Q4 2023 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'd like to welcome everyone to the premise financial Corp, 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 Dan.
Session at <unk>.
Like to ask a question during this time simply press Star then the number one on your telephone keypad.
Mats: You'd like to withdraw your question Press Star one again I would now like to turn the conference over to Mats with their Chief Financial Officer. Please go ahead.
Mats: Okay.
Mats: Good morning, and thank you for joining the conference call before we begin. Please note that many of our comments. During this call will be forward looking statements, which involve risks and uncertainties.
Any 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 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 Sir.
Mats: One of our corporate site firmness bank Dot com.
Mats: 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.
Mats: In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures a reconciliation of the non-GAAP measures to the most comparable GAAP measures can be found in our earnings release.
With that I will now turn the call over to our President and Chief Executive Officer, Dennis <unk>.
Dennis <unk>: Thank you, Matt and thank you to all of you that have joined our fourth quarter conference call.
Dennis <unk>: Before I get into our results for the quarter and the year I wanted to let the investing public know that our company.
Kelly Shiflett: Kelly Shiflett.
Kelly Shiflett: Passed away suddenly on the afternoon of January 16th.
Kelly Shiflett: <unk> was one of the most visionary see I've.
Kelly Shiflett: I've had the good fortune of being around.
Cody could unquestionably out dream minion, Matt, but he had all the engineering and technical skills to make all of it come to life.
Kelly Shiflett: On top of that he pastured, our company staff with love and humble attention that drove the unique culture, we aspire to build.
Kelly Shiflett: Fortunately Cody made toward his staff incessantly for many years to always be prepared and while I'm confident in the future. Our company is reeling from his departure.
Kelly Shiflett: Yeah.
Kelly Shiflett: Now about our results for the quarter. What I think is important is that these results include a pre tax loss in mortgage of about $730000, which obviously is timing related and about $1 4 million lower than where we were in the third quarter.
Kelly Shiflett: And while I don't want to steal all of Mack Good news, which I have been known to do.
Kelly Shiflett: In the quarter, our margin was up our expenses were down NPA down to very low levels liquidity and capital strong and getting stronger.
Mack Good: Nobody at frame of things that we can even see land yet on this journey to top quartile operating ratios, but it's nice to know that we have a lot more wind in our sails.
Mack Good: We took advantage of all the chaos in the industry in 2023 and built momentum that can be clearly seen in improving margin and operating expense control the assets close to 2022 levels.
Mack Good: Going into the new year and impressive growth in core deposits at levels that drive results.
Mack Good: Without any noise in the quarter, our margin was up about 10 basis points.
Mack Good: Resulting from a card management of all of the important factors, we control deposit costs. We increased loan yields are incremental activity was very accretive.
Kelly Shiflett: There is more information and match details better shortly coming but for the quarter. We opened about 75 million in new deposit accounts costing only $2 six 9%.
Mack Good: And that funded new loan production of $86 million with yields of $8 38.
Mack Good: With this kind of activity.
Mack Good: The momentum on margins and net interest income is clearly on our side going into 'twenty, four which is critical to continued quarterly improvement in our ratios.
Mack Good: Cost controls are equally important.
Especially in a year when revenue was so pressured we.
Mack Good: We delivered an impressive second half of 'twenty three with the changes that we made earlier in the year. We've restructured almost every division consolidated eight branches and leveraged technology to absorb even more of the jobs and tasks that were previously Cushing comp levels.
Mack Good: This restructuring mindset continued through the fourth quarter and honestly into today and while the improvements we are making are smaller individually. They are large enough to offset growth levels and allow more of the anticipated revenue to make it to the bottom line.
Mack Good: In 2023, we grew deposits a touch better than 20% with a substantial amount coming through digital channels.
Mack Good: A year later, we still have over 90% of the deposit accounts, we opened originally.
Mack Good: And with virtually no advertising expense, we continue to open accounts almost solely through referrals from existing customers.
Mack Good: We are live with business accounts, now and focusing that activity really only owned referrals for the time being but the promise of lower cost deposits on this platform is starting to take shape.
Mack Good: Our core bank as well outperformed in 'twenty, three with our retail franchise driving substantial deposit activity.
Mack Good: Our branch consolidation and major industry headwinds.
Mack Good: We've taken Bob to new levels.
Mack Good: We didn't think were possible and we're starting to see customer referrals from for new accounts.
Mack Good: That need the convenience and the technology, we're bringing to the table.
Mack Good: Over the last few quarters, we've opened 4400, new non CD deposit accounts with approximately $147 million of balancing our balances costing a remarkably low to two 5%.
Mack Good: I don't want to convey to anybody that we've cracked that nut or that this effort is on autopilot moving deposit balances, even with noticeably better tools and technology is it's through sheer force in grid, but the momentum and success that we've had so far builds confidence in our staff and we are determined to <unk>.
Mack Good: Continued this trend.
Mack Good: Okay.
Mack Good: A few other notable and I think important factors for us for our 2023.
Mack Good: Our key national divisions Panacea in life premium Finance had outstanding years Panacea was just 90 exclusive banking partner of the American Dental Association.
Mack Good: And shortly thereafter closed its series B round rightly, establishing an impressive market value for this concept.
Mack Good: Ownership and paying a fee is worth about $20 million, which of course at this point is unrealized while the while while that entity is consolidated.
Mack Good: We anticipate being able to de consolidate and recognized the gain in the near future.
Mack Good: Which would give us substantial flexibility to either ramp up share repurchases or increase our growth rate by attach across the bank.
Mack Good: Life premium had an amazing year, bringing substantial diversification and quality owned our balance sheet at yields that are substantially better than CRE.
Mack Good: On top of that they built remarkable technology to drive efficiency and speed and they operate with one of the lowest expense burdens imaginable.
Mack Good: Lastly.
