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spk01: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Primus Financial Corporation Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I would now like to turn the conference over to Matt Switzer, Chief Financial Officer. Please go ahead.
spk07: Good morning, and thank you for joining us for Premise Financial Corp's 2022 Fourth 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 site, firmisbank.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. 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 Semper. Thank you, Matt, and thank you to all of you that have joined our fourth quarter conference call. When we started 2022, we were determined to grow our new lines of business alongside the community bank. to finish the work that we'd started on the digital bank and to somehow diversify away from just spread income. Wanting to build some strength and opportunity and non-interest income, which our company has not really benefited from. Looking back over the last 12 months, we've invested so hard in the bank that we envision. And the question, or one of the questions that we all have, is basically, will it pay off and when? I'm going to answer that in a minute, but first a few items. highlight in the quarter and in the year first was the loan growth we experienced i knew matt was conservatively estimating our growth potential he's chuckling right now uh as we started 2022 and we did come in very strong with about 25 percent growth in loans when you exclude the effects of ppp and this was from all areas of the bank just like we had predicted evenly from the community bank from panacea and from white premium finance For almost five years, really through the middle of last year, our bank had just not grown loans organically. We were not known for that. And I think we've turned that around in a really big way, and I'm really proud of the engine that we have built here from scratch. Two of these engines are operating lines of business. Panacea started the year with only about $50 million of loans, all consumer, and about $1.3 million of recurring revenue. We grew our doctor base to about 3,000 doctors doing business with us all across the country. We've invested in production and credit administration and customer support and technology. We spent all this money to build the brand, and as we progressed through the year, results at Panacea progressed nicely. We finished the year with about $7 million of recurring revenue, and the prospect of a material boost to that number as we move to start splitting our production between gain on sales and portfolio. The credit here is outstanding. Our commercial book has debt coverages over two times, no past dues ever, and incremental yields, honestly, that are close to or exceeding traditional bank CREs. Life Premium Finance ended with just under $200 million of outstanding loans and about $800 million underwritten. In less than a year, they've built a brand in all the infrastructure and can take this to something much more sizable where the only real incremental operating expense is higher incentive pay for the producers. This division also moved deals higher on loans that are entirely cash-secured And in the fourth quarter, we were getting incremental variable rate yields within 30 to 40 basis points of fixed rate CRE. Another area we invested in was the mortgage business. Our total investment in the mortgage company, including the losses associated with recruiting the teams, stands at just under $6 million, which is considerably less than our former investment in Southern Trust. Looking at our production teams, our restructured comp plans, the level of administrative staffing and the current rate and housing environment, I feel confident that this investment has a payback of about four or five quarters. We are not so heavily invested in this space that we can't maneuver or pivot if conditions worsen or recruit and build if conditions for this space improve. I really believe we're ideally positioned for this year and this division will improve our earnings and ROA in 23. The last thing I'd mention, the next to last thing I'd mention really before turning this back to Matt is in regards to credit quality. During the quarter, we took a very large provision for a single asset, one that we had put in non-performers, I think, in the third quarter. When this loan got wobbly, we got new appraisals and we felt pretty confident in our position. But we reappraised the properties in the fourth quarter and aggressively wrote them down to the 90-day liquidation value and levels that I'm hopeful will move the property as soon as we're able to do so. The other material MPA on our books is the first mortgage on the large estate property. We have a 40% or so LTV there, three junior lien holders behind us. And right now that loan is current, but we have left it in non-performers for the time being. So outside of these two credits, we only have about 20 basis points of non-performers, and our credit quality in 22 would have improved dramatically, almost by 50%, and nearly to the top of our peer group. None of that actually, none of that excuses our actual results. We finished the year with about 119 basis points of non-performers, And I'm just trying to illustrate to you how determined we are to move these two assets out of the bank as fast as we can and restore credit quality that you'd expect from a top-performing bank.
spk04: Back to how I started about investing in the bank.
