Primis Financial Corp. (FRST) Earnings Call Transcript & Summary

Good morning. My name is Aaron, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Primis Financial Corporation First Quarter Earnings Call. [Operator Instructions] With that, I am pleased to turn the call over to Matt Switzer, Chief Financial Officer.

Thank you. Good morning, and thank you for joining us. Before we begin, please note that many of our comments during this call will be forward-looking statements, which involve 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 been posted -- 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 is used, if not readily apparent. I will now turn the call over to our President and Chief Executive Officer, Dennis Zember.

Thank you, Matt, and thank you to all of you that have joined our conference call this morning. For the quarter, we saw continued -- we saw the -- our performance continued track -- for the quarter, we saw our performance continuing to track to the levels that we have expected. We have 3 in-place strategies that will drive much higher ROAs that I'd like to discuss with you. But before I do that, I want to highlight our core community bank, which I believe is going to be a driver of our growth and results this year. We continue building pipelines of new customers in the current quarter, pushing today's pipeline to about 3x what it was a year ago. For the first quarter, loans were down a touch because of some delayed closings. But in April, as of this morning, our core bank is up $25 million in loans over the quarter end with plenty of pipeline to keep the numbers moving for the rest of the second quarter. Our loan repricings in the first quarter at the core bank were in the mid-7% range and our new deposit accounts opened came in under 2%. All that and our core bank ended with essentially the same operating expense that they had a year ago, managing tight and letting our improvements have an outsized impact on the bottom-line. The momentum at the core bank is encouraging and important when you consider the 3 in-place strategies we have to materially change our results. I'll give you a quick recap of these and some first quarter results realizing them. First is growth in earning assets, back to the level that we experienced before we sold the Life Premium book. In the second quarter of 2024, we had about $3.75 billion of earning assets, about $350 million higher than where we finished the first quarter of '25. Growing earning assets hasn't been a problem for our bank. And as I look through the rest of this year, we expect about $100 million of growth from the core bank, about $150 million more in warehouse and about $125 million more from Panacea. None of these strategies need more operating expense to drive this growth. And so over the next few quarters, as we reach our target, I expect the spread on this growth to drop straight to pretax and lift the ROA by 20 to 25 basis points over our first quarter numbers. Second is our mortgage division. We need mortgage to add about 20 basis points to our return on assets compared to last year's contribution of about 5 basis points. We've been slowly and reliably building our mortgage division since we acquired it in 2022. And I know that, that growth sounds insurmountable. But we closed $800 million of loans in 2024. That had about $1.2 billion of momentum as we exited the year. Our pretax income divided by closed volume in the first quarter of '25 was 50% higher than all of '24. And so we already have the higher volumes and higher profitability to carry us very close to that goal. But to further support that and to highlight the opportunity here, we continue to recruit and brought on some of the best teams in the country. We added the top producing team in Nashville, Tennessee that likely will close somewhere between $150 million and $175 million per year. And we added a family team in Wilmington, North Carolina, all are military veterans and expect that they will close $175 million to $200 million per year of mostly FHA VA business. We also added teams in Austin, Texas and some other markets. And collectively, the first quarter's recruiting yielded increased production capacity of about $500 million. Lastly, we are working -- and probably most importantly, we are working to simplify and consolidate our core processing contracts into one. We've built all the proprietary integrations and customer experiences and we did that last year so that it would be core agnostic and allow for the kind of move that we need to make. Our customer experience, which is unquestionably leading the market, will not change nor will our unique and reliable method for banking the entire country with proprietary concepts that weed out bad actors and fraudsters. What will change is the bottom-line impact and we think materially. We expect to have this announced in the second quarter of '25 with a clear path to what we think our confident will be a 15 to 18 basis point pick-up in our ROA. Before I leave this, I want to make a comment about the importance of the digital platform and why that core consolidation is so important. I had a question from an investor last night, and I sort of -- jogged me, sort of made me think about this and put this together. Right now, we fund everything that isn't the core bank with our digital platform, meaning I'm not stressing my very profitable core community bank with having to stretch to fund national ideas. The digital platform funds all of Panacea's excess lending, which I believe will be around $500 million by the end of the year. With that funding and at our digital cost of funds, Panacea will earn the bank around a 1.5% after-tax ROA. The digital platform funds mortgage warehouse, which will bring in a lot of low-cost funds itself. But with its production, I suppose it will need about $200 million to $250 million throughout the rest of '25. At the digital cost of funds, warehouse will earn the bank over a 2% return on assets. Collectively, this is an exceptional idea for growth and profitability. It augments and supports the community bank and severely tamps down the idea that we have to win every single loan and every single deposit in the marketplace in our core bank. Over time, that pressure in a community bank leads to poor credit decisions and higher cost of deposits. The only problem with realizing this dream scenario on almost $1 billion of balance sheet is the cost to run the digital core is pretty high. Our trailblazing idea was supported by something back then that the cores couldn't do. But over time, the cores have modernized and now accept outside APIs and integrations. And once we've resolved the higher cost of these 2 cores, this safe and balanced strategy is going to be exceptionally profitable for the bank. My last general comment about all this is about Panacea and our efforts to deconsolidate. We have made some of the -- we made what we think are most of the changes near the end of the first quarter to lessen our control over the parent company and believe we may be close to being able to illustrate a real case for deconsolidation. Given that the gain is large and the accounting is complex, we are working closely with our consultants and with [ Crowe ] to know for sure if the changes are adequate. Consolidating Panacea in the first quarter reduced our operating ROA by 10 basis points, simply from reporting our share of the non-tax affected operating loss in our results. So consolidating this would have an additional impact improvement in our results. Last comment quickly about the consumer book that's driven all of the volatility in our results and really covered up a lot of the progress and improvements we've made in the company. We moved the portfolio back to our held-for-investment portfolio as the prospects to sell the portfolio faded. Virtually all of the volatility and risk in this portfolio centered around the loans with promotional features that have declined from $90 million at June 30 of '24 to only $17 million at the end of the most recent quarter. The standard portfolio has good consumer performance and the remaining portfolio of promotional loans are reserved at 75% of the principal balance that we expect to roll to amortization. We evaluated this book aggressively in the quarter as we moved it to held-for-investment in our CECL model and we booked an additional provision related to that analysis. So going forward, we believe we've neutralized the noise and volatility here and are focused on earning back the hits we took on this as fast as possible. With that, Matt, I will turn it over to you.

