Primis Financial Corp.

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 Premise 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, or 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, premisebank.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 measures used have not readily apparent. I will now turn the call over to our President and Chief Executive Officer, Dennis Eber.

Thank you, Matt, and thank you to all of you that have joined our fourth quarter conference call. First off, let's start with a discussion about why we moved this portfolio into held for sale and what the impact of that decision was financially. Moving this portfolio into held for sale allowed us to market significantly enough that we can mostly neutralize the credit costs and position it to be moved off the balance sheet. We are serious about moving on a host of strategic options, like we said in the press release, that would realize the market value of our company. And no real strategic option is available to us until this book is in health 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 that we believe we 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 these hidden values real quick. At December 31st, 24, our core bank had 2.1 billion of core deposits with a cost of deposits 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 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 consolidations. 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 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 book yielded 647 and our digital deposit 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 strategies. The fact is this isn't fully at scale yet, but as we build the book on warehouse and construction firms, 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 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 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%. and are only accelerating as we move into the end of the year, where we believe we have a chance to reach 10,000 clients. The banking division is very profitable, with an ROA that's accretive to the bank's overall ROA, and the parent company, PFH, where we have significant unrealized value, continues to innovate solutions for doctors that have high adoption rates and make them customers for life. There are $100 billion banks in our country with fewer doctor clients than we have. And I dare say there isn't a bank in the U.S. with more innovative ways to capture the lifetime market value of a doctor client than Premise 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 annual once Warehouse 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 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 AK file with the SEC. In those materials, you will find a discussion of recent trends and quarter-over-quarter comparisons. Given the noise from various initiatives this quarter, both offensive and defensive, my remarks this morning are going to focus on interpreting the associated adjustments to articulate the core profitability of the bank which is closer to 10 million pre-tax income versus the loss reported. On a pre-tax basis, when you exclude the consolidated pre-tax 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 help for sale. $2.5 million of interest reversal related to charged off consumer loans, and $1.25 million of fraud losses on consumer loans. Without these items, we would have made $7.1 million pre-tax. Other items that impacted the quarter or were non-recurring in nature that we discussed in the earnings release include the following. A $4.7 million net gain from the sale of the life premium finance business. 1.8 million approximately of legal and accounting expenses related to restatements and other activities. And approximately 2 million of other expenses, 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 it's temporary until mortgage warehouse gets to scale later this year. We had approximately 50 million of promotional loans on average in the fourth quarter where we recorded no income. This cost us at least 1 million of revenue in the fourth quarter. Half of the remaining promo balances exit the period in the first quarter, so this drag will largely be eliminated soon. We lagged adjustments to rates on the digital platform due to a technology change that was planned for November. As a result, we didn't make our first rate adjustment until mid-December and another one in mid-January. This cost us another $1 million approximately of interest carry in the fourth quarter. Lastly, retail mortgage is seasonally slow in the fourth quarter and was a drag to pre-tax earnings of roughly half a million, but we'll 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 is very hard to parse through all these moving parts, but we believe the decision to tackle the consumer portfolio in the fourth quarter was the right one and positions the bank to have cleaner earnings and demonstrate the bank's true profit potential as we move through 25 and our initiatives bear fruit. With that, operator, we can now open the line for questions.

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'll take our first question from Russell Gunther at Stevens.

Hey, good morning, guys. Good morning, Russell.

If we could start on the loan growth outlook, given some of the puts and takes with exit verticals and new entrants. I think the DEC also referenced the new construction to PERM relationship. It's unlikely to contribute a lot this year. Maybe just start in terms of the sort of net loan growth outlook you've got baked in for 25.

Yeah, man, I'll start. You can fill in the blanks. You know, 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's 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's 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, you know, somewhere between, call it $125 and $175 million. So not quite double digits, but the fact is we don't focus real hard on on investor CRE. We're mostly just owner-occupied CRE and C&I. We're chasing new relationships, so not just, you know, 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 or values as what we disposed of. So that's probably against where we at the end of the year, probably another 300 million. I think that 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'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 has got some level of opportunity in 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 growth.

know what you would see in the secondary market might be much more competitive with some of their doctor customers all right dennis thank you that's really helpful and then maybe just switching gears to the margin so uh similar question just given the entries and exits of lending verticals you talked about 325 to 350 uh for the margin over time maybe just give us a sense for the cadence and where you would expect to exit this year for Q25?

