Q1 2024 Primis Financial Corp Earnings Call

Participants

Matthew Switzer; Chief Financial Officer, Executive Vice President of the Company and the Bank; Primis Financial Corp

Dennis Zember; President, Chief Executive Officer, Director of the Company and the Bank; Primis Financial Corp

Casey Whitman; Analyst; Piper Sandler Companies

Christopher Marinac; Analyst; Janney Montgomery Scott LLC

Russell Gunther; Analyst; Stephens Inc.

Presentation

Operator

Thank you for standing by. My name is John, and I'll be your conference operator for today. At this time, I would like to welcome everyone to the Primis Financial Corp first quarter earnings conference call. (Operator Instructions)
I would now like to turn the call over to Matt Switzer, Chief Financial Officer. Please go ahead.

Matthew Switzer

Good morning, and thank you for joining us for Primis Financial Corp's 2024 first 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 risks and uncertainties. There are many factors that could cause actual results to differ materially from the antigen 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 permits, bank.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 our non-GAAP measure relates to the most comparable GAAP measure will be discussed when the non-GAAP measures used is not readily apparent.
I will now turn the call over to our President and Chief Executive Officer, Dennis Zember.

Dennis Zember

Thank you, Matt. Appreciate that, and I appreciate everyone that's joined our call today. I want to start by just saying that we've plowed a lot of changes through our company over the last year and I think it's very satisfying to see how all those changes have added up to such material improvement.
When I look when I add back the cost of the consulting services that were unique expense this quarter, I'm showing that we improved pretax, pre-provision by about $3.2 million compared to a year ago. That's substantial improvement. Given this how serious the industry's headwinds have been. I want to give a little more color on where this improvements come from.
First, the core bank's results are are outstanding. Last year, the bank consolidated 25% of its branch infrastructure and still retained about 95% of those deposits. Our core margin, which excludes the impacts of the third party portfolio, came in at 3.03%, which is down just a touch from the fourth quarter, but still above the 3% level.
Driving these results is our core deposits. Our core bank's deposit franchise, which posted a cost of interest-bearing deposits of only 2.56% when you separate out the impact of the national deposit franchise, this cost of interest-bearing deposits is between 50 basis points and 150 basis points lower than most of our regional peers. And it speaks volumes about the quality of our customer base and our franchise. Our sales pipelines are heavily focused on the deposit side, where we're leveraging our advantages with Bob and other technologies to win make meaningful relationships.
Secondly, Panacea earned about $1.6 million pretax in the quarter, which compares favorably to only $22,000 in the same quarter a year ago. Their growth in loans and deposits over the past year has been remarkable but especially deposits where they now fund about 30% of their entire balance sheet. Their pipeline on deposit growth is multiples stronger than their pipeline of loans, and it's a direct result of the technology build-out that was made possible by their capital raise.
We still have approximately $16 million after-tax of market value and tangible book that we have not recognized, but expect to be able to as soon as we deconsolidate Panacea Financial Holdings and recognize that improvement in book value.
Our mortgage division last year recruited and built technology and secondary capabilities and through all of that, they tweaked or continued to tweak their operating expense burden. This allowed mortgage to earn about $850,000 pretax in the first quarter compared to a loss of $250,000 in the same quarter a year ago.
That is an excellent result for the first quarter of the year. And for this industry in particular right now with with 30-year rates at or above 8%. I want to keep recruiting in the division with just hitting singles and doubles to build our capacity and be ready for lower rates and the revenue boom that we expect when rates begin to fall.
Lastly, our premium finance division finished the quarter with pretax income of about $1.3 million, up from about $850,000 in the same period a year ago. Driving those results are remarkably low operating expense burdens managing the sector's fastest and most digitally oriented process for their facilitators and customers.
This kit, this business is 100% cash secured with current production yields that are easily 100 basis points ahead of CRE. I think it says a lot about our company that we emerged through this last year. This much stronger without question. It's our multifaceted strategy for the rate is the reason for our success where we are not fully dependent on just one region or just one concept to drive results at the consolidated level, we are not looking to add any more strategies or complexities where instead just looking to tweak and improve the slate that we already have and enjoy the better operating results that come from that success at WoodMac.
With that I will turn it back to you, Matt.