Mack Good: Despite an expected slowdown.
Mack Good: Despite the expected slowdown in activity and profitability.
Our mortgage division finished the year profitable with just $600 million total protection, we have recruited all year without big sign on bonuses using culture and great technology to build our stable of producers.
Mack Good: Looking at the current month January 24, our pipeline is up over 25% from a year ago and so we feel like the revenue opportunity here is much brighter.
Mack Good: Turning this over to Matt I'm pretty excited about what 24 could bring our core banks never been this strong on expense control or management on core deposit growth and loan quality. Our divisions are past the concept stage and in places where they will drive the base operating ratios that we expect.
Matt Smith: And our capital and liquidity levels gives us all the flexibility we need to be nimble with uncertain.
Matt Smith: Economic and rate conditions.
Matt Smith: Turning to you.
Dennis <unk>: Thank you Dennis.
Dennis <unk>: I'll provide a brief overview of our results. So that we can get to Q&A, but as a reminder, a full description of the fourth quarter results can be found in our earnings release and Investor presentation, both of which are on our website.
On our 8-K with the SEC.
As Dennis just discussed our results. This quarter include the consolidation of Tennessee, a financial holdings are psh results will be discussed relative to common shares unless otherwise noted.
Dennis <unk>: Operating earnings per share for the fourth quarter were $8 6 million or <unk> 35 per diluted share versus $7 8 million or <unk> 32.
Dennis <unk>: Linked quarter and up substantially from <unk> in the year ago period.
Dennis <unk>: Total assets were $3 9 billion.
Kelly Shiflett: Essentially up a little bit versus September 30.
Matt Smith: Excluding PPP loans, which are de Minimis at this point and loans held for sale loan balances increased one 5% linked quarter and thats after selling roughly $31 million or selling are participating out of roughly $31 million of loans in the fourth quarter.
Kelly Shiflett: Deposits were essentially flat as we've discussed previously we managed excess liquidity by sweeping off excess deposits of which we had approximately 113 million swept off the balance sheet at December 31 <unk>.
Kelly Shiflett: Impressive impressively and as noted in our press release average noninterest bearing deposits were essentially flat for the third quarter in a row, which we think is.
Kelly Shiflett: Exciting in the current environment.
Matt Smith: Net interest income excluding accounting noise from third party managed portfolio increased almost $1 million to $27 7 million in the fourth quarter as funding cost pressures were offset with higher earning asset yields.
Matt Smith: Core net interest margin as Dennis alluded to increased 10 basis points to three 9% in the fourth quarter.
Matt Smith: We continue to believe we have a unique advantage due to our two pronged deposit funding strategy as a result in the fourth quarter core bank cost of deposits increased only three basis points versus the third quarter.
Matt Smith: Excluding accounting adjustments noninterest income was $5 9 million in the fourth quarter versus $7 $9 million in third quarter, largely due to reduced mortgage activity, which we think will.
Matt Smith: Seasonal.
Matt Smith: Will improve in the first quarter.
Kelly Shiflett: Core noninterest expense, excluding accounting adjustments nonrecurring item and mortgage was $18 7 million for the fourth quarter versus $20 5 million in the third quarter.
Kelly Shiflett: As we discussed in the press release, the fourth quarter includes expense reimbursement from PNC financial holdings related to division expenses.
Mack Good: But in addition to that the decline is reflective of administrative cost saves that we announced earlier in the year and the consolidation of eight branches in October.
Mack Good: The provision for credit losses was $3 1 million in the fourth quarter versus $1 6 million in the third quarter.
Matt Smith: $3 million of that was due to accounting for our third party managed portfolio, which is offset by noninterest income gains core net charge offs were $2 million more surety of which was charge off related to specific reserves from credits impaired in previous quarters.
Nonperforming assets were down substantially to $7 7 million or 20 basis points of assets at the end of the year.
Kelly Shiflett: The allowance for credit losses to gross loans was 106% at December 31 versus.
Kelly Shiflett: 113 basis points last quarter.
Kelly Shiflett: Lastly, as Dennis indicated operating ROA improved to 89 basis points in the fourth quarter.
Highest level since the second quarter of 2021.
Kelly Shiflett: We have rightsize the expense base and are confident we can keep grinding net interest income higher with a healthy margin combined.
Kelly Shiflett: With additional mortgage activity that we expect in 2024, we believe we still have opportunity to improve profitability, even in a tough environment and are optimistic about our prospects in the near term.
Kelly Shiflett: With that we can now open the line for Q&A.
Kelly Shiflett: At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad. Our first question will come from the line of Casey Whitman with Piper Sandler. Please go ahead.
Hey, good morning.
Casey Whitman: Good morning, Jamie.
Casey Whitman: So just looking at that core operating expense burden.
Cable you have in the release just coming off I think its 18.7 million do you still have room to bring that down a bit in the first quarter just for full cost saves coming off or is this.
Jamie: Pretty good run rate.
No.
Casey Whitman: I would say a little artificially low Casey.
I think our guidance previously of 19% to 19 and a half is still the better.
Casey Whitman: Run rate that $18 seven in the fourth quarter does include some excess expense reimbursement from Panacea holdings.
Casey Whitman: That won't be there in the first quarter, even though they will still be.
Casey Whitman: Reimbursing us for expenses in the division.
Casey Whitman: And it also had some other.
Casey Whitman: Accrual noise that would offset some of that so I would say that 19% to $19 $5 million is still the best run rate.
Casey Whitman: In the near term.
Kelly Shiflett: Okay, but that $2 8 million you referenced in the expenses for the effect of consolidating panacea, that's just the reimbursement costs.
Kelly Shiflett: Largely while they're consolidated all of our expenses are added to our expenses.
Kelly Shiflett: But there.
Kelly Shiflett: The vast majority of their expenses outside of a couple of small things.
Kelly Shiflett: Related to our expense.
