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spk00: Thank you for standing by. My name is Kayla and I will be your conference operator today. At this time, I would like to welcome everyone to the Premise Financial Corp second 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'd 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, again, press the star and one. I will now turn the call over to Matt Switzer, CFO. You may begin.
spk01: 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, PermissBank.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. 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 Embert.
spk02: Thank you, Matt, and thank you to all of you who have joined our call today. Starting at the top, earnings for the quarter improved to $7.8 million when compared to a net loss of $311,000 for the same quarter a year ago. Both quarters have some noise, and Matt will outline that shortly. But when you exclude the noise, we're showing pre-tax earnings of approximately $11.7 million for the current quarter, which would be one of our strongest quarters to date. These results are mostly across the board and come before we really, before we experience any real lift in net interest margin. Results from the core bank, our lines of business, steady margins, just over 3%. Operating expense controls from the initiatives that we undertook a year ago have all played a significant part in these results. Consolidated the company's reporting a net interest margin of 3.03%. On a standalone basis, excluding the lines of business and the digital platform, The community bank's margin improved to 3.25% in the current quarter of 24, compared to 2.82% the same quarter a year ago. These results against last year reflect the bank's dedication to seizing all of the loan yield opportunities we can at renewal periods, but more so the focus on deposit costs. Our core banks had the luxury of having the digital platform behind it, And that's provided an opportunity to focus on the more profitable deposit relationships at the community bank level and not let the cost of funds get away from us. The legacy franchise we have in the core bank has really shined in this past year through all the pressures the industry has faced, as well as our efforts on branch consolidation. Our lines of business also had a great quarter. On a combined basis, Panacea, Life Premium Finance, and our digital platform finished the quarter with $835 million in total loans and just under a billion in total deposits. This represents about 25% of our total loans and about 29% of our total deposits. Incremental loan yields are still very good with new production in the high sevens and even some in the 8% range for these higher quality lending strategies. Funding costs have been stable. over the past few periods at about 4.84% combined, which is high, but we still believe that or are confident that the beta here on this funding is high and that as rates begin to decline, these combined strategies will see a material profitability lift. Mortgage had a great quarter, reporting net income of pre-tax net income of just over $1 million compared to essentially a breakeven quarter a year ago. During the quarter, we took about $228 million in locks, which was up about 25% against last year's, against the same quarter last year. Our gain on sale margins came in at 3.1%, up from 2.8% a year ago. Given how we believe rates will be moving in the coming years, we really would like to recruit harder and maybe double our volume potential, closer to $2 billion annually. But recruiting right now in this industry is not easy. We're going to stay disciplined and offensive. We're going to look for opportunities where we can on the recruiting side. And we're going to make sure that our profitability continues to improve like we saw this quarter. Tangible book value improved to $12.59 per share, which is 8.8% higher against the same time last year. We still expect to deconsolidate PFH as soon as we can. and record the value of those shares, which would lift tangible book value by about 65%, excuse me, 65 cents per share and improve tangible capital ratios by about 40 basis points. Matt got pretty excited about 65%, but 65 cents per share. Lastly, as I close out, as we look forward, I believe we're going to see continued strength in the company and incremental progress on our operating results. The core bank's focus on deposit growth first and commercial lending with new and existing customers will continue to benefit from all of our digital capabilities and other advantages like Bob. Our lines of business, although pretty young, are going to continue to age well and improve quarter over quarter just like we've seen for more than a year. Collectively, our focus on holding the line on operating expense or potentially even seeing some net savings will make the results even more positive. I'm not going to sit here and say that I think we're wildly liability sensitive, but a falling or softer rate environment will be positive for us, both on spreads and on mortgage volumes. The rapid success we've had on our lines of business and the impressive adoption by customers has our phone ringing a lot with ideas and pitches, but we're staying focused on just our existing strategies and opportunities. As we tweak and improve our current offerings, we're going to continue to pivot on the digital platform to focus more on lower cost, higher value deposit relationships. and make our offering a more familiar and complete community bank rather than being singularly focused on only a handful of pretty innovative deposit accounts. All right, with that, Matt, I'll turn it to you.
