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spk05: Simply press star, then the number one on your telephone keypad. If you'd 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.
spk03: Good morning, and thank you for joining the 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 Corpus site, firmnessbank.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. With that, I will now turn the call over to our President and Chief Executive Officer, Dennis Semberg.
spk04: Thank you, Matt, and thank you to all of you that have joined our fourth quarter conference call. Before I get into our results for the quarter and the year, I wanted to let the investing public know that our company CIO, Cody Shefflett, passed away suddenly on the afternoon of January 16th. Cody was one of the most visionary CIOs I've had the good fortune of being around. Cody could unquestionably outdream 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 aspired to build. 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 $1.4 million lower than where we were in the third quarter. And while I don't want to steal all of Matt's good news, which I've been known to do, in the quarter our margin was up, our expenses were down, NPAs down to very low levels, liquidity and capital strong and getting stronger. 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 10 basis points, resulting from hard management of all the important factors. We controlled deposit costs. We increased loan yields. Our incremental activity was very accretive. There's more information in Matt's details that are shortly coming, but for the quarter, we opened about $75 million in new deposit accounts, costing only 2.69%. And that funded new loan production of $86 million with yields of $838. With this kind of activity, the momentum on margins and net interest income is clearly on our side going into 24, which is critical to continued quarterly improvement in our ratios. Cost controls are equally important, especially in a year when revenue is so pressured. We delivered an impressive second half of 23 with the changes that we made earlier in the year. We've restructured almost every division, consolidated eight branches, and leveraged technology to absorb even more of the jobs and tasks that were previously pushing comp levels. This restructuring mindset continued through the fourth 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're 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 is starting to take shape. Our core bank as well outperformed in 23, 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 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 million 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. A few other notable and I think important factors for our 2023. Our two national divisions, Panacea and Life Premium Finance, had outstanding years. Panacea was just named the exclusive banking partner of the American Dental Association. shortly thereafter closed its Series B round, rightly establishing an impressive market value for this concept. Our ownership in Panacea is worth about $20 million, 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 us substantial flexibility to either ramp up share repurchases or increase our growth rate by a touch across the bank. 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 million 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. Turning this over to Matt, I'm pretty excited about what 24 could bring. Our core banks have 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.
spk03: Thank you, Dennis. I'll provide a brief overview of our results so that we can get to Q&A. But as a reminder, a full description of the fourth quarter results can be found in our earnings release and investor presentation, both of which are on our website and on our 8K 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 fourth quarter were $8.6 million or $0.35 per diluted share versus $7.8 million or $0.32 in the linked quarter and up substantially from $0.03 in the year-ago period. Total assets were $3.9 billion, essentially up a little bit versus September 30th. Excluding PPP loans, which are de minimis at this point, and loans held for sale, loan balances increased 1.5% length quarter. And that's after selling roughly 31 million or selling or participating out of roughly 31 million of loans in the fourth quarter. Deposits were essentially flat, as we discussed previously. We managed excess liquidity by sweeping off excess deposits, of which we had approximately 113 million 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 third quarter in a row, which we think is exciting in the current environment. Net interest income, excluding accounting noise from the third-party managed portfolio, increased almost $1 million to $27.7 million in the fourth 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% in the fourth quarter. We continue to believe we have a unique advantage due to our two-pronged deposit funding strategy. As a result, in the fourth quarter, core bank cost of deposits increased only three basis points versus the third quarter. Excluding accounting adjustments, non-interest income was $5.9 million in the fourth quarter versus $7.9 million in the third quarter, largely due to reduced mortgage activity, which we think is seasonal and will improve in the first quarter. Core non-interest expense excluding accounting adjustments, non-recurring items, and mortgage was $18.7 million for the fourth quarter versus $28.5 million in the third quarter. As we discussed in the press release, the fourth quarter includes expense reimbursement from Pansea 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 eight branches in October. The provision for credit losses was $3.1 million in the fourth quarter versus $1.6 million in the third quarter. $3 million of that was due to accounting for a third-party managed portfolio, which is offset by non-interest income gains. Core net charge-offs were $2 million, the majority of which was charge-off related to specific reserves from credits impaired in previous quarters. Non-performing assets were down substantially to $7.7 million or 20 basis points of assets at the end of the year. The allowance for credit losses to gross loans was 1.06% at December 31 versus 113 basis points last quarter. Lastly, as Dennis indicated, operating ROA improved 89 basis points in the fourth quarter, the highest level since the second quarter of 2021. We have right-sized 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. With that, we can now open the line to Q&A.
spk05: At this time, I'd like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. Our first question will come from the line of Casey Whitman with Piper Sandler. Please go ahead. Hey, good morning.
