Primis Financial Q1 2023 Earnings Call Transcript

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April 28, 2023

There are 6 speakers on the call.

Operator

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Premise Financial Corp. First Quarter Earnings Call. Today's conference is being recorded.

Operator

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. At this time, I would like to turn the conference over to Matthew Schweitzer, Chief Financial Officer. Please go ahead.

Speaker 1

Good morning, and thank you for joining us. Before we begin, please note that many of our comments during this call will be forward looking statements, which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward looking statements. Further discussion of the company's risk factors and other important information regarding our forward looking statements are part of our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has also been posted to the Investor Relations section of our corporate site, premisebank.com. We undertake no obligation to update or revise forward looking statements to reflect changed A reconciliation of the non GAAP measures to the most comparable GAAP measures can be found in our earnings release.

Speaker 1

I will now turn the call over to our President and Chief Executive

Speaker 2

Thank you, Matt, and thank you to all of you that have joined our Q1 conference call. Matt asked me last night after our Board meeting what part of the quarter I wanted to address on this call and I told him of course all the good parts. Only one of us had a chuckle about it. He's still not laughing as much as I thought he would. But seriously, We're very encouraged about what happened here at the bank in the Q1.

Speaker 2

With that said, I'm really mindful of what the industry is experiencing, especially banks Say our size, maybe even a little larger, but our thesis for this bank and our future has played out very well this quarter. And I think maybe for the cycle that we could be close to entering. I'll cover all of that shortly, but first wanted to summarize net income. For the quarter, we're reporting $5,700,000 of net income. The one time kind of things were About $1,000,000 of negative spread and DP costs associated with the digital success that unquestionably will not replay in the 2nd quarter About $450,000 of fraud expenses, all of which are at the core bank, none of which were individually significant And a mortgage run rate that I think is about $300,000 below our current run rate, even with no additional pickup in volumes or lock Pipeline.

Speaker 2

All of that moves our ROA closer to say 75 or 80 basis points, which isn't good enough, but I think it's within striking distance Given the momentum I see in several areas of the bank. I'm happy with the performance of the core bank this quarter. On the headline, it appears that non interest bearing deposits were down significantly, but one chunky deposit associated with a mortgage servicing rights loan Of about $54,000,000 left this quarter and excluding that non interest bearing only dropped 5.8%, which I believe is a good result. Total deposits, even including this departure, were only down 0.2%, just $6,000,000 Our bankers on both sides of the balance sheet did a great job. Our margin at the core bank was at 3.38%, Down obviously from the 4th quarter, but up materially in percentage terms from where we were a year ago when we reported 2.96%.

Speaker 2

In mortgage, we've been focused on 2 seemingly different strategies. And without sounding too Southern, it boils down to trimming and recruiting. We've been rightsizing support staff, commission rates, incentive plans And everything we can to make our breakeven production levels as low as possible. Given the performance in the last 2 months, I believe We are somewhere around say $40,000,000 to $45,000,000 a month to breakeven, which is remarkable for this industry. We've been recruiting as well looking for lenders that like our culture, our speed to closing, our nearly nationwide capacity that aren't looking for 2021 signing bonuses.

Speaker 2

These combined efforts have moved production Somewhere around $700,000,000 to $800,000,000 a year and positioned us well for when rates fall and volumes return to pre pandemic levels. In Panacea and Light Premium Finance, we see strong pipeline and honestly some resiliency to today's yields. Both units have very good pipelines and their profitability and efficiency curves are directionally very nice. Panacea in particular has benefited from the attractiveness of their credit offering and we're seeing more parties interested in this paper, Which signals better non interest income opportunities and a faster pathway to meaningful profitability. On top of that, Panacea continues to punch way above their weight, finding niches with larger and larger organizations And associations that build their brand and the balance sheet affordably.

