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spk01: Hello, my name is Krista and I'll be your conference operator today. At this time, I would like to welcome everyone to the Primus Financial Corporation third quarter earnings 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, please press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, again, press star one. Thank you. I will now turn the conference over to Matt Switzer, Chief Financial Officer. You may begin.
spk03: 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 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.
spk02: Thank you, Matt, and thank you to all of you that have joined our third quarter conference call. I'm excited about our quarter and about the broad-faced improvement and momentum we see in some key areas. I'll discuss a few of those and then give it back to Matt for some more details. I'm joined today here in the call, by the way, by Matt Switzer, who is our CFO, and Rick Falk, who has recently been named president of Premise Bank. First, and most importantly, is our net interest margin. Our margin improved significantly this quarter thanks to a couple items. First, we began sweeping excess funds off of the balance sheet on June 30th. So the entire impact of that was felt in the third quarter, but none of it was felt in the second quarter. If I go back and normalize that for the second quarter, our margin would have still increased in the third quarter by a couple basis points, which is significant for the margin to be directionally headed that way. Further, and as our release states, we had a strong September with a margin of 305, so we are increasingly confident that we can hold at these levels and continue moving higher. Obviously, there's a lot of moving parts at play in improving the margin, but the foundational block to this success are the wins we're having in the community bank. On the new account side, we note that we opened 2,404 new accounts for new customers totaling almost $73 million with a weighted average cost of only $180 million. On an annualized basis and, of course, neutralizing any movements in existing deposit accounts, this would have represented a 9% annualized growth rate in total deposits and would be almost dead on top of our existing cost of funds. So to have this kind of deposit activity without having to post really high interest rates is pretty notable. And further, even with the scale of our national deposit platform, we did more than two-thirds of this new account activity in the community banks. On the existing customer side, the core bank managed an impressive 1.91% cost of deposits, which was up only slightly from the second quarter of 23. The retention of deposits has been a key focus and really more of a challenge because we announced a consolidation of eight branches or 25% of our footprint about a quarter ago. But our calling efforts and our customer convenience factors like Vibe have made such a difference, and the runoff from those eight branches has been minimal. In fact, two of the eight branches that we're consolidating actually have increased deposit levels since the announcement. Rick and his team have done an outstanding job with this result in getting us in a place where we believe it's sustainable. Our pipelines for the fourth quarter and closed activity so far look very promising against our third quarter result, and the energy level and excitement at the bank with these wins is well deserved. On the digital side, we spent no money on paid marketing in the third quarter. Even so, we opened about 1,400 new accounts and grew total accounts on the platform by about 15% annualized. Impressively, the average cost of these new deposits was still below 5%, and a significant percentage of the activity was from existing customer referrals. In the third quarter, customers opened about five new accounts for every one account they closed. Our average balance per customer is $73,000, and our average depositor is about 49 years old. On the lending side, we're demonstrating in an increasing fashion the value of our niches. Between the community bank, Panacea, and Life Premium, we had new production over $100 million at an average yield of about $795 million. Matt notes in the press release that we booked incremental spreads of 518, which way more than neutralizes the dilutive pressure of today's interest rate environment. Panacea and Life Premium are obviously high-quality lending niches with established brands and sources of business. Both divisions spent the quarter sourcing relationships and partners, whether it be other banks or securitization platforms, and collectively placed what I believe is about 25% of their production capacity. As we go into the fourth quarter, we're going to move this number, this percentage higher, and through next year, it's my hope that we'll have sources in place to run these engines at full capacity. Our mortgage division shines this quarter and continues to move forward, albeit in a tough environment to build this kind of division. During the quarter, they funded about $169 million of volume and had pre-tax earnings of almost $700,000. Importantly, our division got this excellent result by focusing on top-shelf lenders and serious efforts on cost controls. Our team understands the environment we're in, and when yields turn and volumes jump again, and they will do that, our division's profitability will impress and our disciplines will pay off. As I close and turn it back to Matt, I want to make a quick comment on the balance sheet itself. Today we're sitting here with very strong liquidity and really a great story on deposit. We have strong capital levels. We have very low non-performing assets. We really have no concentrations in office CRE or really anything problematic. We have substantial loan and deposit engines that are incrementally very profitable. and that we can take on or off the balance sheet. Our earnings are moving up as well as we inch higher on margins and are able to control and reduce operating expenses. And I really like where we are in this period of uncertainty. Matt, with that, I'll turn it back to you. Thank you, Dennis.
