Premier Financial Corp. (NASDAQ:PFC) Q4 2023 Earnings Call Transcript

Premier Financial Corp. (NASDAQ:PFC) Q4 2023 Earnings Call Transcript January 24, 2024

Premier Financial Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Premier Financial Corp. Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Paul Nungester with Premier Financial Corp. Please go ahead.

Paul Nungester: Thank you. Good morning, everyone, and thank you for joining us for today’s fourth quarter 2023 earnings conference call. This call is also being webcast and the audio replay will be available at the Premier Financial Corp. website at premierfincorp.com. Following our prepared comments on the Company’s strategy and performance, we will be available to take your questions. Before we begin, I’d like to remind you that during the conference call today, including during the question-and-answer period, you may hear forward-looking statements related to future financial results and business operations for Premier Financial Corp. Actual results may differ materially from current management forecasts and projections as a result of factors over which the Company has no control.

Information on these risk factors and additional information on forward-looking statements are included in the news release and in the Company’s reports on file with the Securities and Exchange Commission. I’ll now turn the call over to Gary for his opening remarks.

Gary Small: Thank you, Paul, and good morning to all for joining us. Per our release, fourth quarter earnings totaled $20.1 million or $0.56 per share for the quarter. The results lagged our third quarter performance, as anticipated, due to lower net interest margin and the seasonal impacts of our residential business as guided at the end of the third quarter. However, the quarter did also include a couple of unanticipated non-recurring or timing items that left the earnings for the quarter slightly below our expectations. And now, I’ll rundown the particulars. First, a quick look at capital. As you noticed, our earnings combined with a favorable AOCI movement, brings our tangible book value per share to $18.69. That’s a really good strong progression over the last three quarters, which of course included the big pickup we had on the sale of our insurance operation, but evidence that we’ve got more upside there and we’ve made good progress during the year.

Loan growth for the quarter totaled 2.5% on an annualized basis. And that brings our total loan growth for the year to 4.3% and that was in line with the expectations that we had for the year coming off of a 20%-plus growth here in ’22 where we were designed to be a 4% shop this year. Annualized commercial growth totaled 5.8% and for the full year, it grew 4.2%, again controlled growth was our mantra for ’23. Our consumer deposits annualized for the quarter grew at just shy of 8%, and when you combine third quarter and fourth quarter figures, our annualized growth for those two quarters was 6.7%. That’s a really strong number for us. Non-interest-bearing deposits also stabilized, delivering 2% annualized growth over that same period of Q3 and Q4 combined.

It’s good positive trend for customer deposits over the second half of the year. Net interest margin did decrease 8 basis points from Q4 to Q3 and that was a bit more slippage than we provided in guidance on our last call, which was about 4% on our high — 4 basis points on our high-end expectation. We had a very effective new money deposit and household acquisition program that we initiated early in the quarter and it contributed to the decline. We have selected targeted markets across the organization for a bit more aggressive deposit-gathering activity and it totals less than 10% of our locations, so we’re happy with that particular outcome the trade offers in the margin. Fee income stories for the quarter. Our wealth fee income increased 18% versus Q3 and it really reflects, as we all saw, the strong finish we had in equity and fixed income markets at the end of the year and should carry forward into ’24.

Mortgage banking income declined more than the typical seasonal decline anticipated for the quarter. Significant move in 10 year treasury yields toward the end of December drove unfavorable valuation adjustments on the MSR asset and on our construction commitment hedges. We benefited from the same volatility when the 10 year was rising in the third quarter. So, it’s just one of those lumpy factors in our business. Expenses were right on the mark, just shy of $38 million for the quarter. And on the credit front, our non-performing assets declined 10% for the quarter. Delinquencies did tick up a bit in auto and residential real estate, but each remains within historical norms. Net charge-offs for the quarter were driven by a single credit, 70% or so of the total.