spk07: It is not easy to grow a bank this size organically, especially at the pace that we're trying to grow. It's gut-wrenching, actually. It takes about 18 months to conceive a strategy, build it out, suffer some operating losses that us CEOs like to call investments, stay the course while you make small adjustments here and there while you're second-guessed, and then finally come out on the other side with something that drives value. You know, the outset for me here about three years ago, I saw some issues that I thought were standing in the way of us creating long-term shareholder value. And we've invested a lot of our dollars in operating results and honestly a lot of myself personally. Building engines that I know unquestionably drive value in this industry. We needed a safe way to grow loans. We needed reliable sources of non-interest income. We needed more deposit strategies. We needed more expertise in every area of the bank. We needed better regulatory reputations, relationships. We needed a better brand. And just saying all that leaves me out of breath. The good news for 23 is that we don't have a lot left to invest in. What we've done over the last three years, and especially in 22, is enough to produce outsized growth and profitability for some time. In 23, we need to let all of that come to fruition. And I believe that we'll see all of this build and start to pay off, and I'm determined, with Matt's help, to not be distracted with any other with anything else other than getting the payback on these investments and honestly illustrating how great a value our stock is at these levels. All right, Matt, with that, I will turn it back to you. Thanks, Dennis. I will provide a brief overview of our results before we turn to a Q&A, but as a reminder, a full description of our fourth quarter results can be found in our earnings release and fourth quarter earnings presentation, both of which can be found on our website. Earnings from continuing operations for the fourth quarter were $3.1 million or $0.12 per diluted share versus $5.1 million or $0.20 per diluted share in the third quarter. Excluding one-time items, earnings in the fourth quarter were $0.03 per diluted share versus $0.21 in the third quarter. As Dennis mentioned, as I will discuss further, earnings were impacted by a large provision in mortgage-related losses in the fourth quarter. Total assets were $3.57 billion at December 31 versus $3.36 billion at September 30. Excluding PPP loans and loans held for sale, loan balances grew 32% annualized in the fourth quarter. Growth was primarily driven by panacea and life premium finance again in Q4, but we did see growth in the core bank as well. Given the rate environment, we did not expect this level of loan growth to continue at this pace in 2023. Deposits were up approximately 2% annualized in Q4. Non-interest bearing deposits declined to 21.4% from 25.4% last quarter as depositors began looking for yield. Our loan to deposit ratio increased to 108% in the fourth quarter, which is higher than we prefer. We are singularly focused on bringing that ratio down in Q1 of this year. Excluding accounting adjustments, net interest income increased to $28.2 million from $27.5 million in Q3. Excluding these same adjustments plus effects of PPP, our margin was 3.51%, down seven basis points from the third quarter. Adjusted yield on earning assets expanded 35 basis points, while cost of deposits and cost of funds increased 30 basis points and 48 basis points respectively from Q3. Excluding accounting adjustments and a one-time gain, non-interest income was $5 million versus $4.4 million in the third quarter. Mortgage originations were up 36% in Q4 in the face of substantial industry headwinds and on top of normal seasonal lows for mortgage. The additional teams we added late in the third quarter are fully onboarded and building pipelines. We're projecting originations of $1 billion in 2023, including and taking into account the current environment and up from roughly $300 million in 2022 and with meaningful additions to non-interest income and profitability overall. Non-interest expense. included a number of items this quarter, including $1.2 million of non-recurring expenses, $36,000 for unfunded commitment reserve, and increased mortgage expenses of roughly $2.2 million from a full quarter of the production team build-out that we started late in Q3. Excluding these items, non-interest expense was $21.2 million, up from $20 million last quarter. While we intend to moderate them in the first quarter, marketing costs remain high in the fourth quarter. Turnover in the organization continues to cause inflationary pressures in salary and benefits. We also had approximately $500,000 of year-end true-ups for various accruals. As we look to the first quarter, we expect cost controls to push expenses down slightly from Q4. Excluding non-recurring accounting adjustments and the impact of mortgage, our operating efficiency was just under 70% in Q4. Mortgage improvement, which is expected to be break-even in the first quarter, plus increasing operating leverage for Panacea and Life Premium Finance will drive the efficiency ratio lower in 2023. As Dennis alluded to, the provision for credit losses was $7.86 million in the fourth quarter versus $2.89 million in Q3, excluding accounting-related adjustments, the provision would have been $6 million in the fourth quarter, with the increase largely due to the impairment of the relationship that Dennis discussed earlier. We also had net charge-offs in the fourth quarter of $3.7 million, excluding accounting adjustments, again, largely tied to the relationship discussed previously and offset partly by $1.3 million of recoveries in the quarter. Taken altogether, the allowance for credit losses to gross loans excluding PPP was flat at 117 basis points at December 31. Non-performing assets net of SBA guarantees decreased to $34.9 million in the fourth quarter from $36.1 million last quarter. The relationship we previously discussed along with the other loan that Dennis mentioned combined are 78% of our non-performing loans. We also now have no Oreo as of December 31. Pre-tax pre-provision operating ROA was 78 basis points in Q4, down from 105 basis points in Q3. Excluding the investment in mortgage, this ratio would have been approximately 110 basis points versus 115 last quarter. Similar to the efficiency ratio discussion above, we expect meaningful contributions from our newest business lines, including mortgage, panacea, and life premium finance in 2023 that will materially increase profitability and drive us to our 1% ROA goal. With that, operator, we can now open the line for Q&A.
