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spk01: Good day, and welcome to the Primus Financial Corp 2022 Second Quarter Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Matt Switzer. Please go ahead.
spk03: Good morning, and thank you for joining us for Primus Financial Corp's second quarter webcast and conference call. 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 website, premisebank.com. We undertake no obligation to update or revise forward-looking statements to reflect change 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. A reconciliation of the non-GAAP measures to the most comparable GAAP measures can be found in our earnings release. I will now turn the call over to our President and Chief Executive Officer, Dennis Ember. Thank you, Matt, and thank you to all of you that have joined our second quarter conference call. We're very excited to see the momentum in several areas of the company and really believe it sets us up well for the rest of this year and for next year. I'll highlight a few of the items here, and then Matt can share some more insight into the numbers for the quarter. It was right before COVID in 2020 that we started to restructure the company. Right out of the gate, we identified some key areas that were material drags on our market value. First was the ability to grow both sides of the balance sheet reliably. We strengthened our commercial banker team with new hires first, and then we were crafty with some strategies that we believe will cement our reputation as a growth-oriented company. On the loan side, we've seen four quarters now of loan growth, each with a little more momentum, and from all areas of the bank. Our results this quarter alone were pretty notable, and while that toward pace of growth may not be our long-term pace, it does set us up nicely for the rest of this year. On the funding side, we've transitioned away from CD as our main focus and funding source, and we've worked to build momentum in checking accounts and other low-cost deposits. We've moved our cost of deposits down aggressively, very close to our peers, but in a zone that supports the growth we need for our asset strategies. This quarter, checking balances moved nicely to about 24% of total deposits, and while we know there's more work to do here, The success to date and the momentum we are building is very encouraging about the future. Our mortgage solution is brand new, and I believe the timing on our decision is pretty ideal. Our price was small, I mean really negligible, and while the market activity is slowing because of higher rates, I've been around this business long enough to know that volumes will return. Right now, large mortgage companies are shedding support, eliminating marketing resources, trimming assistant positions, and looking to reset for today's reality. That's put a lot more really good teams and originators in play than were a year ago. Simply put, the market for mortgages have slowed, but the market for originators and good teams is noticeably better. One last thing weighing on our market value is our operating performance. Incremental improvement here, like you saw this quarter, is critical. And so I'm looking for signs that the discipline and the desire to achieve it is present. Our internal communication aligns with this unquestionably. What we celebrate at premise and what we are incenting is also aligned. I see positive moves in the net interest margin, in checking accounts, in pipelines. I see that core revenue has grown twice as fast as core expenses. So while I want the operating performance at our company to be wow right now, I am confident that we are doing what is necessary and that we are just a few quarters away from putting that value overhang to bed as well. Matt's going to be more specific about where the growth came from this quarter, but let me say something about the lines of business. These businesses are meant to augment our core bank. Our growth rate, our credit quality, our profitability, They're not designed or meant to gut it or replace it. I mean, an honest review of this industry would say that the industry has changed and is still changing. And I challenge anybody to show me a community bank strategy that can punch out 150 ROAs with good credit quality and with reliable growth. I just mathematically don't think it's possible. I feel like you have to augment what you're doing with something new and creative. Finding that balance in a small bank is not easy. You know, where to invest, where to pull back, how to transition, how fast. But let me illustrate the power of this concept. Our company was founded in 2005. Since then, we've done everything that good community banks are supposed to do. We've built relationships with professionals in our market. We've built branches. We've hired bankers. We've bought other banks, integrated them. We've advertised aggressively. We've negotiated. We've been downright street fighters to build our company and build our brand. But right now, a review of all of our customer data and relationships shows that we're banking 50% more doctors, vets, and dentists in our footprint through the Panacea franchise than we do in our core bank after 17 years. Panacea is only 18 months old, barely 18 months old. They're barely break-even right now. And we're investing hard in that business with the founders to continue harvesting this easy opportunity. The point here is not that the core bank is unsuccessful because it's not. The point here is instead to illustrate that we are more than twice as present in the pockets of doctors, vets, and dentists in Virginia, Maryland, and D.C. as