Thank you, Dennis. As a reminder, a detailed discussion of our financial results can be found in our press release on our website and in our 8-K filed with the SEC. As Dennis mentioned, as in prior periods, the financial results for Panacea Holdings are included in our consolidated earnings. When you exclude the consolidated pretax loss from Panacea Holdings, we reported pretax net income of $4.5 million in the first quarter. We also had a little over $1 million of one-time items, largely related to accounting expense and $1.9 million of additional credit expense as we moved the consumer portfolio back to held-for-investment. Adjusting for these items, pretax net income was $7.5 million or $5.9 million after tax, which equates to a 66 basis point ROA in the first quarter. As we previously discussed, we expected ROA in Q1 to be lower due to the balance sheet shrinkage from the sale of the Life Premium Finance portfolio in the fall, which caused earning assets to be 10% lower than the third quarter of last year prior to the sale. The first quarter also exhibited seasonal slowness in mortgage and mortgage warehouse. As Dennis discussed, our focus has been making sure we execute on the strategies to drive ROA higher from here, which we are doing. Net interest margin in the first quarter was 3.15%, up from the reported 290 basis points last quarter. We ratcheted down deposit costs exiting last year, particularly on the digital platform, benefiting the margin. Core bank cost of deposits remained very attractive at 183 basis points. We are still booking new loans with yields well over 7% and we have a substantial amount of loans repricing later this year, well below that level that will continue to help the margin. Non-interest income was $7.8 million in the quarter versus $8.5 million in the fourth quarter when excluding the Life Premium Finance gain. Increased mortgage revenue was offset by a negative swing linked quarter of $1.2 million in fee income related to the consumer program that we are running off. A substantial driver of that swing was the continued write-down of the derivative asset related to loans exiting promotional periods. The derivative value was down to $1.6 million at March 31 and will amortize off at a much slower rate over the next 5 quarters. On the expense side, when you exclude mortgage volatility and non-recurring items, our core expenses were $20.3 million, down $3.2 million from the fourth quarter and more in line with prior periods. We have continued to prioritize holding the line on expenses to position ourselves for substantial operating leverage going forward. The technology saves Dennis discussed has the potential to reduce that run rate an additional 9%, not including the efficiencies in other areas that come with simplifying our infrastructure. Looking forward, our focus is on executing the plan we have laid out, growing earning assets back to $3.75 billion would add 24 basis points to the ROA, achieving the growth in mortgage volumes and profitability expansion that's right in front of us would add 15 basis points and reducing our technology spend would add another 15 basis points. Collectively, that puts us on track to exceed the 1% ROA goal we've set out for ourselves. With that, operator, we can now open the line for questions.

