take a take care of the balance sheet and not drive up there leverage.

Christopher Marinac

Okay, great. That's helpful. And you see new inflows from that source of business or just even net new corporate inflows this year in sales?

Paul Nungester

Great question. We did look at the month-to-month movement since January. And as I mentioned, it's stabilized. It got down to plus or minus a de minimus movement off of that changeover period. And we started to get the uptake in April. That's not inconsistent. If the if we go back to the bad days of last year. At this time, after the three banks issue, we had some commercial deposits move around looking for additional protection and so forth. Once that was in place, the balances immediately start to grow because the cash that they are creating over the course of operating the year starts to stack up. And I don't see this year being any different. There's no indication that we should expect anything different.

Christopher Marinac

Got it. And then just a quick question on credit for me. Do you see any stress on debt service coverage ratios coming into criticized levels or is that already reflected in?

Paul Nungester

What we saw at the end of March is very much reflective. We did a very detailed review that in the fourth quarter of last year on all credits of $0.5 million in higher than you can imagine. That's a big pile of cross organization and really got random to shock scenarios and so forth. How what we are seeing is a few more credits. They're still finding in the past category, but if there was a one 20 coverage ratio that they needed, whether it's fixed coverage charge or P&I payments awards, we might see them falling into the one 10 to 1 20 or 1.5 to one 20. They still got cash on hand and since then the payment as agreed, but it's a narrower margin for air, if you will. So that's the way I would classify it as there's just been some movement into the world one, 25, and now you're one 18, and we'll score that and move a month on our grading system. No reason to think they can't move right back into preferred territory, but we're conservative on the moving there.

Christopher Marinac

Great. Thank you for all the background this morning.
It's a very helpful feedback.

Paul Nungester

Thanks, Chris.

Operator

(Operator Instructions) Peter de with Piper Sandler.

[Peter Hasbay]

Hey, good morning, guys. Just filling in for Alex today. Kagan vertical.

Paul Nungester

Great to have you on.

[Peter Hasbay]

I just wanted to touch on the loan book, what rates are you guys seeing new loans coming on the books and possibly if you have by commercial and resi segment? I know you guys mentioned the loan yields being tight 0.29 in March?

Paul Nungester

Peter, I'll take that when we were just at a Board meeting yesterday about having a discussion about that, we were tracing all the new money business done on the commercial side in the second half of the year for us at 23 and each month, if it wasn't eight to eight, 25 than it was seven 95 to eight. I mean it was in that range and we're holding are sticking to our pricing on that, and that's without fee amortization and so forth that would just be stated.
Right.
So and for to answer your question, we're still north of eight. There's some competitive pressure out there as folks are seeing a little bit less in the way of opportunities in the marketplace and trying to take rates down, especially backwards rates look like they may move in that direction back in January, we resisted and you know what happened to the rate dip in January that that evaporated. So now seems like everybody's back generally in the same category as they were before, and we're comfortable with that, there's plenty of business there.
On the residential side, we continue to move a bit with the elevated curve over the last six weeks. And if you are looking at a perfect pristine, 30-year fixed commitment. Right now, it would be seven, 35 seven, 25. A number of them will not be as absolutely pristine as it takes to get that rating and there's plenty going off at seven, 50 and so forth. Having said that, we saw them March, as I mentioned, volumes were very good whether that was pent-up demand from a weaker January or February or just seasonality. It was a good indication that there is acceptance for the rates that are moving out there right now and out. I don't see that changing. It's an intertwined issue, but it's more about inventory and the rates as folks get used to that, we may start to see more inventory come on board through a beta of just real quick. J
Just to clarify that, that yield we cited on the call that was obviously the in-place total portfolio average sell all of history. You get that stuff it's years old at the high threes and fours. That's not our new production rates. Obviously, that's just what it where it stood at the end of March.

[Peter Hasbay]

I've got it thanks.
And then one more on I know you guys on the release had the Yum. Not sure if it was the repricing program that you guys touched on the start of the call on that you did early in March to lower deposit funding costs. Could you provide more color on that?
Not sure. If you have actually at the start of the call the?

Paul Nungester

Yes. So our in our deposit book, we've been, um, slicing and dicing that putting it into different buckets. So whether it's private or pure consumer, commercial, etc., and if you go back to last year when we were growing deposits and had a lot of promos going on things like that, and especially in the money market space, they had some guaranteed periods and whatnot. So we've been aggregating those into buckets as they've matured already or are coming up for maturity.
And what have you and I'm starting to roll those back right. So if they were at a high rate, we're trimming that a few bps here and there testing the waters, the how that's going to hold, what kind of retention we've got our early early results are encouraging, as Gary said, and we're going to keep at that from bringing new ones in as they roll off if they haven't already and even taken some second swings when we can.

Gary Small

Yes, it's really a matter of testing the elasticity of the particular product grouping our site markets since we have a rather rather relatively distinct markets, and that's something that you're always doing. And if you look at our portfolio right now, you would find that we early on identified a very inelastic set of outstandings in the savings and interest checking and chose to have done utilize that as a as an offset to some of the less inelastic pricing that we were having to do on money markets and so forth. So we still think there's room there and we're going to continue to test waters. We watch for balanced movement and anything that looks up and abnormal or if it starts to have an impact there of pulling pause for a moment and determine whether that's a theme or just an anomaly. But we think what we're saying is we can now is not our intention to wait for the Fed to do something to trigger us to do a little bit more activity with our existing portfolio. And we'll also be looking at some lower new money rates on CDs and so forth, and we've been running again for three quarters. On the consumer side, we've been running at about a 7% annualized growth rate. So and that was intentional. So now we're done this is the right time to step in were up a little bit more on the margin front because the deposit momentum on the consumer side. It has been so good.

[Peter Hasbay]

Understood. Thanks on. That's all for me. Thanks for taking my questions.

Gary Small

Yes, thank you, better in queue.

Operator

There are no questions registered at this time. So as a final reminder, it is star one to ask a question. There are no questions registered at this time. So I would like to pass the call back over to Gary Smalley for any further remarks.

Gary Small

Yes. I appreciate the thoughtful questions this morning. And I also appreciate those that were able to get notes out in advance of the meeting last night so forth. That's very helpful for helping us prepare so that we could touch on the things of most interest. Again, it's a it's an effort you could be elsewhere. We really appreciate you taking the time to understand our business and our approach. And thanks again for joining us.

Operator

Thank you. Concludes today's call. Thank you for your participation. You may now disconnect your lines.