Primis Financial Corp (FRST) 2024 Q4 法說會逐字稿

Good morning. My name is Audra and I will be your conference operator today.

At this time, I would like to welcome everyone to the Primis Financial Corp., fourth-quarter earnings call.

Today's conference is being recorded. (Operator Instructions)

At this time, I would like to turn the conference over to Matthew Switzer, Chief Financial Officer. Please go ahead.

Good morning and thank you for joining us for Primis Financial Corp.'s 2024 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 risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements.

Further discussion of the company's risk factors and other important information regarding our forward-looking statements are part of our recent filings with the Securities and Exchange Commission, including our recently filed earnings release which has also been posted to the Investor Relations section of our corporate site, primisbank.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. How a non-GAAP measure relates to the most comparable GAAP measure will be discussed when the non-GAAP measure's used, if not rarely apparent.

I will now turn the call over to our President, Chief Executive Officer, Dennis Zember.

Thank you, Matt and thank you to all of you that have joined our fourth-quarter conference call.

First off. Let's start with a discussion about why we moved this portfolio into held for sale and what the impact of that decision was financially. Moving this portfolio into held for sale allowed us to market significantly enough that we can mostly neutralize the credit costs and position it to be moved off the balance sheet.

We are serious about moving on a host of strategic options. Like we said in the press release, that would realize the market value of our company and no real strategic option is available to us until this book is in held for sale and/or sold.

I believe having it marked like this lets our company focus on all of the strategies that we've outlined and, even more, to succeed. And we orchestrated this exit alongside the deconsolidation of Panacea. We would have improved tangible book value and our company's strategic future.

And I really wish we could have orchestrated that in just one quarter. But the fact is we could only do half of that this quarter and we're working on the other half, right now, for what we believe we can handle in the first half of '25.

So the decision here was either to slog through a couple more quarters with lower earnings or just take the hit, position us to shed this book as soon as we can, and push the kind of operating ratios that we believe would be noticeable in the end. I believe we made the right decision so that '25 could be cleaner.

I obviously see real value in our company that has not been recognized, partially, because we haven't been selling as hard with last year's delayed filings and some because of the noise of this consumer book.

I want to go over some of these hidden values real quick. At December 31, '24, our core bank had $2.1 billion of core deposits with the cost of deposits of only 1.87% at year end. That's 25 basis points to 50 basis points lower than some of our larger $25 billion peers. And it's easily 100 basis points lower or more than our comparably sized community bank competition.

Better yet. Our core bank has very enviable levels of CRE and we have very reliable credit quality over the last five years. We've grown core deposits slowly but surely. But we've only focused on core relationships and the result is this significant pricing advantage. The digital strategy of course, has higher rates.

But if my community bank had a cost of funds; if my community bank has a cost of deposit that's 100 basis points lower than my competition, you have to attribute some of that to a digital strategy that let us be this laser-focused in the bank.

We've achieved all of this while consolidating our branch footprint from 42 to only 24 branches, rolling most of those customers into VBE and achieving a 95% retention rate through all the consolidation. Even better, on the lending side, we ended the year with a pipeline that was twice as large as the prior year and over 80% of that volume is coming from new customers to the bank. I don't mean new money to existing customers, I mean brand-new customers that have never banked with us.

Our model in the bank is profitable and clean and positioned in very good markets.

On the digital side, we have a remarkable offering with one of the nation's only fully-digital, full-service checking account that's grown to about 18,000 customers. But if we can't drive the results, the margins, the operating ratio improvement, then really it's not valuable.

Last year, our Life Premium book yielded 647 basis points and our digital deposit cost, 507 basis points. So we only had 140 basis points of margin. I mean, both of these are very efficient platforms but, collectively, that just didn't provide a meaningful bottom line.

If you fast forward to right now, we reduced the rate on those deposits by 75 basis points. And we've moved higher on the asset side by about 200 basis points, with Mortgage Warehouse.

Essentially, we are positioned to push margins in the 325 basis points to 350 basis points range on this national strategy with efficient platforms and safe short-term asset strategies. The fact is this isn't fully at scale yet but as we build the book on warehouse and construction-perm, we will see progress in the results in '25.