spk03: Good morning, Casey.
spk00: So just looking at that core operating expense burden table you have in the release, Just coming off, I think it's $18.7 million. Do you still have room to bring that down a bit in the first quarter just with full cost saves coming off, or is this a pretty good run rate?
spk03: 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 18.7 in the fourth quarter does include some excess expense reimbursement from panacea holdings that won't be there in the first quarter even though they will still be uh reimbursing us for expenses in the division um and it also had some other uh accrual noise uh that would offset some of that so I would say that $19 to $19.5 million is still the best run rate in the near term.
spk00: Okay. That $2.8 million you referenced in the expenses for the effect of consolidating Panacea, that's just the reimbursement cost?
spk03: Marginally. While they're consolidated, all of their expenses are added to our expenses, but the vast majority of their expenses outside of a a couple of small things were related to our expense reimbursement.
spk00: Okay. I mean, looking at the panacea relationship, just in the near term, I guess, how does the investment affect the P&L for you guys going forward or does it not here in the near term? Or just sort of dumb down how it's going to work.
spk04: I mean, the incremental profitability from panacea, what's sort of been hitting the bottom line, you know, spread income, you know, 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, you know, I would probably expect somewhere $1.7 million, $1.8 million to be hitting the bottom line pretty consistently and increasing, obviously, as assets increase. Whereas in the past, you know, it might fluctuate. If they had a big loan growth quarter, we might post, you know, a zero. 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 23. Going forward, our operating results from Panacea will be higher and they will be more consistent.
spk00: Thank you.
spk03: 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 apple to the apples comparison to the last couple quarters. So if you, the consolidation, I mean, right now they only have expenses. um and most of it is expense reimbursement to us so if you take all of the line items other than non-interest expense um there's very essentially no impact from the consolidation in those line items there's it's still the panacea division line items which we've had in our run rate for the last three years 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'll get you back to kind of how we have been prior to the consolidation.
spk00: Got it. And the $19 million you referenced would include the effect of Panacea, correct? And then you'd add mortgage on top of it?
spk03: It would include the effect of the future level of reimbursement from Panacea, yeah, as if they weren't consolidated.
spk00: Okay. Appreciate that. And then just given where capital is today and the
spk03: potential to keep growing I guess just how are you thinking about overall balance sheet going forward um could you potentially start the portfolio more or sort of how should we think about that yeah I know we've talked the last couple quarters about mid-single digits growth I think for 24 we're targeting more towards uh around 10 overall balance sheet growth okay
spk00: Thank you. Last thing I'll ask, just appreciate there's some seasonality within mortgage this quarter, but what's a reasonable outlook for those revenues next year to the extent you can share?
spk04: You know, we made $700,000 or $800,000 or so in the second and third quarter. I think we'd be probably 25% 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 fourth quarter. So I think a little bit of that has to do with some rate fluctuations and the fourth quarter seasonality. But I mean, we made, I think altogether, we made like $300,000 in mortgage during the year. On $600 million.
spk03: On $600 million.
spk04: And I, you know, the incremental, I think we probably could be somewhere um 900 million maybe even a billion and it's going to be incrementally much more profitable just given um the fixed expense burden there is is not expected to grow um if we made 300 000 this year i and we were able to increase volume to 900 million which it looks like we're going to be able to do
spk03: Probably $3 million. Yeah. That's what I would say. Pre-tax.
spk00: Sounds good. Thank you.
spk03: Yeah. Thank you.
spk05: Your next question comes from the line of Russell Gunther with Stevens. Please go ahead.
spk02: Hey, good morning, guys. Hey, Russell. I just wanted to start on the loan growth commentary, about 10% for 2024. That's just in a minute touch on the mix, maybe particularly address the life premium finance and panacea as well?
spk04: I mean, I think life premium and panacea both could, you know, 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's got great production capabilities, but he's also working on flow agreements and loan sale opportunities. So I don't know that as much of that will hit the balance sheet, probably 100 to 150 on our balance sheet for Tyler, for Panacea. I think life premium finance probably in the 150 range, probably. Life premiums getting yields that are just remarkable. The expense burden is just unimaginably low. And then I think the core bank probably could do the same as either of those divisions. I just think the, I don't know for sure that the market is there. So 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. Okay. That's very helpful. Yeah, 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.
spk02: That's a really helpful color, Dennis. And then maybe just switching gears to the margin. So again, you guys talked about the success you have with new deposits at a much lower rate than where the loan yields are coming on and the 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?
