Primis Financial Corp.

If you have any background noise after the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. 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 a Premise Financial Corps 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, a part of our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has also been posted to the investment relations section of our corporate site, permisbank.com. We undertake no obligation to update or revise forward-looking statements to reflect change assumptions, the occurrence of unanticipated events, or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. How a non-GAAP measure relates to the most comparable GAAP measure will be discussed when the non-GAAP measure is used, if not rarely apparent. I will now turn the call over to our President and Chief Executive Officer, Dennis Sember.

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 Hale for Sale and what the impact of that decision was financially. Moving this portfolio into Hale 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 Hale 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 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 the values, some of these hidden values real quick. At December 31st, 24, our core bank had 2.1 billion of core deposit with a cost of deposit of only 187 at year end. That's 25 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, had a cost of, 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 Vibe and achieving a 95% retention rate through all the consolidation. Even better, on the lending side, we ended the year with a pipeline that's 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 market. On the digital side, we have a remarkable offering with one of the nation's only full digital, fully digital, full service checking accounts that's grown to about 18,000 customers. But if we can't drive the results, the margin, the operating ratio improvement, then really it's not valuable. Last year, our life premium books yielded $647, and our digital deposits cost $507. 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 $325 to $350 range on this national strategy with efficient platforms and safe short-term asset strategy. The fact is, this isn't fully at scale yet, but as we build a book on warehouse and construction perms, we will see progress and 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 RLA by 10 to 15 basis points. We've built this slowly over the last few years, moving from 250 million of production to over a 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 Doc, Fets, and Dennis. 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 year where we believe we have a chance to reach 10,000 clients. The banking division is very profitable with an RLA that's accretive to the bank's overall RLA, 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 U.S. with more innovative ways to capture the lifetime market value of a doctor client than Primus and Panacea have brought. Matt will discuss in more detail and give you his reconciliation, but I'd leave you with this. Our move 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 premiums. That number moves to about $17 million annual once warehouse is at scale in 25, and there's only $1.5 million more of incremental operating expense to achieve this. Mortgage values are 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 to have done this, but limping along trying to outlast it was not a good strategy. I'd just rather take my licks 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.

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 AKFALB DSEC. In those materials, you will find a discussion of recent trends and -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 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, an additional provision for the smaller portion that was not moved to help for sale. Two and a half million of interest reversal related to charged off consumer loans, and one and a quarter 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 but are not, 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 half a million, but will begin to flip back to profitability as we 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 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 2025 and our initiatives bear fruit. With that, operator, we can now open the line for questions.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. We will take our first question from Russell Gunther at Stevens.

Good morning, guys.

Good morning, Russell.

If we could start on the long growth outlook, given some of the puts and takes with exit verticals and new entrants, I think the DEC also referenced the new construction to perm the relationship. It is unlikely to contribute a lot this year, but maybe just start in terms of the net long growth outlook you have got baked in for 2025.

Yeah, Matt, I will start. You can fill in the blanks. If you look across the company, this is probably the first year, I think, since I have been here that we are coming in with a pipeline and long growth potential that is probably mostly bank focused. At the end of the year, like I said on the, like we said in the press release, I mentioned our core bank's long 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 and $175 million. So, not quite double digits. But the fact is we don't focus real hard on investor CRE. We are mostly just owner occupied CRE and CNI. We are chasing new relationships. So, not just existing money to, or not just new money to existing customers, we are looking for actual new customers that can help grow checks and accounts as well. Life premium finance is gone, so that is not in our number at the end of the year. What we expect is for mortgage warehouse to grow to scale, which we are calling about the same values as what we disposed of. So, that is probably against where we 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

double that outstanding and triple that at some point before they sort of cut off funding. So, there is a lot of scale potential there. But for this year, we are really just modeling replacing life premium. Panacea is going to grow up and down. So, Panacea has got some level of opportunity within 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 is 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 to $350 for the margin over time. Maybe just give us a sense for the cadence and where you would expect to exit this year $4,225.

I think we should be closer to the upper end of that range. I mean, as we roll off the Life Free and 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 318 margin, if you add back the interest reversal in the fourth quarter, and that was before reduction in rates. The Life Free and Finance book, if you, I mean, not the Life Free and Finance book, the Consumer Book on a core basis does have a reasonable yield. So that'll go away, but that'll 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, 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 build up volume.

