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spk01: 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. I would now like to turn the call over to Matt Switzer, Chief Financial Officer. Please go ahead.
spk06: Good morning. And thank you for joining us for Primus Financial Corp's 2024 first 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, premisebank.com. We undertake no obligation to update or revise forward-looking statements to reflect change assumptions, 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. How a non-GAAP measure relates to the most comparable GAAP measure will be discussed when the non-GAAP measure is used, if not readily apparent. I will now turn the call over to our president and chief executive officer, Dennis Ember.
spk05: Thank you, Matt. I appreciate that. And I appreciate everyone that's joined our call today. I want to start by just saying that we've plowed a lot of changes through our company over the last year. And I think it's very satisfying to see how all those changes have added up to such material improvement. When I add back the cost of the consulting services that were a unique expense this quarter, I'm showing that we improved pre-tax, pre-provision by about $3.2 million compared to a year ago. That's substantial improvement given how serious the industry's headwinds have been. I want to give a little more color on where this improvement's come from. First, the core bank's results are outstanding. Last year, the bank consolidated 25% of its branch infrastructure and still retained about 95% of those deposits. Our core margin, which excludes the impacts of the third-party portfolio, came in at 3.03%, which is down just a touch from the fourth quarter, but still above the 3% level. Driving these results is our core bank's deposit franchise, which posted a cost of interest bearing deposits of only 2.56% when you separate out the impact of the national deposit franchise. This cost of interest bearing deposits is between 50 and 150 basis points lower than most of our regional peers and it speaks volumes about the quality of our customer base and our franchise. Our sales pipelines are heavily focused on the deposit side, where we're leveraging our advantages with Vibe and other technologies to win meaningful relationships. Secondly, Panacea earned about $1.6 million pre-tax in the quarter, which compares favorably to only $22,000 in the same quarter a year ago. Their growth in loans and deposits over the past year has been remarkable, but especially deposits where they now fund about 30% of their entire balance sheet. Their pipeline on deposit growth is multiples stronger than their pipeline on loans, and it's a direct result of the technology build-out that was made possible by their capital raise. We still have approximately $16 million after-tax of market value intangible book that we have not recognized but expect to be able to as soon as we deconsolidate Panacea Financial Holdings and recognize that improvement in book value. Our mortgage division last year recruited and built technology and secondary capabilities and through all of that they tweaked or continue to tweak their operating expense burden. This allowed mortgage to earn about $850,000 pretax in the first quarter compared to a loss of $250,000 in the same quarter a year ago. That is an excellent result for the first quarter of the year and for this industry in particular right now with 30-year rates at or above 8%. I want to keep recruiting in the division with just hitting singles and doubles to build our capacity and be ready for lower rates and the revenue boom that we expect when rates begin to fall. Lastly, our premium finance division finished the quarter with pre-tax income of about $1.3 million, up from about $850,000 in the same period a year ago. Driving those results are remarkably low operating expense burdens, managing the sector's fastest and most digitally oriented process for the facilitators and customers. This business is 100% cash secured with current production yields that are easily 100 basis points ahead of CRE. I think it says a lot about our company that we emerged through this last year this much stronger. Without question, it's our multifaceted strategy is the reason for our success, where we are not fully dependent on just one region or just one concept to drive results. At the consolidated level, we are not looking to add any more strategies or complexities. We're instead just looking to tweak and improve the slate that we already have and enjoy the better operating results that come from that success. All right, with that, I will turn it back to you, Matt.