Matthew Switzer

Thank you, Dennis. I will now provide an overview of our results before we turn to Q&A. But as a reminder, the financial information we will discuss is preliminary pending our previously discussed disclosed SEC preclearance process. These results incorporate consistent accounting methodologies as previous quarters for comparison purposes.
As in previous quarters, these results include various adjustments related to a third-party managed portfolio that net across different line items in the first quarter, $1.31 million related to this portfolio is included in interest income with an offsetting amount included in noninterest expense. In addition, $6.28 million of the provision for credit losses related to this portfolio with an offsetting amount included in noninterest income in the following discussion, references to core items will exclude these amounts.
In addition, our results this quarter continued to include the consolidation of Panacea financial holdings or PFHPFH. pretax loss included in consolidated pretax income was $2 million. This was comprised of approximately $78,000 of noninterest income and $2.1 million of noninterest expense that's included in our consolidated financial results.
Results will be discussed, excluding these amounts and relative to common share, unless otherwise noted. With that earnings available to common and earnings per diluted share for the first quarter were $6.3 million or $0.26 per diluted share, respectively. Adjusting for PFH. and certain one-time items, core earnings were $7.2 million or $0.29 per share and up substantially from $0.23 in the year-ago period.
Total assets were $3.9 billion at March 31, up slightly versus December December 31. Excluding PPP loans and loans held for sale, loan balances increased approximately 1% annualized after selling roughly $11 million of point-of-sale loans in the quarter. Deposits were $3.3 billion in Q1, up slightly from the fourth quarter and net of approximately $70 million of deposits.
Off-balance sheet in the sweep program at March 31, noninterest bearing deposits approximately 2% in the quarter to $463 million. Core net interest income, excluding accounting adjustments from the third-party managed portfolio decreased $0.7 million to $27.0 million in Q1 due to one less calendar day and with increased loan yields only partially offsetting increased funding costs core net interest margin decreased 6 basis points to 3.03% in Q1, core yield on loans held for income increased 9 basis points to 6.10%, while core yield on earning assets increased 5 basis points to 5.84%.
Cost of deposits increased 13 basis points to 2.82%, while cost of funds increased 12 basis points to 2.97%. Excluding accounting adjustments, noninterest income was $8.3 million in Q1 versus $6.1 million in Q4, largely due to increased mortgage activity. Noninterest income this quarter also included $386,000 of gain on sale revenue from the panacea loan sale.
Noninterest expense was $26.5 million, excluding PFH. mortgage expenses. Included in that number were $5.1 million this quarter, up from $4.8 million last quarter on higher volume unfunded commitment reserve expense of $75,000 in the first quarter versus $299,000 last quarter. Core noninterest expense include excluding accounting adjustments nonrecurring items and mortgage was $19.4 million in Q1 versus $18.7 million for the previous quarter and in line with expectations.
More importantly, core noninterest expense was lower by approximately 10% this quarter versus the year ago period, demonstrating the substantial strides we've made rightsizing the expense base while executing on our growth strategies. Core provision for credit losses was $1.6 million in Q1 versus a much smaller core provision of $100,000 approximately in Q4.
Core net charge-offs were $900,000, down from $1.9 million last quarter. The net reserve build in Q1 versus Q4 was influenced by softer forward economic forecasts when modeling our allowance under CECL, particularly for projected unemployment.
Lastly, operating return on average assets was 75 basis points in Q1. Mortgage was nicely profitable in the first quarter with a roughly $2 million pretax swing versus the fourth quarter offsetting an increase in the core provision. Core pretax pre-provision earnings were $10.7 million in the first quarter, up 7% linked quarter and 44% versus the year ago period.
Core profitability remains solid even in this difficult operating environment, and we are optimistic we can continue improving core returns from here with that, operator, we can now open the line for Q&A.

Question and Answer Session

Operator

(Operator Instructions)
Casey Whitman, Piper Sandler.

Casey Whitman

Good morning.

Matthew Switzer

Good morning.

Casey Whitman

To sell this asset, is there any update on the timing for when you might be able to deconsolidate panacea?

Matthew Switzer

I can't say definitively that it will be in the second quarter, Casey, we're hopeful it possible in the third quarter.

Casey Whitman

Okay. I appreciate that. Maybe I'll go towards I mean, can you just walk us through sort of the deposit growth this quarter break out sort of how much you have in the digital deposits now? Are you seeing the core deposit growth out of the non-interest-bearing faring and just sort of walk us through the deposits this quarter?

Matthew Switzer

Yes. The core deposits were relatively flat, actually, which sweep some off balance sheet, but the amount that we sweep all declined in the quarter. Average deposits were about $2.5 million down, call it $20 million and $30 million in the core bank from last quarter, so not by a large margin and then the pickup at least on balance sheet within the digital platform. If you look at the cost, the digital deposits have been relatively consistent.
I think this quarter average cost of interest bearing on that plot on digital was [504] versus [503] last quarter. The core bank deposits did tick up and we've seen general activity across our peers. But cost of total deposits in the Core Bank was about up about 15 basis points in the quarter.

