Premier Financial Corp.

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 1 on your telephone keypad. 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.

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 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. And I'll turn the call over to Gary for his opening comments.

Thank you, Paul, and good morning to everyone. Thanks again for joining us today. Quickly, for the quarter, we reported net income of $17.8 million, or 50 cents per share, and I will 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 strength of the storyline. Average outstandings were up 7.5% annualized, and that's a continuation of being up 6.7% annualized during the second half of 23. So that's 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 non-interest-bearing deposit balances down $86 million, and that's about 8% in the month of January. And that's far in excess of the typical posterior 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 more typical CapEx financings and other financeable working capital borrowing needs. Clients are making efficient use of their capital, and the NIB balance movement did stabilize over February and March, and balances were beginning to replenish in April. Premier secured higher cost funding to replace those NIB balances, and we expect to recover the majority of those lost NIB balances over the course of the next two quarters as businesses refill their coffers. The atypical January event resulted in a six to seven basis point hit to Premier's net interest margin for the quarter. It was a bit more of an episode than any 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, etc. Early results are encouraging, and we expect more 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 on board 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 non-interest income benefited from a resurgence in residential mortgage volume and better unit gain on sale related to those mortgages. 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 delinquency declines. Total MPLs 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 numbers on, and I'm going to turn it to Paul for his perspective.

Thanks, Gary. Beginning with the balance sheet, we had another quarter of deposits growth, including 2.3% point-to-point annualized. and 2.6% annualized for average balances. Mixed migration continued, with decreases in non-interest-bearing savings and checking deposits, while CDEs, money market, and pub fund deposits all increased. On the other side, total earnings and 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 impact of PPP balance sheet hedges and acquisition marks, the 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%. Next, non-interest income increased $0.7 million to $12.5 million in one Q. primarily due to mortgage banking income, where 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 dollar 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 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 point to 1.15% of loans. And I'll close by mentioning our continued improvements to capital. Our TE ratio remained north of 8%, and our regulatory ratios have further strengthened, including CET1 at 12%, and total capital at 14.35%. These enhancements represent a solid foundation as we continue to weather the near-term uncertainty. That completes my financial review, and I'll turn the call back over to Gary.

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 and adjustments to our assumptions for the remainder of the year. To begin with, 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 2% movement, with commercial being up 3%. Offset by 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 in 24 we eliminated a turn in May and and now just have one sitting in the middle of the third quarter and 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 260s to probably a topping out of about 265, all things being equal. That's a 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're now forecasting us to be down 2% from where we were in 2023. From a provision standpoint, net charge off expectations remain very favorable for the year. We're re-forecasting to be at a level of five basis points versus the 10 basis points that we would have directed in January. And we still expect our coverage ratio to be a couple of bips higher for the year. On the non-interest income front, I would adjust the full year estimate. We originally gave you $48 million. We're 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 now would be at the 156 range versus the 160 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, The hockey stick that I mentioned back in the first quarter relative to the quarterly earnings progression has flattened out a bit with Q2 more flattened and more of an upward slope for Q3 and Q4. We do still expect to perform on plan. We're 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 non-interest income, lower expenses, and continued solid credit performance, we still are on target with our full year expectations from earning this that we were thinking about back in January. And with that, operator, we're ready for questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If your question has been answered or you wish to remove your question, please press star followed by 2. As a reminder, if you were using a speakerphone, please pick up your handset before asking your question. Our first question comes from the line of Brendan Nozol with Hovde Group. Brendan, your line is now open.

Hey, good morning, folks. I hope you're doing well. Good morning, Brendan. Hey, Brendan. Just to start off here on kind of the liability mix moving through the year, it's 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 on wholesale sources as you move through the year?

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. So for the remainder of the year, we would not expect to have to lean into wholesale fundings. We're changing the mix between FHLB broker dependent on relative pricing, you know, taking advantage when we can. But in terms of levels, we would look to keep that flat for the year.

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

Sure, Vernon, this is Gary. Good eye there. It really was just a movement from one category to the other of the same credit. We have, it's an accruing credit, and we have a clear path. forward for the group, but I think it'll take the next couple quarters for them to make the adjustments they've got to make to their CapEx scheduling and so forth before we would see it reverting backward. But it is not a new credit, it is just a movement of one credit over.

Understood. Okay, that's super helpful. Thank you for taking the questions.

Thank you.

Thank you. Our next question comes from the line of Christopher Marinak with Janium Scott. Christopher, your line is now open.

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, etc.? ?