Speaker 2

Lastly, Tyler, his partners and the bank continue To tweak and build technology solutions and at the LLC level have considered raising capital to turbocharge things On the technology bill. I'm increasingly aware though that their earnings rate alone can fuel all of this investment that we collectively need to absolutely own this medical space in the next couple of years. Lastly, the digital platform and the deposit Success. In short, we raised $1,000,000,000 nationwide with no more staff, no fraud losses, Almost nothing on advertising spend and virtually no impact at the core bank. Right now, we have over 12,000 customers on the digital 54% of them came from the nation's 10 or 12 largest banks, where realistically they were earning close to nothing.

Speaker 2

Another 21% came from smaller community banks or credit unions, where realistically they appreciate customer service and personal relationships. The average age is just over 50 and the average deposit is a touch over $80,000 Daily, we have multiples more in deposits to existing accounts than we have withdrawals or account closures. We are still opening accounts. Last night, we opened about 53 accounts at a rate that's about 50 basis points below the national sweep rate. And the obvious boost to our company's safety with liquidity is obvious.

Speaker 2

Our liquidity ratios and our uninsured deposit levels are some of the best in the country. And with the sweep in place, we'll have done all of this in a way that doesn't dent our capital ratios. That's so important in this environment to be confident on liquidity and capital. But what may be lost on some is the opportunity with this platform. We're going to have the same success in the near future on checking accounts and lower cost deposits.

Speaker 2

Our app is more progressive and functional And safe with respect to fraud or bad actors. And as we do that, especially with the sweep in place, I expect incremental spread To the rate we offer with very little impact on our earning asset levels. So hopefully in a way that could boost our margins by some amount. There is no playbook for banks our size, even banks 10 times our size to build a national brand or image. The industry has been so awash in liquidity with really subpar technology and it's just seemed nonsensical to focus A lot of strategic energy on being a deposit growth leader.

Speaker 2

Our strategy is to get as many customers on this app at rates that have positive spread to the swaps, Surprise them with customer service and attention, surprise them with humanizing communications, smart technology, Accessibility to our executive team, rates that are better than our competition that is stuck with incremental or branch or marketing costs And over time build a significant national customer base that can fully fund our lines of business at cost that will push 3% margins or better. I absolutely love connecting with these customers, whether it's in text or email or telephone calls Or honestly, even in person as I travel across the country and seeing how pleased they are with the experience that Premise Bank has delivered. It isn't perfect yet, but we aren't done tweaking things and making improvements either. Before I turn it back over to Matt, I want to thank our staff. I cannot say it loud enough or too many times.

Speaker 2

What we've rolled out here And succeeded with is not something you buy off the shelf. We built this. We engineered this solution. We dreamed up everything from the background systems, features on the app, security and fraud prevention and the unbelievably affordable and effective marketing of this idea. This is not just FinTech relationships that are pouring deposits onto our balance sheet.

Speaker 2

Beyond just the digital team, I'm so thankful for the rest of our bank that has stepped up this quarter answering calls and working with customers to make this quarter and this effort successful and it's great work for our team. All right, Matt, with that, I will turn it over to you. Thank you, Dennis. I will provide

Speaker 1

a brief overview of our results before we turn to Q and A. But as a reminder, a full description of our Q1 results can be found in our earnings release and Q1 earnings presentation, both of which can be found on our website. Operating earnings for the Q1 were $5,800,000 or $0.23 per diluted share versus Well, less than $1,000,000 or $0.03 per diluted share in the Q4. Total assets were $4,200,000,000 at March 31 versus 3.6 at December 31. Excluding PPP loans and loans held for sale, loan balances grew 13% annualized And that's after a $15,000,000 panacea loan sale in the Q1.

Speaker 1

Roku was particularly strong in life premium finance again in the Q1. Given the current environment, we expect to see continued loan growth with an emphasis on quality. Deposits were up approximately 35% on annualized in Q1, bringing our loan deposit ratio down to 83% at the end of the quarter from 108% at the end of the 4th quarter. As we discussed on last quarter's call, reducing that ratio was a singular focus in Q1 and the success of our digital offering has been a tremendous boost to our bank. As a result, we had excess cash of approximately $500,000,000 at March 31 and excess average cash of approximately $300,000,000 for the quarter.

