Primis Financial Corp
NASDAQ:FRST
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Primis Financial Corp
Earnings Call Analysis
Summary
Q4-2023
Primis Financial ended 2023 with a positive note as its core net interest margin rose by 10 basis points to 3.09%. The quarter saw a pre-tax loss in the mortgage division of $730,000, an improvement from the previous quarter. Deposit growth exceeded 20%, bolstered by digital channels. New deposit accounts opened in the quarter amounted to $75 million with a low cost of 2.69%, funding new loans worth $86 million. Impressively, the mortgage pipeline in January '24 is up by over 25% year on year. Operating earnings per share also increased to $0.35 from $0.32, with total assets slightly rising to $3.9 billion. Both Life Premium and Panacea experienced significant successes, the latter being valued at roughly $20 million, with anticipated gains to be recognized soon.
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Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Primis Financial Corp. Fourth Quarter Earnings Conference Call. [Operator Instructions]
I would now like to turn the conference over to Matt Switzer, Chief Financial Officer. Please go ahead.
Good morning, and thank you for joining the 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.
Further discussion of the company's risk factors and other important information regarding our forward-looking statements are part of our recent filings with the Securities and Exchange Commission including our recently filed earnings release, which has also been posted to the Investor Relations section of our corporate site, primisbank.com. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.
In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. A reconciliation of the non-GAAP measures to the most comparable GAAP measures can be found in our earnings release.
With that, 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 fourth quarter conference call. Before I get into our results for the quarter and the year, I wanted to let the investing public know that our company CIO, Cody Sheflett, passed away suddenly on the afternoon of January 16. Cody was one of the most visionary CIOs I've had the good fortune of being around. Cody could unquestionably outdream me and Matt. but he had all the engineering and technical skills to make all of it come to life.
On top of that, he fostered our company staff with love and humble attention that drove the unique culture we aspire to build. Fortunately, Cody mentored his staff incessantly for many years to always be prepared. And while I'm confident in the future, our company is reeling from his departure.
Now about our results. For the quarter, what I think is important is that these results include a pretax loss in mortgage of about $730,000 which obviously is timing related and about $1.4 million lower than where we were in the third quarter.
And while I don't want to steal all of Matt's good news, which I've been known to do. In the quarter, our margin was up. Our expenses were down. NPAs down to very low levels. Liquidity and capital is strong and getting stronger. Nobody at Primis thinks that we can even see land yet on this journey to top quartile operating ratios, but it's nice to know that we have a lot more wind in our sales.
We took advantage of all the chaos in the industry in 2023 and built momentum that can be clearly seen in improving margins, operating expense control that has us close to 2022 levels going into the new year, and impressive growth in core deposits at levels that drive results.
Without any noise in the quarter, our margin was up about 10 basis points, resulting from hard management of all the important factors. We control deposit costs, we increased loan yields. Our incremental activity was very accretive.
There's more information in Matt's details that are shortly coming. But for the quarter, we opened about $75 million in new deposit accounts, costing only 2.69%. And that funded new loan production of $86 million with yields of $838 million. With this kind of activity, the momentum on margins and net interest income is clearly on our side going into '24, which is critical to continued quarterly improvement in our ratios.
Cost controls are equally important, especially in a year when revenue was so pressured, we delivered an impressive second half of '23 with the changes that we made earlier in the year. We've restructured almost every division, consolidated 8 branches and leveraged technology to absorb even more of the jobs and tasks that were previously pushing comp levels. This restructuring mindset continued through the fourth quarter and honestly, into today.
And while the improvements we are making are smaller individually, they are large enough to offset growth levels and allow more of the anticipated revenue to make it to the bottom line. In 2023, we grew deposits a touch better than 20% with a substantial amount coming through digital channels. A year later, we still have over 90% of the deposit accounts we opened originally and with virtually no advertising expense, we continue to open accounts almost solely through referrals from existing customers. We are live with business accounts now and focusing that activity really only on referrals for the time being. But the promise of lower-cost deposits on this platform is starting to take shape.
Our core bank has well outperformed in '23, with our retail franchise driving substantial deposit activity amidst branch consolidation and major industry headwinds. We've taken 5 to new levels that we didn't think were possible. And we're starting to see customer referrals for new accounts that need the convenience and the technology we're bringing to the table. Over the last 2 quarters, we've opened 4,400 new non-CD deposit accounts with approximately $147 million of balances costing a remarkably low 2.25%. I don't want to convey to anybody that we've cracked this nut, or that this effort is on autopilot.