I think we should be closer to the upper end of that range. I mean, as we roll off the life room finance book and, you know, it'll be spread over the year, but in terms of the build up to that margin, but we exited uh the fourth quarter we had a 318 margin if you add back the interest reversal in the fourth quarter um and that was before reduction in rates um the life premium finance book if you i mean not the life romance but the consumer book um on a core basis does 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 we wouldn't see construction firm this year. We 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 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, it was a little depressed inside of that with what I would probably call something under 2% on the digital side. Obviously, we've made the move to relieve ourselves of that and think that that's going to come through as well. When Matt and I model net interest income and net interest margin, we don't have 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 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 significantly. to a degree that we expect to see interest income shrink. We still have upside potential on most of what's renewed.

All right, guys, great. Thank you both for the help on the puts and takes to the NIM. And then with the consumer exit, what should we be thinking about in terms of core 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 five 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 room and finance book had.

so you know probably maybe a million a quarter of provision um covered charge offs and covered some incremental growth got it okay great thanks matt and then guys last one for me uh just kind of bigger picture you know the release reference uh and you guys in your comments the potential for the panacea consult deconsolidation and recognizing that gain i think the release also reference do you think it's uh more than the last valuation of roughly $20 million. So are you able to quantify any upside to that estimate today and then just give us a sense for what pro forma tangible book is expected to look like with that recognized?

I wish I could confidently say a number. I can just confidently say that it not less than what we did last time. I mean, panacea is 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 of 23 to right now and through the middle of the year is massive. Okay. So I know that the value is there. I know the excitement for what they're doing is there. I see the results. You know, 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 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 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 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.

Guys, that's it for me. Thanks for taking all of my questions.

Thanks, Russell. We'll move next to Christopher Marinak at Janie Montgomery Scott.

Hey, thanks. Good morning. Can we go back to the consumer loan sale? And just let me just do one 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.

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 were significant charge offs, uh, in the quarter on the book, in addition to the charge we took to move it to fair market value. So our, um, our intention is to get out of this portfolio, um, as soon as possible, which is part of why we went ahead and moved it to help for sale. Um, so that's unlikely to, uh, result in a big recovery on that charge, maybe a small amount, um, 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 hell for sale earning us zero, but we're not assuming a big portion of that $20 million fair market value adjustment comes back.

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

Exactly. Yep.

Okay. And then on the strategic sort of front, you know, is there anything else on the strategic review that you've done? That was the beginning of the press release last night and I just wanted to verify if there's something else down there or 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 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 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 spread on digital. I mean, if we just grew 10% of our incremental funding with checking accounts, you know, we'd be closer to 4%. So, I mean, we're not modeling that, but we're not sitting here on our hands either. We do have some strategies to realize some of that. um 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 um recruiting hard Um, for new lenders really in our markets, in our region, there's been some disruption that's probably going to help that. Um, the, and the telephone is ringing and there's opportunity. So I'd say strategically, you know, the opportunity, the things that we're already doing are really focused on recruiting at the core bank and getting more checking accounts, um, through the digital platform.

Great. Thanks for that, Dennis. And I guess that leads to my follow-up question on 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 in change at the core and the roughly $1 billion at the digital.

Probably would like to see probably $2.5 billion. If 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 hardcore relationships. The fact that we were able to accomplish this in the core bank, I don't want to give up that and get out there and just do anything aggressive on the growth side. So I think with commercial relationships and stuff that we're doing with new business, I think we could grow 10% a year for the next couple of years there. probably two 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 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 caught three billion of deposits or really three three one or three two when you include panacea in there it took five or six billion dollars we're really just focused on tweaking the mix um and driving all the profitability that comes out of that before we try to get um materially bigger got it and that evolution 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, you know, 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 a year or two?

I mean, I think the contributed 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, 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 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 the doctor's devices and you know almost immediately started seeing a lift in deposit growth um panacea is exceptional at selling commercial checking account. The average commercial checking account there is $75,000. They have more, they're not just plain checking account. 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%. 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.

Great. Thanks for all the background, Dennis, and that too. I appreciate it. So helpful.

All right. Thanks, Chris.

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