Primis Financial Q4 2023 Earnings Call Transcript

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January 26, 2024

There are 6 speakers on the call.

Operator

and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Premise Financial Corp. 4th Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

Operator

I would now like to turn the conference over to Matt

Speaker 1

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 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 firmnessbank.com. We undertake no obligation to update or revise forward looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non GAAP financial measures.

Speaker 1

A reconciliation of the non GAAP measures to the most comparable GAAP measures can be found in our earnings release. With that, I will now turn the call over to our President and Chief Executive Officer, Dennis Semberg.

Speaker 2

Thank you, Matt, and thank you to all of you that have joined our Q4 conference call. Before I get into our results for the quarter and the year, wanted to let the investing public know that our company CIO, Cody Sheflett passed away suddenly on the afternoon of January 16. Cody was one of the most visionary CIOs I've had the good fortune of being around. Cody could unquestionably out dream me and Matt, But he had all the engineering and technical skills to make all of it come to life. On top of that, he pastored our company staff with love and humble attention that drove the unique culture we aspire to build.

Speaker 2

Fortunately, Cody mentored his staff incessantly For many years to always be prepared and while I'm confident in the future, our company is reeling from his departure. Now about our results. For the quarter, what I think is important is that these results include a pre tax loss in mortgage of about $730,000 which obviously is timing related and about $1,400,000 lower than where we were in the 3rd quarter.

Speaker 1

And while I don't want

Speaker 2

to steal all of Matt's good news, which I've been known to do, in the quarter our margin was up, our Nobody at Premise thinks that we can even see land yet on this journey to top quartile operating ratios, But it's nice to know that we have a lot more wind in our sails. We took advantage of all the chaos in the industry in 2023 and built momentum that can be clearly seen in improving margin, operating expense control that has us close to 2022 levels going into the New Year and impressive growth in core deposits at levels that drive results. Without any noise in the quarter, our margin was up about basis points resulting from hard management of all the important factors. We control deposit costs. We increased loan yields.

Speaker 2

Our incremental activity was very accretive. There's more information in MAP's details that are shortly coming, but For the quarter, we opened about $75,000,000 in new deposit accounts, costing only 2.69% And that funded new loan production of $86,000,000 with yields of $838 With this kind of activity, The momentum on margins and net interest income is clearly on our side going into 2024, which is critical to continued quarterly improvement in our ratios. Cost controls are equally important, especially in a year when revenue was so pressured. We delivered an impressive second half of twenty twenty three with the changes that we made earlier in the year. We've restructured almost every division, consolidated 8 branches and leveraged technology to absorb even more of the jobs and tasks that were previously pushing comp levels.

Speaker 2

This restructuring mindset continued through the 4th quarter and honestly into today. And while the improvements we are making are smaller individually, they are large enough to offset growth levels and allow more of the anticipated revenue to make it to the bottom line. In 2023, we grew deposits a touch better than 20% with a substantial amount coming through digital channels. A year later, we still have over 90% of the deposit accounts we opened originally And with virtually no advertising expense, we continue to open accounts almost solely through referrals from existing customers. We are live with business accounts now and focusing that activity really only on referrals for the time being, but the promise of lower cost deposits on this platform It's starting to take shape.

Speaker 2

Our core bank is well outperformed in 2023 with our retail franchise driving substantial deposit activity Amidst branch consolidation and major industry headwinds, we've taken VIBE to new levels that we didn't think were possible and we're starting to see customer referrals from for new accounts that need the convenience and the technology we're bringing to the table. Over the last two quarters, we've opened 4,400 new non CD deposit accounts with approximately $147,000,000 of balances costing a remarkably low 2.25%. I don't want to convey to anybody that we've cracked this nut or that this effort is on autopilot. Moving deposit balances Even with noticeably better tools and technology is through sheer force and grit. But the momentum and success that we've had so far builds confidence in our staff and we're determined to continue this trend.

Speaker 2

A few other notable and I think important factors for our 2023. Our 2 national divisions, Panacea and Life Premium Finance had outstanding years. Panacea was just named the exclusive banking partner of the American Dental Association and Shortly thereafter closed its Series B round rightly establishing an impressive market value for this concept. Our ownership in Panacea is worth about $20,000,000 which of course at this point is unrealized while that entity is consolidated. We anticipate being able to deconsolidate and recognize this gain in the near future, which would give flexibility to either ramp up share repurchases or increase our growth rate by touch across the bank.