Our Mortgage division has been consistently growing production, 30% to 40%, when you compare any month to the prior year. Assuming no scenario where rates fall and volumes move higher, our Mortgage company will still produce results that impact our ROA by 10 basis points to 15 basis points.

We've built this slowly over the last few years, moving from $250 million of production to over $1 billion. We could absolutely step on the gas here with recruiting but we are cautious and stingy with signing bonuses and, instead, working organic strategies like the national construction-perm offering.

Lastly, Panacea, our division focused on doctors and dentists. This division grew to just under $435 million in total loans and impressively reached almost $100 million in low cost funding. These growth rates are around 30% to 40% and are only accelerating as we move into the end of the year, where we believe we have a chance to reach 10,000 clients.

The Banking division is very profitable with an ROA that's accretive to the bank's overall ROA. And the parent company, PFH, where we have significant unrealized value continues to innovate solutions for doctors that have high adoption rates and make them customers for life.

There are $100 billion banks in our country with fewer doctor-clients than we have. And I dare say there isn't a bank in the US with more innovative ways to capture the lifetime market value of a doctor-client than Primis and Panacea have brought.

Matt will discuss in more detail and give you his reconciliation but I'd leave you with this: our moves in the fourth quarter neutralized $20 million of credit costs.

As of today, we're about $5.5 million better annualized in net interest income, from the combination of lowering deposit costs and selling life premium. That number moved to about $17 million annual once warehouses at scale in '25. And there's only $1.5 million more of incremental operating expense to achieve. This mortgage values are strong and still growing. And most importantly, our core bank is our central focus for value and profitability.

As I stated in the beginning, we are focused on all of the strategies that would realize the market value in our company. This starts with cutting out the noise and just posting the kind of results that we know the bank can achieve. It feels like a massive knife wound to have done this but limping along, trying to outlast it was not a good strategy.

I'd just rather take my L like we did and find new ways to work even harder to succeed. And we are positioned to do that.

Matt, with that, I will turn it over to you for your comment.

Thank you, Dennis.

As a reminder, some of our financial results can be found in our press release and investor presentation, both of which can be found in our 8-K Form for SEC. In those materials, you will find a discussion of recent trends and quarter-over-quarter comparisons, given the noise from various initiatives this quarter, both offensive and defensive.

My remarks this morning are going to focus on interpreting the associated adjustments to articulate the core profitability of the bank, which is closer to $10 million pre-tax income versus the loss reported on a pre-tax basis. When you exclude the consolidated pre-tax laws from Panacea holdings, we reported a loss of $17.4 million.

The following items are included in this loss related to the Consumer Program. Clean-up of $20.8 million of provision for the consumer loan book for the fair value marked an additional provision. For the smaller portion that was not moved to held for sale, $2.5 million of interest reversal related to charged-off consumer loans and $1.25 million of fraud losses on consumer loans. Without these items, we would have made $7.1 million pre-tax.

Other items that impacted the quarter or were non-recurring in nature that we discussed in the earnings release include the following: a $4.7 million net gain from the sale of the Life Premium Finance business; $1.8 million, approximately, of legal and accounting expenses related to restatements and other activities; and approximately $2 million of other expense items related to various initiatives or accrual activity that we can't lump into the non-recurring item in the press release that are not expected to continue in subsequent quarters. After the net impact of these items, the bank would have made approximately $6.2 million pretax in the fourth quarter.

This level of profitability is still below what we believe run rate will be due to the following drags: the Life Premium Finance portfolio was sold at the end of October and only partially replaced with Mortgage Warehouse in the quarter. The loss of spread on the Life Premium Finance portfolio was approximately $1.3 million but it's temporary until Mortgage Warehouse gets to scale later.

This year, we had approximately $50 million of promotional loans, on average, in the fourth quarter where we recorded no income. This cost us at least $1 million of revenue in the fourth quarter. Half of the remaining promo balances exit the period in the first quarter so this drag will largely be eliminated soon.

We lagged adjustments to rates on the digital platform due to a technology change that was planned for November. As a result, we didn't make our first rate adjustment until mid-December and another one in mid-January. This cost us another $1 million, approximately, of interest carry in the fourth quarter.