spk01: At this time, I would like to remind everyone, in order to ask a question, simply press star followed by the number one on your telephone keypad.
spk02: We'll pause for just a moment to compile the Q&A roster. Our first question will come from the line of Casey Whitman with Piper Sandler. Please go ahead. Hey, good morning.
spk04: Good morning, Casey.
spk03: All right, maybe I thought we'd start just to touch on expenses. So it sounds like you've got the mortgage work done, and as you go into 2023, do you have your, I guess, starting point for quarterly expenses somewhere around like $27 million, $28 million, or am I off there? And then I think you just answered it. this, but just safe to say there are no other chunky sort of investments that might come in over the next few quarters, at least that you're expecting at this point, so that that's sort of the runway to go off of?
spk04: That's right.
spk03: Okay. Okay, and then just looking at premise mortgage, I mean, you talk about the $1 billion in production. Is that enough to break even there? Are we assuming some pickup in the gain-on-sale margins in that space, or sort of Is it a little too optimistic to think about that in the first quarter? Are you talking more just sort of throughout the year or maybe just walk us through sort of the evolution to get that towards profitability?
spk07: I'll start. Dennis can add to it or correct me where I go wrong. We're expecting a billion dollars of production for the year. That is enough to more than break even. We expect mortgage to contribute to profitability for the full year. The comment I was making earlier was, as you know, mortgage is very seasonal. The housing season really starts in the spring. As production ramps in the first quarter, we expect them to be break-even for the first quarter and then materially more profitable in the second and third quarters. Fourth quarter is usually, again, break-even, sometimes slight loss depending on seasonality. But taken overall, we're expecting mortgage to contribute,
spk04: four to five million after tax in 23.
spk03: Okay, and that's assuming the same kind of expense level that you had, I guess, in the fourth quarter?
spk07: It'll be lower than... The fourth quarter had, you know, a considerable amount of sort of draws that didn't have any associated productions Some of that's because it's the fourth quarter. Some of that is because people bringing over pipelines. Almost all of those, 90% of them or more, expired on 12-31. So really, as we go into the first quarter, for the most part, almost all of our producers are on commission only. I would also say, and one other thing, so just said a little bit differently. So the $27, $28 million, probably closer to $27 million for the first quarter with mortgage is fair. But remember, as their production increases, that expense line is going to increase, but it's because of commission expense. Right, so they're generating revenue on the other side. You're saying that the expense side may stay the same, but we expect an extra $1.5 million or so of revenue. I'm saying that expense excluding mortgage should... Oh, I got you. I mean, the expense with mortgage will go up through the year and probably come back down in the fourth quarter as production declines. But I don't want you to be surprised if in the second and third quarter expenses are a little bit higher because of the peak of the mortgage market.
spk04: Does that make sense?
spk03: That does. There's going to be a piece of the expenses that will be tied to production. Okay. There was a lot of noise around a third-party service portfolio this quarter. I guess, can you just dumb down what's going on there? Should we be assuming the 350 margin is sort of the better starting point or the 370 or whatever that you reported, the 367 you reported?