Moving deposit balances even with noticeably better tools and technology is through sheer force and grid. But the momentum and success that we've had so far builds confidence in our staff, and we're determined to continue this trend.
A few other notable and, I think, important factors for our 2023. Our 2 national divisions, Panacea and Life Premium Finance had outstanding years. Panacea was just named the exclusive banking partner of the American Dental Association. And shortly thereafter closed its Series B round, rightly establishing an impressive market value for this concept.
Our ownership in Panacea is worth about $20 million which, of course, at this point is unrealized while that entity is consolidated. We anticipate being able to deconsolidate and recognize this gain in the near future, which would give us substantial flexibility to either ramp up share repurchases or increase our growth rate by touch across the bank.
Life Premium had an amazing year, bringing substantial diversification and quality on our balance sheet, at yields that are substantially better than CRE. On top of that, they've built remarkable technology to drive efficiency and speed, and they operate with one of the lowest expense burdens imaginable.
Lastly, despite an expected slowdown -- despite the expected slowdown in activity and profitability, our mortgage division finished the year profitable with just $600 million in total production. We have recruited all year without big sign-on bonuses using culture and great technology to build our stable producers. Looking at the current month, January, '24, our pipeline is up over 25% from a year ago. And so we feel like the revenue opportunity here is much brighter.
Turning this over to Matt. I'm pretty excited about what '24 could bring. Our core bank has never been this strong on expense control or management on core deposit growth and loan quality. Our divisions are past the concept stage and in places where they will drive the boost to operating ratios that we expect, and our capital and liquidity levels give us all the flexibility we need to be nimble with uncertain economic and rate conditions.
So with that, Matt, turn it to you.
Thank you, Dennis. I'll provide a brief overview of our results so that we can get to Q&A. But as a reminder, a full description of the fourth quarter results can be found in our earnings release and investor presentation, both of which are on our website and on 8-K with the SEC. As Dennis just discussed, our results this quarter include the consolidation of Panacea Financial Holdings, or PFH. Results will be discussed relative to common shares unless otherwise noted.
Operating earnings per share for the fourth quarter were $8.6 million or $0.35 per diluted share versus $7.8 million or $0.32 in the linked quarter and up substantially from $0.03 in the year ago period. Total assets were $3.9 billion, essentially up a little bit versus September 30. Excluding PPP loans, which are de minimis at this point and loans held for sale, loan balances increased 1.5% linked quarter, and that's after selling roughly $31 million or selling or participating out of roughly $31 million of loans in the fourth quarter.
Deposits were essentially flat. As we discussed previously, we manage excess liquidity by sweeping off excess deposits of which we had approximately $113 million swept off the balance sheet at December 31. Impressively and as noted in our press release, average noninterest-bearing deposits were essentially flat for the third quarter in a row, which we think is exciting in the current environment.
Net interest income, excluding accounting noise from a third-party managed portfolio increased almost $1 million to $27.7 million in the fourth quarter as funding cost pressures were offset with higher earning asset yields. Core net interest margin, as Dennis alluded to, increased 10 basis points to 3.09% in the fourth quarter. We continue to believe we have a unique advantage due to our 2-pronged deposit funding strategy.
As a result, in the fourth quarter, core bank cost of deposits increased only 3 basis points versus the third quarter. Excluding accounting adjustments, noninterest income was $5.9 million in the fourth quarter versus $7.9 million in the third quarter largely due to reduced mortgage activity, which we think will -- is seasonal and will improve in the first quarter.
Core noninterest expense, excluding accounting adjustments, nonrecurring items and mortgage was $18.7 million for the fourth quarter versus $20.5 million in the third quarter. As we discussed in the press release, the fourth quarter includes expense reimbursement from Panacea Financial Holdings related to division expenses. But in addition to that, the decline is reflective of administrative cost saves that we announced earlier in the year and the consolidation of 8 branches in October.
The provision for credit losses was $3.1 million in the fourth quarter versus $1.6 million in the third quarter, $3 million of that was due to accounting for our third-party managed portfolio, which is offset by noninterest income gains core net charge-offs were $2 million, the majority of which was charge-off related to specific reserves from credits impaired in previous quarters. Nonperforming assets were down substantially to $7.7 million or 20 basis points of assets at the end of the year.
The allowance for credit losses to gross loans was 1.06% at December 31 versus 113 basis points last quarter.