Lastly, retail mortgage is seasonally slow in the fourth quarter and was a drag to pre-tax earnings of roughly $0.5 million but will begin to flip back to profitability as we move through the first quarter and is projected to be meaningfully more profitable in 2025.

If you adjust for these drag items, pre-tax earnings potential is closer to $10 million. And before building in any growth or further margin expansion in 2025, these items are not hypothetical as they are based on strategic moves we have already implemented.

And we realized in the first half of 2025, we appreciate it. It is very hard to parse through all these moving parts but we believe the decision to tackle the consumer portfolio in the fourth quarter was the right one and positions the bank to have cleaner earnings and demonstrate the bank's true profit potential as we move through '25 and our initiatives bear fruit.

With that, operator, we can now open the line for questions.

(Operator Instructions)

Russell Gunther, Stephens.

Hey. Good morning, guys.

Morning, Russell.

If we could start on the loan growth outlook -- given some of the puts-and-takes with exit verticals and new entrants, I think the deck also referenced the new construction-perm relationship unlikely to contribute a lot this year.

But, maybe, just start in terms of the net loan growth outlook you've got baked in for '25.

I'll start. You can fill in the blanks. If you look across the bank -- this is across the company -- this is probably the first year, I think, since I've been here, that we're coming in with a pipeline and loan growth potential that's, probably, mostly bank-focused at the end of the year.

Like we said in the press release and I mentioned our core banks' loan pipeline is double what it was a year ago. So can we grow in the bank? Absolutely. I think the bank, probably, this year is somewhere between, call it, $125 million and $175 million. So not quite double digit.

But the fact is we don't focus real hard on investor CRE, we're mostly just owner-occupied CRE and C&I. We're chasing new relationships of not just new money to existing customers. We're looking for actual new customers that can help grow checking accounts as well.

Life Premium Finance is gone. So that's not in our number at the end of the year. What we expect is for Mortgage Warehouse to grow to scale, which we're calling about the same values as what we disposed of. So that's probably against where we are at the end of the year, probably another $300 million.

I think that the opportunity there is much larger than what the team we brought had. More than double that outstanding and triple that some point before they cut off funding. So there's a lot of scale potential there. But for this year, we're really just modeling, replacing Life Premium.

Panacea is going to go up and down. Panacea has got some level of opportunity with the capital market, securitizing loans and forward flow agreements. So I think Panacea may grow a little bit in the first quarter and then get to realize some of the potential for what you would see in the secondary market -- make them much more competitive with some of their doctor customers.

All right, Dennis, thank you. It's really helpful.

And then, maybe, just switching gears to the margin. So similar question. Just given the entries and exits of lending verticals, you talked about 325 basis points to 350 basis points for the margin over time, maybe just give us a sense for the cadence and where you would expect to exit for this year, for '25.

I think we should be closer to the upper end of that range as we roll off the Life Premium Finance book and it will be spread over the year. But in terms of the build up to that margin -- but we exited the fourth quarter -- we had a 318 basis points margin.

If you add back the interest reversal in the fourth quarter, and that was before reduction in rates, the Life Premium Finance book -- not the life book -- the consumer book on a core basis, this does have a reasonable yield.

So that will go away but that will be replaced by Mortgage Warehouse construction-perm. I think you might have said we wouldn't see construction-perm this year. We fully expect to see some construction-perm lending this year and, probably, a noticeable amount and that comes with good yields on it.

And then the continued reduction in deposit rates. So we're expecting March and expansion in the first quarter and then ticking up through the year as all the different business lines build up volume.

Russell, I'd also add: we posted decent margins last year, especially relative to our competition. And that was really with, call it, 30% of our funding being from the National platform. But the fact is our asset strategy, that was very thin. So even with those margins, it was a little depressed inside of that with what I would probably call something under 2% on the digital side of that.

Obviously, we've made the move to relieve ourselves of that. And think that that's going to come through as well. When Matt and I model net interest income and net interest margin, we don't have that level in the checking account that we want. And when we model net interest income, we come out, still, with a number, like Matt said, at the top end of that range.