we were 18 months ago and that we got here with a resource-like strategy with seemingly unlimited scale. The power on a community bank with something like that is fantastic. With that good news, I'll turn it back to Matt for some details. Thank you, Dennis. As a reminder, a full description of our second quarter results can be found in our earnings release and second quarter earnings presentation, both of which can be found on our website. Earnings from continuing operations for the second quarter were $5 million or $0.20 per basic and diluted share versus $4.6 million or $0.19 per basic and diluted share in the first quarter. Excluding one-time items, earnings in the second quarter were $6 million or $0.24 per diluted share versus $4.7 million or $0.19 per diluted share in the first quarter. Total assets were $3.24 billion at June 30, up slightly from March 31. Excluding PPP loans and loans held for sale, total loan balances grew 10.5% linked quarter or approximately 42% annualized. Growth came from all parts of the organization in the second quarter, including almost 20% annualized growth in the core bank, while Panacea and Life Premium Finance both had growth accelerating from Q1. We have a lot of momentum currently in anticipating the approximately 31% loan growth rate for the first half of 2022 to continue for the rest of the year. Deposits were essentially flat in Q2 while the mix continues to improve. Non-interest-bearing deposits are 24.3% at quarter end, and continue to be a focus, while CDs have declined to 12.3% of total deposits. Cost of deposits were flat at 35 basis points in the second quarter, and cost of funds increased one basis point from Q1. As expected, our robust business lines have consumed the excess liquidity we were carrying through last year. Growing low-cost core deposits is a significant focus of the bank as we look to fund this growth going forward. Net interest income saw strong growth in the quarter, increasing to $24.6 million from $22.9 million in Q1, or 7.7% linked quarter. Our reported margin was 3.33% for the second quarter, or $3.35, excluding the effects of PPP, up 37 basis points and 39 basis points, respectively, from the first quarter, driven by strong loan growth and a better earning asset mix. Non-interest income increased to $2.6 million from $2.1 million linked quarter due to the addition of Premise Mortgage Company late in the quarter. Premise Mortgage originated $27 million in June, down slightly from May as the company transitioned to Premise. As previously discussed, our goals for Premise Mortgage in 2022 are to grow production and invest in talent versus a meaningful contribution to earnings this year. We expect mortgage to be a more meaningful contributor to earnings in 2023. Non-interest expense included a number of items this quarter, including branch closure costs, merger-related expenses, and the addition of one month of expenses for premise mortgage. Excluding these items and recovery or expense for unfunded commitments, non-interest expense was down slightly to $18.5 million from $18.6 million last quarter. The provision for credit losses was $422,000 in Q2 versus $99,000 in Q1. Combined with net recoveries of $408,000 in Q2, the allowance increased by $830,000 for the quarter. While economic outlook weakened, loan growth in the quarter was concentrated in categories with lower model reserve requirements. As a result, the allowance for credit losses to gross loans, excluding PPP balances and loans held for sale, decreased to 1.16% at June 30 versus 1.24% at March 31. Non-performing assets net of SBA guarantees increased $5 million in Q2, primarily due to one $8.5 million relationship on a residential property that has struggled to service the debt, but offset by the payoff of a non-accrual development loan of $4.6 million. The LTV on the residential property is less than 50%, and we aren't expecting any losses. As mentioned previously, we had net recoveries in the quarter and have now had recoveries in four of the last five quarters. Our operating efficiency ratio was approximately 70 percent in the second quarter, down meaningfully from 76 percent in Q1. Panacea and Life Premium Finance continue to experience substantial revenue growth and increasing operating leverage as profitability of those business lines accelerates. We consolidated six branches late in Q2, with another two branches planned to consolidate in Q3. We've also identified several opportunities that could generate three to four million of additional savings on an annual basis that we are pursuing. Combined with continued revenue growth, we believe we could drive the operating efficiency ratio to the low 60s as we finish 2022. Pre-tax pre-provision operating ROA was 100 basis points in Q2. The excluded PPP fee income, which was a temporary source of revenue, pre-tax pre-provision ROA is at the highest level since Q3 of 2020. Over that time period, we've invested heavily in new business lines and offerings and are starting to see the returns from those investments. Similar to the efficiency ratio discussion, we are confident pre-tax, pre-provision ROA will continue to see meaningful improvement in the near future. We are pleased with the progress we have made and are excited by our momentum. We are confident profitability will continue to improve in the near future as we drive towards top quartile results. With that, operator, we can now open the line for Q&A.
spk01: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Andrew Terrell with Stevens. Please go ahead with your question.
spk00: Hey, good morning, Dennis. Morning, Matt.
spk03: Morning. Morning.
