Primis Financial Corp. Q1 2023 Earnings Call
Good morning, My name is Andre and I will be your conference operator today at this time I would like to welcome everyone to the premise financial Corp. First quarter earnings call. Today's conference is being recorded 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 the star key followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star one again.
At this time I would like to turn the conference over to Matthew Schweitzer Chief Financial Officer. Please go ahead.
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 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 Companys risk factors and other import.
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 a reconciliation of the non-GAAP measures to the most comparable GAAP measures can be found in our earnings release.
I will now turn the call over to our President and Chief Executive Officer, Dennis number.
Thank you, Matt and thank you to all of you that have joined our first quarter conference call.
Matt asked me last night after our board meeting what part of the quarter I wanted to address on this call.
I told him of course, all the good parts.
Only one of us Chuck.
Chuckle about it.
Lapping as much as I thought it would but.
Seriously, we're very encouraged about what happened here at the bank in the first quarter.
With that said I'm really mindful of what the industry is experiencing especially banks.
Our size, maybe even a little larger but our thesis for this bank and our future has played out very well this quarter and I think maybe for the cycle that we could be close to enter it.
I'll cover all of that shortly but first wanted to summarize net income for the quarter, we're reporting $5 $7 million of net income.
Onetime kind of things were about $1 million of negative spread in D. P costs associated with the digital success that unquestionably will not re play in the second quarter about 450000 of fraud expenses all of which are at the core bank, none of which were individually significant and a mortgage.
Run rate that I think is about 300000.
Below our current run rate.
Even with no additional pick up in volumes, our locked pipeline all of that moves our way closer to say 75 or 80 basis points.
We can't get good enough, but I think it's within striking distance given the momentum I see in several areas of the bank.
I'm happy with the performance of the core bank this quarter.
On the headline it appears that noninterest bearing deposits were down significantly, but one chunky deposits associated with our mortgage servicing rights.
Of about $54 million left this quarter and excluding that noninterest bearing only dropped five 8%, which I believe is a good result, total deposits even including this departure, we're only down zero, 2% just $6 million.
Our bankers on both sides of the balance sheet did a great job our margin at the core bank was up 338% down obviously from the fourth quarter, but materially in percentage terms from where we were a year ago, when we reported 296%.
In mortgage we've been focused on two seemingly different strategies and without sounding too southern it boils down to training.
And recruiting.
We've been right sizing support staff commission rate incentive plans and.
And everything we can to make our breakeven production levels as low as possible given the performance in the last few months I believe we're somewhere around say, 40% to $45 million a month to breakeven which is remarkable for this industry.
We've been recruiting as we're looking for lenders that like our culture, our speed to closing our nearly nationwide capacity.
That arent looking for 2021 size signing bonuses.
These combined efforts have moved production to somewhere around $7 million to $800 million, a year and positioned us well for when rates fall in volumes return to pre pandemic levels.
And payments data and life premium finance, we see strong pipeline and honestly some resiliency to todays yields.
Both units have very good pipelines and their profitability and efficiency curves are directionally very nice.
Panacea in particular has benefited from the attractiveness of the credit offering and we're seeing more parties interested in this paper, which signal better noninterest income opportunities and a faster pathway to meaningful opportunity meaningful profitability.
On top of that paint a sea of containers continues to punch way above their weight, finding niches with larger and larger organizations and associations to build their brand and the balance sheet affordably.
Lastly, Tyler his partners and the bank continue to tweak and build technology solutions.
And at the end and at the LLC level have considered raising capital to turbocharge things.
On the technology build.
Im increasingly aware their earnings rate alone can feel all of this investment that we collectively need to absolutely out of this medical space in the next couple of years.
Lastly, the digital platform and the deposit success in short, we raised $1 billion nationwide with no more staff no fraud losses.
Almost nothing on advertising spend and virtually no impact at the core bank.
Right now we have over 12000 customers on the digital platform.
54% of them came from the nation's 10 or 12 largest banks, where realistically they were earning close to nothing.
Another 21% came from smaller community banks or credit unions, where realistically they appreciate customer service and personal relationships.
The average age is just over 50.
The average deposit is a touch over $80000.
Daily we have multiples more in deposits to existing accounts than we have withdrawals or account closures.
We are still opening accounts last night, we opened about 53 accounts at a rate that's about 50 basis points below the national sweep right.
And the obvious based our cotton safety with liquidity is obvious our liquidity ratios and our uninsured deposit levels are some of the best in the country.
And when the sweep in place will have done all of this in a way that doesn't that our capital ratios.