Reimbursement.
Kelly Shiflett: Okay, and just I mean looking.
Kelly Shiflett: Looking at the Panacea relationship just in the near term I guess, how does the investment effect.
Kelly Shiflett: P&L for you guys going forward or does it not in the near term or just start dumbed down how it's how it's going to work.
Kelly Shiflett: The incremental profitability from payments.
What's sort of been hitting the bottom line.
Kelly Shiflett: Spread income minus their operating expenses.
Kelly Shiflett: Plus a little bit of fee income likely from loan sales and all that.
Kelly Shiflett: Going forward, especially now that the capital is is at the parent.
Kelly Shiflett: The bottom line is basically.
Kelly Shiflett: Our operating hurdle rate.
Kelly Shiflett: <unk> their average outstanding.
Kelly Shiflett: Thomas There total assets.
Kelly Shiflett: So.
I would probably expect I, probably expect somewhere.
Kelly Shiflett: $1 million seven.
And many of seven 1 million eight to be hitting the bottom line.
Kelly Shiflett: Pretty consistently until and increasing obviously is as <unk>.
Kelly Shiflett: Assets increase whereas in the past it might fluctuate if they had a big loan growth quarter, we might post.
Kelly Shiflett: Zero, just because we're finding the provision or if we did some recruiting or something like that.
Kelly Shiflett: The expense reimbursement was basically to establish that.
Operator: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Primus Financial Corp. Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
Mack Good: A little bit lower operating hurdle the operating hurdle going forward is higher the expense reimbursement that maps talking about was basically just to catch us up for 2000 and going forward. Our operating results from <unk>, It will be higher and they will be more consistent.
Operator: 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, then the number 1 on your telephone keypad. If you'd like to withdraw your question, press star 1 again. I would now like to turn the conference over to Matt Switzer, Chief Financial Officer. Please go ahead.
Kelly Shiflett: Okay great.
Great. Thank you and just given the go ahead.
Kelly Shiflett: Obviously gives I know this is very confusing what we tried to do.
Kelly Shiflett: Is.
Put.
Kelly Shiflett: Things on up as.
Kelly Shiflett: As much as possible and allow you to get back to an apples to apples comparison to the last couple of quarters.
Good morning, and thank you for joining us on this 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 statement.
Kelly Shiflett: So if you.
The.
Kelly Shiflett: The consolidation I mean, right now they only have expenses.
Kelly Shiflett: And most of it is expense reimbursement to us so if you take.
Kelly Shiflett: Take.
Kelly Shiflett: All of the line items other than noninterest expense.
Further discussion of the company's risk factors and other important information regarding our forward-looking statements is 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, firmnessbank.com. We undertake no obligation to update or revise forward-looking statements to reflect change assumptions, the occurrence of unanticipated events, or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. A reconciliation of the non-gap measures to the most comparable gap measures can be found in our earnings report. With that, I will now turn the call over to our President and Chief Executive Officer, Dennis. Thank you, Matt, and thank you to all of you that have joined our fourth quarter conference call.
Kelly Shiflett: There is very essentially no impact from the consolidation in those line items. There, it's still Panacea Division line items, which we've had in our run rate for the last three years. The change is really on the noninterest expense line and then a lot of that is also offset down below in the noncontrolling.
Kelly Shiflett: Interest.
Speaker Change: Because we only own 19% of it.
Kelly Shiflett: So if youre trying to get back to apples to apples.
Kelly Shiflett: With those.
Kelly Shiflett: Revenue line items.
Kelly Shiflett: And then.
Basically.
Use the noninterest expense that youre not just talked about.
Kelly Shiflett: As you think about going forward and that will get you back to.
Before I get into our results for the quarter and the year, I wanted to let the investing public know that our company CIO, Cody Shefflett, passed away suddenly on the afternoon of January 16th. Cody was one of the most visionary CIOs I've had the good fortune of being around. He could unquestionably outdream me and Matt, but he had all the engineering and technical skills to make all of it come to life.
Kind of how we have been prior to the consolidation.
Got it and then the $19 million referenced would include the effect of Tennessee. It correct and then you'd add mortgage on top of it.
Kelly Shiflett: It would include the effect of the.
Kelly Shiflett: The future level of reimbursement front P&C it yes, as if they weren't consolidated.
Okay.
Kelly Shiflett: Appreciate that.
Kelly Shiflett: And then just given where capital is today and the potential to keep growing I guess, just how are you thinking about <unk>.
Dennis: On top of that, he pastored our company staff with love and humble attention that drove the unique culture we aspire to build. Fortunately, Cody mentored his staff incessantly for many years to always be prepared. And while I'm confident in the future, our company is reeling from his departure. Now about our results for the quarter, what I think is important is that these results include a pre-tax loss on the mortgage of about $730,000, which obviously is timing-related and about $1.4 million lower than where we were in the third quarter. And while I don't want to steal all of Matt's good news, which I've been known to do,
Kelly Shiflett: Overall balance sheet going forward.
Kelly Shiflett: Could you potentially start that portfolio more sort of how should we think about that.
Yes, I know we've talked the last couple of quarters about mid single digits growth I think for 'twenty four we're targeting more towards <unk>.
Kelly Shiflett: Around 10% overall balance sheet growth.
Kelly Shiflett: Okay.
Thank you.
Kelly Shiflett: Last thing I'll ask just appreciate there is some seasonality within mortgage this quarter, but what's a reasonable outlook for those revenues next year to the extent you can share.
Kelly Shiflett: Okay.
Kelly Shiflett: We made seven or 800007 or 800000 or so in the second and third quarter.