spk03: I'll provide a brief overview of our results before we turn to Q&A. But as a reminder, a full description of our third quarter results can be found in our earnings release and third quarter investor presentation both of which can be found on our website. Operating earnings for the third quarter were $7.7 million or $0.32 per diluted share versus $1 million or $0.04 per diluted share in the second quarter and up over 50% from the year-ago period. Total assets were $3.8 billion at September 30 flat versus June 30. Excluding PPP loans and loans held for sale, loan balances declined 1% linked quarter. We sold 15 million of Panacea loans and moved another 9 million to held for sale at September 30. We also sold 10 million of Participations in Life premium finance loans in the quarter. If not for those transactions, loans held for investment would have grown slightly in the third quarter. Deposits were down slightly in Q3 as we managed excess liquidity by sweeping off excess deposits. We had approximately 229 million of deposits in the sweep program at the end of the quarter. Impressively, average non-interest-bearing deposits were flat in the third quarter, while ending non-interest-bearing balances increased 2% unannualized from June 30 to September 30. Our core bank is a source of strength in this environment, and the unique products and services we've developed continue to resonate with customers, particularly small businesses. Net interest income increased $1 million to $27.1 million in the third quarter as funding cost pressures were offset with higher earning asset yields. Net interest margin increased to 3.02% from 3% last quarter when adjusting for the excess liquidity we carried in Q2. We believe we have a unique advantage due to our two-pronged funding strategy. As a result, in the third quarter, we were able to hold the increase in deposit costs in the core bank to 11 basis points, well below the increase in wholesale options. Excluding accounting adjustments, Non-interest income was $7.9 million in the third quarter versus $7.3 million in the second quarter. Mortgage revenue declined slightly in Q3, but was still strong given the environment. Offsetting that decline was an increase in gain-on-sale income. We sold $15 million of Panacea loans for a $400,000 gain and moved another $9 million to help for sale as they will close shortly. Additional potential sales in the pipeline lead us to have confidence that gain-on-sale income will be higher in the fourth quarter. Core non-interest expense excluding accounting adjustments, non-recurring items, and mortgage was $20.5 million for the third quarter versus $23.5 in the previous quarter. The decline is reflective of the administrative cost saves we announced last quarter and that were effective midway through the third quarter. We also will consolidate eight branches at the end of October. We continue to be disciplined on the expense side and look for additional saves through attrition while navigating this challenging environment. The provision for credit losses was $1.6 million in the third quarter versus $4.3 million last quarter. $2.1 million of the provision was due to accounting for a third-party managed portfolio and which is offset by non-interest income gains. Core net charge-offs were $2.3 million, the majority of which was the charge-off of specific reserves tied to the partial resolution of the assisted living problem relationship we've discussed in previous quarters. The final piece of that relationship was resolved in October, bringing pro forma non-performing assets to 6.5 million, or 17 basis points of assets, at 930. The allowance for credit losses to gross loans excluding PPP balances was 1.14% at September 30 versus 121 basis points last quarter, with the decline largely due to the charge-off of specific reserves and a small reserve release from a lower loan balance and reduced model losses under CECL. Lastly, and in summary, operating ROAA improved to 81 basis points in the third quarter, the highest level since the fourth quarter of 21. We have further expense savings being realized in the fourth quarter and are confident we can keep grinding net interest income higher with a healthy margin. Combined with additional gain on sale revenue, we believe we can still improve profitability even in this difficult environment and are optimistic about our prospects in the near term. With that, Operator, we can now open the line for Q&A.
spk01: As a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from the line of Casey Whitman from Piper Sandler. Please go ahead.
spk00: Hey, good morning. Congrats on the quarter.
spk04: Good morning, Casey.
spk00: So first, can you walk us through how we should think about the size of the balance sheet from here? Do you see that holding pretty flat, allowing profitability improvement, capital accrete? Could we see some modest growth? What is your outlook there?
spk03: I think we'll see modest growth over the next four or five quarters, but not nearly the pace it's been the last year or two. So probably mid to high single digits over that time frame.
spk02: Really, and really not in a way that moves TCE lower. I mean, we want to inch higher on TCE. I mean, I think we're more than comfortable with capital levels where they are right now, especially with non-performers this low.
spk03: Yeah, so with earnings moving where they are, being able to continue growing the balance sheet but at a slower pace is what we're looking for. Okay.
spk00: So then with some balance sheet growth, the margins stable to maybe even up, do we have pretty high confidence that we've reached the inflection point on NAI and we'll continue to see growth? Maybe not to the same extent this quarter, but the trend will continue to go up?
spk04: I think so.
spk00: Okay. Okay. And Dennis, do you want to maybe talk about your success this quarter with the $50 million in deposits at the community bank? Can we expect more of this kind of inflow? Just thought that was a big one.