And on a full year basis, net charge-offs still come in at 6 basis points, and we’re very pleased with that outcome. Our Special Mention ratings category increased in Q4 and that was driven by a single additional relationship. For the year, that brings three credits to the front that make up the lion’s share of the increase in our Special Mention category. There is no central theme. Each is a unique industry. Each is still accruing, and we have good expectations. They represent two C&I clients and one investment in multi-family real estate. The combination of those two created about a 5% to 6% reduction in the quarter relative to the additional provision that we set aside for those two items. Again, credit can be a bit lumpy. We are very pleased with our full year performance on that front, but worth a mention here in the fourth quarter.

And now, I’ll turn it over to Paul for some more performance details.

Paul Nungester: Thank you, Gary. I’ll start with the balance sheet where total deposits increased by 4.4% point-to-point annualized for 4Q, primarily due to customer deposits, which increased 7.7% annualized. We continued to experience more mix migration during the quarter, including decreases in savings and demand deposits, which were more than offset by increases in our time and money market deposits as customers continue to seek higher yields. On the other side, total earning assets increased primarily as a result of commercial loan growth, which was 5.8% annualized for 4Q. Our loan-to-deposit ratio improved by 50 basis points and we were able to reduce higher-cost wholesale fundings by another $90 million due to the combination of our strong customer deposit growth, but only modest earning asset growth.

As a result of these balance sheet changes in deposit costs outpacing earning asset yields, we experienced some additional net interest margin compression for 4Q. Total interest-bearing deposit costs increased 29 basis points to 2.83% for 4Q, which was driven mostly by growth in mix migration, while loan yields increased 9 basis points to 5.21%. Excluding the impact of PPP and marks, earning asset yields were 4.85% in December 2023 for an increase of 146 basis points since December 2021. This represents a cumulative beta of 28%, up from 26% in September, compared to the 525 basis point increase in the monthly average effective federal funds rate for the same period. Excluding marks, cost of funds were 2.38% in December 2023 for an increase of 217 basis points since December 2021, which represents a cumulative beta of 41% up from 38% in September.

Next, non-interest income decreased $1.5 million to $11.8 million in 4Q, primarily due to mortgage banking income where gains declined $2.1 million from last quarter as a result of lower margins on hedged losses related to the drop in 10 year treasury rates in late 4Q. This was partially offset by higher security gains, better wealth revenues, and increased BOLI income, which did include $453,000 in claim gains. Expenses of $37.9 million were down $0.2 million or almost 2% annualized on a linked quarter basis. Through the combination of successful cost-saving initiatives and the insurance agency sale, we reduced our expense run rate by 11% to $152 million annualized from our original 2023 estimate of $170 million. We also improved our expense to average assets ratio by 30 basis points to 1.76% compared to the fourth quarter of 2022.

Provision for the fourth quarter was an expense of $1.8 million comprised of $2.1 million expense for loans and a $0.4 million benefit on a linked-quarter decrease in unfunded commitments. Provision expense for loans was primarily due to $2.1 million of net charge-offs, which was mostly due to the one commercial credit. The allowance coverage ratio remained flat at 1.14% of loans. We closed by mentioning, our continued improvements to capital, including book equity up 24% annualized, and tangible equity up 37% annualized from 3Q. Our TE ratio has climbed back north of 8% and our regulatory ratios have further strengthened, including CET1 over 12% and total capital over 14%. These enhancements represent a solid foundation as we begin 2024. It completes my financial review, and I’ll turn the call back to Gary.

Gary Small: Thank you, Paul. 2023 has been an important year of change for Premier Bank in addition to focusing on the inverted yield curve challenges that were presented to all. We successfully divested our insurance agency business and significantly right-sized our residential mortgage business during the year. When combined with the completion of other significant projects across the organization, Premier is very well-positioned to leverage on our anticipated margin and revenue growth going forward. As Paul mentioned, our expenses per earning asset ratio was 1.76%. It’s one of the best in the industry. With that in mind, I’ll touch on some guidance topics for ’24. Earning asset growth, we post a range of 4%, continue with our mantra of controlled growth over the next 12 months.