Last thing, Matt's deck shows that pretty much all of the asset repricing, assuming we stay here right now, that we have for the year is positive to interest income. So we're not in a place where rates have fallen to a degree that we expect to see interest income shrink. We still have upside potential on most of what's renewed.

All right guys, great. Thank you both for the help on the puts-and-takes.

To the NIM and then with the consumer exit, what should we be thinking about in terms of core net charge-off and provision levels?

Our core charge-offs -- this core was like 5 basis points so we're not seeing a whole lot of charge-off activity outside of the consumer book. So, call it, 5 basis points to 10 basis points here in the near term.

And then provisioning levels should still be relatively modest. Because if you think of the biggest drivers of balance sheet growth, probably the largest incremental volume is coming from Mortgage Warehouse and the reserve burden on that business is very, very low.

I think we're modeling like 15 basis points, which is arguably still too high. But a similar level of coverage is the Life Premium Finance book had so probably, maybe, $1 million a quarter of provision cover charge-offs covered some incremental growth.

Got it. Okay, great. Thanks, Matt.

And then, guys, last one for me. Just bigger picture, the release reference.

And you, guys, in your comments, the potential for the Panacea conso-deconsolidation and recognizing that gain and the release, also reference, you think it's more than the last valuation of roughly $20 million?

So are you able to quantify any upside to that estimate today? And then just give us a sense for what pro forma tangible book is expected to look like with that? Recognize them.

I wish I could confidently say a number. I can just confidently say that it's not less than what we did last time. I mean, Panacea's growth.

The whole strategy there is to develop the products and services and solutions, more than just loans and deposits, but everything that you would possibly need to exhaust and recognize the full financial value of a doctor-client for life and the progress that we have made on that since December 23 to right now and through the middle of the year is massive, okay?

So I know that the value is there. I know the excitement for what they're doing is there. I see the result. You know, honestly, we probably could have deconsolidated that last year. But deconsolidating it means that we really have to do that.

You have to move a lot of the employees, who are bank employees, into that entity. And I don't know. We didn't want to risk doing that fall into the banking as a service. Even though we didn't think it would be but didn't want any nuances available for that.

And I don't know. I think we've, as time has gone on and PFH has become more substantial, I don't think the risk of banking as a service is as real. And so I think we can probably move to one, just deconsolidate it.

That's really all we're talking about. It's not selling down our position. It's not selling out. It's not monetizing it, necessarily. And we're not saying that that would never happen.

But just deconsolidating it is really all we're talking about. And the safe way to do that is to just transfer some employees and some services into that entity.

That's it for me. Thanks for taking all of my questions.

Christopher Marinac, Janney Montgomery Scott.

Hey. Thanks. Good morning.

Can we go back to the consumer loan sale? And just jimmy just one more recap about the loss.

There is that more timing-based from an accounting standpoint? And is there potential to recoup some of those losses? I just really want to go back to the history of these having credit enhancements along the way.

We're not modeling a whole lot of recovery on this, Chris. The unfortunate fact is if you look at the core charge-offs that we reported, there was significant charge-off, in the quarter, on the book in addition to the charge we took to move it to fair market value.

So our intention is to get out of this portfolio as soon as possible, which is part of why we went ahead and moved it to held for sale. So that's unlikely to result in a big recovery on that charge. Maybe a small amount but not something that we're necessarily counting on while we're going through that process.

There will still be some income on the portfolio, though. It's not to say that it's sitting there in held for sale earning a zero but we're not assuming a big portion of that $20 million fair market value adjustment comes back.

Got it. Okay.

So at the end of the day, this is more a strategic decision to exit and move on to your other core business lines?

Exactly.

Yeah. Okay.

And then on the strategic front, is there anything else on the strategic review that you've done?

And that was the beginning of the press release last night. I just wanted to verify if there's something else down or if we've seen the strategic changes and, now, you're executing on the core bank from here.

Strategically, there are other things we're doing. The operating expense base, obviously, we are not trying to drive every improvement that we have with just revenue.