Casey Whitman

I starting to see that kind of pace of deposit cost increases start to slow, at least in share are so far this month.

Matthew Switzer

And yes, to a certain extent, I mean, I think we're as we go into the second quarter, probably not as optimistic as we're going to have a lot of margin expansion in the quarter from thinking more flattish and hopefully more margin expansion towards the latter half of the year, even if for no rate cut environment.

Dennis Zember

Yes, the casing on that at this point, I would add that I think the margin compression would probably come if we got a little anomalies, we're desperate, but a little more needy for more deposits. I don't see that. That's that I don't see that's happening every day, we're opening I mean, each week, we're open in somewhere between, call it 50 and 100 accounts on the digital platform.
Again, with no advertising on each of those accounts are probably those accounts are coming in somewhere pricing, probably right below 5% on fees, D&O and about $25,000 averages, you know, and that takes a lot of pressure off what we have to do in the core bank, which is, again, back to where we think the core banks, cost of deposits and the value of that franchise is so good.
So I don't and I don't Matt may have a view, but I don't see us this coming quarter, even with the loan demand or the pipeline, I don't think we're going to be in a place where we feel like we got it really start moving all right to get funds in here.

Casey Whitman

Okay. I threw a lot of numbers out there, Matt, but it sounds like from a core expense run rate from a core fees, core margin, you're sort of where you had hoped to be or somewhat near there. And your sort of outlook for 2024 hasn't hasn't meaningfully adjusted. Would that be accurate?

Matthew Switzer

Yes.

Casey Whitman

Okay. And I'll just ask one more, and I recognize that nonaccruals are coming off of that at a very low level, but did you see any sort of credit migration this quarter or any major upticks and upticks in the classifieds or anything you want to address there?

Matthew Switzer

We did not tell you what are so or risk rated. Special mention was up, call it $4.5 million this quarter, but still at a relatively low base, roughly $19.5 million versus $15 million last quarter, which is not an unusual level of activity. Substandard actually declined to [14.9 from 17.2] last quarter. So net-net, that's a little bit of movement in and out of buckets, but no, no large directional swings.

Casey Whitman

Okay. Thank you for collection of Snap-on.

Operator

Christopher Marinac, Janney Montgomery Scott.

Christopher Marinac

Hey, good morning. I'm going to pick up where Casey left off on the credit question. So the reserve build, we saw this quarter, was that sort of an out of an abundance of caution? Do you think you'll have higher losses? Or is it just because it was prudent at this juncture?

Matthew Switzer

You mean the core reserve build, like some of the provision was charge-offs, obviously. And then the rest of it, it was about $600,000 or so of core reserve build and half of that was an increase in specific reserves on individual credits. So about [SEK300], not a huge number. And then the other half, the other [SEK300] grand roughly was just model-driven under CECL.
We did see in our in the Moody's forecast this quarter, the front end of the forecasts were weaker on average than they had been recently. And that does factor into our model. I mean, we have seen other thanks releasing reserves, but under our methodology and with those forecasts, it had a little bit of a reserve build not substantial, but kind of just not a release.

Christopher Marinac

So perfectly fine. And I guess, you know, if we look at the core charge-offs, we saw this quarter were outside of the third parties that is good run rate for the near term, would you expect that to be a little higher over the course of the cycle.

Matthew Switzer

I think that's probably a good run rate. Hopefully it will be, you know, down from there.

Christopher Marinac

Got it. And then last question just has to do with on kind of just new deposits at the margin what does it cost to get new money in the door? And do you think that that sort of incremental rate made may back off a little bit this next quarter develops.

Matthew Switzer

Dennis, you want take a stab at that if I may do it. Other income depends on the avenue we're pursuing, Chris, on the digital platform, incremental cost of funds is probably still around five or low fives. And then in the core bank, it all depends on in most of our efforts in the core bank or in our local markets is commercial driven.
I think that Dennis referenced in his remarks, we've had a lot of success using some of our technology offers, particularly Bob getting corporate customers and we can get those customers even if they're coming into an interest-bearing business account, yes, four, sometimes well below four to wear, probably weighted average raising money in the low to mid fours on an incremental basis but it's just we're pulling all the levers all the time to get those dollars.

