Q4 2022 Primis Financial Corp Earnings Call
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 premise Financial Corporation fourth quarter earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' 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 he 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.
Good morning, and thank you for joining us for our 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 risks 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 permits bank Dot com.
We undertake no obligation to update or revise forward looking statements to reflect changed 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 <unk>.
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.
But finished the work that we started on the digital bank and to somehow diversify away from just spread income.
Wanting to build some strength and opportunity of noninterest 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 the question or one of the questions that we all have is basically.
And when.
Good morning answer that in a minute, but first a few items to highlight in the quarter ending of the year.
First was the loan growth we experienced.
And maybe Matt what conservatively estimating our growth potential he's chuckling right now.
We started 2022 and we did come in very strong with about 25% growth in months 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 for 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, yes, 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 from scratch.
Two of these engines are operating lines of business.
Payments that you started the year with only about $50 million of lines all consumer.
And about $1 3 million of recurring revenue.
We grew our Doctor base to about 3000 doctors doing business with us all across the country, we've invested and production and credit administration and customer support and technology.
We spent all this money to build the brand and as we progress through the year results at Panacea progressed nicely with.
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 protect production between gain between excuse me between gain on sale and portfolio.
The credit here its outstanding or our commercial book has debt coverages.
In the over 2% or excuse me over two times, no past dues ever and the incremental yields honestly that are close to or exceeding traditional bank CRE.
Life premium finance ended with just $200 million, just under $200 million of outstanding loans and <unk>.
About 800 million underwritten.
In less than a year, they've built a brand and all the infrastructure and can take this to something much more sizable we're the only real incremental operating expenses higher incentive pay.
For the producers.
This division also many deals higher.
All lines that are entirely cash secured and in the fourth quarter, we are getting incremental variable rate yields within 30 to 40 basis points of fixed rate CRE.
Another area, we invested in was the mortgage business and our total investment in the mortgage comp, including the losses associated with recruiting pertains J&J.
He is at just under $6 million, which is considerably less than our former investment in southern Trust.
Looking at our production teams are restructured comp plans.
Level of administrating excuse me the level of administrative staffing in 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 maneuver our pivot if.
<unk> worsen or recruit and build if conditions for this space improve.
I really believe we are ideally positioned for this year and this division will improve our earnings in <unk> and 'twenty three.
The last thing I've mentioned.
The next the 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 assay at one that we had.
Good in non performers I think in the third quarter.
When this one got wobbly.
Got new appraisals, and we felt pretty confident in our position, but we reappraise the properties in the fourth quarter and aggressively write them down to the 90 day liquidation value.
And levels that I'm hopeful we'll move the property as soon as we're able to do so.
The other material NPA on our books is the first mortgage on the largest state property we.
We have a 40% or so LTV there three junior lien holders behind us and right now that loan its 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 2000, <unk> would have improved dramatically almost by 50%.
And to the near and nearly to the top of our peer group.
And none of that actually none that excuse is 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 would expect from a top performing bank.
Back to how I started about investing in the bank.
It is not easy to grow a bank the size organically, especially at the pace that we're trying to grow.
It's got ranching naturally it takes about 18 months to conceive of strategy build it out.
So for some operating losses that are Ceos like to call investments.
David of course, while you make small adjustments here and there while you're second gas.
And then finally come out on the other side, good something that drives value.
And at 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 don't know unquestionably drive value in this industry.
We needed a safe way to grow lives we.
We need to have reliable sources of noninterest income we.
We needed more deposit strategies, we need more expertise in every area of the bank, we needed better regulatory reputations.
Relationships, we needed a better brand.
And you're saying all of that leaves me out of breath. The good news for 'twenty. Three is that we don't have a lot left to invest here.
What we've done over the last three years and especially in 'twenty two is enough to produce outsized growth and profitability for some time in.
In 'twenty, three we need to let all of that come to fruition.
And I believe that we will see all of this build and start to pay off and I am determined.
With Matt sale.
And not be distracted with any other with anything else other than getting the payback on these investments and honestly illustrating how greater value our stock is at these levels.
Thanks des.