Speaker 1

We're in the process of implementing a suite program that will allow excess funds and deposits to be moved off balance sheet and expect that to be live by the end of the second quarter. Excluding accounting adjustments related to a 3rd party managed portfolio, net interest income was down slightly to $27,500,000 from $28,200,000 in the 4th quarter. The decrease was largely due to a temporary drag to earnings from building deposits in advance of the last Fed move and which is now abated. Net interest margin was 3.15 percent, down 52 basis points from 3.67% in the 4th quarter. Approximately 29 basis points of the decrease was due to the excess liquidity described earlier.

Speaker 1

Excluding accounting adjustments and a one time gain in the 4th quarter, Non interest income was $6,600,000 in the quarter versus $4,800,000 last quarter. Mortgage originations were up 43% in $53,000,000 up 110 percent from the last quarter, adjusting strong momentum into the 2nd quarter. Lastly, non interest income included a gain of $427,000 from a $15,000,000 loan sale from Panacea. Anthea has cultivated a number of relationships with other banks that will lead to increasing gain on sale revenue through the rest of this year. Core non interest expense excluding accounting adjustments and non recurring items was flat at $26,500,000 for the quarter, which includes approximately $5,000,000 related to Premise Mortgage.

Speaker 1

Of note, marketing costs were down even with the increased deposit raising activity as we were particularly With how we attracted funds to the digital platform. Also of note, fraud losses were higher by $371,000 in the quarter, but none was attributed to the digital platform activity. Digital activity did contribute most of the data processing expense increase of 549,000 due to application volumes, which is expected to subside in the second quarter. Efficiency ratio declined to 69% from 72% in the quarter as our various business lines increased profitability. The provision for credit losses was $5,200,000 in the quarter versus $7,900,000 last quarter.

Speaker 1

The vast majority of the provision was due to accounting for a third party managed portfolio, which is offset by non interest income gains. Excluding these adjustments, the provision would have been approximately $500,000 for the quarter. Core net charge offs were $2,100,000 and were largely charge offs of Specific reserves established in prior quarters. The allowance for credit losses to gross loans excluding PPP balances was flat at 117 basis points for March 31 December 31. Nonperforming assets net of SBA guarantees Decreased to $32,800,000 in the quarter from $34,900,000 last quarter.

Speaker 1

A little over 80% of our NPAs are comprised of 2 relationships that we discussed previously, one of which was actually current as of March 31. The assisted living credits that we've described previously were impaired last quarter Currently being marketed by receiver with bids expected in the next couple of weeks. We also have no OREO still. Pre tax pre provision operating ROA was 131 basis points in the quarter, up from 99 basis points in Q4. Operating ROA was 60 basis points, up materially from 9 basis points last quarter.

Speaker 1

Without excess liquidity and the slight earnings drag from raising funds when we did ROA would have been over 70 basis points in the quarter as Dennis described. While there are plenty of headwinds facing the industry right now, we see upcoming suite capabilities, increasing gain on sale revenue, stronger mortgage activity And general improvement in operating performance across our business lines in the core bank, all as reasons to believe we will continue driving that ROA higher this year. Operator, we can now open the line for Q and A.

Operator

Thank you. We'll take our first question from Casey Whitman at Piper Sandler.

Speaker 3

Hi, good

Speaker 2

morning. Hi, good morning, Casey.

Speaker 3

So congrats on the success of the Digital Bank here. Wondering How should we think about how big on balance sheet you would run the digital bank versus like the core bank here? Or how should we think about the size on balance sheet of that once you implement that sweep function?

Speaker 1

So we ended the quarter with about $600,000,000 in cash. Our rough math We will probably drive that cash back down to about $100,000,000 So it'd be about $500,000,000 of balance sheet shrinkage in the second quarter. And with that sweep Casey, so we can then manage that cash level at about that level depending on overall balance sheet growth And any incremental deposits we raise, we can immediately move off. So net net, we'll stay around that $100,000,000 in cash.

Speaker 3

Okay. And then sticking with the Digital Bank, I would assume like the back office compliance costs have already been incurred. What about marketing costs from here? Is there any more, I guess, expenses there? Or are you pretty set with what you've got here for expenses?