Dennis Zember

Yes, Matt, I'm sorry, Elestat was speaking very eloquently, but on mute, Tom, if he thinks you have backing up what Matt just said. I mean, on the digital side, yes, I mean, we're bringing in money that's kind of for call it for with a little bit of checking. I mean, we're probably in the in the high fours on the digital side. And I think we probably can do without any marketing or anything we probably can do $30 million to $60 million a quarter there on the core bank side, Matt, exactly right.
I mean, it's not as expensive on the core bank side, but what the core bank has is viable and some of the other technologies that move in probably call it, $20 million a quarter of checking accounts and that, you know, especially with rates where they are right now that just blends down the the total cost of deposits and our total on like for the whole bank, the total incremental back to Casey's question about the margin.
I mean I and Matt and I are like-minded on that. I don't think that we're doing a lot of things in the bank that's dilutive to a 3% margin. I bank our incremental cost of funds in our incremental lending levels are accretive to that may be one-off here and there and the repricings for sure you did that. But I think we're in a really good place actually.

Christopher Marinac

Great. That's all very helpful. And then the pace that you're talking about in the digital channel is a function of kind of the groundwork you've laid the past couple of years. So over time, is it possible that that number could be a little bit bigger it, I mean, yes, absolutely.

Dennis Zember

I mean, we actually restrict the amount of deposits that will open on this just first because we're trying to still be pretty we're still trying to introduce customer service and every digital customer still has a banker that we, you know, contact. So we are limiting the amount of customers that will open on that really what we are sort of the next phase of this is introducing concepts that bring in deposits that are more checking oriented and long term have lower costs.
But But Chris, to your point, I mean, we're not marketing there. We really do not market the digital platform. I mean we have call it 16,000 customers. We probably opened 18,000 accounts and we're really not marketing it is those customers referring other customers in and increasingly to your point on name recognition, which helps I mean, it's not reasonable to believe that we're going to get an avalanche of customers opening accounts in a bank.
They've never heard up. But the longer we do this and you said this, but the longer we do this and the better our name gets out there, the the time the more account activity we're going to see.

Christopher Marinac

Great. That's helpful, Dennis, and thank you both.

Matthew Switzer

Thanks, Chris.

Operator

Russell Gunther, Stephens.

Russell Gunther

Hey, guys. I wanted to ask about your loan growth expectations for the year. And if you could talk about the volume and mix and and how your gain on sale strategy factors in?

Dennis Zember

Yes, I'll start the I think the core bank, the core bank definitely got some some loan opportunities from a lot of that's with existing customers on I think the industry's cautiousness and honestly seek real estate investors cautiousness on CRE is probably going to mute. They see the kind of balance sheet growth we can see out of the core banks.
You know, I think life premium finance, as you know, there's no talent where we could take life premium finance, some E&O and we're kind of trying to we're trying to meet those growth levels a little, but some but really not that much. We could probably between life premium finance and I think Tennessee has got the same kind of loan volumes. I think we're probably looking for total loan growth at that, maybe high single digits, Matt?

Matthew Switzer

Yes, I think last quarter we said a high single digits, maybe low double digits, 10%-ish net loan growth net of sales. And I think it's still eminently doable.

Russell Gunther

But okay, I appreciate it guys. And then just a couple of follow-ups. I hear you on the potential timing of the ability to deconsolidate panacea. Can you just remind us in terms of the use of capital balancing that kind of high single digit, maybe low double digit loan growth with the potential share buyback activity?

Matthew Switzer

Well, when we get that game, we will definitely evaluate the best use for that capital, be it growth or buybacks mean if we continue to trade at a meaningful discount to tangible book value buybacks, obviously you become much more attractive, probably move land.

Dennis Zember

Probably move the buyback would probably move way up the list of strategic ideas.

Russell Gunther

Okay. Very good. And then thank you, guys. Last one for me and that you touched on in response to a question overall '24 outlook, given the start to the year hasn't hasn't materially adjusted. So as we fold all of this together, can you just remind us of your time line to achieving that 1% ROA target?

Matthew Switzer

Yes, on a sustainable basis, we still believe that that's doable at the end of this year. And so I think we've talked pretty consistently about latter half of '24 getting for that level, whether it's third quarter, hard to say it's going to somewhat depend about the on the margin environment, but that's still where we think we can get.

Russell Gunther

Okay. That's very helpful, guys. The rest of my questions were asked and answered. So thank you very much.

Matthew Switzer

Thanks, Russell.

Operator

As there are no further questions at this time, I would like to turn the call over back to Dennis Zember for closing remarks.

Dennis Zember

Okay. Thanks again for everyone that joined the call and expressing interest. Matt and I are available on the rest of the day, really any time. So call us if you have any more questions. Otherwise Hope you have a good weekend and we'll talk to you soon.

Operator

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