I will provide a brief overview of our results before we turn to Q&A, but as a reminder, a full description of our fourth quarter results can be found in our earnings release 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 <unk> 12 per diluted share versus $5 1 million or <unk> 20 per diluted share in the third quarter, excluding onetime items earnings in the fourth quarter were <unk> <unk> per diluted share versus 21 in the third quarter.
As Dennis mentioned as I will discuss further earnings were impacted by a large provision and mortgage related losses in the fourth quarter.
Total assets were $3 $5 7 billion at December 31 versus 336 billion at September 30 <unk>.
Excluding PPP loans, excluding PPP loans and loans held for sale loan balances grew 32% annualized in the fourth quarter.
Growth was primarily driven by panacea in 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 was higher than we prefer and 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 the effects of PPP, our margin was $3 five 1% 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 to 48 basis points, respectively from Q3.
Excluding accounting adjustments and a onetime gain noninterest 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.
Additional teams we added late in the third quarter are fully on boarded in building pipelines, we're projecting originations of $1 billion in 2023.
Including and taken into account the current environment and up from roughly $300 million in 2022.
And with meaningful additions to noninterest income their profitability overall.
Noninterest expense included a number of items this quarter, including $1 2 million of nonrecurring expenses 36000 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.
<unk>.
Excluding these items noninterest expense was $21 2 million up from $20 million last quarter.
While we intend to moderate them in the first quarter marketing costs remained high in the fourth quarter.
Turnover in the organization continues to cause inflationary pressures in salary and benefits.
We also had approximately 500000 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 nonrecurring accounting adjustments and the impact of mortgage our operating efficiency was just under 70% in Q4.
Mortgage improvement, which is expected to be breakeven in the first quarter, plus increasing operating leverage for pain at CA and life premium finance will drive the efficiency ratio lower in 2023.
As Dennis alluded to the provision for credit losses was $786 million in the fourth quarter versus $2 $8 9 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.
Nonperforming 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 <unk>.
Combined our 78% of our nonperforming 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.
To the efficiency ratio discussion above we expect meaningful contributions from our newest business lines, including mortgage Panacea, Mike premium finance in 2023 that will materially increase profitability and drive us to our 1% ROA goal.
Okay.
With that.
Later, we can now open the line FERC Q&A.
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 well 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.
Good morning Casey.
Maybe I thought we'd start just to touch on expenses. So it sounds like you've got the mortgage worked on and as you go into 2023 do you have your starting.
Starting point for quarterly expenses somewhere around like 27% $28 million or am I off there and then I think you just answered this but 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 that's sort of the run rate to go off of.
That's right.
Okay.
Okay and then.
Looking at mortgage I mean, you talk about the $1 billion in production is that enough to breakeven. There are we assuming some pickup in the gain on sale margins in that space to sort of <unk>.
It's a little too optimistic to think about that in the first quarter or are you talking more.
Throughout the year or maybe just walk us through sort of the evolution to get that towards profitability.
Sure I'll start Dennis gains.
Add to it or correct me, where I go wrong, we're expecting $1 billion of production for the year that is enough to more than breakeven, 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.
Housing season really starts in the spring.
As production ramps in the first quarter, we expect them to be breakeven for the first quarter and then materially more profitable in the second and third quarters four quarters, usually again breakeven, sometimes slight loss depending on seasonality.
But taken overall, we're expecting mortgage to contribute.
$4 5 million.
After tax and 23.
Okay, and Thats, assuming the same kind of expense level that you had I guess in the fourth quarter.
It'll be lower metals envelope in the fourth quarter, the fourth quarter had.
A considerable amount.
<unk>.
<unk>.
Sort of.
Of draws.
That didn't have any associated production with it some of that because it's a fourth quarter. Some of that is because people, bringing over pipelines all of those almost all of those 98% 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 all of our producers around.
Commission only.
So.
I would also say one other thing so just set a little bit differently, so the $27 $28 million, probably closer to $27 million for the third 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 thats they are generating revenue on the other so im saying that youre, saying that the expense side may stay the same but we expect an extra $1 five or so of revenue I'm sorry, the expense excluding mortgage should all I got.