spk07: So we're going to, as we go forward, continue to kind of strip out some of the noise from that portfolio. So we have a portfolio of loans that we originated with a third party. They come on our balance sheet directly, but they're managed and serviced by a third party. And when it was smaller, we were just booking the net revenue from the portfolio. But now that it's bigger... the accounting requires us to run more of the adjustments from the portfolio through various line items. So booking yield at a gross level instead of net, booking the charge-offs that are on the portfolio but that are covered by the third party And then there are offsets for all that in non-interest income and non-interest expense. The net profitability that we're making on these loans has not changed. The only thing that's changed is we have more of the effects from the portfolio running through various lineups. So it's really where it shows up in our income statement has changed, but the impact on net income has not. So from a core basis... I would encourage you to focus on the 351, which is really apples to apples versus last quarter, where we think about our margin going forward. The accounting for this portfolio is going to create some margin effects on a reported basis, but we'll do our best to adjust for all that and keep it apples to apples going forward.
spk04: Okay. Okay.
spk03: I guess I would just ask one last question. Obviously, a lot of noise this quarter. You guys got a lot of stuff done last year. If we think bigger picture about the profitability outlook and how quickly we can build the ROA, I guess what kind of outlook can you guys give us over the next few quarters into next year to the extent you know, the environment stays somewhat like it is today.
spk07: I would say, well, Matt got a slide that sort of, that shows where the improvement's coming from. Some's from, obviously, panacea and the life bringing finance, you know, growth in the core bank. a little more expense, marketing, the digital bank, mortgage, and I think gets us to right at $1.50 of earnings per share.
spk04: I mean, I would tell you, I think for $23,000.
spk07: Yeah, the slide he's referring to builds up pre-tax pre-provision, starting with our run rate in the fourth quarter, shows the impact of mortgage improvement that we just talked about, the improvement in fantasy and life finance, and builds us up to a higher run rate or a higher full-year pre-tax pre-provision for 2023. And if you assume a reasonable level of provision for more moderate loan growth in 23 and then tax effect that, you could get to $1.50 a share for the year. That's about, that will be, we will be very delighted with that. But really that just sort of shakes out to just over a 1% ROA. And clearly, that's not our goal. I mean, we need, I really believe that Panacea, life premium finance and mortgage will be meaningful contributors to the ROA. Honestly, in 23, but more so in the out years. I think the core community bank, I mean, it's hard really to grow that beyond or to improve the profitability there, say, beyond, say, a 110 or 115. And so all these other items, all these other businesses are important. I think long-term we're still sort of believing that we should be, you know, in the 125 to 135 range.
spk04: Our goal in 23 is just to be 1% on the bottom line. Okay. Appreciate it.
spk03: Thanks for all the color. I'll let someone else jump on.
spk01: Again, to ask a question, simply press star one on your telephone keypad. Your next question will come from the line of Christopher Marinak with Jamie Montgomery Scott. Please go ahead.
spk06: Hey, Dennis. Hey, Matt. Thank you for hosting the call today. I'm just going to follow up on the last point about the pre-tax pre-provision kind of run rate that you put out. That slide was very helpful. Do you think that that's possible to be at a run rate by the end of 23? I just want to get a little more background on timing and kind of what's realistic. I think we follow, you know, what you're trying to do.
spk04: I just want to know kind of what the timing we should expect. I guess I haven't tried to think about the ROA on us.
spk07: quarterly basis when we put that together, because that includes mortgage contribution, which is only going to be break-even in the first quarter, but more meaningful contribution in second and third quarter. And then you've got the ramp for panacea and life premium finance over time. So I have a perfect answer to your question there, Chris. I think I've been more on the full year
spk04: I think probably if I had to – I don't think we'd be – I mean, fourth quarter obviously is not the best quarter for mortgage.
spk07: I mean, I think it'll be accretive to the ROA in the fourth quarter, but I don't think it will be meaningfully accretive to the ROA. I think if you look at the first half of the year, Chris, versus the second, I think we have a few things teed up.
spk04: I mean, panacea, like we said in the – reports looking at some loan sales, and we've got a little bit of momentum there.
spk07: I'd say the first half probably is closer to 90, and the second half is probably closer to 110. Even with mortgage dipping a little in the fourth quarter, I still think second half of the year, probably 110, and maybe the fourth quarter, like a 105, probably, if I had to guess.
spk06: So again, slide seven is more than aspirational. It's really kind of what you're trying to do for this year.
spk04: It's just a question of when it all falls in place. I wouldn't, yeah, I would call it 10% aspirational.