spk06: Thank you, Dennis. I will now provide an overview of our results before we turn to Q&A, but as a reminder, the financial information we will discuss is preliminary pending our previously disclosed SEC preclearance process. These results incorporate consistent accounting methodologies as previous quarters for comparison purposes. As in previous quarters, these results include various adjustments related to a third-party managed portfolio that net across different line items. In the first quarter, $1.31 million related to this portfolio is included in interest income with an offsetting amount included in non-interest expense. In addition, $6.28 million of the provision for credit losses related to this portfolio with an offsetting amount included in non-interest income. In the following discussion, references to core items will exclude these amounts. In addition, our results this quarter continue to include the consolidation of Panacea Financial Holdings, or PFH. PFH pre-tax loss included in consolidated pre-tax income was $2 million. This is comprised of approximately $78,000 of non-interest income and $2.1 million of non-interest expense that's included in our consolidated financial results. Results will be discussed excluding these amounts and relative to common share unless otherwise noted. With that, earnings available to common and earnings per diluted share for the first quarter were $6.3 million or $0.26 per diluted share respectively. Adjusting for PFH and certain one-time items, core earnings were $7.2 million or $0.29 per share and up substantially from $0.23 in the year-ago period. Total assets were $3.9 billion at March 31st, up slightly versus December 31st. Excluding PVP loans and loans held for sale, loan balances increased approximately 1% annualized after selling roughly 11 million of Panacea loans in the quarter. Deposits were $3.3 billion in Q1, up slightly from the fourth quarter, and net of approximately 70 million of deposits off balance sheet in the suite program at March 31st. Non-interest bearing deposits declined approximately 2% in the quarter to $463 million. Core net interest income, excluding accounting adjustments from the third-party managed portfolio, decreased $0.7 million to $27.0 million in Q1 due to one less calendar day and with increased loan yields only partially offsetting increased funding costs. Core net interest margin decreased six basis points to 3.03% in Q1. Core yield on loans held for income increased nine basis points to 6.10%, while core yield on earning assets increased five basis points to 5.84%. Cost of deposits increased 13 basis points to 2.82%, while cost of funds increased 12 basis points to 2.97%. Excluding accounting adjustments, non-interest income was $8.3 million in Q1 versus $6.1 million in Q4, largely due to increased mortgage activity. Non-interest income this quarter also included $336,000 of gain-on-sale revenue from the Panacea loan sale. Non-interest expense was $26.5 million, excluding PFH. Mortgage expenses included in that number were $5.1 million this quarter, up from $4.8 million last quarter on higher volume. Unfunded commitment reserve expense was $75,000 in the first quarter versus $299,000 last quarter. Core non-interest expense, excluding accounting adjustments, non-recurring items, and mortgage was $19.4 million in Q1 versus $18.7 million for the previous quarter, and in line with expectations. More importantly, core non-interest expense was lower by approximately 10% this quarter versus the year-ago period, demonstrating the substantial strides we've made right-sizing the expense base while executing on our growth strategies. The core provision for credit losses was $1.6 million in Q1 versus a much smaller core provision of $100,000 approximately in Q4. Core net charge-offs were $900,000 down from $1.9 million last quarter. The net reserve billed in Q1 versus Q4 was influenced by softer forward economic forecasts when modeling our allowance under CECL, particularly for projected unemployment. Lastly, operating return on average assets was 75 basis points in Q1. Mortgage was nicely profitable in the first quarter with a roughly $2 million pre-tax swing versus the fourth quarter, offsetting an increase in the core provision. Core pre-tax pre-provision earnings were $10.7 million in the first quarter, up 7% linked quarter and 44% versus the year-ago period. Core profitability remains solid even in this difficult operating environment, and we are optimistic we can continue improving core returns from here. 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, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Casey Whitman from Piper Center. Please go ahead.
spk00: Hey, good morning. Good morning, Casey. First of all, just ask, is there any update on the timing for when you might be able to deconsolidate Panacea?
spk06: I can't say definitively that it would be in the second quarter, Casey. We're hopeful it possible in the third quarter.
spk00: Okay, appreciate that. Maybe I'll go towards, I mean, can you just walk us through sort of the deposit growth this quarter, break out sort of how much you have in the digital deposits, you know, are you seeing some core deposit growth, how are the non-sparing-faring, just sort of walk us through the deposits this quarter.
spk06: Yes, the core deposits were relatively flat. Obviously, we sweep some off balance sheet, but the amount that we sweep off declined in the quarter. Average deposits were about 2.5 million, down call it 20 or 30 million in the core bank from last quarter, so not by a large margin. pick up at least on balance sheet within the digital platform. If you look at the cost, the digital deposits have been relatively consistent. I think this quarter our average cost of interest bearing on digital was 504 versus 503 last quarter. The core bank deposits did tick up and we've seen similar activity across our peers. but cost of total deposits in the core bank was up about 15 basis points in the quarter.
spk00: Yep. Are you starting to see that kind of pace of deposit cost increases start to slow, at least in March or so far this month?