That's so important in this environment to be confident on liquidity and capital, but what may be lost on some is the opportunity with this platform.
We're going to have the same success in the near future on checking accounts and lower cost deposits.
Our app is more progressive and functional and site with respect to fraud or bad actors.
And as we do that especially with the sweep in place I expect incremental spread to the right. We offer with very little impact on our earning asset levels. So hopefully in a way that could boost our margins by some amount.
There's no playbook for banks, our SaaS EBIT Bank 10 times, our SaaS to build a national brand or image.
The industry has been so awash in liquidity with really subpar technology, and it's just a nonsensical to focus a lot of strategic energy being a deposit growth later.
Our strategy is to get as many customers on this app at rates that have positive spread to the swaps surprise them with customer service and attention to surprise them with Humanizing Communications Smart technology accessibility to our executive team.
That are better than our competition that is stacked with incremental branch or marketing costs and over time build a significant national customer base that can fully fund our lines of business at costs that will push 3% margins or better.
Absolutely love connecting with these customers, whether it's in text or E mail or telephone calls or honestly, even in person as I travel across the country and seeing how pleased they are with the experienced at premise bank has delivered.
It isn't perfect, yet, but we arent done tweaking things and making improvements either.
Before I turn it back over to Matt I want to thank our staff I cannot say it loud enough or too many cost.
Well, we've rolled out here and succeeded with is not something you buy off the shelf.
We built this.
We engineered installation, we dreamed up everything from the background systems features on the App security and fraud prevention and the unbelievably affordable and effective marketing of this idea. This is not just fintech relationships at a <expletive> deposits onto our onto our balance sheet.
And just the digital team.
Thankful for the rest of our bank and it stepped up this quarter answering calls and working with customers to make this quarter and this effort successful arms great work for our team.
Alright, Matt with that I'll turn it over to you.
Thank you Dennis I'll provide a brief overview of our results before we turn to Q&A, but as a reminder, a full description of our first quarter results can be found in our earnings release and first quarter earnings presentation, both of which can be found on our website.
Operating earnings for the first quarter were $5 $8 million or <unk> 23 per diluted share versus well less than $1 million or <unk> <unk> per diluted share in the fourth quarter.
Excluding PPP loans and loans held for sale loan balances grew 13% annualized and Thats after a $15 million payment senior loan sale in the first quarter.
<unk>, particularly strong in life premium finance again in the first quarter.
Given the current environment, we expect to see continued loan growth with an emphasis on quality.
Deposits were up approximately 35% on annualized in Q1, bringing our loan deposit ratio down to 83% at the end of the quarter from 108% at the end of the fourth quarter.
As we discussed on last quarter's call, reducing that ratio was a singular focus in Q1 and the success of our digital offering has been a tremendous boost to our bank.
As a result, we had excess cash of approximately 500 million at March 31, and excess average cash of approximately 300 million for the quarter.
We're in the process of implementing a suite program that will allow excess funds and deposits to be moved off balance sheet and expect that to be live by the end of the second quarter.
Excluding accounting adjustments related to a third party managed portfolio net interest income was down slightly to 27 5 million from $28 2 million in the fourth quarter.
The decrease was largely due to a temporary drag to earnings from building deposits in advance of the last fed move and which has now abated.
Net interest margin was three 5% down 52 basis points from 367% in the fourth quarter, approximately 29 basis points of the decrease was due to the excess liquidity described earlier.
Excluding accounting adjustments and a onetime gain in the fourth quarter noninterest income was $6 6 million in the quarter versus $4 8 million last quarter.
Mortgage originations were up 43% in the quarter in the face of substantial industry headwinds and on top of normal seasonal lows.
Locked pipeline also ended the first quarter at $53 million up 110% from last quarter adjusting strong momentum into the second quarter. Lastly, noninterest income included a gain of 427000 from a $15 million loan sale from panacea.
<unk> has cultivated a number of relationships with other banks that will lead to increasing gain on sale revenue through the rest of this year.
Core noninterest expense, excluding accounting adjustments and nonrecurring items was flat at 26 5 million for the quarter, which includes approximately $5 million related to premise mortgage.
Of note marketing costs were down even with the increased deposit raising activity as we were particularly efficient with how we attracted funds to the digital platform.
Also of note fraud losses were higher by 371000 in the quarter, but none was attributed to the digital platform activity.
Digital activity did contribute most of the data processing expense increase of 549000 lead application volumes, which is expected to subside in the second quarter.
Efficiency ratio declined to 69% from 72% in the fourth quarter as our various business lines increased profitability.