Speaker 2

Life Premium had an amazing year, bringing substantial diversification and quality onto our balance sheet at yields that are substantially better than CRE. On top of that, they've built remarkable technology to drive efficiency and speed and they operate with one of the lowest expense burdens imaginable. Lastly, despite an expected slowdown despite the expected slowdown in activity and profitability, Our mortgage division finished the year profitable with just $600,000,000 in total production. We have recruited all year without big sign on bonuses using culture and great technology to build our stable of producers. Looking at the current month, January 24, our pipeline is up over 25% from a year ago and so we feel like the revenue opportunity here is much brighter.

Speaker 2

Turning this over to Matt, I'm pretty excited about what 2024 Our core banks never been this strong on expense control or management on core deposit growth and loan quality. Our divisions are past the concept stage and in places where they will drive the boost to operating ratios that we expect And our capital and liquidity levels give us all the flexibility we need to be nimble with uncertain economic and rate conditions. So with that, Matt, turn it to you. Thank you, Dennis.

Speaker 1

I'll provide a brief overview of our results that we can get to Q and A. But as a reminder, a full description of the Q4 results can be found in our earnings release and investor presentation, both of which are on our website and on our 8 ks with the SEC. As Dennis just discussed, our results this quarter include the consolidation of Panacea Financial Holdings or PFH. Results will be discussed relative to common shares unless otherwise noted. Operating earnings per share for the Q4 were $8,600,000 or $0.35 per diluted share versus $7,800,000 or $0.32 in the linked quarter and up substantially from $0.03 in the year ago period.

Speaker 1

Total assets were $3,900,000,000 Essentially up a little bit versus September 30. Excluding PPP loans, which are de minimis at this point and loans held for sale, Loan balances increased 4.5% linked quarter and that's after selling roughly $31,000,000 or selling or participating out of roughly $31,000,000 of loans in the Q4. Deposits were essentially flat as we've discussed previously. We manage excess liquidity by sweeping off excess deposits, of which we had approximately $113,000,000 swept off the balance sheet at December 31. Impressively and as noted in our press release, Average non interest bearing deposits were essentially flat for the Q3 in a row, which we think is exciting in the current environment.

Speaker 1

Net interest income excluding accounting noise from a 3rd party managed portfolio increased almost $1,000,000 to 27 $7,000,000 in the 4th quarter as funding cost pressures were offset with higher earning asset yields. Core net interest margin, as Dennis alluded to increased 10 basis points to 3.09 percent in the 4th quarter. We continue to believe we have a unique advantage due to our 2 deposit funding strategy. As a result, in the 4th quarter, core bank cost of deposits increased only 3 basis points versus the 3rd quarter. Excluding accounting adjustments, non interest income was $5,900,000 in the 4th quarter versus $7,900,000 in the 3rd quarter, largely due to reduced mortgage activity, which we think will is seasonal and will improve in the Q1.

Speaker 1

Core non interest expense excluding accounting adjustments, non recurring item and mortgage was $18,700,000 for the 4th quarter versus 20 $500,000 in the 3rd quarter. As we discussed in the press release, the 4th quarter includes expense reimbursement from financial holdings related to division expenses. But in addition to that, the decline is reflective of administrative cost saves that we announced earlier in the year and the consolidation of 8 branches in October. The provision for credit losses was $3,100,000 in the 4th quarter versus 1 point $6,000,000 in the 3rd quarter, dollars 3,000,000 of that was due to accounting for our 3rd party managed portfolio, which is offset by non interest income gains. Core net charge offs were $2,000,000 the majority of which was charge off related to specific reserves from credits impaired in previous quarters.

Speaker 1

Nonperforming assets were down substantially to $7,700,000 or 20 basis points of assets at the end of the year. The allowance for credit losses to gross loans was 1.06 percent at December 31 versus 113 basis points last quarter. Lastly, as Dennis indicated, operating ROA improved 89 basis points in the 4th quarter, the highest level since the Q2 of 2021. We have right sized the expense base and are confident we can keep grinding net interest income higher with a healthy margin. Combined with additional mortgage activity that we expect in 2024, we believe we still have opportunity to improve profitability even in a tough environment and are optimistic about our prospects in the near term.

Speaker 1

With that, we can now open the line for Q and A.

Operator

Our first question will come from the line of Casey Whitman with Piper Sandler. Please go ahead.