Dennis: In the quarter, our margin was up, our expenses were down, NPAs down to very low levels, liquidity, and capital were strong and getting stronger. Nobody at Premise thinks that we can even see land yet on this journey to top quartile operating ratios, but it's nice to know that we have a lot more wind in our sails. We took advantage of all the chaos in the industry in 2023 and built momentum that can be clearly seen in improving margins, operating expense control that has us close to 2022 levels going into the new year, and impressive growth in core deposits at levels that drive results. Without any noise in the corridor, our margin was up about 10 basis points, resulting from hard management of all the important factors.
Kelly Shiflett: I think we'd be probably 25% higher than that in the second and third quarter.
Kelly Shiflett: I don't think we'd normally would have broke even excuse me lost money in the fourth quarter. So I think a little bit of that has to do with.
Kelly Shiflett: Some rate fluctuations in the fourth quarter seasonality, but.
Kelly Shiflett: Yes.
Kelly Shiflett: I mean, we made I think altogether, we made like 300000 in mortgage for the year of $600 million $600 million.
Kelly Shiflett: The incremental I think we probably could be somewhere.
Speaker Change: $900 million, maybe even a $1 billion.
And it's going to be incrementally much more profitable just given.
Dennis: We controlled deposit costs. We increased loan yields. Our incremental activity was very accretive.
Speaker Change: The fixed expense burdened areas.
Speaker Change: Is not expected to grow.
Dennis: There's more information in Matt's details that are coming soon, but for the quarter, we opened about $75 million in new deposit accounts, costing only 2.69%, and that funded new loan production of 86 million with yields of 838. With this kind of activity, the momentum on margins and net interest income is clearly on our side going into 2024, which is critical to continued quarterly improvement in our ratios. Cost controls are equally important, especially in a year when revenue was so pressured. We delivered an impressive second half of 23 with the changes that we made earlier in the year.
Speaker Change: If we made 300000 this year.
Speaker Change: And we were able to increase volume.
Speaker Change: To $900 million, which it looks like we are going to be able to do.
Speaker Change: Probably $3 million pre.
Speaker Change: Pre tax.
Speaker Change: Sounds good thank you.
Speaker Change: Yes. Thank you.
Speaker Change: Your next question comes from the line of Russell Gunther with Stephens. Please go ahead.
Russell Gunther: Hey, good morning, guys.
Russell Gunther: I wanted to start Matt.
On the loan growth commentary about 10% for 2020 for you guys just spend a minute touch on the mix.
Matt Smith: Maybe particularly addressable premium financing in Tennessee as well.
Dennis: We've restructured almost every division, consolidated eight branches, and leveraged technology to absorb even more of the jobs and tasks that were previously pushing comp levels. This restructuring mindset continued through the fourth quarter and honestly into today. And while the improvements we are making are smaller individually, they are large enough to offset growth levels and allow more of the anticipated revenue to make it to the bottom line. In 2023, we grew deposits by a touch better than 20 percent with a substantial amount coming through digital channels. A year later, we still have over 90% of the deposit accounts we opened originally. And with virtually no advertising expenses, we continue to open accounts almost solely through referrals from existing customers.
Matt Smith:
Matt Smith: I mean, I think wide premium and paying a fee or both.
Matt Smith: It could.
Matt Smith: If we let them out of the barn.
Matt Smith: I think they could probably good enough growth to move the needle.
Matt Smith: Our much larger banks. So some of what I would tell you here is muted relative to what their real opportunity could be but.
Tyler Scott: Tyler Scott.
Matt Smith: Great.
Production capabilities, but he is also working on.
<unk>.
Matt Smith: On.
Matt Smith: Yes.
Flow agreements and loan sale opportunities. So I don't know that as much of that will we will hit the balance sheet, probably 100 to 150 on our balance sheet for Tyler for Panacea.
Dennis: We're live with business accounts now and focusing that activity really only on referrals for the time being, but the promise of lower-cost deposits on this platform is starting to take shape. Our core bank is well positioned for 2023, with our retail franchise driving substantial deposit activity amidst branch consolidation and major industry headwinds. We've taken Vibe to new levels that we didn't think were possible, and we're starting to see customer referrals for new accounts that need the convenience and the technology we're bringing to the table. Over the last two quarters, we've opened 4,400 new non-CD deposit accounts with approximately 147 million balances costing a remarkably low 2.25 percent. I don't want to convey to anybody that we've cracked this nut or that this effort is on autopilot.
Tyler Scott: I think life premium finance probably.
Tyler Scott: 100, 100, 100 150 range probably.
Tyler Scott: Life premiums getting yields that are <unk>.
Matt Smith: Just remarkable.
Matt Smith: Yes.
<unk> burden is just unimaginable low.
Matt Smith: And then I think the core bank, probably could do the same as either of those divisions I just think the.
Kelly Shiflett: I don't know for sure that the market is there so.
Kelly Shiflett: Kind of what gets us back Thats, probably a 150 in each of the divisions and probably somewhere around.
75 to 100 in the core bank.
Kelly Shiflett: Okay long term thats very helpful.
Kelly Shiflett: Yes long term.
Sure everybody knows long term, we would love to be driving more activity through the core banking there is the potential there and we've got the horses.
Kelly Shiflett: I think we're all just realistic I don't know that the market or the economy can be there for that.
Dennis: Moving deposit balances, even with noticeably better tools and technology, is through sheer force and grit. But the momentum and success that we've had so far build confidence in our staff, and we're determined to continue this trend. A few other notable and, I think, important factors for our 2023. Our two national divisions, Panacea and Life Premium Finance, had outstanding years. Panacea has just been named the exclusive banking partner of the American Dental Association and shortly thereafter closed its Series B round, rightly establishing an impressive market value for this concept.
Kelly Shiflett: Okay.
Kelly Shiflett: Really helpful color, Dennis and then maybe just switching gears to the margin. So again you guys talked about the success you have with new deposits.
Dennis <unk>: Much lower rate than where the loan yields are coming on and we're looking at a 10% loan growth. So could you spend a second just thinking through how that core margin trends in 2024.