spk00: Maybe just to start, I think it was really good to see the deposit growth come in this quarter. It seems like you were able to buck kind of a more negative trend across the industry. I was hoping you could just speak to kind of pipeline on the deposit side and just expectations for deposit growth in the back half of the year. And then as part of that, I saw you went live with the digital bank this quarter, just deposit growth expectations within that division specifically. And then can you remind us, do you have any kind of deposit account opening goals or any kind of metrics that you're targeting for that business?
spk03: I start from the back of that question. I think our metrics are What we'd really like to see is checking accounts keep moving higher up to the 30% range. Now, I mean, that's probably of all the goals we have around here, the ratios that we measure and sort of answer to the board on, that's clearly the hardest. And I think especially in the current environment, it's not going to be easy, but I think it's critical. I think that's where our whole franchise value comes from. So we're focused there. As far as the strategies to get there, I mean, I would tell you, yes, the digital bank, no question about it, is something we're hoping is going to move us there. The digital bank is named Premise Bank. It offers the exact same products and services that the core bank offers. So there's really no differentiation there. But when we market it in our core footprint and really beyond, It's easy to market it as the most convenient solution out there. We're going to market it that it's not run by bots and that there's still access to bankers. Um, now when we start marketing that outside of our footprint, clearly that market or that idea will change, but that concept, that digital bank concept in our footprint will make us a better bank. Um, here in our footprint, the, um, outside of that, I think we're internally, we're focused on changing incentives or, or enhancing incentives. We're already paid. The biggest incentive we pay here is still on a checking account. Um, I think on the deposit pricing, you know, we have, like I said, we've moved cost of funds or cost of deposits down aggressively. I think we probably could have gone a little further, but just knowing what the pipelines look like on the asset side and the opportunity, we've sort of stayed a little aggressive and I think we would continue to stay aggressive there. Um, that really drives home why the checking account strategy is so important sort of to augment, um, or make the growth a little more reasonably priced? Does that answer all the questions there?
spk00: Yeah, no, that's helpful. Just overall kind of net kind of deposit growth expectations for the back half, if you have them.
spk03: I would answer it this way, Andrew. I mean, at our current loan and deposit ratio, that's about as high as we want to take it. So we're looking to fund dollar for dollar the loan growth for the rest of the year. So that'll be call $300 million of growth we're going to need to have on the deposit side.
spk00: Got it. Okay. That's perfect. Thank you. Maybe just think of it, Matt, I think it was good to see in the release, and then I think you discussed it briefly in the commentary, the $3 to $4 million of potential cost savings that you discussed. It was really good to see. Can you just elaborate a little bit more on kind of where those saves are coming from And then is it fair to think that timeline for recognition is kind of fully loaded in the back half, run rate, and then just overall expectations for expenses in 3Q?
spk02: Sure.
spk03: It'll come from a variety of areas, branch consolidation, some of which we've talked about, some additional ones. So additional ones above what we've talked about would be in that number. Some back office restructuring and consolidation of some positions that we can have some visibility to. And then some other operating efficiencies, contracts and stuff that we can renegotiate that we see some opportunities to reduce costs. In terms of run rate, I would say, so this is going to be excluding... any one-time costs related to branch closures, et cetera, and excluding premise mortgage just so it's apples to apples with what we reported the last couple quarters. So we were at $18.5 million this quarter. That should be probably closer to $18 million in Q3, give or take.
spk00: Okay, got it. And then for this $3 million to $4 million kind of saves that you've identified, kind of once we work past the back half of this year, do you think there's kind of any more potential cost-cutting efforts as you look into 2023, or is it more just going to be on kind of tweaking things here and there and reinvesting in the franchise?
spk03: I think it's going to be – I mean, we're always looking for efficiencies, but I think it'll be more tweaking things here and there. Um, and look, we still, and that's kind of a net number, right? When we still have some investments we need to make in, uh, panacea and life premium finance, um, maybe some more to do in the digital side. So, uh, it's really trying to reallocate resources.