Speaker 3

Hey, good morning. So just looking at that core operating expense burden, table you have in the release, Just coming off, I think it's $18,700,000 Do you still have room to bring that down a bit in the Q1 just with full Cost saves coming off or is this a pretty good run rate?

Speaker 1

No. I mean it's, I would say a little artificially low, Casey. I think our guidance previously of 19% to 19.5% is still the better run rate. That $18,700,000 in the 4th quarter does include some excess expense reimbursement from Anesthesia Holdings That won't be there in the Q1, even though they will still be reimbursing us for expenses in the division. And it also had some other accrual noise that would offset some of that.

Speaker 1

So I would say that $19,000,000 to $19,500,000 is still the best run rate in the near

Speaker 3

term. Okay. But that $2,800,000 you referenced in the expenses for the effect of consolidating Panacea, that's just the reimbursement cost?

Speaker 1

Largely, while they're consolidated, all of their expenses are added to our expenses. But the vast majority of their expenses outside of a couple of small things were related to our expense reimbursement.

Speaker 3

Okay. And just, I mean, looking at the Panacea relationship, just in the near term, I guess, how does The investment effect, the P and L for you guys going forward or does it not here in the near term or just sort of thumb down how it's going to work?

Speaker 2

The incremental profitability from Panacea, what sort of been hitting the bottom line, Spread income minus their operating expenses, plus a little bit of fee income lately from loan sales and all that. Going forward, especially now that the capital is at the parent, the bottom line is basically our operating hurdle rate times their average outstanding times their total assets. So, I would probably expect somewhere

Speaker 4

$1,700,000

Speaker 2

to $1,800,000 to be hitting the bottom line pretty consistently until and increasing obviously as assets increase. Whereas in the past, it might What's your weight? If they had a big loan growth quarter, we might post a 0 just because we're funding the provision or if we did some recruiting or something like that. The expense reimbursement was basically to establish That a little bit lower operating hurdle, the operating hurdle going forward is higher. So the expense reimbursement that Matt's talking about was basically just to catch us up for 2023.

Speaker 2

Going forward, our operating results from Panacea will be higher and they will be more consistent.

Speaker 3

Okay. All right. Thank you. Just given go ahead.

Speaker 1

I was just going to say, I know this is very confusing. What we tried to do is put things on as much as possible and allow you to get back to an apples to apples comparison for the last couple of quarters. So if you The consolidation, I mean, right now, they only have expenses, and most of it is expense reimbursement to us. So if you take All of the line items other than non interest expense, there's very essentially no impact from the consolidation in those line items. It's still the Panacea division line items, which we've had in our run rate for the last 3 years.

Speaker 1

The change is really on the non interest expense line. And then a lot of that is also offset down below in the non controlling interest because we only own 19% of it. So if you're trying to get back to apples to apples, start with those Revenue line items, and then basically, use the non interest expense that you and I just talked about as you think about going forward and that will get you back to kind of how we have been prior to the consolidation.

Speaker 3

Got it. And the $19,000,000 you referenced would include the effect of Panacea, correct? And then you'd add mortgage on top of it?

Speaker 1

It would include the effect of the future level of reimbursement from PANSEA, yes, as if they weren't consolidated.

Speaker 3

Okay. Appreciate that. And then just given where capital is today and the potential to keep growing, I guess, just how are you thinking about Overall balance sheet going forward, could you potentially start the portfolio more or sort of how should we think about that?

Speaker 1

Yes. I know we've talked the last couple of quarters about mid single digits growth. I think for 2024, we're targeting more towards around 10% overall balance sheet growth.

Speaker 3

Okay. Thank you. Last thing I'll ask, just appreciate there's some seasonality within mortgage this quarter, but what's a reasonable outlook So those revenues next year to the extent you can share?

Speaker 2

We made 700,000 or 800,000 700,000 or 800,000 or so in the second and third quarter. I think we'd be probably 25 percent higher than that in the second and third quarter. I don't think we normally would have broke even I mean, excuse me, lost money in the 4th quarter. So I think a little bit of that has to do with some rate fluctuations and the Q4 seasonality. But I mean, we made I think altogether we made like $300,000 in mortgage during the year.

Speaker 2

On $600,000,000 On $600,000,000 And The incremental, I think we probably could be somewhere $900,000,000 maybe even $1,000,000,000 and it's going to be incrementally much more profitable just given the fixed expense burden there is Not expected to grow. If we make $300,000 this year and we are able to increase volume To $900,000,000 which it looks like we're going to be able to do, probably $3,000,000

Speaker 1

Yes, that's what I would say, pre tax.