Speaker 1

I don't see any material increases in marketing expenses from here. I mean at the margin maybe, but I think our experience in the

Speaker 4

Q1 is we have

Speaker 1

a Pretty good playbook for how we think we can grow these digital deposits without spending tons of dollars. It's Largely digital advertising, which is much more efficient as you can imagine than radio and TV ads and other local advertising Methods?

Speaker 2

Yes.

Speaker 3

Okay. And then just generally, Just touching on sort of how you're thinking about profitability this year next. It seems like you're on track for a lot of the things we were discussing last quarter. So has, I guess some of the industry turmoil pushed any of your goals out a bit or we still, I guess pretty on track from your guys' standpoint?

Speaker 2

I mean, we see good pipelines in panacea and life premium finance. I think Loan demand in the core bank is no different than I think what the industry. I think core bank, I think that's come in a little. I don't think there's just not as much demand there. I think we could grow both of those divisions profitably from here, especially with the gain on sale.

Speaker 2

I think we can grow net income, but still Tyler is not we're not going to sell all of that business. So there's going to be some balance sheet growth there. I mean, are there margin headwinds? There are. I don't think there's going to be for us, especially when we have this much cash, I don't think we're going to have as much margin headwinds As maybe our competition, so but I still think there's a little bit of that out there.

Speaker 2

I mean, I still feel I mean, assuming that there's we don't see anything in credit, I didn't make this in these I wrote this, but I didn't say it in my prepared comments. I think the thesis about our bank being diversified We've got less than say 30 we have about 35% in CRE. We have lines of business that drive C and I, Good C and I volumes and a safe diversified. I think that thesis is going to play out pretty well here. It's going to allow us to keep growing, Not at the pace we did last year, but I don't think you'll see us with a stagnant balance sheet.

Speaker 3

Yes. Okay. And that one large relationship seemed pretty big for you guys. Are there other, I guess, chunky Non interest bearing you might be, I don't know, worried about or looking at or was that sort of just a unique situation?

Speaker 1

That was a unique situation. We don't have any other large non interest bearing accounts.

Speaker 3

Okay. Great. And just for modeling purposes, I guess, what's like a normal run rate for that credit enhancement I recognize there's an offsetting the provision, but would like the $5,000,000 be a little large?

Speaker 1

So the way it works and I know this is somewhat complicated and noisy. The charge offs on that portfolio flow through our provision and then we get it back in non interest income. And then there's Incremental spread that runs through net interest income that we give back in non interest expense. And you can see all those in the income statement on our tables in the press release. But We had an allowance build on that portfolio in the Q1 that would due to some modeling changes.

Speaker 1

I wouldn't expect that to occur again in the Q2. So really the only thing running through the provision and non interest income related to that portfolio will be Losses, which we don't expect to be as high as they were. It was about $1,900,000 In the Q1, so that should be lower in the Q2. And then in the net interest income and non interest Expense pieces, it was about $900,000 in the Q1 and that's probably a reasonable number for the Q2.

Speaker 3

Okay, great. Well, congrats to you guys and thank you.

Speaker 2

All right. Thanks, Casey.

Operator

We'll go next to Russell Gunther at Stephens.

Speaker 5

Hey, good morning guys.

Speaker 2

Good morning, Michael.

Speaker 5

Good morning. I wanted just to stick with some of the balance sheet size a bit, just given some of the puts and takes Here. So on the loan growth side, I hear you in terms of where you expect it to come from. But from an order of magnitude perspective, Do you guys have a view on overall organic loan growth? And then similar question on the deposit side.

Speaker 5

I hear you on the sweeps, but kind of where do you think balances go from

Speaker 2

I think normally we would have expected a couple of 100,000,000 maybe a little more than that From Tyler's Group, I think we'll probably end up probably seeing half of that, Some from sales and some from a little softer demand. So maybe $100,000,000 or so, 125,000,000 I think, Life Premium Finance, I think we would have normally seen a couple of 100,000,000 there. I think that might still We might still hit that number. And then at the core bank, I think just given demand honestly, I think maybe just 1% or 2% growth at the core bank would be a good result. Honestly, I think so maybe I think for the whole year, we're probably looking at, call it 10%, 12%, 13%.

