Primis Financial Corp. (NASDAQ:FRST) Q4 2024 Earnings Call Transcript

Primis Financial Corp. (NASDAQ:FRST) Q4 2024 Earnings Call Transcript January 29, 2025

Operator: 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. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the conference over to Matthew Switzer, Chief Financial Officer. Please go ahead.

Matthew Switzer: 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. For 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 measures used if not readily apparent. I will now turn the call over to our President and Chief Executive Officer, Dennis Zember.

Dennis Zember: Thank you, Matt, and thank you 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 modestly neutralize the credit cost 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.

Had 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 — that we believe can handle in the first half of 2025. 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 the value, some of the hidden values real quick. At December 31, 2024 our core bank had $2.1 billion of core deposits with a cost of deposits of only $1.87 billion 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 banks had a cost of fund — if my community bank has a cost of deposits, that’s 100 basis points lower than my competition.

You have to attribute some of that to a digital strategy that led us to 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 V1BE 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 6.47% and our digital deposits cost 5.07%. 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’ve 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 3.25% to 3.50% 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 and the results in 2025. 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 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 year with recruiting, but we are cautious and stingy with signing bonuses and instead working organic strategies like the national construction term offering. Lastly, Panacea, our division focused on doctors, vets 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% — 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 that 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 a more innovative way to capture the lifetime market value of a doctor client then 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 moves to about $17 million annually, once warehouses is at scale in 2025, 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 values 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 nice one to have to have done this, but limping along, trying to out last it was not a good strategy. I’d just rather take my list 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 comments.

Matthew Switzer: 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 filed with the SEC. In those materials, you will find a discussion of recent trends in 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 of pre-tax income versus the loss reported. On a pre-tax basis, when you exclude the consolidated pre-tax loss from Panacea Holdings, we reported a loss of $17.4 million. The following items are included in this loss related to the consumer program cleanup.

$20.8 million of provision for the consumer loan book for the fair value mark and 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 were non-recurring in nature that we discussed in the earnings release include the following: $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, but 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 pre-tax 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 is 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 will be realized in the first half of 2025.

We appreciate it. It’s very hard to parse through all these moving parts, but we believe the decision to tackle the consumer portfolio in the fourth quarter was right one and positions the bank to have cleaner earnings and demonstrate the bank’s true profit potential as we move through 2025 and our initiatives bear fruit. With that, operator, we can now open the line for questions.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] We’ll take our first question from Russell Gunther at Stephens.

Russell Gunther: Hey, good morning guys.

Matthew Switzer: Good morning, Russell.

Russell Gunther: Just 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 is 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 2025?

Dennis Zember: Yeah, Matt, 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 that we — since I’ve been here that we’re coming in with a pipeline and loan growth potential that probably mostly bank focused. At the end of the year, I mean, like I said on the — or like we said in the press release and I mentioned our core bank 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 digits. 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.

So not just existing money to — or 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 value as value is what we disposed of it. So that probably against where are at the end of the year, probably another $300 million. I think the opportunity there is much larger than that. The team we brought had more than doubled that outstanding and triple that at some point before the 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 grow up and down. Panacea’s got some level of opportunity within the capital markets, 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 might be much more competitive with some of their doctor customers?

Russell Gunther: All right, Dennis. Thank you. That’s really helpful. And then maybe just switching gears to the margin. So a similar question, just given the entries and exits of lending verticals, you talked about $325 million to $350 million for the margin overtime. Maybe just give us a sense for the cadence and where you would expect to exit this year 4Q 2025?

Matthew Switzer: I think we should be closer to the upper end of that range. I mean as we roll off the Life Premium Finance book, and it will be spread over the year, but in terms of the buildup to that margin. But we exited the fourth quarter, we had a 3.18% margin, if you add back the interest reversal in the fourth quarter and that was before reduction in rates. The Life Premium Finance book, if you — I mean, not the Life Premium Finance, but consumer book, on a core basis, does have 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 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 I mean, we’re expecting margin expansion in the first quarter and then kind of ticking up through the year as all those different business lines buildup volume.

Dennis Zember: Russell, I’d also add. Excuse me. I’d also add. I mean, 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 there was very thin. So even with those margins, I mean it was a little depressed inside of that with what I would probably call something under 2%, on the digital side and that — obviously we’ve made the moves 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, I mean, we don’t have the level of the checking account that we won’t — and when we model net interest income, I mean, we come out with — still with — like Matt said, at the top end of that range.

Matt’s deck, last thing — Matt’s deck shows that, pretty much all of the asset repricing, assuming we stay here right now, all of the asset repricing 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.

Russell Gunther: Okay. Great. Thank you for both the help on the outs and takes to the NIM. And then with the consumer exit, what should we be thinking about in terms of core kind of net charge-off and provision levels?

Matthew Switzer: Our core charge-offs this quarter was like five basis points. So we’re not seeing a whole lot of charge-off activity outside of the consumer book. So call it, 5 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 reserve coverage as the Life Premium Finance book had. So probably maybe $1 million a quarter of provision covered charge-offs and covered some incremental growth.