spk01: Thank you, Dennis. I will 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 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 second quarter, $577,000 related to this portfolio is included in interest income with an offsetting amount included in non-interest expense. In addition, 4.6 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 2.3 million in the second quarter. Results will be discussed excluding these amounts and relative to common share unless otherwise noted. Earnings available to common and earnings per diluted share for the second quarter were $7.8 million and 32 cents respectively. Adjusting for PFH and certain one-time items, core earnings were $9.3 million or 38 cents per share and up substantially from 3 cents in the year-ago period. Total assets were $4 billion at June 30th, up slightly from March 31. Loans held for income increased 2.5% from the end of Q1, driven primarily by panacea and life premium finance activity. Deposits were $3.3 billion, up slightly from last quarter. Average non-interest-bearing deposits declined 5% versus the first quarter due to remixing. Core net interest income, excluding accounting noise from the third-party managed portfolio, decreased slightly, roughly $300,000 to $27.1 million in Q2. with growth in earning assets offsetting margin pressure in the quarter. Reported net interest margin was 3.03%, while core net interest margin, excluding accounting noise, was 2.94% as compared to 3.03% last quarter. Core yield on loans, health, or income increased slightly to 6.14%, while core yield on earning assets increased to 5.92%. Cost of deposits increased to 2.98%, while cost of funds increased to 3.16% in the quarter. Excluding accounting adjustments, non-interest income was $9.9 million in Q2 versus $8.3 million last quarter, an increase of $1.6 million and largely driven by increased mortgage activity. Non-interest expense was $27.8 million, excluding the impact of PFH Mortgage expenses were $6.1 million in the second quarter, up from $5.1 million last quarter and on higher volume. Unfunded commitment reserve expense was a release of $432,000 in the quarter versus an expense of $75,000 last quarter. We also incurred approximately $1.3 million of accounting and accounting advisory costs in the quarter. Core non-interest expense expenses Excluding accounting adjustments, these non-recurring items and mortgage was $20.3 million in this quarter versus $19.4 million last quarter. A portion of the increase is due to heavier legal expenses in the quarter, also partially tied to the restatement activities of roughly $330,000. These costs, along with heavier accounting-related expenses, will be reduced in the near future as we complete our activities with the SEC. The core provision for credit losses was a release of 600,000 versus a core provision of 1.6 million in the first quarter. Core net charge-offs were 600,000, approximately down from 900,000 last quarter. The net reserve release in Q2 versus Q1 was largely due to a reduction in individually evaluated and PCD reserves. Lastly, operating ROA was 90 basis points in the second quarter, up up from 70 basis points linked quarter. Our core profitability continues to be solid even in this difficult operating environment, and we are optimistic we can continue improving core returns from here as we put noise-related to SEC filings behind us. With that, operator, we can open up for questions.
spk00: Thank you. And at this time, I would like to remind everyone, in order to ask a question, simply press star, then the number 1 on your telephone keypad. And our first question comes from the line of Christopher Marnack with Jamie Montgomery Scout. Your line is open.
spk03: Hey, good morning, Dennis and Matt. I guess I'll start on just the expense point that Matt was making a minute ago. So is that lower $20-ish million expense number a good place to think about as you get behind this noise in future quarters? Or should we think of still something closer to what we just reported?
spk01: I think closer to where we have got it last couple of quarters, kind of mid-19s.
spk03: Okay. So that profitability obviously is much better than what we're seeing as that goes back to the new normal. Correct. Okay. And then would the same be true on provision, where provision...
spk01: know particularly x x the third party uh stuff uh it kind of hones in on kind of this this you know low basis point uh sub 10 area yes i mean our our provision has been even taken out the um the third party portfolio that when we discuss on a core basis it's been somewhat up and down the last couple of quarters but um we think that should normalize here in the near future as these economic forecasts settle down.
spk03: Got it. And then do you have a sense on sort of timing for when this gets resolved? I mean, are we talking a few more weeks, a few more months, or is it hard to say at this point?
spk01: Yeah, we're close to, it's kind of a multi-step process but we're close to getting through the first step which will allow us to start completing filings and getting back caught up that's probably i'm hopeful we'll start seeing filings hit the tape in by the end of august great
spk03: And then, Dennis, maybe just a quick one for you back to the kind of core business. I mean, how do you feel about the sort of digital account openings and just your normal kind of deposit gathering and kind of what you see out there? How is it changing today from where it may have been three or four months ago?