spk00: Yep. Okay. Um, if I could speak just one more end, um, for, for Dennis, um, heard some of your comments on dislocation in the mortgage market and maybe that provides you an opportunity to capitalize from a talent perspective. Can you just discuss your outlook for hiring within the mortgage division? I know the mortgage backdrop has changed quite a bit over the past few months. What do you think is an achievable target for mortgage production in 2023? I think the
spk03: you know, 30-year mortgages now kind of 6% maybe come off that just a touch. I mean, yeah, that's going to slow mortgage volumes, has slowed mortgage volumes. I mean, it'll reset and the mindset, the American homeowner mindset will reset and volumes will come in at some level. Right now, There's just so many mortgage companies, and I'm not faulting anybody. I mean, the volumes were mind-blowing, and you just had to staff up, and now that reset is sort of changing the day-to-day for a lot of originators. I remember when we started looking at this and we were looking at some other strategies, I mean, we talked to some decent-sized teams that wanted a million dollars to make the move. And you could probably, I mean, back then you probably could have justified it. I mean, we're doing enough volume, a couple hundred million dollars of volume. You're maybe paying them six months of bottom line profitability. That's changed right now. So that's, I mean, again, for us, that's good because I think even back then, I don't think Matt and I wanted to be cutting a lot of million dollar checks for new teams given the you really only have one month of sight on what mortgage will do. So I think that's a very, that's a positive for us. Um, there are teams out there. There are definitely teams out there that, you know, maybe the culture where they are isn't good. Uh, the enthusiasm for mortgage feels different in their company. I mean, the enthusiasm for mortgage here is, is very high. It's fever pitch. It's, um, You know, Matt and I both know this business, you know, and I think that sort of helps too when we start talking to bankers. I think as far as what we can expect, I'd say probably, I think comfortably I would say maybe $500 million, just what I know now. I think we bought probably $300 million. I think comfortably I can say $500 million knowing that there's kind of, even at these levels, there'll be a reset, there'll be some activity, there'll be some recruiting. I think if we can get, I don't even want to say lucky, I don't know what the word is, but if we can be successful on some of the recruiting that we're doing, if we can get some reasonably priced teams and negotiate well and exploit our position here, being kind of, one of the few offensive mortgage companies, maybe we can get that to a billion dollars. And just to add to that, I mean, Primus Mortgage was a purchase-focused shop. They were not refi-heavy at all. And the markets that they're in are still seeing robust purchase activity. And then you combine that with what should continue. I mean, there's still a lot of housing demand, even at these mortgage rates. And then We highlighted in the release a gentleman that joined us as a regional executive, came from a much larger shop and ran a very large region, and he's excited about what the team at Premise Mortgage is building, and he's already hit the ground running on the recruiting side. And he gets it. I mean, we're looking for teams that are purchase-oriented, not refi-oriented, so that they can still generate volume in this market. So... We're highly confident we're going to get volume going into 23. Great.
spk00: Okay, I'll step back. I appreciate you guys taking my questions, and congrats on a good quarter.
spk01: Thanks, Andrew. Again, if you have a question, please press star, then 1. Our next question comes from Christopher Marinak with Janie Montgomery Scott. Please go ahead with your question.
spk02: Hey, thanks. Good morning. Dennis and Matt, I wanted to kind of start with credit. The information you gave in the release and deck was very helpful, so I just kind of wanted to extend beyond the one loan that you talked about. What other credit indicators are you seeing on classified and criticized? Any early warning things at this point in the cycle?
spk03: I mean, early warning signs, weaknesses in credit, or underwriting terms coming through that I don't think we're seeing that. I think we are. Anything that exhibits a little bit of weaknesses We are probably moving harder on right now, I will tell you that. But I don't – are there – is that wholesale across the footprint? No. I mean, I think the values – this is one thing I would say. The values of anything that shows up a little weak, the collateral values are strong and resolvable. I think they're at resolvable levels. That's probably something that's different where we are right now. People want to know what's different now than back in 2007 and 2008. I think that is a big difference. Collateral values right now are resolvable on credit. Credit might exhibit a little bit of cash flow weakness, but the collateral values are there. I think the one loan that Matt was talking about that went non-accrual, I mean, we're we're at like a 40 something percent loan to value. There are two or three mortgages behind us. I mean, there's, there's no loss in that. It, it kind of contaminates your asset quality story, but there's just no loss. There's just a cashflow problem. The person, and this is a famous person has just, they just don't have the cashflow to support the mortgage. And, um, And, you know, I think we probably could have worked with them like this or worked with them like that or done it, but I just think right now it's not in our best interest to push off any kind of credit problem, especially right now when asset values are resolvable. I think it's in our best interest to deal with something. I don't know.
spk02: No, that's all very helpful.