[Operator Instructions] Our first question for today comes from the line of Christopher Marinac with Janney Montgomery and Scott.

Dennis and Matt, I wanted to ask about any wrenches that you see in the second quarter for not being able to get back to this higher profitability. I know there's some progress and it's going to be several quarters in the making, but just looking specifically at kind of the transition to better numbers in Q2. Is there anything that you see that could throw you off another quarter?

I mean, the -- we are up over average balances over the first quarter to where we are right now. We're up about $60 million in earning assets. So I think the track towards having upside on the margin, I think we're tracking well there. We're about to come into the season where I expect mortgage warehouse to be up a little just seasonally, the core banks closing loans that have been in the pipeline and doing well there. So I see that. We're taking on average -- I mean, in March, we took about $160 million of applications in the mortgage group. We closed about 65% of those. That is -- that's up 45% over January and February. So up pretty tremendously. This month, I mean, we've got today left to go, but it looks like this month, we're going to beat that number. So I think the mortgage number is going to come in strong, on track with what we're looking for. And on operating expense, there really is nothing on the -- there's really nothing around here that's pressuring operating expense to move higher. We're not going to have the professional fees on a go-forward basis. I mean, a lot of the professional fees we had in the first quarter were just to -- our auditor didn't get the job and start working until...

October.

October. I mean, that's probably easy 3, 4 months. They had to do a couple of Qs to get through the year and just accelerating that. That's not going to continue. So I know those costs are coming out. I do believe we're going to be able to deconsolidate Panacea. We may have to make a couple of more tweaks working with our auditors and with the consultants. But I feel like we've done the vast majority of that. So that savings is going to come as well as hopefully a pretty material pick-up in book value.

Yes. I mean, I agree with everything Dennis said. I mean, Chris, our key -- I mean, mortgage is kind of baked in the cake at this point. We're going into the busy season. They've recruited a tremendous couple of teams here recently in addition to the recruiting from late last year. So I mean, we're very confident in mortgage volumes even in this rate environment. Mortgage warehouse was up 80% in the quarter, but a lot of that growth in balances came at the end of the quarter. So you didn't really see it in the average balance and net interest income in the first quarter because of seasonality. But they're going to be up substantially on an average basis in the second quarter by a healthy bit and they're getting good yields with fees on their business. And the core bank is showing good momentum. Again, they were kind of flattish in the first quarter, but that's just because January and February is always so slow, but they had healthy closings in March and that's even with some of that being pushed into April. So as Dennis said, we're already up for the month of April relative to March. So all the momentum is there. It's -- our whole story is getting to the back half of '25 and holding the line on expenses, which we feel confident in and rebuilding earning assets. As you know that those earning assets compound. We've got to get stuff booked and on the balance sheet here to replace what we sold late last year, but we're in progress on that.