Russell Gunther: Got it. Okay. Great. Thanks, Matt. And then guys, last one for me. Just kind of bigger picture. The release referenced — and you guys in your comments potential for the Panacea deconsolidation and recognizing that gain. I think the release also referenced, do you think it’s more than the last valuation of roughly $20 million. So can you — 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 recognized.

Dennis Zember: 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 — I mean, 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 2023 to right now and through the middle of the year is massive. So I know that the value is there. I know the excitement for what they’re doing is there. I see the results. Honestly, we probably could have deconsolidated that last year, but deconsolidating it means that we really 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. And fall into the banking as a service, even though we didn’t think it would be, but didn’t want any nuance 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 sort of transfer some employees and some services into that entity.

Russell Gunther: Guys, that’s it for me. Thanks for taking all of my questions.

Matthew Switzer: Thanks, Russell.

Operator: We’ll move next to Christopher Marinac at Janney Montgomery Scott.

Christopher Marinac: Hey, thanks. Good morning. Can we go back to the consumer loan sale? And Jimmy, just a 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 want to go back to the history of these kind of having credit enhancements along the way.

Matthew Switzer: There’s — we’re not modeling a whole lot of recovery on this, Chris. I mean the unfortunate fact is, I mean, if you look at the charge-offs, the core charge-offs that we reported, I mean, there was significant charge-offs 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. So it’s not to say that it’s sitting there in held for sale earning us 0, but we’re not assuming a big portion of that $20 million fair market value adjustment comes back.

Christopher Marinac: 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?

Matthew Switzer: Exactly.

Christopher Marinac: Yeah. Okay. And then on the strategic sort of front, is there anything else on the strategic review that you’ve done? And just that was the beginning of the press release last night, and I just wanted to verify if there’s something else down there or have we seen the strategic changes and now you’re executing on the core bank from here?

Dennis Zember: I mean, strategically, I mean, there are other things we’re doing. I mean we are — the operating expense base, obviously, we are not trying to drive every improvement that we have with just revenue. So we are focused hard on some strategies on the on the expense sort of efficiency side. One thing that we did not — I mean, we’re not baking in here is, is there a chance or a strategy that would drive lower cost funding onto the digital platform? I mean we’re talking about 325 basis points of digital — of spread on digital. I mean if we just grew 10% of our incremental funding with checking account, we’d be closer to 4%. So, I mean we’re not modeling that. But we are not sitting here on our hands either. We do have some strategy to realize some of that.

And some of that is — I mean, 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 results. 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’d 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.

Christopher Marinac: Great. Thanks for that Dennis. And I guess that leads to my follow-up question on deposits. I mean what would you say is the mix of deposits a year or two from now? Or where would you like it could be in terms of the digital bank versus the core bank, just thinking about the $2 billion and change at the core and the roughly $1 billion of the digital?

Dennis Zember: Probably would like to see probably $2.5 billion — you’re talking two years from now, probably $2.5 billion at the core bank. We’re not going to get — we’re going to stay laser-focused on only hard core relationship. 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 do anything aggressive on the growth side. So, I think with commercial relationships and the stuff that we’re doing with new business I think we can 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 to — and just sort of change the mix there as well so that it’s kind of 20% lower cost funding and then the rest sort of what we have right now.

That’s really the only thing we’re focused on. We’re not looking to try to grow $3 billion of deposits are really $3.1 billion or $3.2 billion we 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 that comes out of before we try to get materially bigger.

Christopher Marinac: Got it. And that evolution on the mix has already started with the last quarter, really last two quarters as those costs have come down.

Dennis Zember: Yes, yes, correct.

Christopher Marinac: 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, I guess, ask: a, should the deposits grow at Panacea; and then b, where do you see the Panacea beyond doing some of the deconsolidation moves that Matt talked about, where do you see that in terms of size and contributor to earnings looking out a year or two.

Dennis Zember: I mean I think the contributor to earnings, it’s going to be more profitable this year than last year. I think as they — I mean we don’t want Tyler and I both don’t want Primis’ balance sheet overwhelmed with their business. It’s good for us and for them to have alternate sources. So I think we — I don’t think we’re peaking on profitability, but we’re probably $1 million or $2 million sort of away from that. I think the chances of growing deposits there are very real. I mean the — when we talk about exhausting the financial value of a lifetime doctor client, I mean, a lot of that centers on introducing technology. I mean we’re going to have 10,000 doctors, best engineers 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 kind of 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. Average commercial checking account there is $75,000. They have more — they’re not just playing checking account. They have all the ancillary treasury services, they have bankers servicing them real time, real life. So well, I mean, I think their deposit pipeline is — I mean, 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 where I could see it — I’m sure Tyler’s listening, I could probably see that moving to 30%, 35%, 40% over time, maybe even better than that.

Christopher Marinac: Great. Thanks a lot, Dennis and Matthew, I appreciate it. Very helpful.

Dennis Zember: Thanks, Chris.

Operator: And that concludes our Q&A session. I will now turn the conference back over to Dennis…

Dennis Zember: ….all day today, and we’ll be at the Janney conference tomorrow. If you have any questions or comments, we are available. All right. Thank you. Have a good day.

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