spk03: I mean, we see stuff moving around, but nothing... that we would characterize as systemic, just kind of, you know, if you're in the business of allocating risk, some stuff's going to go bad. So we've had some movements in and out, but nothing earth-shattering at this point.
spk02: Great. And then I had a related question on Tennessee. Just to sort of remind us on kind of how the business is being built from a guardrail perspective and just how you sort of think of credit as you expand and as they continue to have success?
spk03: I mean, their offerings are, each quarter, the offerings are a little more varied. I mean, commercial is probably, what is commercial? I mean, commercial right now is 60%, 70% of volume productions. 55. 55, okay. But trending higher? I mean, the commercial production is so right down the line. I mean, the commercial production, what we're doing in the bank, underwriting style, if it were to come through the bank versus coming through Panacea, there's really no difference there. Not at all. In fact, our commercial production, the people doing our commercial production, that are doing the commercial production, reviewing the commercial production, approving it, are all Wells Fargo, TD Bank, Big Bank. I mean, our strategy is that. On the consumer side, which is what really got us started here, and I think what differentiates us, I mean, we're banking fourth-year medical students, residents, fellows. I mean, the fact is, I think a lot of those don't have the proven credit background that you look. I mean, if you're trying to bank those doctors on a 750 beacon, you're probably going to, or a beacon, you're probably going to, that's just not how you bank those doctors. Most of them don't have established credit. They may be 30 years old. They just don't have established credit yet. And that doesn't mean, absolutely does not mean that we're, you know, slinging consumer credit to unqualified borrowers, period. I mean, our credit trends there are fantastic. Nothing has gone wrong in Panacea. We got 2,000 doctors, and I would tell you the path-to-do ratios, the charge-off ratios, the losses, the credit problem indicators there are fine. Maybe as good as what we expected or better. I mean, on the consumer side, we're not What I know is a focus right now given the economic outlook, I mean, we're not offering consumer loans to technicians or nurses or it's doctors, you know, vets, dentists. These are folks that are at the upper end of the income bracket when they get out of school. So these are bridge loans basically to very high-earning people, and that's how they're underwritten.
spk02: Great. And then I guess one more question for me. This goes back to slide 12. The deposits you have been driving in at LPF and Panacea, is there anything unique you have to do on rate for those deposits as we move through this environment the next couple of quarters?
spk03: I would say no. In fact, those deposits probably are maybe more reasonably priced than the rest of the bank? I mean, life premium finance, it's immaterial at this point. They only have, I think, less than $3 million of deposits tied to life premium finance. And then for Panacea, I think it's $10 or $11 million. And a lot of that's coming on the commercial side. So when we make a loan to a practice or what have you, we require an operating account. some of it's consumer for our consumer borrowers, but I think most of the dollars are tied to those operating accounts, so it's, again, low interest rate. We probably have room. We do have room to be more aggressive on the price side, on pricing those deposits, and probably sort of move the deposit flows up in those businesses. Okay.
spk02: Right. And I presume you can do that within kind of how you want your betas to look as you bring in new money. So that all makes sense. Exactly. Great. And then I guess, you know, I know you cover a lot on expenses on the prior question, but just curious if you have any, you know, longer term goals about where you'd like to see the expense ratio to assets or efficiency in general. It's not a guide for next quarter as much as it is just kind of big picture goals for the organization.
spk03: I mean, we had a board meeting yesterday, and we told the board, look, right now the goal is to get to the low 60s as fast as possible. Our ROA that Matt and I want is probably 135 range and moving higher, but 135 probably short-term efficiency ratio in the low 60s. and moving lower and margin being driven by good yields and good deposits is critical as well. So I think the first goal I would tell you, Chris, is to see low 60s. And then as we do that, let these lines of business that I think both are going to operate with, I mean, I didn't say it in my comments, but I think both of these lines of business are going to ultimately operate probably 20s and 30s in the efficiency ratio. Sort of let them pull us down a little lower into the 50s.
spk02: Great, Dennis. Thank you for all the background this morning. We appreciate it.
spk01: All right. Thank you, Chris. Thanks, Chris. This concludes our question and answer session. I would like to turn the conference back over to Dennis Zimber for any closing remarks.
spk03: All right, thank you. I appreciate everybody on the call today. If you have any questions or comments, feel free to reach out to me or Matt anytime. We appreciate it. Have a good weekend.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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