spk02: Yeah. You know, when we announced, well, a month or so before, 45 days or so before we announced the branch closures, Rick and his team sort of mobilized to go out and talk to every customer that was going to be impacted. And Rick's sitting in here. Rick, that's Not only did that sort of neutralize any impact that you might have seen from, you know, closing some branches on the outflows. I mean, really, they uncovered quite a few opportunities, and it really turned into a little bit more of a sales initiative. And really, there were a couple sizable accounts, I think, that we were working on at the end of September that we didn't close before quarter end. And I think that's really why we're all sitting in here with kind of the confidence about sort of duplicating the third quarter, you know, as we go into the fourth quarter. So, yeah, and, you know, the restructure, I mean, it's important, the restructure that we had in the third quarter, or excuse me, in the second quarter, that essentially let us move Rick into this position and let Rick start, you know, directing the team and getting the wins and sort of building the excitement and energy level there, pretty positive for our company.
spk03: And I'll just add, I mean, and we're not alone probably with this strategy that we feel like we've got some advantages with some of our technology and products and services, but we have dedicated the core bank 100% to pursuing small business customers. We can raise retail funds through the digital platform out of market at a reasonable cost so we don't have to put a lot of energy into CD specials or other retail deposit raising campaigns in market because we can do that out of market. So our focus in the core bank and in our Virginia, Maryland markets is small business, and they're generally higher balances, lower costs, and a lot of them are coming from the big banks, particularly Truist, but also we're hearing a lot from PNC that are getting horrible service as those banks cut back on costs and are still way underpaying on... interest rate on those balances. So, we think there's a lot of running room to go after those banks and move some business.
spk00: Okay. Thank you. And then, can you give us an update as to where you think quarterly expenses will land with the branch consolidations in there? Is it sort of the same range you gave last quarter or any change to that?
spk03: I mean, it won't fully be in until next quarter. Still feel pretty confident about that range. Maybe it's much higher. I think we said 18 to 18 and a half, maybe 18 and a half to 19 at the end of the day, but still comfortably in that neighborhood next quarter.
spk00: And that just excludes the mortgage, right?
spk04: Yes, it does. Yep. Branch is closed today.
spk00: Is that right? The branch is closing at the end of the month or today?
spk04: Okay.
spk00: Great. Thank you.
spk04: All right. Thank you. Thanks, Casey.
spk01: Your next question comes from the line of Freddie Strickland from Janie Montgomery Scott. Please go ahead.
spk03: Hey. Good morning, gentlemen.
spk02: Good morning.
spk03: Just wanted to go back to that expense point we were just talking about, the $18.5 million to $19 million expense run rate. How much could we see that grow over the course of 2024? Just trying to get a good sense for beyond just next quarter or the next couple of quarters, whether that's low, mid, single digits or what you're thinking in terms of expenses for next year. That's a great question. In the environment, we are 100% focused on controlling expenses. So our goal is to bottom out at that level and then keep increases to a minimum. So I'd like to thank low single digits at the end of the day. Certainly not higher than that. Got it. And then I think you mentioned this in your opening comments, but what was the spot rate on the deposits at the end of the quarter? As we said here in late October, has that gone up by any meaningful amount?
spk02: I think the spot rate on deposits obviously is still inching higher. Not in a dramatic fashion, but what's But we're more than outpacing that with asset repricing and with incremental new business. I mean, the incremental new business was solidly in the fives. So, I mean, I think we're generating enough. Honestly, I think we're generating enough new incremental spread with just new business that really asset repricing is really what's moving the margin higher.
spk03: I think we saw... On cost of deposits in July and August, overall cost of deposits went up about five basis points a month, but it was lower than that in September. And with some of the wins we got late in the month, we're hoping that's less than that to flat in October and November. Understood. That's helpful. And then the $75 million in brokerage CDs that you have, rolling off later this year. Do you think you'll put some level of that back on just to supplement the funding base, or do you feel like deposit growth is strong enough at this point that you can potentially let that roll off? We're going to let that roll off. Okay. Last question for me. What's your base case for net charge-offs over the next couple quarters? I mean, obviously, we don't know exactly how everything's going to play out with credit, but Should we expect a certain level each quarter and just compare that with where the strong reserve level is today? I think with the last piece of that assisted living relationship, there's still a little bit of specific reserve left that will be charged off in the fourth quarter. Absent that, I mean, our charge has been running, wow, there's 600 a quarter.
spk04: about $600,000 a quarter, and we don't see any reason why that would be in the near term. Understood. Thanks for taking my question.
spk01: Again, if you would like to ask a question, please press star 1 on your telephone keypad. We have no further questions in the queue at this time. I'll turn the call back over to Dennis Zimber for closing remarks.
spk02: All right, thank you again for joining our call. I hope you have a good and safe weekend. If you have any questions, we're here in the office and I'm happy to take the call. All right, thank you. Have a good day.
spk01: And this concludes today's conference call. Thank you for your participation and you may now disconnect.
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