That's super. And then I just want to ask about the consumer loans. Is the sort of resolution on those and payoff, is a chunk of that going to happen this next 3 or 4 quarters? Just would you just remind us on kind of the time frame that those will get worked out?

The pay-off rate in the first quarter on the standard book, which is the promo loans definitely will -- more than half of those are scheduled to pay-off before the promo period ends given what's remaining. And then the rest are sort of resolved with the pretty substantial reserves we have. So I think the promo book is -- by the end of the year, I think we have the promo book being down to $4 million or $5 million. The remaining book is about $100 million. It's standard consumer paper. It's low interest rate, low payment. The pay-off rate on that, Chris, is about 7% per quarter, at least it was in the first quarter. So if you look at that, you probably could realistically believe that 20% to 30% of that would pay-off this year, maybe a little more. So...

I think it's amortizing. It's fully amortizing paper. So it's just -- we're not booking any more and it's now just running it down over time.

Middle of last year, we had $200 million in this book. I think we'll end this year probably 18 months later, I think we'll end this year probably somewhere, call it, $70 million, $65 million to $75 million.

[Operator Instructions] Our next question is from the line of Russell Gunther with Stephens Incorporated.

I appreciate all of the color on the average earning asset walk and where new yields and deposits came on this quarter. Could you just give us a sense for how that translates to the margin outlook in 2Q and across the remainder of the year?

I mean, I think we'll see, I don't know, 5, 10 basis points of margin expansion in the second quarter. And then for -- by the end of the year, we'll probably be up, call it, 10 to 15 basis points, maybe 10 to 20, depending on what happens with the broader rate environment.

The loan repricing that we're having in the core bank are easily 100 basis points higher than where the book is even now with rates sort of settling down on the 5 to 10-year and 1 month SOFR. We're still picking up yield on loan repricing. Deposits, I said they were in the -- just below 2%, probably 190-ish, 195. The core bank's cost of deposits is 183 or 184 -- 183. So I mean, really, we're sort of growing the core bank with very -- I mean, almost no move in on deposit costs. So pretty strong there. Mortgage warehouse has a margin that's better than our overall margin. So as that grows, I'd expect you to see some of that sort of fade into the numbers and lift the margin. So I like the numbers Matt is telling you.

That's helpful, guys. I appreciate it. And then a follow-up to the expense conversation you had earlier. If you could just kind of give us a walk-through of where we stand at 1Q and folding in the additional savings, should they materialize, how should we think about an exit core non-interest expense base in 4Q, assuming Panacea deconsolidation?

Yes. There's a table in the press release that walks through that, Russell, that kind of takes out all the different parts, including Panacea's impact and mortgage impact to get to that core level. So take a look at that and then let me know if you have follow-up questions. I would say that run rate should be pretty consistent for the rest of this year. The core consolidation savings is really -- it's possible we would see some late this year depending on the final negotiations on that, but it's more likely something that will affect 2026.

Russell, one thing, too. The Matt backs out the Panacea. When you look at the core bank's OpEx, it's right at $20 million and very consistent with where we were a year ago. I'm like showing how hard we've been managing that around here. Matt backs out Panacea OpEx because when we calculate the impact of Panacea, we basically get paid for all of those operating expenses, and you may see them sort of meander through non-interest income or non-interest expense wherever we allocate that. But really what matters -- and mortgage as well, mortgage OpEx really just drives mortgage revenues. So really, the number that matters is that $20 million, I think it's $20.2 million or $20.5 million this quarter. That's really the number that matters. And I will tell you that we -- we're not having any massive moves around here, but we are trimming back. And anything that's redundant, we're looking at that. We're consolidating other contracts that maybe are not core-related and savings there. The whole goal, again, is to hold OpEx flat and let all of the growth, whether it's mortgage, Panacea, earning assets, whatever we do, skip OpEx and get 100% leverage and scale straight to the bottom-line. And I'm very confident that we'll do all that. I think if we can finish the year somewhere right around $20 million, maybe a touch below that, I think the quarterly pick-up on negotiating this core contract consolidation is probably $1.5 million to $2 million a quarter. So like Matt said, 9% is a material move, and that's really on today's number. So if we could grow the bank back to where we were second quarter, hold the line on OpEx and then get these savings, I think the operating results impact is going to be very, very noticeable.