We are focused hard on some strategies on the expense efficiency side. One thing that we're not baking in here is there a chance or a strategy that would drive lower cost funding onto the digital platform? We're talking about 325 basis points of digital, of spread on digital. If we just grew 10% of our incremental funding with checking accounts, we'd be closer to 4%.

So we're not modeling that but we're not sitting here on our hands either. We do have some strategy to realize some of that. And some of that is -- I can see some of that but we're not modeling it yet and we're not talking about it, strategically.

On the core bank side, really, this is the first time, Chris, that we had enough confidence that the core bank can be meaningful to our result. And so I would tell you that we are recruiting hard for new lenders, really, in our markets, in our region. There's been some disruption that's probably going to help that.

And the telephone is ringing and there's opportunity. So I say, strategically, the opportunity, the things that we're already doing are really focused on recruiting at the core bank and getting more checking accounts through the digital platform.

Great. Thanks for that, Dennis.

And that leads to my follow-up question. Deposits.

What would you say is the mix of deposits a year or two from now? Or what would you like it to be in terms of the digital bank versus the core bank?

Just thinking about the $2 billion change at the core and the roughly $1 billion of the digital.

Probably would like to see $2.5 billion. If you're talking two years from now, probably $2.5 billion at the core bank. And we're not going to get where we're going to stay laser-focused on only hardcore relationships.

We did the fact that we were able to accomplish this in the core bank. I don't want to give up that and get out there and just do anything aggressive on the growth side. So, I think, with commercial relationships and stuff that we're doing on with new business, I think we could grow 10% a year for the next couple of years there. Probably, $2.5 billion.

We don't really need to grow the digital side. Really, what we've got to do on the digital side is take it from $1 billion of what we have now and just sort of change the mix as well so that it's 20% lower cost funding.

And then the rest is what we have right now. And that's really the only thing we're focused on. We're not looking to try to grow to $3 billion of deposits or really $3.1 billion or $3.2 billion.

When you include Panacea in there, to $5 billion or $6 billion. We're really just focused on tweaking the mix and driving all the profitability that comes out of that before we try to get materially bigger.

Got it.

And that evolution the mix has already started with the last quarter, really, the last two quarters, those costs have come down?

Yes. Correct.

Got it. Okay.

And then on Panacea. I know you talked a lot about this already with Russell's questions but I just wanted to ask: a. should the deposits grow at Panacea? And then b. where do you see the Panacea, beyond doing some of the deconsolidation moves?

And Matt talked about where do you see that in terms of size and contributor to earnings, looking out a year or two.

I think the contributor to earnings is going to be more profitable this year than last year. I think as they -- we don't want, Tyler [Stafford] and I both, Primis' balance sheet overwhelmed with their business. It's good for us and for them to have alternate sources.

So I don't think we're peaking on profitability but we're probably $1 million or $2 million away from that. I think the chances of growing deposits there are very real. When we talk about exhausting the financial value of a lifetime doctor-client, a lot of that centers on introducing technology.

We're going to have 10,000 doctors and dentists that have never been in a branch have more than, have almost approaching two services, have material checking accounts, have several ancillary services. So all of it is technology-focused. And that technology, really, it was the second half of this year -- really, mostly fourth quarter thing -- where some of their new deposit technology hit the doctors' devices and almost immediately started seeing a lift in deposit growth.

Panacea is exceptional at selling commercial checking accounts. The average commercial checking account there is $75,000. They have more, they're not just plain checking accounts. They have all the ancillary treasury services. They have bankers servicing them real-time, real-life.

So well, I think their deposit pipeline is funding all of their balance sheet with deposits is not possible. But funding a lot more of their deposits, right now, they're probably like 25% that. I could see it.

I'm sure Tyler's listening. I could probably see that move into 30%, 35%, 40% over time. Maybe even better than that.

Right. Thanks for all the background, Dennis. And Matt too. I appreciate it. It's very helpful. Bye.

Bye.

And that concludes our Q&A session. I will now turn the conference back over to Dennis for closing remarks.

Thank you, everybody that called. Matt and I are available all day, today and we'll be at the Janney Conference tomorrow. If you have any questions or comments, we're available.

All right. Thank you. Have a good day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.