Dennis <unk>: We set expectations for us what you're thinking with regard to fed funds and that expectation as well.
I don't know that we have a core fit.
Heated debate internally over the past of fed funds Russell.
Dennis <unk>: Wrapping because he wanted to bet last year, yes ill under vet feel.
Dennis: Our ownership in Panacea is worth about $20 million, which, of course, is unrealized while that entity is consolidated. We anticipate being able to deconsolidate and recognize this gain in the near future, which would give us substantial flexibility to either ramp up share repurchases or increase our growth rate by a touch across the bank. Life Premium had an amazing year bringing substantial diversification and quality to our balance sheet at yields that are substantially better than CRE. On top of that, they've built remarkable technology to drive efficiency and speed, and they operate with one of the lowest expense burdens imaginable. Lastly, Despite the expected slowdown in activity and profitability, our Mortgage Division finished the year profitable with just $600 million in total production. We have recruited all year without big sign-on bonuses, using culture and great technology to build our stable of producers.
I feel like I'm going to win this year.
Dennis <unk>: I may not.
Ill give you scenarios.
Rates were flat.
Margin will continue to grind higher from repricing and we think we could continue to moderate deposit costs.
And on the <unk>.
Balance sheet growth that Dennis just alluded to I mean, we've already got $100 million of that essentially funded.
So we think margin won't continue to grind up probably by the end of the year to the.
Mid $3 33 to 35 range.
A couple of rate cuts depending on when they came in the year.
Arguably may cost us a couple of basis points.
That's going to be true for the whole industry I don't think we get as an industry a whole lot of benefit from that.
<unk> got us because of the shape of the curve.
So maybe were.
325 to $330, if we get a couple of rate cuts.
But that's all it is.
Dennis: Looking at the current month, January 24, our pipeline is up over 25 percent from a year ago, and so we feel like the revenue opportunity here is much brighter. Turning this over to Matt, I'm pretty excited about what January 24 could bring. Our core bank's never been this strong on expense control or management, on core deposit growth, and loan quality. Our divisions are past the concept stage and in places where they will drive the boost to operating ratios that we expect. And our capital and liquidity levels give us all the flexibility we need to be nimble with uncertain economic and rate conditions. So with that, Matt, turn it around.
Hard to predict but that's kind of what we're thinking I think overall we are.
I wrote this in my comments and then I deleted it because it was just.
The way I read it, but I think we're positioned really well.
<unk> going up rates going down, Matt and I, both believe that a couple of rate cuts is not going to bring any relief I mean, 5% fed funds is not going to bring relief.
On deposit costs.
Matt Smith: Because deposit costs for the industry is still in the teams make mostly side.
So I just don't think that deposit costs are.
To start drifting lower dollar for dollar I don't think we won't have.
Pretty have data on the first couple of rate cuts anyway.
Thank you, Dennis. I'll provide a brief overview of our results so that we can get to Q&A. But as a reminder, a full description of the fourth quarter results can be found in our earnings release and investor presentation, both of which are on our website and in our 8K with Yes. As Dennis just discussed, our results this quarter include the consolidation of Pandacy of Financial Holdings, or PFH. Results will be discussed relative to common shares unless otherwise noted. Operating earnings per share for the fourth quarter were $8.6 million, or $0.35 per diluted share versus $7.8 million, or $0.32 in the linked quarter, and up substantially from $0.03 in the year-ago period. Total assets were $3.9 billion, essentially up a little bit versus September 30, excluding PPP loans, which are de minimis at this point, and loans held for sale. Loan balances increased 1.5% in the fourth quarter, and that's after selling or participating out of roughly $31 million of loans in the fourth quarter.
Matt Smith: So.
Well that's helpful guys I appreciate that.
That narrative.
The follow up would be that margin guide is relative to that core 309 from this quarter.
Yes, yes, okay, great. Thanks for that and then just last one.
It seems like Youre getting increased capital flexibility here.
Jim comment on buyback expectations.
Yes.
Hurdles to getting that done.
Matt Matt.
I mean, we.
We come on these calls and obviously, we built some engine that can grow the balance sheet.
And so we're real real cognizant of capital and capital levels and capital opportunities and especially when the stock is trading at or.
Even for a lot of 23 below tangible book.
We are even more determined to see capital levels moving higher we just don't have the flexibility to go grab.
New capital so.
That being said, yes.
Matt and I are pretty confident and we're operating ratios are going where earnings per shares going where our capital build is.
Deposits were essentially flat, as we discussed previously. We manage excess liquidity by sweeping off excess deposits, of which we had approximately 113 million swept off the balance sheet at December 31st. Impressively, and as noted in our press release, average non-interest-bearing deposits were essentially flat for the third quarter in a row, which we think is exciting in the current environment. Net interest income excluding accounting noise from a third-party managed portfolio increased almost $1 million to $27.7 million in the fourth quarter. Funding cost pressures were offset with higher earning assets.
Got to start coming in so if if.
We worked to be able to deconsolidation gain we.
And the stock has not.
Moved off of tangible book, we anticipate getting pretty active.
With that capital.
Okay, I think our I think our.
Our story is starting to get a little bit of obvious legs to it so Matt Matt are thinking that it might end up being capital debt.
Let's just grow a little more Russell, but if not.
We're prepared to.
One a lot more of our stock.
Core net interest margin, as Dennis alluded to, increased 10 basis points to 3.09% in the fourth quarter. We continue to believe we have a unique advantage due to our two-pronged deposit funding strategy. As a result, in the fourth quarter, core bank costs of deposits increased only three basis points versus the third quarter. Excluding accounting adjustments, non-interest income was $5.9 million in the fourth quarter versus $7.9 million in the third quarter, largely due to reduced mortgage activity, which we think will... is seasonal and will improve in the first quarter. Core non-interest expense, excluding accounting adjustments, non-recurring items, and mortgage, was $18.7 million for the fourth quarter versus $28.5 million in the third quarter.