Speaker 3

Sounds good. Thank you.

Speaker 2

Yes. Thank you.

Operator

Your next question comes from the line of Russell Gunther with Stephens.

Speaker 4

Hey, good morning guys. Hey, Russ. I just wanted to start On the loan growth commentary about 10% for 2024, can I just spend a minute to touch on the mix, Maybe particularly address the Life Premium Finance and Panacea as well?

Speaker 2

I mean, I think white premium and panacea both could if we let them out of the barn, I think they could probably get good enough growth to move the needle for a much larger bank. So some of what I tell you here is muted relative to what their real opportunity could be, but Tyler has got great production capabilities, but he's also working on flow agreements and loan sale opportunity. So I don't know that as much of that will hit the balance Probably $100,000,000 to $150,000,000 on our balance sheet for Tyler for Panacea. I think Life Premium Finance probably The $100,000,000 range probably, life premiums getting yields that are Just remarkable. The expense burden is just unimaginably low.

Speaker 2

And then I think the core bank probably could do the same as either of those divisions. I just think I don't know for sure that the market is there. So it's kind of what gets us back. It's probably 150 in each of the divisions and probably somewhere around 75 to 100 in the core bank.

Speaker 1

Okay.

Speaker 2

That's very helpful. Yes, long term, I'll just make sure everybody knows. Long term, we would love to be driving more activity through the core bank and there is the potential there and we've got the horses. I think we're all just realistic. I don't know that the market or the economy is going to be there for that.

Speaker 4

That's really helpful color, Dennis. And then maybe just switching gears to the margin. So again, you guys talked about the you have with new deposits at a much lower rate than where the loan yields are coming on and we're looking at 10% loan growth. So could you spend a second just Thinking through how that core margin trends in 2024 maybe set expectations for us, what you're thinking with regard to Fed funds in that expectation as well?

Speaker 1

I don't know that we have a core fit. There's a Heated debate internally over the passive Fed funds, Russell.

Speaker 2

Matt's laughing because he won the bet last year.

Speaker 1

Yes, I won the bet. I feel like I'm going to win it this year. I mean, I'll give you a scenario. If rates were flat, We think margin will continue to grind higher from repricing and we think we could continue to moderate deposit costs. And on the balance sheet growth that Dennis just alluded to, I mean, we've already got $100,000,000 of that essentially funded.

Speaker 1

So we think margin will continue to grind up probably by the end of the year to the mid-330s, 3.35 range. A couple of rate cuts depending on when they came in the year Arguably may cost us a couple of basis points. And I think that's going to be true for the whole industry. I don't think we get As an industry, a whole lot of benefit from 2 rate cuts because of the shape of the curve. So maybe we're 3.25 to 3.30 if we get a couple of rate cuts.

Speaker 1

But that's all It's hard to predict, but that's kind of what we're thinking.

Speaker 2

I think overall, we're I wrote this in my comments and then I deleted it because it was just The way I wrote it, but I think we're positioned really well, rates going up, rates going down. Matt and I both believe that a couple of rate cuts not going to bring any relief. I mean, a 5% Fed funds is not going to bring relief on deposit costs. I mean, because deposit cost for the industry is still in the 2s mostly. So I just don't think that deposit costs are going to start drifting lower dollar for dollar.

Speaker 2

I don't think we're going to have a pretty high beta on the first couple of rate cuts anyway.

Speaker 4

Well, that's helpful guys. I appreciate just framing that narrative. The follow-up would be that Margin guide is relative to that core 309 from this quarter?

Speaker 1

Yes. Yes.

Speaker 4

Okay, great. Thanks, Matt. And then just last one, it seems like you're getting increased capital flexibility here. Just love Jim comment on buyback expectations and hurdles to getting that done.

Speaker 2

Matt and I, I mean, we come on these calls and obviously we've built some engines that can grow the balance sheet. And so we're real, real cognizant of capital and capital levels and capital And especially when the stock is trading at or even for a lot of 23 below tangible book, We are even more determined to see capital levels moving higher. We just don't have the flexibility to go grab New capital. So that being said, if Matt and I are pretty confident in where operating ratios are going, Where earnings per share is going, where our capital build is not to start coming in. So if We were to be able to deconsolidate and get the gain.