spk03: I don't know that we have a core Fed. There's a heated debate internally over the passive Fed funds, Russell. Matt's laughing because he won the bet last year. Yeah, 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 would 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 million of that essentially funded. So we think margin would continue to grind up probably by the end of the year to the mid 330s 335 range um a couple rate cuts depending on when they came in the year um you know arguably may cost us a couple basis points and i think that's going to be true for the whole industry yeah i don't think we get as an industry a whole lot of benefit from two rates because of the shape of the curve yeah um So, you know, maybe we're, you know, 325 to 330 if we get a couple rate cuts. But that's all, you know, it's hard to predict, but that's kind of what we're thinking.
spk04: I think overall we're, I wrote this in my comments and then I deleted it because it was just cumbersome 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 rate cuts is not going to bring any relief i mean a five percent fed fund is not going to bring relief uh on deposit costs i mean because deposit calls for the industry are still in the twos make mostly so i just don't think that deposit costs are going to start drifting lower dollar for dollar i don't think we're going to have a pretty high beta on the first couple rate cuts anyway so
spk02: 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?
spk03: Yes.
spk02: Yeah. Okay. Great. Thanks, Matt. And then just last one. Seems like you're getting increased capital flexibility here. Just love some comments on buyback expectations and hurdles to getting that done.
spk04: That Matt, Matt and I, I mean, you know, we, we, we come on these calls and obviously we've built some engines that, that can grow the balance sheet. Um, and so we're real, real cognizant of capital and capital levels and capital opportunities. And especially when the stock is trading at, or, you know, even for a lot of 23 below tangible, but 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 about to start coming in. So if we were to be able to deconsolidate and get the gain, and the stock has not moved off of tangible book we anticipate getting pretty active um with with that capital i i'm okay i think our i think our our story is starting to get a little bit of obvious legs to it so matt and i are thinking that it might end up being capital that um lets us grow a little more russell but if not uh we're prepared to own a lot more of our stock. Understood.
spk02: All right, Dennis, thanks for the thoughts. Thank you both for taking my questions. All right.
spk05: Again, for any questions, press star one and your next question will come from the line of Christopher Maranac with Jenny Montgomery Scott. Please go ahead.
spk01: hey thanks good morning um dennis and matt you may have kind of personally answered this in a previous previous callers but i wanted to understand is the pre-tax pre-provision that we talk about on operating basis this quarter can we further adjust that back for the um the operating expenses you know the 18-7 that you call it out you know is the pp and r kind of higher than it appears because of that operating expense change yeah it is a touch it is a touch higher um
spk04: given what Matt was saying. So you'd probably need to add, Matt was saying 19 to 19 and a half. And I would guide to the lower end of that range, Matt might guide to the higher end. So yeah, you probably could add three, 400,000 to that, Chris.
spk01: Okay, and that's on expenses. Would there be any adjustments on the revenue side to kind of get a true apples and apples?
spk03: no because all the third party is netting against each other so we don't have to be too concerned about that on the pre-tax pre-provision well the i can take that back in in pre-tax pre-provision uh there is a third party effect through non-interest income that if you wanted to take all the third party out would come out and there's a lot of that
spk01: Okay, so use that to kind of net that, which would therefore be a reduction to get to kind of a run rate.
spk03: Yeah.
spk01: Got it.
spk03: But if you're using the non-interest expense above the line, obviously that's got the panacea consolidated expenses in there, so you've got to adjust that out as well. Because if you use the table for our non-interest expense, that's adjusting out the consolidated expenses from panacea.
spk01: Yep, understood. Okay, thank you for walking me through that. 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?
spk04: On incremental, on deposit costs as a whole?
spk01: Correct. Yeah, I'm thinking going forward, should we be focused on that core bank number, or are you looking at all three and trying to turn dials on each of them?
spk04: All three, all three for sure. I mean, the fact that our, you know, 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 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. 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 billion balance sheet. It's not anything that's really accelerated by remarkable rates. It's really leveraging the technology and leveraging referrals. And so I think the growth there is a little muted and it really is letting the core banks advantage you shine through that's really why we why and how we get to such a remarkable level on incremental deposit costs 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 um i mean i think the i think the costs Probably 90% of the balances on the digital platform, I think, 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 cost. 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 and or or just non-interest bearing sort of on the business side got it and that makes sense great thank you for taking the questions and all the information today all right thanks chris
spk05: We have no further questions at this time. I'll turn the call back over to Dennis Simber for closing remarks.
spk04: Thank you again for joining our call. Matt and I are available all day if you have any more questions or comments. With that, I hope you have a great weekend. Talk to you soon.
spk05: That will conclude today's meeting. We thank you all for joining and you may now disconnect.
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