The expense with mortgage.
So up through the year and probably come back down in the fourth quarter is.
Production declines.
I don't want you to be surprised if in the second and third quarter expenses are a little bit higher because.
The peak of the mortgage market that makes sense.
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 dumb down what's going on there.
Should we be assuming that $3 50 margin as sort of the better starting point or the debt.
<unk> 70, or whatever that you reported 267 you reported.
So we're going to as we go for continued to kind of strip out some of the noise from that portfolio. So we have a portfolio of loans that we originate with a third party.
They come on our balance sheet directly, but they are managed and serviced by a third party.
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 book and the charge offs that.
Our all in the portfolio, but that are covered by the third party.
And then there are offsets or all of that in noninterest income and noninterest expense. The net profitability that we're making on these loans is has not changed.
The only thing Thats changed is we have more.
Sure.
<unk>.
The effects from the portfolio running through various lineup. So it's really.
Where it shows up in our income statement has changed but the impact on net income has not.
From a core basis.
I would encourage you to focus on the $3 51, which is really apples to apples versus last quarter, where we.
How we think about our margin going forward.
This portfolio the accounting for the portfolio is going to create some margin effects on a reported basis, but we will do our best.
Adjust for all that.
EBIT apples to apples going forward.
Okay.
I guess I'll just ask one last question.
Yes, obviously a lot of noise this quarter and you guys got a lot of stuff done.
Last year just.
If we think bigger picture about sort of the.
The profitability outlook and how quickly we can build.
ROA.
I guess what kind of.
Got it.
Outlook can you guys give us over the next few quarters into next year to the extent.
Environment stays somewhat like it is today.
Okay.
I would say.
While Matt got a slide that sort of bet that shows where are the improvements coming from <unk> from.
Obviously payments.
The life premium finance growth in the ditch and the core bank.
A little more experience marketing the digital bank mortgage and I think gets us to right at $1 50.
Okay.
Of earnings per share.
Thank you Brady.
Yes.
Okay.
Our 23.
The slides referred to buildup pre tax pre provision starting with our run rate in the fourth quarter shows.
The impact.
Margin improvement that we just talked about the improvement in.
P&C and life premium finance and build 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 'twenty, three and then tax effect that.
You could get to $1 50, a share for the year that's about that.
That will be we will be very delighted with that but really just sort of shakes out to just over a 1% ROI.
And clearly thats not our goal we need I really believe that paying a sea life premium finance and mortgage.
Will be meaningful contributors to the ROA E honestly in 'twenty three.
Right.
More so in the out years I think the core community bank.
It is.
It's hard really to grow that beyond or to improve the profitability there side beyond the say, 1% or $1 15.
And so all of these other items. All these other businesses are important I think long term, we're still sort of believing that we should be in the 125 to 135 range.
Our goal in 'twenty three is just to be 1% on the bottom line.
Okay.
I appreciate it thanks for all the color I'll, let someone else jump on.
Again to ask a question simply press star one on your telephone keypad. Your next question will come from the line of Christopher <unk> with Janney Montgomery Scott. Please go ahead.
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 'twenty three I just wanted to get a little more background timing and kind of what's realistic.
I think we follow what you're trying to do I just wanted to know kind of what the timing we should expect.
Yes, I haven't tried to think about.
On a quarterly basis, when we put that together.
That includes mortgage contribution, which is only going to be breakeven in the first quarter.
But.
More meaningful contribution in the second and third quarter, and then you get the ramp for <unk>.
Tennessee and lifetime financing over time so.
Hello.
Perfect answer to your question there Chris.
Think of it more on the full year.
I think probably.
I had two.
I don't think we'd be in fourth quarter, obviously is not the best quarter for mortgage I mean, nothing it'll be it'll be accretive to the ROI in the fourth quarter, but I don't think it will be meaningfully accretive to the ROI 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 I mean, panacea like we said in the.
Report looking at some.
Some loan sales and we've got a little bit of momentum there.
I'd say the first half probably is closer to 90 in the second half is probably closer to <unk>.
Even with even with mortgage.