Speaker 5

Got it. Okay. Really helpful. And then from a deposit balance perspective, In terms of where you expect that to trend and just trying to triangulate to the margin going forward, I think you mentioned, Dennis, in your Remarks, kind of that 3% bogey and an ability to remain kind of at or above that going forward.

Speaker 2

Yes. I think on the what we we're just one bank here. And honestly, all of the people I say core bank and digital I tried to say digital platform, but I mean we're just one bank and honestly all of the people on the core side Help us out tremendously on the digital side. And I think that when we think about digital Platform, I mean, we really think about those national deposits funding national lines of business and stuff like that. And it's that that I think we should be Sort of eyeing about a 3% margin.

Speaker 2

I think when you look at the core bank side, I think it could be a little better than that. I do. I don't think Seeing the margin at the core bank go to 3%, I don't think that's going to happen. Is there some downward pressure? Absolutely, no question about it.

Speaker 2

But if we're at 338 in the Q1, I mean probably 325 ish or so At the core bank is I think a safe number. And then I think 3% or so long term on the digital platform Yes, it's appropriate. I mean, I don't I think we're probably 3 or 4 quarters from hitting the 3% just given that everything is Brand new. What may help us is that we'll have $1,000,000,000 we have $1,000,000,000 on the digital platform right now. When we start sweeping things, we will be getting positive spreads with really No denominator, no earning asset.

Speaker 2

And so that could help boost the margin. As far as what could be on the digital platform, I mean, if we had to sweep in place right now and we were confident that we weren't going to see ugly capital ratios, I mean, I hate to even say a number, but I mean, I think right now, I think we're probably doing probably $50,000,000 a month. I think we could probably triple that. Russell, just to clarify Okay. So In terms

Speaker 1

of the balance sheet, we're at 83% loan to deposit ratio at the end of the quarter. That sweep Reduces cash, obviously, but it also reduces the deposits on balance sheet. So you can assume that loan deposit ratio goes back up to, Call it mid-90s or something around there. And that as we raise as we track new customers Through some of these different initiatives, we'll be able to kind of manage that loan to deposit ratio Last week in excess off the balance sheet, if that helps.

Speaker 5

Yes, that helps a lot. I appreciate it from both of you for the clarification and color there. And then just last one for me. Could you help us with excuse me, could you help me with the non interest expense outlook going forward, Considering some of the puts and takes around fixed mortgage variable with improvement in that fee line and just any other franchise investments and potential offset.

Speaker 2

Well, as you can imagine given and

Speaker 1

you probably are hearing this a lot given the Challenges on the margin side, we're spending a lot of time thinking about non interest expense and controlling that. I mean, we were, call it, $21,500,000 ex mortgage in the Q1 that included some expenses related Fraud and data processing with all the applications, couple of other things. And we would like to see that number Closer to $20,000,000 run rate, maybe even a little bit below as we

Speaker 2

Do some

Speaker 1

pruning and trimming as Dennis talked about earlier. And that's on a core basis. Obviously mortgage non interest expense will fluctuate. I mean it will be higher next couple of quarters because their production Higher. But on a core basis, that's what I'm referring to.

Speaker 2

And Russell, I mean, there's no Given the environment, there's no energy around here to grow expenses anywhere. All of our division leaders know This just isn't the time to be thinking incrementally Positive growth to that. And we're also Matt and I also just to assure you, we're not going to be caught flat footed. If the industry if things turn worse, we're not going to be caught flat footed and stuck on non interest expense. We'll have plans.

Speaker 2

I mean, we're already Kind of developing plans. I don't think right now given the momentum, some of the things that Matt finished with about the positive momentum here, I don't know that it's time to go hard at that, but it is time to have a plan. And I can assure you that that's in the works.

Speaker 5

Understood. Thank you guys very much for taking my question.

Speaker 2

All right. Thanks, Russell.