Understood Alright, thanks for the thoughts. Thank you both for taking my question.
Alright.
Again, Brian a question Press Star one and your next question will come from the line of Christopher <unk> with Janney Montgomery Scott. Please go ahead.
Hey, Thanks, Good morning, Dennis and Matt you May have partially answered this in a previous previous callers, but I wanted to understand is the pretax pre provision that we talk about an operating basis. This quarter can we further adjust that back for the on the operating expenses of $18 seven that you called out is the <unk> higher.
And it appears because of that operating expense change.
Yes, yes. It is it is a touch higher.
Given what Matt was saying, so you'd probably you'd probably need to add.
Matt will say, 19% to 19 and a half.
And.
I would guide to the lower end of that range might get to the higher end.
As we discussed in the press release, the fourth quarter includes expense reimbursement from Pansy Financial Holdings related to division. But in addition to that, the decline is reflective of administrative costs that we announced earlier in the year and the consolidation of eight branches in October. The provision for credit losses was $3.1 million in the fourth quarter versus $1.6 million in the third quarter.
But.
So, yes, you probably could add three or 400000.
To that Chris.
Okay, and Thats all expenses would there be any adjustments on the on the revenue side to kind of get a true apples and apples.
No.
So all the third party is netting against each other so we don't have to be too concerned about that.
On the pre tax pre provision well I can take that back and pre tax pre provision. There is a third party effect through noninterest income that if you wanted to take all the third party that would come out.
3 million of that was due to accounting for a third-party managed portfolio, which is offset by non-interest in. Core net charge-offs were $2 million, the majority of which was charge-off related to specific reserves from credits impaired in previous quarters. Non-performing assets were down substantially to 7.7 million or 20 basis points of assets at the end of the year. The allowance for credit losses to gross loans was 1.06% at December 31, versus 113 basis points last quarter.
And theres a lot of that with customers.
Okay to use that to kind of net debt, which would therefore be more reduction to get to kind of a run rate.
Yes.
But if youre used to seeing.
The noninterest expense above the line, obviously that Scott.
The panacea consolidated expenses in there so you got to adjust that out.
As well because if you use the table for our noninterest expense.
That's adjusting out the consolidated expenses from panacea.
Lastly, as Dennis indicated, Operating ROA improved 89 basis points in the fourth quarter, the highest level since the second quarter of 2021. We have rights at the expense base and are confident we can keep driving net interest income higher with a healthy margin. Combined with additional mortgage activity that we expect in 2024, we believe we still have an opportunity to improve profitability even in a tough environment and are optimistic about our prospects in the near future. At this time, I'd like to remind everyone in order to ask a question, press star followed by the number one on your telephone keypad. Our first question will come from the line of Casey Whitman with Piper Sandler. Please go ahead. Hey, good morning. Morning. Good morning.
Yes understood. Okay. Thank you for walking me through that and then when we talk about deposit costs and I. Appreciate the angles that you've got in the release what is the most important one that youre focusing on as you manage this business quarter over quarter.
On an incremental deposit cost as a whole or or sort of a way to make sure I was thinking going forward and should we be focused on that core bank number or are you looking at all three and trying to turn dials on each of them.
Right.
All three all three for sure.
I mean, the fact that our.
I think coming into this rate cycle. This inverted yield curve crafts people did not think about premises having the strongest.
Core bank deposit portfolio.
So it's remarkable that we've moved all the way through this.
And really in our region, we have one of the lower core bank deposit costs.
And they are part of the reason is I mean, we're just not as desperate for every single dollar because we have so much flexibility.
On the digital platform.
So just looking at that core operating expense burden table you have in the release, it's coming off, I think it's $18.7 million. Do you still have room to bring that down a bit in the first quarter just with full cost savings coming off, or is this a pretty good run rate? No, I mean, it's, I would say a little artificially low, Casey. I think our guidance previously of 19 to 19 and a half is still the better run rate than 18.7 in the fourth quarter does include some excess expense reimbursement from Panace Holdings that won't be there in the first quarter, even though they will still be reimbursing us for expenses in the division. And it also had some other, a cruel noise that would offset some of that.
I remember the digital platform it was.
For like 30 days it seemed like pretty extensive mining and then for the next 11 months at St.
Different.
I think some of the things that we're doing now on the platform, whereas we had a lot of.
Sort of rapid growth I feel like right now, we're really getting into a sweet spot where the growth on the digital platform as is.
Is really at the right level for for say a $4 billion balance sheet. It is not.
Its not anything thats really accelerated.
At remarkable rates, it's really leveraging.
The technology and leveraging referrals and so I think the growth there is a little muted and it really has lessened the core banks.
<unk>.
Advantages shine through.
While we why and how we get.
Okay.
Such a remarkable level on incremental deposit costs.
So I would say that 19 to 19.5 million is still the best run rate in the near term. Okay, but that $2.8 million you reference in the expenses for the effect of consolidating panacea, that's just the reimbursement cost? largely
Got it on the long haul not only would we expect all things being equal that the digital cost would come down quarter over quarter again in Q1.
While they're consolidated, all of their expenses are added to our expenses, but they're The vast majority of their expenses, outside of a couple of small things, were related to our expense reimbursement. Okay, just, I mean, looking at the panacea relationship, just in the near term, I guess, how does the investment affect the P&L for you guys going forward, or does it not, here in the near term, or just sort of dumbed down how it's going to work? I mean the incremental profitability from Panacea, which has sort of been hitting the bottom line, you know, spread income, you know, minus their operating expenses, plus a little bit of fee income lately from loan sales and all that. Going forward, especially now that the capital is at the parent, the bottom line is basically our operating hurdle rate times their average outstanding times their total assets. Ciao.