Loan growth particularly would be 2%-plus, with commercial up about 3.5% and with lower yielding residential mortgage balances declining. Customer deposits would grow generally in the same range as our earning asset growth and we will expect to see a reduction to some degree in our wholesale funding for the year. Net interest margin, we modeled for 3 turns from the Fed beginning in May. From a mid-point range, net interest growth would be in the 2%, that would be mid-point. Full year margin for ’23 — would be similar to ’23 but trending upward from Q1 forward. From a provision perspective, the model assumption is 10 basis points for net charge-offs versus the 6 basis points that we ran this year, factors in loan growth and on an ALLL, we would expect that unemployment information and so forth would have us moving up our coverage ratio a couple of bps from where we closed out the year.

From a fee income perspective, I’ll just throw a number out there. Since there was so much noise in ’23, it’s hard to do percentages, but we’re at $48 million range, is the mid-point for fee income for ’24. On a normalized basis for insurance and the other factors of change, that’s about a 6%-plus increase over the prior year. Deposit-related service fees or modest growth for the year of about 3%, we have initiated limits on our merchant represent net fees in ’24, and getting that behind us. Doing so, creates a slightly more modest year-over-year change on consumer fee income. Residential mortgage revenue and wealth fees though are anticipated to be up 8% to 12%. Expenses run-rate-wise, $160 million will cover it. That’s up about 4.5% over our third quarter and fourth quarter of ’23 run rate, and the expense is a bit front-loaded as it is, I think each year for most organizations with a little bit more cost that falls in compensation-wise in Q1 and the seasonality that goes with the first quarter.

So, $41 million-plus of costs in the first quarter with the rest of that $160 million spread pretty evenly over the remaining three. The earnings progression from the year, it looks like a bit of a hockey stick, as you leave ’23, from a trajectory standpoint, first quarter slightly down with all that typical cost and seasonality pacing and Q2 through Q4 ever increasing. So, with that, operator, I’d ask that we turn the open — lines open for questions.

Operator: [Operator Instructions] We will now take our first question from Michael Perito from KBW. Michael, your line is now open. Please go ahead.

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Q&A Session

Andrew DeFranco: Hi. This is Mike’s associate Andrew filling in. Thanks for taking my question.

Gary Small: Good morning.

Paul Nungester: Good morning, Andrew.

Andrew DeFranco: Good morning. I’d love to start on the margin. I appreciate all the color there with the guide. Just maybe a little bit more color, kind of what the cadence expectation is there. So, it kind of sounds like there’s room for the margin to maybe bottom here in 1Q. And then we’ll get some expansion throughout the rest of the year. And then maybe just some additional color on the drivers there, around the margin. It sounds like deposit costs obviously came up here in the fourth quarter when you guys were pushing for that additional growth. Should we expect that dynamic to kind of continue in the first quarter or maybe kind of level out from here?

Paul Nungester: Yes, that’s correct. You’ve got that correct there, Andrew. So, as we exit ’23 December having a little bit higher deposit cost versus the average for the quarter, but we do have our models showing that we will be bottoming out here in the first quarter. Those conditions kind of stabilize and then grow from there, which is the key driver to the earnings trajectory that Gary just mentioned. Key drivers for the NIM at this point will be continued success on the deposit front, both retention and some additional growth to help fund modest earning asset growth that we have built-in for 2024 and then the Fed actions. So, as Gary mentioned, we’ve got 3% baked into our model. Kind of make quarter for the last three quarters of the year there with May, August, November, so we need to Fed to hopefully play along with that trajectory.

And we’ve got a lot of plans being finalized and ready to go. So, that as that begins to happen, we can start to recapture costs where possible on the deposit front, money markets and such, especially CDs will start to reprice down with it as well. Lower terms on those in terms of locking-in the maturities and things like that. So, really we’re putting all our plans in place here to be able to take advantage of rates starting to come our way on the short end there and that will support the NIM path and ultimately the earnings goals for the year.