The provision for credit losses was $5 2 million in the quarter versus $7 9 million last quarter. The vast majority of the provision was due to accounting for our third party managed portfolio and which is offset by noninterest income gains. Excluding these adjustments the provision would have been approximately 500000 for the quarter.
Core net charge offs were $2 1 million and were largely charge offs of specific reserves established in prior quarters.
The allowance for credit losses to gross loans, excluding PPP balances was flat at 117 basis points for March 31 at December 31.
Nonperforming assets net of SBA guarantees decreased to $32 8 million in the quarter from $34 9 million last quarter.
A little over 80% of our Npa's are comprised of two relationships that we've discussed previously one of which was actually current as of March 31.
The assisted living credits that we've described previously were impaired and were impaired last quarter are currently being marketed by receiver with bids expected in the next couple of weeks. We also have no Oreo still.
Pre tax pre provision operating ROA was 131 basis points in the quarter up from 99 basis points in Q4.
Operating ROA was 60 basis points up materially from nine basis points last quarter.
Without excess liquidity and the slight earnings drag from raising funds. When we did our ROA would have been over 70 basis points in the quarter as Dennis described.
There are plenty of headwinds facing the industry right now, we see upcoming suite capabilities, increasing gain on sale revenue stronger mortgage activity and general improvement in operating performance across our business lines in the core bank all as reasons to believe we will continue driving that ROE higher this year.
Operator, we can now open the line for Q&A.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We'll take our first question from Casey Whitman at Piper Sandler.
Hi, good morning.
Hey, good morning Casey.
So congrats on the success of the digital bank here wondering how should we think about how big the on balance sheet, you would run the digital bank versus the core bank here or how should we think about the size on balance sheet of that once you implement that sleep function.
So we ended the quarter with about $600 million in cash.
Our rough.
Rough math that we will probably drive that cash back down to that $100 million, so that'd be about $500 million of balance sheet shrinkage in the second quarter.
And with that sweep Casey so we can.
We can then manage that cash level at about that level, depending on overall balance sheet growth and any incremental deposits. We raise we can immediately move off so net net will stay around that $100 million in cash.
Okay.
And then sticking with the digital bank I would assume like the back office compliance costs have already been incurred.
What about marketing costs from here is there any more I guess expenses, there or are you pretty pretty set with what you've got here for expenses.
I don't see any material increases in marketing expenses from here and at the margin may be but.
I think our experience in the first quarter as well.
We have.
Bob.
Pretty good playbook for how we think we can grow these digital deposits without spending.
On the $1.
Largely digital advertising, which is much more efficient as you can imagine then.
Our radio and TV ads and other local advertising.
Yes.
Okay.
And then just generally.
Just touching on sort of how youre thinking about profitability. This year and next seems like Youre on track for a lot of the things we were discussing last quarter. So has I guess some of the industry turmoil push any vehicles out of it or are we still.
I guess pretty on track from your guys' standpoint.
I think that I think.
Yes.
I mean, we see we see good pipelines in panacea in life premium finance.
I think loan demand in the core bank is no different than I think what the industry I think the core bank.
I think thats come in a little I don't think there is you're just not as much demand there.
I think we could grow both of those divisions profitably from here, especially with the gain on sale.
We can grow net income, but still toddlers not we're not going to sell all of that business. So theres going to be some balance sheet growth there.
I mean are there margin headwinds, therefore, I don't think theres going to be for us, especially when we have this much cash I don't think we're going to have as much margin headwinds.
As.
<unk>.
Yes, as maybe our competition, so, but I still think theres, a little bit of that out there.
<unk>.
I mean, I still feel I mean, assuming that there is we don't see anything in creating I didnt make gifts in our.
But I did say in my prepared comments I think the thesis.
About our bank being diversified we got less than say 30, we have about 35% and CRE, we have lines of business that drives C&I.
Good C&I volumes.
A safe diversified I think that basis is going to play out pretty well here, it's going to allow us to keep growing.
Not at the pace, we did last year, but I don't think youll see us with a stagnant balance sheet.
Yes.
Okay and that one.
Large relationship.
Pretty big for you guys are there other I guess chunky notwithstanding you might be worried about or looking at or was that sort of just.
Unique situations.
That was a unique situation, we don't have any other large noninterest bearing accounts.
Okay.
Okay great.
And just for modeling purposes, I guess, what's like a normal run rate for that credit enhancement beeline are recognized as an offset in that division.
Yes.
I would like the $5 million be a little large.
So the way it works I notices.
Somewhat.
Complicated noisy.