I mean, I think the I think the costs.
Probably 90% of the balances on the digital platform. I think are are probably have a pretty high beta to fed funds.
Versus our core bank that Matt and I are saying probably.
Has a pretty low beta on the first couple rate moves so I think falling rates might affect the digital platform faster.
Which you would expect given the higher cost I think what's going to bring the weighted average cost on the digital platform down.
Are some of the new incremental products that we're selling.
Have lower betas or excuse me lower spreads to fed funds.
And or <unk> are just noninterest bearing sort of on the business side.
Got it and that makes sense great. Thank you for taking the questions and all the information today.
Alright, Thanks, Chris.
You know, I would probably expect somewhere, a million seven, a million seven, a million eight to be hitting the bottom line pretty consistently and increasing, obviously, as assets increase. Whereas in the past, you know, it might fluctuate. If they had a big loan growth quarter, we might post, um, you know, a zero just because we're funding the provision or if we did some recruiting or something like that. The expense reimbursement was basically to establish that, a little bit lower operating hurdle. The operating hurdle going forward is higher, so the expense reimbursement that Matt's talking about was basically just to catch us up for 23. Going forward, our operating results from Panacea will be higher, and they will be more consistent. Thank you. I was just going to say, I know this is very confusing. What we tried to do is put things on as much as possible and allow you to get back to an apples to apples comparison for the last couple quarters. So, if you...
We have no further questions at this time I will turn the call back over to Dennis <unk> for closing remarks.
Thank you again for joining our call, Matt and I are available all day.
If you have any more questions or comments with that I hope you have a great weekend Dr. <unk>.
That will conclude today's meeting we thank you all for joining and you may now disconnect.
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The, The consolidation, I mean, right now, they only have expensive, and most of it is expense reimbursement to us. So if you take all of the line items, other than non-interest expense, there's essentially no impact from the consolidation on those line items. It's still the panacea division line items, which we've had in our run rate for the last three. The change is really on the non-interest expense line, and then a lot of that is also offset down below in the non-controlling interest because we only own 19% of it. So if you're trying to get back to apples to apples, start with those revenue line items and then basically use the non-interest expense that you and I just And that will get you back to kind of how we were prior to the consolidation. The $19 million you referenced would include the effect of panacea, correct? And then you'd add a mortgage on top of it?
It would include the effect of the future level of reimbursement from PANCEA, yeah, as if they weren't already appreciating that. And then just given where capital is today and the potential to keep growing, I guess just what are you thinking? Overall balance sheet going forward, could you potentially start the portfolio more or sort of how should we think about it? Yeah, I know we've talked in the last couple quarters about mid-single digit growth. I think for 24, we're targeting more towards around 10% overall balance sheet growth. Thank you. Last thing I'll ask, just appreciate there's some seasonality within mortgage this quarter, but what's a reasonable outlook for those revenues next year to the extent you can, and you know, we made $7 or 800,000, seven or 800,000, or so in the second and third quarter.
I think we'd be probably 25% higher than that in the second and third quarter. I don't think we normally would have lost money in the fourth quarter, so I think a little bit of that has to do with some rate fluctuations and the fourth quarter seasonality, but um, I mean we made, I think all together we made like $300,000 in mortgage during the year on $600 million.
And I think we probably could be somewhere $900 million, maybe even a billion. And it's going to be incrementally much more profitable, just given that the fixed expense burden there is not expected to grow.
If we made $300,000 this year and we were able to increase volume... to $900 million, which it looks like we're going to be able to do, probably 3 million. Sounds good. Thank you. Yeah, thank you. Your next question comes from the line of Russell Gunther with Stevens. Please go ahead.
Russell Gunther: Hey, good morning, guys. I just wanted to start on the loan growth commentary about 10% for 2024. Guys, just spend a minute touching on the mix, maybe particularly address the like premium finance and panacea as well. Um, I think Wythe Premium and Panacea both could. You know, if we let them out of the barn, I think they could probably get good enough growth to move the needle for a much larger bank. So some of what I tell you here is muted relative to what their real opportunity could be. But, you know, Tyler's got it.
Dennis: Great production capabilities, but he's also working on flow agreements and loan sale opportunities. So I don't know that as much of that will hit the balance sheet, probably $100 to $150 on our balance sheet for Tyler, for Panacea. I think life premium finance will probably be in the $100, $150 range, probably.
Dennis: Life premiums are getting yields that are just remarkable. The expense burden is just unimaginably low, um, and then I think the Core Bank probably could do the same as either of those divisions. I just think the...
Dennis: I don't know for sure that the market is there, so I kind of what gets us back. It's probably 150 in each of the divisions and probably somewhere around 75 to 100 in the core business.
Dennis: Okay. That's very helpful. Yeah, long term, I'll just make sure everybody knows long term, we would love to be driving more activity through the core bank, and there is the potential there, and we've got the horses. I think we're all just realistic.
I don't know that the market or the economy is going to be there for that. That's really helpful, caller Dennis. And then maybe just switching gears to the margin. So again, you guys talked about the success you had with new deposits that are at a much lower rate than where the loan yields are coming on, and we're looking at 10% loan growth. So could you spend a second just thinking through how that core margin trend in 2024 maybe sets expectations for us, and what you're thinking with regard to Fed funds in that expectation as well? I don't know that we have a core fit. There's a heated debate internally over the path of fit bonds, Russell. Matt's laughing because he won the bet last year. Yeah, I won the bet. I feel like I'm going to win it this year, too.
I'll give you a scenario: rates were flat. We think margin would continue to grind higher from repricing. I think we could continue to moderate deposit calls, and on the balance sheet growth that Dennis just alluded to, I mean, we've already got a hundred million of that essentially funded. So we think marketing will continue to grind up probably by the end of the year to the mid-330s, 335 range. A couple rate cuts, depending on when they came in the year, arguably may cost us a couple basis points, and I think that's I don't think we get, as an industry, a whole lot of benefit from rate cuts because of the shape of the curve. So, you know, maybe we are. 325 to 330 if we get a couple rate cuts, but that's all. It's hard to predict, but that's kind of what we're thinking.