Okay. So I guess, my follow-up and just what I'm trying to get at is, so that $20.2 million when you're saying you expect to finish the year around there, once we fold in the tech and data processing spend, we should expect that to reduce by the $1.5 million to $2 million or is that $20.2 million kind of inclusive?

Yes, I'd say, $18.5 million. I'd say, $18 million to $18.5 million. With everything else that we're working on, we probably -- we might get to $18 million, but $18.5 million, I'm very confident we'd get to.

Okay. That's super helpful, guys. That's what I was trying to get to. And then just switching gears on your outlook for charge-offs going forward, just given all the actions that have already been taking in consumer, that was the bulk of charge-offs this quarter. How would you expect that ratio to trend over the course of the year?

I think we'll continue to see high charge-offs. The key will be we're not expecting to see high provisions related to them, right? So our core charge-offs was, I think, 5 or 6 basis points when you take out the consumer. The portfolio is in run-off. It's got a 16% total reserve with discounts against it. There's going to be charge-offs against that reserve. But the key is, have we got enough allowance and discounts against that portfolio to absorb the charge-offs as it runs off. We think we do at this point.

So -- pretty confident that we do. I mean, the promo book, like we said, is 75% reserves on what we think will roll to [ M ]. The delinquent book has comparable reserves. And then the standard book has reserves that are probably 4x -- 3x or 4x the rest of our consumer -- our homegrown consumer book. So we think we're appropriately marked. I mean, we -- so we may have the charge-offs. I think we -- rolling through those 3 quarters of promo loans, that's where the charge-offs are coming. And we had in the second -- excuse me, in the first quarter, we had about $20 million of promo loans mature, about $10 million of it paid off and $10 of it rolled. And of that $10 million -- so again, that $10 million is probably marked with $7.5 million of reserve. And if we can -- round numbers. And so that's what Matt is kind of saying. We don't think the charge-offs will be greater than 7.5%, but that's where we're marked.

Got it. Okay. Super helpful. And then just last one for me. You guys mentioned a lot of the work has been done around the Panacea deconsolidation. So just best guesses in terms of when that should occur from a timing perspective and a reminder on what the pick-up in the gain could be?

So Dennis mentioned, we made the changes operationally and whatnot technically at the end of the first quarter. But then we have to evaluate whether going through the accounting and GAAP requirements, does that suggests that we no longer need to deconsolidate it. If we come to that conclusion, it would actually be effective March 31. So even though we haven't reflected it in our numbers here, we would reflect it -- we would revise the first quarter to reflect that. And it would show up in our -- we would obviously make that public, but it would show up in our results when we file our 10-Q, which is scheduled for May 12, I believe. So again, no guarantee that we're going to come to that conclusion. Still a lot of work to be done to sort through that. It's a very complicated analysis. But if we did make that determination, it would be effective at the end of the first quarter. We would elect the fair value treatment for that investment, which means we would market to fair market value. We're carrying it at basically 0. So we would book a substantial gain from writing it up. And that's going to have to require, given the size of it, we need a third-party to do that valuation, which we're getting in parallel in case we do get that determination or make that determination to deconsolidate so that we'll be prepared. I can't tell you what that valuation is going to be, though we have indicated publicly that the value of those shares at the time of the Panacea Holdings capital raise at the end of '23 was just under $20 million pretax. Given all the progress they've made since then, we would like to think that it would be worth more than the valuation of that capital raise, but that's all subject to a third-party valuation.

Ladies and gentlemen, that will conclude our Q&A session for today. Dennis, I'd like to hand it back over to you for any closing comments.

Okay. Thank you again for joining the call and your interest. If you have any questions or comments, Matt and I are available to give us a room. Thank you. Have a great day.

Thank you.