The charge offs on that portfolio flow through our provision and then we would get it back in noninterest income and then there's incremental.
Incremental spread that runs through net interest income that we give back in noninterest expense and you can see all those in.
Income statement on our <unk>.
Our tables in the press release, but.
We had a.
Allowance build on that portfolio in the first quarter that.
Due to some modeling changes.
I wouldn't expect that to occur again in the second quarter. So really the only thing running through the provision of noninterest income related to that portfolio will be losses, which we don't expect to be as high as they were it was about $1 9 million.
In the first quarter, so that should be lower in the second quarter.
And then in the net interest income and noninterest expense pieces. It was about 900000.
First quarter, and Thats, probably a reasonable number for the second quarter.
Okay great.
Congrats to you guys and thank you.
Alright, Thanks Casey.
We'll go next to Russell Gunther at Stephens.
Hey, good morning, guys.
Good morning Russell.
Good morning.
Just to stick with sort of the balance sheet size a bit just given some of the puts and takes here. So on the loan growth side I hear you in terms of.
Where do you expect it to come from but from an order of magnitude perspective do you guys have a view on overall organic loan growth and then similar question on the deposit side.
Yes, we hear you on the sweets, but kind of where do you think balances go from here.
I think I think normally we would've expected a couple of hundred million, maybe a little more than that on Power's group I think we will probably.
And that.
Probably seeing half of that.
Some from sales and some from a little softer.
Demand.
So maybe $100 million or sorry $125 million.
<unk> life premium finance I think we would have normally seen a couple of hundred million Bayer.
I think that Mike.
<unk> steel.
We might still hit that number and then a core bank kept bank just given demand honestly.
I think I think maybe just one or 2% growth at the core bank would be would be a good result, honestly I think so it may be.
I think for the whole year, we're probably looking at.
Call. It 10 12, 13%.
Got it okay.
Really helpful and then from a deposit balance perspective.
In terms of where you expect that to trend I'm just trying to triangulate.
To the margin going forward I think.
Dennis in your remarks.
And of that 3% bogey and.
<unk> ability to remain kind of at or above that going forward.
I am.
I think on the what we.
We're just one bank here and honestly all of the people I think core banking digital by I've tried to say digital platform, but.
I mean, we're just one bank and honestly all of the people on the core side helped.
Helped us out tremendously on the digital side and.
I think that when we think about digital platform I mean, we really think about those national deposits funding national lines of business and stuff by that back then I think we should be sort of about a 3% margin.
I think when you look at the core bank side, I think it could be a little better than that.
I do I don't think.
And the margin at the core Bank go to 3% I don't think thats going to happen.
Is it is there some downward pressure absolutely no question about it but if we're at $3 38 in the first quarter.
I mean, probably 325 ish or so at the core bank is.
A safe number and then I think 3% or so long term on the digital platform.
Yes.
Is appropriate.
I think we're probably three or four quarters from hitting the 3% just given that everything is brand new.
Might help us.
That will have a $1 billion, we have $1 billion on the digital platform right now when we start sweeping things will be at <unk>.
We'll be getting.
Positive spreads.
With really no.
No denominator, no, earning asset and so that could help boost.
The margin.
As far as what could be on the digital platform.
I mean, if we had the sweep in place right now and we were confident that we werent going to see ugly.
Ugly capital ratios.
I mean.
Even say a number but I mean, I think right now I think we're probably do and third probably $50 million a month.
I think we could probably triple that.
The Russell just yet.
So.
In terms of the balance sheet, we're about 83% loan to deposit ratio at the end of the quarter.
That sweep reduces cash obviously, but it also reduces the deposits on balance sheet. So you can assume that loan deposit ratio goes back up to call it mid nineties or something around there.
And that as we raise as we attract new customers through some of these different initiatives.
We will be able to kind of manage that loan to deposit ratio.
By sweeping excess off the balance sheet that helps.
Yes that helps a lot I appreciate it from from both of you for the clarification and color. There and then just last one for me could you help us with excuse me could you help me with the noninterest expense outlook going forward, considering some of the puts and takes around.
Fixed mortgage variable with improvement in that fee line and just any other franchise investments and potential offsets.
Well as you can imagine given you probably are hearing this a lot given the.
Challenges.
Challenges on the margin side were spending a lot of time thinking about noninterest expense and controlling that and we were call. It 21 5 million ex mortgage in the first quarter that included.
Some expenses related to fraud in data processing with all the applications couple of other things and we would like to see that number.
Closer to $20 million.
Run rate, maybe even a little bit below is weak.
Terrific.
Pruning and trimming as Dennis talked about earlier.