Operator

We'll go next to Christopher Marinac at Janney Montgomery Scott.

Speaker 4

Hey, good morning. Dennis and Matt, just want to circle back on the deposit growth initiative in the Checking in now accounts going forward, is that going to pay down some of the savings or is it going to be complementary and therefore just have a lower blended rate?

Speaker 1

It will be complementary. So hopefully, average down the cost of those deposits.

Speaker 4

And as the Fed plays out over time, whether up or down, do you have to move those savings rates that you've established so far?

Speaker 2

I suppose, yes, I suppose we would. We there's in our offering, there's no term On the rate we're offering. And I mean, Chris, initially, I would have thought, okay, it's just going to I made a comment about this. I would have thought, oh, this is just All Internet rate shoppers. I mean it turns out that's exactly what it's not.

Speaker 2

Over half of it come from money center banks where I know they weren't Being paid hardly anything. I think long term, I think if this could be could hover say maybe 10 or 15 below Fed funds, I think that would be excellent. I'm pretty confident we could be there. I think we could probably hold a lot of the funds with some of the other stuff that we're doing sort of humanizing our company and establishing relationships. I think in a year, It might even be better than that.

Speaker 2

That's what the whole effort around here is. A lot of The concept that you just get digital customers in here and they use the app, seriously 90% of them opened an account in 5 minutes, Open and funded an account in 5 minutes and never and just use the app. For us to illustrate that they're not banking with bots, so to speak, is a term we use around here and to humanize our company With emails, letters, phone calls, visits from me or the other executives, I mean, it means a lot. And I think over time, The savings that we're going to get sort of from those qualitative or esoteric relationship building things is You're going to see that in the yield here.

Speaker 4

And I know it's early on the expense side, but your expenses all much cheaper than what you do in the branch. That's going to blend that whole experience and return as you get further along on this.

Speaker 2

Correct. Yes, exactly.

Speaker 4

And then last question just related here is, you mentioned about the fraud experience so far. Is there anything unique because you've built it from scratch compared to other deposit systems you've worked

Speaker 5

with in the past, Dennis?

Speaker 2

Eric, absolutely no question. Yes. The I'll tell you just Anecdotally, I'll tell you, when we turned this on, it was what October 1st, We turned this on October 1 and we did some light marketing of it sort of in our core markets like mostly In the DC MSA. And every single morning, I would look at the balances at the accounts. And I would say 4 or 5 accounts and that was I see the balances come through and I would write personal notes and do all that.

Speaker 2

And then is it just it's already catching on a little more and you'd see 5 accounts, 10 accounts, 50 accounts. When we were doing 6700 accounts a day. I mean, we had a moment around here, we're like, oh my God, Is this going to I mean, are we going to lose the bank because fraud is so prevalent. I mean, I've talked to other bankers. Fraud at the core bank level is so prevalent It's so massive right now.

Speaker 2

And we just sort of as we were in the middle of that, Chris, we just went back and looked at all of Fraud measures, what it takes to open an account, how we identify who you are, how we know that you're that these are your funds and not somebody else's that Putting in these accounts, what we do after you put the money in the account. And all of that we engineered ourselves. Adam, it's none of that we bought off the shelf. And it has just it's worked. It's worked fantastically.

Speaker 2

And honestly, it's protecting our customers as well. And we've not figured out exactly how to communicate that back to the customers, But the ones that I'm meeting in person or talking to on telephone recognize that this is a safer way to bank.

Speaker 4

Great. Thanks for all the background this morning and

Speaker 2

disclosures. Thanks, Chris.

Operator

And we have no further questions at this time. I'll turn the conference back over to management for any closing remarks.

Speaker 2

All right. Thank you for again for everybody that to everybody that's joined the call. Matt and I are available. If you want to call, text or e mail, we'll answer any other questions you might have. Hope you have a good weekend.

Speaker 2

We'll talk to you soon.

Operator

And that does conclude today's conference. Again, thank you for your participation. You may now disconnect.

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Earnings Conference Call
Primis Financial Q1 2023
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