spk07: I mean, I think some of the stuff that we're looking at, I mean, I think there is science behind all of this. You know what I mean? The core bank improvements of 2.6, don't want to go into that i know exactly where the 2.6 is and on the mortgage pre-tax of 4.9 you know i know how to get to that 4.9 with 700 million of production and i know how to get there with a billion of production so um you know in panacea i know how much in loan sales we've got to have and how much we've got a portfolio and so i don't think it's aspirational i think it's And I know you didn't mean that word sort of in a negative sense, but I kind of go back to my comments at the end of my prepared comments is, I mean, this is what we've been working towards.
spk04: This is really what we've been working towards. And, yeah, I'll just leave it at that.
spk07: And I would just say, I mean, y'all don't, get to see this, obviously, but when we work on our multi-year projections, when we were working on our projections last year, we had 22, you know, someone basically coming in, you know, there were more moving parts that we experienced this year than we anticipated, but we ended up netting out around what we thought we would be this year with the various investments we were planning. And we anticipated 23 seeing meaningful improvement in EPS and profitability as a result. With that slide 7 and that buildup, it's not inconsistent with what the plan was a year or so ago. And as Dennis said, we're increasingly confident that we can get to those numbers just based on kind of what we're seeing with the improvement in these business lines.
spk06: That's helpful for both of you. I appreciate that clarity a lot. My only other question just goes back to deposits. I know you've made a lot of progress on deposits as you decided within Panacea specifically, but just as a general kind of question about opening new deposit accounts and that, what do you see organically ahead of you this year? I know it's a challenging environment with rates, but you are organically focused and so just want to get a sense of what you think is possible on kind of new deposits coming across the company.
spk04: in the core bank, out of the branches, in our markets, I think staying flat is going to be pretty magnanimous.
spk07: I mean, in the whole industry, you know, I find a CEO, bank CEO that believes they're going to be able to grow their core deposits and Now, you can, but you're obviously paying up for every new deposit coming into the bank. Our advantage, and we have got to exacerbate this advantage, our advantage is the digital bank that honestly is as good in Phoenix, Arizona, and I always say Minnetonka, than as it is in our core footprint. And so being able to use the digital bank to raise those deposits in places that we aren't and that won't affect our really valuable core deposit franchise. I mean, we have an advantage that not every other bank in the country has. Very few banks have this advantage. And so we've got to exacerbate that. You know, really help us. I mean, because honestly, if it wasn't for that and we were trying to grow loans like we are or had all the opportunity, we would basically be faced with sacrificing the real value in our core deposit franchise and making it more rate sensitive. We don't have to do that because of the opportunity we have with the digital bank. We're just hitting our stride on the digital bank. Really, we are. We've got some places that we're about to market that at reasonable prices and that's going to work. I mean, in our delta or what we need to be impactful here is really not a big number when you consider it's got a potential national reach. If I was trying to raise this number in Hampton Roads or Richmond, it would be daunting. We would be having a different conversation here. But when I know that I have the whole country I feel better about it. The other thing I would add, we've talked about this or highlighted it in our investor presentations previously. With the digital platform, we've been growing it in the fourth quarter with one hand tied behind our back. It's only got consumer accounts so far. In the first quarter, business accounts will go live, and at the same time, we have an upgrade of the mobile experience for both consumer and business that will take place that's a meaningful improvement. And for business accounts, a meaningfully improved user experience and functionality for small business customers. So we're very excited about that. Our CIO will tell you we are counting in every day on updates on when we're going to have all that live because we think that's – I mean, consumer is important because you can market broadly and move the needle with a lot of accounts, but we really need this business piece live because we can then move the needle with some larger balances and fewer accounts, and we haven't had that to leverage yet.
spk06: Good. I follow you there, and I thank you for that. It sounds like the digital bank is going to influence both total deposits as well as core deposits, just back to kind of the way that you explained it on the slide 20. So that's good.
spk04: Thanks again for taking the question this morning. Thanks, Chris.
spk02: I'd now like to hand the conference back over to management for any closing remarks.
spk07: We have no closing remarks, but we are available if you have questions or comments or want to call us directly. Matt and I are both around. Thank you and have a good weekend.
spk01: That will conclude today's meeting. Thank you all for joining. You may now disconnect.
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