Russell, I'd also add. Excuse me. I'd also add, you know, I mean, we posted decent margins last year, especially relative to our competition, and that was really with, you know, 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, you know, what I would probably call something under 2% on the digital side. And 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, I mean, you know, we don't have the level of checking account that we want. And when we model net interest income, I mean, we come out with still with, you know, 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 reprising, assuming we stay here right now, all of the asset reprising 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, that's 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 kind of net charge off and provision levels?

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, you know, five to ten 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. So it's what a similar level of reserve coverage is the life from a finance book had. So, you know, probably maybe a million a quarter of provision. Covered charge offs and covered some incremental growth.

Got it. Okay, great. Thanks, Matt. And then guys last one for me, just kind of bigger picture, you know, the release reference. And you guys in your comments, the potential for the panacea can stop the consolidation and recognizing that gain. I think the release also reference. Do you think it's more than the last evaluation 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? Recognize

them. I wish I could. I wish I could. Competently say a number. I can just confidently say that it's not less than what we did last time. I mean, panacea is growth. Yeah, 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 that we have made on that in December of twenty three to right now and through the middle of year is. 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. I, you know, honestly, we probably could have deconsolidated that last year 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, you know, 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 the, I think we've as time has gone on and has become more substantial. I don't think the risk of banking as a service is as real. And so I think we can. I think we can probably move to one just be consolidated. That's really all we're talking about. It's not. You know, setting down our position is 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 into that entity.

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

move. We'll move next to Christopher Marinak at Janney Montgomery Scott.

Hey, thanks. Good morning. Can we go back to the to the consumer loan sale and just let me just think just a little more recap about the loss there. Is that more timing based from an accounting standpoint? And is there, you know, 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.

There's very, we're, 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 off 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, our intention is to get out of this portfolio as soon as possible, which is part why we went ahead and moved it to help 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, you know, it's sitting there in help for sale earning us zero. But we're not, we're not assuming a big portion of that twenty million dollar 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.

Yep. Okay. And then on the strategic sort of front, you know, is there anything else on the strategic review that you've done? I just, that was the beginning of the press release last night. I just wanted to verify there's something else down there. If we've seen the strategic changes and now you're executing on the core bank from here.

I mean, strategically, I mean, there are things other things we're doing. I mean, we are, you know, the operating expense base. Obviously we are not trying to drive every improvement that we have with just revenue. Excuse me. 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, you know, 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 was checking account, you know, we'd be closer to 4%. So, I mean, we're not modeling that, but, but we're not sitting here on our hands either. We do have some strategies 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. Sure. The 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. The, and the telephone is ringing and there's opportunities. So I say strategically, you know, the opportunity and things that we're already doing. Or really focused on recruiting at the core bank and getting more checking account. Through the digital platform.

Great. Thanks for that Dennis. And I guess that that leads to my follow up question on the 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 and change at the core and the roughly a billion at the digital.

Probably would like to see probably 2 and a half. You're talking 2 years from now, probably 2 and a half billion. At the core bank. We're not going to get 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 and do anything aggressive on the growth side. So I think with commercial relationships and stuff that we're doing with new business, I think we could grow 10% a year for the next couple of years. They're probably 2 and a half 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 a 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. And that's that's really the only thing we're focused on. We're not looking to try to grow. Talk 3 billion of deposits are really 3, 3, 1, or 3, 2, when you include panacea in there. It took 5 or 6 billion dollars. 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 on and that evolution on the mix has already started with the last quarter, really last two quarters as 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, I guess, ask, A, should the deposits grow at panacea? And then, you know, 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, you know, looking out at year two?

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, you know, Tyler and I both don't want premises 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 a million or two million dollars sort of away from that. I think the chances of growing deposits there are very real. I mean, the, you know, 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, vets, and dentists that have never been in a branch, have more than have almost approaching two services, have material checking accounts, have, you know, 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, you know, almost immediately started seeing a lift in deposit growth. Can you see is exceptional at selling commercial checking accounts, average commercial checking account. There's $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, 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's probably, 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.

Great. Thanks for all the background Dennis and Matt too. I appreciate it. Very helpful.

Thanks, Chris.

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

Thank you everybody that called. Matt and I are available all day today and we'll be at the JANI 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.