Different a little in the fourth quarter I still think second half of the year, one probably 110 and maybe the fourth quarter.
Like a 105.
Probably went up I had to guess.
So again slide seven is more than aspirational, it's really kind of what you are trying to do for this year. It's just a question of when does that all falls in place.
I wouldn't call it.
10% aspirational.
Right.
I mean, I think some of the stuff that we're looking I mean, I think I think there is science behind all of this.
I mean, the core bank improvements of $2 six I don't.
I wont go into that I know exactly where the two six is the mortgage pre tax a $4 nine.
I know how to get to that $4 nine.
$700 million of production and I know how to get there with $1 billion of production. So.
In our 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 its aspirational I think it's it's.
And I know you didn't mean network sort of been.
Been a negative stance.
<unk>.
Kind of go back to my comments at the end of <unk>.
My prepared comments.
He is I mean this is what we've been working towards.
This is really what we've been working towards an end.
Yes.
And I would just say I mean, you also get to see this obviously.
But when we were when we work on our multiyear projections when we were working on our projections last year.
<unk> 22.
Somewhat basically coming in.
More moving parts that we experienced this year than we anticipated, but we ended up netting out around where we thought we would be this year with the various investments we were planning.
And we anticipated 23, seaney seeing meaningful improvement in an EPS and profitability as a result.
Yes, that's what that slide seven of that buildup.
That's not inconsistent with what the plan was a year or so ago.
We had a set where.
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.
Great. 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 in.
That what do you see organically ahead of you. This year I know, it's a challenging environment with rates that you are organically focused and so I just wanted to get a sense of what you think is possible.
New deposits coming across the company.
Hi.
In the.
In the core bank out of the branches in our markets.
I think staying flat is going to be.
Pretty magnanimous.
And the whole industry.
Yes.
Find the CEO . Thanks CEO .
Believes they are going to be able to grow there.
Or deposits and now you can but you're obviously paying up for every new deposit coming into the bank the our advantage.
And we have got to exacerbate disadvantage or advantage is the digital bank that honestly is as good in Phoenix, Arizona in our segment of Tonka.
Dan as it is in our core footprint and being able to use the digital bank to raise those deposits.
And in places that we arent and that won't affect a really valuable core deposit franchise is.
I mean, we have an advantage that not every other bank in the country have very few banks.
<unk> disadvantage and so we've got to exacerbate that.
Really helped us because honestly if it wasn't for that and we were trying to grow loans like we are or at all the opportunity.
We would basically be faced with sacrificing.
The real value in our core deposit franchise, and making it more rate sensitive and we don't have to do that because of the.
The opportunity we have with the digital bank.
And.
We're just hitting your stride on the digital bank really we are and we've got some places that we're about to market that.
At reasonable prices.
And.
That's going to work.
And 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 write this number in Hampton roads of Richmond.
Would be it would be daunting, we would be.
Having a different conversation here, but I know that I have the whole.
Country.
<unk>.
I feel I feel better about it.
The other thing I would add.
And we've talked about this are highlighted in our investor presentations previously.
With the digital platform, we've been growing into the fourth floor with one hand tied behind our back it's only got consumer accounts so far.
In the first quarter.
<unk> counts will go loss and at the same time.
We have an upgrade of the.
The mobile experience for both consumer and business that will take place.
A meaningful improvement and for business accounts.
Meaningfully improved user experience and functionality for small business customers. So.
We're very excited about that work.
I mean, our CIO will tell you we are.
And everyday on updates on one we're going to have all of that loss, because we think thats.
Consumer is important.
Because you can you can market broadly.
<unk> move the needle with a lot of accounts, but we really need this business piece lot. Because we can then move the needle with some larger balances and fewer accounts and we haven't had that the leverage yet.
Okay I'll follow you there thank you for that.
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.
That's good.
Thanks again for taking the question this morning.
Alright, Thanks, Chris.
I would now like to hand, the conference back over to management for any closing remarks.
We have no closing remarks, but we are available if you have questions or comments or one cost directly Matt and I are both.
Our ramp thank you and have a good weekend.
That will conclude today's meeting. Thank you all for joining you may now disconnect.
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