spk06: Yeah, to a certain extent. I mean, I think as we go into the second quarter, probably not as optimistic as we're going to have a lot of margin expansion in the quarter i'm thinking more flattish and hopefully more margin expansion towards the latter half of the year even in a no rate cut environment yeah casey i would add that i think the margin compression
spk05: would probably come if we got a little, I don't want to use the word desperate, but a little more needy for more deposits. I don't see that that's happening. Every day we're opening, I mean, each week we're opening somewhere between call it 50 and 100 accounts on the digital platform, again, with no advertising. Each of those accounts are probably, you know, those accounts are coming in somewhere pricing probably right below five percent um each you know about 25 000 averages you know and that takes a lot of pressure off what we have to do in the core bank which is again back to why we think the core banks um cost of deposits and the value of their that franchise is is so good so i don't and i don't matt may have a view but I don't see us this coming quarter, even with the loan demand or the pipeline, I don't think we're going to be in a place where we feel like we got to really start moving on rates to get funds in here.
spk00: Okay. You threw a lot of numbers out there, Matt, but it sounds like from a core expense run rate, from a core fees, core margin, you're sort of where you had hoped to be or somewhat near there and that you're sort of outlook for 2024 hasn't meaningfully adjusted. Would that be accurate?
spk03: Yes.
spk00: Okay. And I'll just ask one more. I recognize that non-accruals are coming off of it at a very low level, but did you see any sort of credit migration this quarter or any major upticks in the classifieds or anything you want to address there?
spk06: We did not. And I can tell you what our so our risk rated special mention was up caught four and a half million this quarter but still at a relatively low base 19 roughly 19 and a half million versus 15 million last quarter which not an unusual level of activity and then substandard actually declined to 14.9 from 17.2 last quarter. So, you know, a little bit of movement in and out of buckets, but no large directional swings.
spk00: Okay. Thank you. I'll let someone else jump on.
spk01: The next question comes from the line of Christopher Marinak from Janie Montgomery Scott. Please go ahead.
spk02: Hey, thanks. Good morning. I'm going to pick up where Casey left off on the credit question. So the reserve bill we saw this quarter, was that sort of out of an abundance of caution? Do you think you'll have higher losses, or is it just because it was prudent at the structure?
spk06: I mean, the core reserve bill, like some of the provision was charge-offs, obviously, and then the rest of it, it was a bounce. 600,000 or so of core reserve build. Half of that was an increase in specific reserves on individual credits, so about 300 grand, not a huge number. And then the other half, the other 300 grand roughly, was just model-driven under CECL. We did see in the Moody's forecast this quarter the front end of the forecast were weaker on average than they had been recently, and that does factor into our model. We have seen other banks releasing reserves, but under our methodology and with those forecasts, it had a little bit of a reserve bill. Not substantial, but just not a release.
spk02: Nope, perfectly fine. And I guess, you know, if we look at the core charge-offs we saw this quarter outside of the third party, is that a good run rate for the near term? Would you expect that to be a little higher over the course of the cycle?
spk06: I think that's probably a good run rate. Hopefully it will be down from there.
spk02: Got it. And then last question just has to do with kind of just new deposits at the margin. You know, what does it cost to get new money in the door? And do you think that that sort of incremental rate may back off a little bit as this next quarter develops?
spk04: Dennis, you want to take a stab at that or you want me to do it?
spk06: I'll do it. It depends on the avenue we're pursuing, Chris. On the digital platform, incremental cost of funds is probably still around five or low fives. And then in the core bank, it depends on most of our efforts in the core bank or in our local markets is commercial driven. I think Dennis referenced in his remarks we've had a lot of success using some of our technology offers, particularly Vibe, getting corporate customers. We can get those customers, even if they're coming into an interest-bearing business account, four, sometimes well below four. We're probably weighted average, raising money in the low to mid fours on an incremental basis. But it just, we're pulling all the levers all the time to get those dollars in.