Andrew DeFranco: Awesome. And then second from me here, maybe just switching to capital for a second. I believe, correct me if I’m wrong, I think there is around 1.2 million shares left on the authorization. Could you just kind of give us a little bit of a reminder on thoughts around buybacks here and then maybe alternative uses of capital for 2024, maybe M&A conversations, anything going on there? And then also just — strictly just for wrap-up here, how — when does that authorization expire as well? I just couldn’t find it off the top of my head.

Gary Small: So, the authorization, although we have an expiration date, I think it’s just shares, Andrew we’ll get back with you if we find that we do have one, but typically the case, right. On the actual activity relative to M&A, what I would share is similar to what I would have shared last quarter. There’s a little bit more conversation as we can now see over the horizon and see positive marks coming our way to the portfolios over the next four quarters to eight quarters versus uncertain marks based on the Fed’s activity over ’23. Having said that, I really don’t think that we will see things in earnest change until the Fed has moved quite a bit and purchase accounting and predictability of capital and other impacts are — have settled down a bit more, but I do feel a little more animal spirits in the marketplace relative to conversation and so forth and that would — we include ourselves in those conversations.

But I wouldn’t say it’s a meaningful change from the last time we had this discussion.

Paul Nungester: And then I guess, little bit more, Andrew, to your questions around the buybacks. It’s always a tool that we have in our chest there that we look at for the opportunity to enhance some earnings. The math is a little different these days with the new tax rules and that extra excise tax and needing to cover that to make it like move the needle and things like that. As we’ve said on past calls, we weren’t any — we’ve seen the numbers haven’t been active on that front. Mainly, we’re focused on building capital, and now that the curve has moved in the right way to help that at least from a tangible equity perspective, that’s something that we will look more at on a go-forward basis and find our spots to possibly execute, if it makes sense.

Gary Small: We have nothing cooked into the plan, and that’s typical with us because we’ll take the opportunistic move when the market is right. And as Paul mentioned, we’ve got our capital where we like it. Right now, we’re running at about mid-point versus pure on capital, maybe it’ll — it goes heavy in all our trajectory would say we’ll be on a little bit overcapitalized if you will as we go through the year. So, it’s the right topic and we’ll address those opportunities as they come up.

Andrew DeFranco: Great. Thank you. And then just if I can sneak one last one in here. I believe it was last quarter, you guys were talking a little bit about this Small Business Banking platform possibly seeing it in early 2024. I was just curious if you can provide any update there. And maybe just kind of a broad overview on what you’re looking for with that project throughout the year.

Gary Small: Andrew, we’ve curtailed the pace of expansion of that business as we finished out the ’23 and the first half of ’24, just in keeping with the more modest business acquisition mode that we’re at. But we are still building the capabilities around the business. So, if you looked at the back room as far as credit capability and underwriting and uniqueness that goes with small business on that and adding some talent relative to being in the market in the smaller business space, that’s still moving forward along with for our folks that are in the branch network, the continued development of their understanding and knowledge. But just the pacing, if it were two normal years, would have been faster and we’ve backed away just a little bit, and it’s — right now, with the commercial book, the larger commercial clients that we’re trying to serve, are getting the priority relative to our capital and our deployed lending going forward.

Andrew DeFranco: Great. I appreciate all the color and thanks for taking my questions, guys.

Gary Small: Thank you.

Operator: We will now take our next question from Nick Cucharale from Hovde Group. Nick, your line is now open. Please go ahead.

Nick Cucharale: Good morning, everyone. How are you?

Gary Small: Good morning, Nick.

Paul Nungester: Very good, Nick. Thanks for joining us.

Nick Cucharale: Thank you. On the loan growth front, it sounds like your expectation is for another moderate year. Can you just give us some color on the overall lending environment? Is competition still fierce across your markets? And is your anticipation that more forceful growth returns once the funding landscape normalizes?