Okay.
And thats on a core basis, obviously mortgage noninterest expense will fluctuate I mean it.
It'll be higher next several quarters because their production will be higher.
But on a core basis.
That's what I'm, referring to and Russell.
There is no.
Given the environment there is no energy around here to grow expenses anywhere.
All of our division leaders know.
It just isn't the time to be thinking.
Incremental.
Generally.
Positive growth to that and we're also Matt and I are also not just assure you we're not going to be caught flat footed.
If the industry.
Things turned worse, we're not going to be caught flat footed and stuck on noninterest expense. We will have plans from a we're already kind of develop implants I don't think right now given the momentum some of the things that Matt finished with about the positive momentum here.
I don't know is it is.
Tom to go hard at that but but it is time to have a plan and our can assure you that that's in the works.
Understood. Thank you guys very much for taking my question.
Alright, Thanks Russell.
We'll go next to Christopher Merrimack at Janney Montgomery Scott.
Hey, good morning.
Dennis and Matt just wanted to circle back on the deposit growth initiatives.
Checking and now accounts going forward is that going to pay down some of those savings or is it going to be complementary and therefore, it does have a lower blended rate.
It'll be complementary so hopefully.
Average down the cost of those deposits.
And as the fed plays out over time, whether up or down do you have to move those savings rates that you've established so far.
I suppose yes, I suppose we would.
We there is in our offering there is no term.
On the right we're offering.
I mean.
Initially I would have thought okay. This is just going to have made a comment that gets I would've thought Oh. This is just all.
Internet rate shoppers.
I mean, it turns out that that's exactly what it is not.
Over half of it come from money Center banks.
Where I, where I know they work.
Being paid hardly anything I think long term.
I think if this could be could hover say, maybe 10 or 15 below fed funds.
I think that would be that would be excellent and I'm pretty confident we can be there I think we could probably.
I think we could probably hold a lot of the funds with some of the other step that we're doing sort of heme and asking our company and establishing relationships I think in a year it might even be better than that.
That's what the whole effort.
Around here is a lot of the concept that you just digital customers and hearing that use the apps seriously that 90% of them opened an account in five minutes opened and funded in an account in five minutes and never and just use the app.
For us to illustrate that theyre not banking with box. So to speak is term we use around here into human as our company with E. Mails letters phone calls visits from me or the other executives.
It means a lot and I think over time the <unk>.
Savings that we're going to get silver from those qualitative or esoteric.
Relationship building things is you.
Youre going to see that in the yield here.
And I know, it's early on the expense side the year expenses overall much cheaper than what you're doing the branch. So that's going to blend that whole experience and return as you get further along on this.
Correct, yes.
Exactly.
And then last question just related here if you.
You mentioned about the fraud experienced so far is there anything unique because you've built this and scratch compared to other deposit systems, you've worked with in the past status.
Absolutely no question.
Yes.
<unk>.
I will tell you that.
Anecdotally I will tell you when we.
When we turned the sound is what October one we.
We turned this on October one and we did some light.
Marketing of its sort of in our core markets like mostly in the in the DC MSA.
And every single morning, I would look at the balances at the accounts.
And I would say four or five accounts and that was that see the balances come through and I would write personal notes and do all that and then is it just it started catching on a little more than you would see box counts 10 accounts 50, count when we were doing 600 700 accounts that day.
I mean.
We had a moment around here were like Oh My God.
It is.
Is this going to I mean are we going to lose the bank because fraud is so prevalent.
Talk to other bankers fraud at the core bank level is so prevalent and so massive right now.
And we just sort of as we are in the middle of that Chris. We just went back and looked at all of our fraud measures. What it takes to open accounts, how we identify who you are how we know that you are that these are your phones and not somebody else's that you're putting into these accounts what we do after you put the money into it.
Count.
And all of that we engineered our sales.
And I mean, it's not none of that we bought off the shale.
It is just it's worked.
It's worked fantastically and honestly, it's protecting our customers as well.
And we have not figured out exactly how to communicate that back to the customers, but the ones that are meeting in person or talking to you on telephone recognize that this is a safer way to bank.
Great. Thanks for all the background this morning and disclosures.
Thanks, Chris.
And we have no further questions at this time I'll turn the conference back over to management for any closing remarks.
Alright. Thank you for again for everybody that to everybody Thats joined the call, Matt and I are available if you want to call text or E mail.
We will answer any other questions you might have if you have a good weekend and we'll talk to you soon.
Okay.
And that does conclude today's conference again. Thank you for your participation you may now disconnect.
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