I wrote this in my comments and then I deleted it because it was just, Humberson, the way I wrote it, but I think we're positioned really well, rates going up, rates going down. Matt and I both believe that a couple rate cuts are not going to bring any relief. I mean, a 5% Fed Fund is not going to bring relief on deposit costs; deposit calls for those industries are still in the two's, mostly. So I just don't think that deposit costs are going to start drifting lower dollar for dollar. I don't think we're going to have a very high beta on the first couple of rate cuts anyway.
Well, that's helpful, guys. I appreciate just framing that narrative. The follow-up would be that margin guide is relative to that core 309 from this quarter. Yes.
Yeah. Okay. Great. Thanks, Matt. And then just the last one.
Dennis: Seems like you're getting increased capital flexibility here. Love to comment on buyback expectations and the hurdles to getting that done, that Matt, Matt, and uh... I mean, you know, we come on these calls, and obviously, we've built some engines that can grow the balance sheet, and so we're real real cognizant of capital and capital levels and capital opportunities, especially when the stock is trading at or, you know, even for a lot of 23 below tangible, but we are even more determined to see capital levels moving higher. We just don't have the flexibility to go grab new capital.
Dennis: So That being said, Matt and I are pretty confident in where operating ratios are going, where earnings per share are going, where our capital build is, you know, about to start coming in. So if we were to be able to deconsolidate and get the game we, and the stock has not, moved off of Tangible Book, we anticipate getting pretty active. Oh, with that cap.
Dennis: I'm okay. I think our story is starting to get a little bit of obvious legs to it. So Matt and I are thinking that it might end up being capital that lets us grow a little more, Russell, but if not, we're prepared to... own a lot more of our stock. Understandable. All right, Dennis, thanks for the thoughts.
Russell Gunther: Thank you both for taking my questions. All right. Again, for any questions, press star 1, and your next question will come from the line of Christopher Marinac with Jenny Montgomery Scott. Please go ahead. Hey, thanks. Good morning.
Christopher William Marinac: Dennis and Matt, you may have kind of partially answered this in previous callers, but what we wanted to understand is the pre-tax pre-provision that we talk about on an operating basis this quarter. Can we further adjust that back for the operating expenses, you know, the 18-7 that you called out? Is the PPNR kind of higher than it appears because of that operating expense change? Yeah, it is a touch higher.
Dennis: Um, given what Matt was saying. So you probably need to add 19 to 19 and a half. I would guide to the lower end of that range; Matt might guide to the higher end, so yeah, you probably could add three, four hundred thousand to that group.
Dennis: Okay, and that's on expenses. Would there be any adjustments on the revenue side to kind of get a true apples-to-apples comparison? Because all the third parties are netting against each other. So we don't have to be too concerned about that, on the pre-tax, pre-provision side. Well, I can take that back.
Dennis: In pre-tax, pre-provision, there is a third-party effect through non-employment that if you wanted to take all the third-party out, and there's a lot about all the press about it, okay, so use that to kind of net that, which would therefore be a reduction to get to kind of a. But if you're using the non-interest expense above the line, obviously that's got... The pain of the consolidated expenses is in there, so you've got to adjust that out. Well, because if you use the table for our non-interest expense, that's, that's adjusting out the consolidated. Yep, I understand. Okay, thank you for walking me through that.
Dennis: And then we talk about deposit costs, and I appreciate the angles that you've got in the release. What is the most important one that you're focusing on as you manage this business quarter to quarter? On inquiry. All three. All three for sure.
Dennis: I mean, the fact that our – I mean, we – I think coming into this rate cycle, this inverted yield curve, Chris, people did not think about premises having the strongest core bank deposit portfolio. So it's remarkable that we've moved all the way through this, and really, in our region, we have one of the lower core bank deposit costs. And part of the reason is, I mean, we're just not as desperate for every single dollar because we have so much flexibility on the digital platform. I mean, I remember the digital platform. It was, for like, 30 days. It seemed like pretty expensive money. And then for the next 11 months, it seemed, differently.
Dennis: I think some of the things that we're doing now on the platform, whereas we had a lot of, sort of rapid growth. I feel like right now we're really getting into a sweet spot where the growth on the digital platform is really at the right level for, say, a $4 billion ballot sheet. It's not anything that's really accelerated by remarkable rates.
Dennis: It's really leveraging technology and leveraging referrals. And so I think the growth there is a little muted, and it really is letting the core banks' advantages shine through. That's really why we why and how we get to such a remarkable level on incremental deposit costs.
Dennis: Got it. And then, incrementally, would we expect, just all things being equal, that the digital cost would come down quarter over quarter again in Q1? I mean, I think the call, you know, probably 90% of the balances on the digital platform probably have a pretty high beta to Fed funds versus our core bank that, you know, Matt and I were saying probably has a pretty low beta on the first couple of rate moves. So I think falling rates might affect the digital platform faster, which you'd expect given the higher cost. I think what's going to bring the weighted average cost on the digital platform down are some of the new incremental products that we're selling that have lower betas, or excuse me, lower spreads to Fed funds, um, and or and or or just non-interest bearing sort of on the business side. Got it. And that makes sense to me.
Dennis: Great. Thank you for taking the questions and giving us all the information today. All right, thanks, Chris. We have no further questions at this time. I'll turn the call back over to Dennis Zimber for a closing remark. Thank you again for joining our call. Matt and I are available all day. If you have any more questions or comments, with that, I hope you have a great weekend. Talk to you soon. That will conclude today's meeting. We thank you all for joining, and you may now disconnect.