spk02: I mean, I think it's still similar to what we've been seeing. I mean, we open a substantial amount of accounts on the digital platform. We don't advertise. We don't see, you know, we don't see a lot of money in and then a lot of money out. I mean, it's stable, more stable than you might think. It is a little more rate driven than what we want it to be long term, but from a sort of a technology build, it was probably necessary to start that way. I think the pivot now is we're focusing on some business accounts, and those are you know, individual sales, just like it is in the community bank. You know, we have several strategies that we're implementing that really aren't going to cost anything, but just what I was mentioning about sort of being more fulsome on our offering, you know, right now it's just focused on some innovative deposit products. But as we start adding other traditional community bank services, you know, it's going to make us stronger in our core market because we do market as premise bank, both digitally and locally. So it will make us better in all of our local markets and sort of wherever else we're able to market that. I mean, we're still pretty positive about it and see a lot of opportunity there. But really, until we demonstrate the ability to open low cost accounts, lower cost accounts, we're not going to get all the value the shareholder that we want so that's that's really where we're focused right now got it that's very helpful and i imagine the cost of funds uh still is in the process of kind of you know evolving to where you want it to go kind of to your point just made yeah i mean the and but i will tell you i mean we've got the the operating expense burden on the digital deposits is about 15 percent of what the operating expense burden is in the community bank So the thesis that, you know, the digital customers are, you know, more savvy maybe or more used to using their devices has played out, played out. And so we could probably have a higher cost of funds on the more digital-oriented deposits and still find our way to above-average profitability. It just doesn't need to be. Right now we're really, call it, 65 basis points behind Fed funds. below Fed funds, we probably need to be another 65 below to really be pushing all the profitability here that we want. I don't feel like we got to go from 484 is our combined yield. I don't think we have to go to 4.84 on those deposits to 3%. We don't have to do that. We just got to go probably down another 50 or 60 basis points overall, and we'd be pushing some real profitability here.
spk05: Great. Thank you both. I appreciate you with my questions and also hosting the call today. All right. Thanks, Chris.
spk00: And your next question comes from the line of Nick Lorenzoni with Stevens, Inc. Your line is open.
spk04: Hey, good morning, guys. Going in for Russell Gothard. I just wanted to start with the NIM. Could you talk about your expectations to be able to keep the NIM above 3% and what the related puts and takes are there? And if not, do you think you can still grow NII if NIM declines?
spk01: We, I think we can keep the NIM, um, pretty confident, plus or minus, where we are even in this rate environment. Because as Jens was talking about in terms of where new production's coming on and relative to our incremental funding, we see incremental earning assets coming on pretty close to three. We can continue growing NII because we've got pretty healthy engines for growing earning assets and funding. can continue to outpace NIM compression and grow, if there is any, and grow NII, but that then becomes limited by capital. I mean, we don't want to stress our capital ratios just to load up on earning assets and crush the NIM, but grow NII. So that's where we're trying to find the right balance.
spk04: Okay, great. Another sidetrack question, how are you thinking about the overall balance sheet growth for the remainder of this year and then into 2025? And if you could also address expectations for Panacea and the life premium finance specifically as to what you plan to portfolio versus sell in the end.
spk01: I mean, I think the overall loan growth for the year, we're still targeting high single digits to 10%. I think we were a little bit lower at the beginning of the year, but it's been a little bit faster than that was, so probably still approaching 10% as the upper end of what we would see for the whole year. We did not have any loan sales in the second quarter. We're working on some potential outlets, particularly for Panacea. probably wouldn't happen in the third quarter, potentially in the fourth quarter, but that would free them up to, they've got actually both Pansy and Lightroom Finance have all the opportunity to grow earning assets that they want. We've slowed them both down while we look for potential outlets. If even if the panacea does end up selling a portfolio later in the year, I think that'll be replaced pretty quickly. I think our expectations for 25 is probably similar. Assuming similar rate environments where we have right now. I mean, even if we get one rate cut, I think we're still in a somewhat challenging yield curve and rate environment until we get more cuts. probably would look for that high single digit, low double digit growth in 25 as well.
spk05: Got it. That's solid color. Thanks for taking my questions, guys. Thanks, Nick.
spk00: And there are no further questions at this time. I will turn the call back over to CEO Dennis Zimber.
spk02: All right. Thank you. And I appreciate everybody taking time on your Friday for the call. If you have any questions, Matt and I are available. Have a good weekend.
spk00: This concludes today's conference call. You may now disconnect.
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