Speaker 2

We and the stock has not Moved off of tangible book, we anticipate getting pretty active with that capital. Okay. I think our story is starting to get a little bit of obvious legs to it. So Matt and I Our thinking that it might end up being capital that

Speaker 1

lets us grow a little more, Russell.

Speaker 2

But if not, we're prepared to own a lot more of our stock.

Speaker 4

Understood.

Operator

And your next question will come from the line of Christopher Marinac with Janney Montgomery Scott. Please go ahead.

Speaker 4

Hey, thanks. Good morning. Dennis and Matt, you

Speaker 5

may have kind of personally answered this in previous callers, but one thing I understand is the pretax pre provision that we talk about on operating basis this quarter, can we Further adjust that back for the operating expenses, the $18,700,000 that you called out, is the PPNR kind of higher than it appears because of that operating expense change?

Speaker 2

Yes. It is a touch higher Given what Matt was saying, so you probably need to add, Matt was saying 19 to 19.5. And I would guide to the lower end of that range. Matt might guide to the higher end. But So yes, you probably could add $300,000 $400,000 to that, Chris.

Speaker 5

Okay. And that's on expenses. Would there be any adjustments On the revenue side to kind of get a true apples and apples?

Speaker 1

No.

Speaker 5

Because all the 3rd party is netting against each other, so we don't have to be too concerned about that.

Speaker 2

On the pretax pre provision, Well, I can

Speaker 1

take that back. In pre tax pre provision, there is a third party effect through non interest income that if you wanted to take all the 3rd party out would come out. And there's a line up.

Speaker 5

Okay. So use that to kind of net that, which would therefore be a reduction to get to kind of a run rate?

Speaker 2

Yes. Got it.

Speaker 1

But if you're using the non interest expense above the line, obviously, that's got The panacea consolidated expenses in there. So you got to adjust that out as well. So if you use the table for our non interest expense, that's adjusting out the consolidated expenses from Panacea.

Speaker 5

Yes, understood. Okay. Thank you for walking me through that. And then when we talk about deposit costs, and I appreciate the angles that you've got in the release, What is the most important one that you're focusing on as you manage this business quarter to quarter?

Speaker 2

On incremental on deposit cost as a whole or sort of Correct.

Speaker 5

I mean, so yes, thinking going forward, we be focused on that core bank number or are you looking at all 3 and trying to turn dials on each of them?

Speaker 2

All 3. All three for sure. I mean the fact that our I mean we I think coming into this rate cycle, this inverted yield curve, Chris, People did not think about Premises having the strongest core bank deposit portfolio. So it's remarkable that we've moved all the way through this and really in our region we have one of the lower core bank deposit costs. And the part of the reason is, I mean, we're just not as desperate for every single dollar because we have so much flexibility on the digital platform.

Speaker 2

I mean, I remember the digital platform. It was for like 30 days, it seemed like pretty expensive money. And then for the next 11 months, it seemed different. I think some of the things that we're doing now on the platform, whereas we had a lot of Sort of rapid growth, I feel like right now we're really getting into a sweet spot where the growth on the digital platform is really at the right level for say a $4,000,000,000 balance sheet. It's not anything that's really accelerated by remarkable rates, it's really leveraging the technology and leveraging referrals.

Speaker 2

And so I think the growth there is a little muted and it really is letting the core banks advantages shine through. That's really why and how we get to such a remarkable level on incremental deposit costs.

Speaker 5

Got it. And then incrementally, would we expect just all things being equal that the digital cost would come down quarter over quarter again in Q1?

Speaker 2

I mean, I think the cost Probably 90% of the balances on the digital platform, I think are probably have a pretty high beta to Fed funds versus our core bank that Matt and I were saying probably has a pretty low beta on the first couple of rate moves. So I think Falling rates might affect the digital platform faster, which you'd expect given the higher costs. I think what's going to bring the Weighted average cost on the digital platform down are some of the new incremental products that we're selling have lower betas or excuse me, lower spreads to Fed funds and or or just non interest bearing sort of on the business side.

Speaker 5

Got it. And that makes sense. Great. Thank you for taking the questions and all the information today.

Speaker 2

All right. Thanks, Chris.

Operator

We have no further questions at this time. I'll turn the call back over to Dennis Sember for closing remarks.

Speaker 2

Thank you again for joining our call. Matt and I are available all day if

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Primis Financial Q4 2023
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