You know, when we looked at over 100 relationships that had the biggest movements, if you will, from a point-to-point perspective over our eight 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 begin about that time of year, along with the normal distributions that you would expect once numbers are settled and folks know what they can move out of the till. Where we saw, as I mentioned on the comments, we did see absolutely folks were saying, I would normally finance that $3 million or $2 million or $1 million of rolling stock or whatever that might be. And rather than dip into my 8.5% line or ask for fixed credit on that, I'll just pay with cash, keep my leverage down. If that would have been once or twice out of all those relationships we reviewed, that would be one thing. it was a pretty consistent theme as to where the money went this year that was a little bit different than it had in the last. We did have two credits in that whole stack where the money moved from excess liquidity and non-interest bearing and 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 price in the way it is now, went ahead and moved that into an investment portfolio. Those two would be outliers, but they were not small balances, but it was mostly just using cash on hand to take care of the balance sheet and not drive up their leverage.

Okay, great. That's helpful. Do you see new inflows from that source of business or just net new corporate inflows as this year ensues?

great question we did look at the month-to-month movement since january and as i mentioned it stabilized it got down to plus or minus the the minimus movement off of that january period and we started to get the uptick in april that's not inconsistent if if we go back to the bad days of last year at this time after the three banks uh 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.

Got it. And then just a quick question on credit for me. Do you see any stress debt service coverage ratios coming into criticized levels, or is that already reflected in what we saw at the end of March?

very much reflected we did a very detailed review that in the fourth quarter of last year on all credits a half a million and higher so you can imagine that's a big pile across the organization and really got random through shock scenarios and so forth what we are seeing is a few more credits they're still finding in the past category but if there was a 120 coverage ratio that they needed whether it's fixed coverage charge or P&I payments and so forth, we might see them falling into the 110 to 120 or 105 to 120. They've still got cash on hand and payment is agreed, but it's a narrower margin for error, if you will. So that's the way I would classify it is there's just been some movement into the you were a 125 and now you're a 118. And we'll score that and move them 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.

Great. Thank you for all the background this morning. It's very helpful. You bet. Thanks, Chris.

Thank you. There are no questions registered at this time, so as a reminder, if you would like to ask a question, it is star 1.

Our next question comes from the line of Bader Hilde with Piper Sandler.

Bader, your line is now open.

Hey, good morning, guys. Just filling in for Alex today. Hey, good morning. Great to have you. 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 buy commercial and resi segments? I know you guys mentioned the loan yields being 5.29 in March.

Peter, I'll take that one. We were just in 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 23. And in each month, If it wasn't 8 to 825, then it was 795 to 8. I mean, it was in that range. And we're holding or sticking to our pricing on that. And that's without fee amortization and so forth. That would just be stated rates. So to answer your question, we're still north of 8. There is 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 back when rates looked like they may move in that direction back in January. We resisted. And you know what happened to the rate dip in January, that evaporated. So now it 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 were looking at a perfect, pristine 30-year fixed commitment right now, it would be 735, 725. A number of them will not be as absolutely pristine as it takes to get that rating, and there's plenty going off at 750 and so forth. Having said that, we saw 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 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.

Hey, Bader, just real quick, just to clarify that yield we cited on the call, that was obviously the in-place total portfolio average. So, you know, all of history, you got stuff that's years old, you know, threes and fours. That's not our new production rates, obviously. That's just where it stood at the end of March.

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

Yeah, so in our deposit book, you know, we've been, slicing and dicing that, putting it into different buckets. So whether it's private or pure consumer, commercial, et cetera. And if you go back to last year when we were growing deposits and had a lot of promos going on and 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 starting to roll those back. So if they were at a high rate, we're trimming that a few bits here and there, testing the waters to see how that's going to hold, what kind of retention we've got. Early results are encouraging, as Gary said, and we're going to keep at that, bringing new ones in as they roll off if they haven't already, and even taking some second swings when we can.

Yeah, it's really a matter of testing the elasticity of the particular product group or market, since we have eight relatively distinct markets. And it'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 utilize that 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 balance movement and anything that looks abnormal or if it starts to have an impact there, pause for a moment and determine whether that's a theme or just an anomaly. But I think what we're saying is It's 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 than we've been running. Again, for three quarters on the consumer side, we've been running at about a 7% annualized growth rate, and that was intentional. So now this is the right time to step in. work a little bit more on the margin front because the deposit momentum on the consumer side has been so good.

Understood. Thanks. That's all for me. Thanks for taking my questions. Thank you. Thank you, Bader.

Thank you. There are no questions registered at this time, so as a final reminder, it is star 1 to ask a question. There are no questions registered at this time, so I would like to pass the call back over to Gary Small for any further remarks.

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 and so forth. That's very helpful for helping us prepare so that we can touch on the things of most interest. Again, 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. Thank you.

That concludes today's call. Thank you for your participation. You may now disconnect your line.