spk05: Yeah, Matt, I'm sorry. I was speaking very eloquently, but on mute. Backing up what Matt just said, I mean, on the digital side, yeah, I mean, we're bringing in money that's kind of for, call it for with a little bit of checking, I mean, we're probably in the high fours on the digital side. And I think we probably can do, without any marketing or anything, we probably can do 30 to, you know, 50, 60 million a quarter there. On the core bank side, Matt's exactly right. I mean, it's not as expensive on the core bank side, but what the core bank has is Vibe and some of the other technologies that's moving probably call it 20 reliably 20 million a quarter of checking accounts and that you know especially with rates where they are right now that just blends down the the uh total cost of deposits and our total um like for the whole bank the total um incremental i you know back to casey's question about the margin i mean i i matt and i are Like-minded on this, I don't think that we're doing a lot of things in the bank that's dilutive to a 3% margin. I think our incremental cost of funds and our incremental lending levels are accretive to that. Now, it may be one-off here and there, and the repricing for sure, you know, dent that. But I think we're in a really good place, actually.
spk02: Great, that's all very helpful. And Dennis, the pace that you're talking about, the digital channel, is a function of kind of the groundwork you've laid the past couple of years. So over time, is it possible that that number could be a little bit bigger?
spk05: I mean, yeah, absolutely. I mean, we actually restrict the amount of deposits that we'll open on this, just first because, you know, we're trying to still be pretty – we're still trying to introduce – customer service and every digital customer still has a banker that we, you know, contact. So we are limiting the amount of customers that will open on that. Really what we are sort of the next phase of this is introducing concepts that bring in deposits that are more, um, checking oriented, you know, and, and long-term have, uh, lower costs, but, But, Chris, to your point, I mean, we're not marketing this. We really do not market the digital platform. I mean, we have, call it, you know, 16,000 customers. We've probably opened 18,000 accounts, and we're really not marketing it. It's those customers referring to other customers and increasingly, to your point, name recognition, which helps. I mean, it's not – reasonable to believe that we're going to get an avalanche of customers opening accounts in a bank they've never heard of. But the longer we do this, and you said this, but the longer we do this and the better our name gets out there, the more account activity we're going to see.
spk02: Great. That's helpful, Dennis, and thank you both.
spk03: Thanks, Chris.
spk01: The last question comes from the line of Russell Gunther from Stephens. Please go ahead.
spk03: Hey, good morning guys. I wanted to ask you, Hey guys, I wanted to ask you about your loan growth expectations for the year. If you could talk about this volume and mix and then how your gain on sales strategy factors in.
spk05: Yeah, I'll, I'll start the, I think the core bank, um, The core banks definitely got some loan opportunities. A lot of that's with existing customers. I think the industry's cautiousness and honestly, real estate investors' cautiousness on CRE is probably going to mute the kind of balance sheet growth we can see out of the core banks. You know, I think life premium finance, You know, there's no telling where we could take life premium finance. You know, and we're kind of trying to mute those growth levels a little, but really not that much. We could probably, between life premium finance and I think Panacea has got the same kind of loan volumes, I think we're probably looking for total loan growth that's maybe high single digits. Matt?
spk06: Yeah, I think last quarter we said high single digits to maybe low double digits, 10-ish percent net loan growth, net of sales, and I think that's still eminently doable.
spk03: Okay. I appreciate it, guys. And then just a couple follow-ups. I hear you on the potential timing of the ability to deconsolidate Panacea. Can you just remind us in terms of use of capital balancing that kind of high single digit, maybe low double digit loan growth with the potential for buyback activity?
spk06: Well, when we get that game, we will definitely evaluate the best use for that capital, be it growth or buybacks. I mean, if we continue to trade at a
spk03: meaningful discount to tangible book value buybacks obviously become much more attractive probably move yeah probably move the buyback would probably move way up the list of strategic ideas okay uh very good and then thank you guys last one for me um you know matt you touched on in in response to a question just overall 24 outlook given the start to the year hasn't hasn't material adjusted so um as we fold all of this together can you just remind us of your timeline to achieving that one percent roa target on a sustainable basis uh we still believe that that's doable at the end of this year so i think we've talked pretty consistently about latter half of 24 getting to that level
spk06: whether it's third or fourth quarter. Hard to say. It's going to somewhat depend on the margin environment, but that's still what we think we can get.
spk01: Okay. That's very helpful.
spk03: All right, guys. The rest of my questions are asking answers, so thank you very much. Thanks, Russell.
spk01: If there are no further questions at this time, I would like to turn the call over back to Dennis Zimber for closing remarks.
spk05: Okay, thanks again for everyone that joined the call and expressed some interest. Matt and I are available the rest of the day, really anytime. So call us if you have any more questions. Otherwise, hope you have a good weekend. We'll talk to you soon.
spk01: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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