Lastly, as Dennis indicated, operating ROA improved to 89 basis points in the fourth quarter, the highest level since the second quarter of 2021. We have rightsized the expense base and are confident we can keep grinding net interest income higher with a healthy margin, combined with additional mortgage activity that we expect in 2024. We believe we still have opportunity to improve profitability even in a tough environment and are optimistic about our prospects in the near term.
With that, we can now open the line to Q&A.
[Operator Instructions] Our first question will come from the line of Casey Whitman with Piper Sandler.
So just looking at that core operating expense burden, cable you have in the release, just coming off, I think it's $18.7 million. Do you still have room to bring that down a bit in the first quarter just with full cost saves coming off? Or is this a pretty good run rate?
No. I mean, it's I would say a little artificially low, Casey. I think our guidance previously of $19 million to $19.5 million is still the better run rate. That $18.7 million in the fourth quarter does include some excess expense reimbursement from Panacea Holdings that won't be there in the first quarter, even though they will still be reimbursing us for expenses in the division. And it also had some other accrual noise that would offset some of that. So I would say that $19 million to $19.5 million is still the best run rate in the near term.
Okay. But that $2.8 million you referenced in the expenses for the effect of consolidating Panacea, that's just the reimbursement cost?
Largely while they're consolidated, all of their expenses are added to our expenses but there -- the vast majority of their expenses outside of a couple of small things were related to our expense reimbursement.
Okay. And just -- I mean looking at the Panacea relationship, just in the near term, I guess, how does the investment effect the P&L for you guys going forward? Or does it not here in the near term? Or just sort of dumb down -- how it's going to work?
The incremental profitability from Panacea what's sort of been hitting the bottom line spread income, minus their operating expenses plus a little bit of fee income likely from one sales and all that. Going forward, especially now that the capital is at the parent. The bottom line is basically our operating hurdle rate times their average outstanding -- times their total assets. So I would probably expect -- I'd probably expect somewhere $1.7 million, $1.8 million, to be hitting the bottom line pretty consistently until -- and increasing, obviously, as assets increase. whereas in the past, it might fluctuate.
If they had a big loan growth quarter, we might post 0 just because we're funding the provision or if we did some recruiting or something like that. The expense reimbursement was basically to establish that a little bit lower operating hurdle. The operating hurdle going forward is higher. So the expense reimbursement that Matt's talking about was basically just to catch us up for '23. Going forward, our operating results from Panacea will be higher and they will be more consistent.
Okay. Just given -- go ahead.
I was just going to say, I know this is very confusing. What we tried to do is put things on as much as possible and allow you to get back to an apples-to-apples comparison to the last couple of quarters. So if you -- the consolidation, I mean, right now, they only have expenses, and most of it is expense reimbursement to us. So if you take all of the line items other than noninterest expense, there's very -- essentially no impact from the consolidation in those line items.
There's -- it's still the Panacea division line items, which we've had in our run rate for the last 3 years. The change is really on the noninterest expense line. And then a lot of that is also offset down below in the non-controlling interest because we only own 19% of it. So if you're trying to get back to apples-to-apples, start with those revenue line items and then basically use the noninterest expense that you and I just talked about as you think about going forward, and that will get you back to kind of how we have been prior to the consolidation.
Got it. And the $19 million you referenced would include the effect of Panacea, correct? And then you'd add mortgage on top of it?
It would include the effect of the future level of reimbursement from Panacea, yes, as if they weren't consolidated.
Okay. Appreciate that. And then just given where capital is today and the potential to keep growing, I guess, just how are you thinking about overall balance sheet going forward? Could you potentially start the portfolio more? Or sort of how should we think about that?
Yes. I know we've talked the last couple of quarters about mid-single digits growth. I think for '24, we're targeting more towards around 10% overall balance sheet growth.
Last thing I'll ask, just appreciate there's some seasonality within mortgage this quarter, but what's a reasonable outlook for those revenues next year to the extent you can share?
We made $700,000 or $800,000 or so in the second and third quarter. I think we'd be probably 25% higher than that in the second and third quarter. I don't think we normally would have broke even -- I mean, excuse me, lost money in the fourth quarter. So I think a little bit of that has to do with some rate fluctuations and the fourth quarter seasonality. But I mean we made -- I think altogether, we made like $300,000 in mortgage during the year.
About $600 million.
About $600 million. And the incremental, I think, would probably could be somewhere $900 million, maybe even $1 billion, and it's going to be incrementally much more profitable, just given the fixed expense burden there is not expected to grow.
If we made $300,000 this year, and we were able to increase volume to $900 million, which it looks like we're going to be able to do. Probably $3 million...
Yes. That's what I would say, pretax.
Your next question comes from the line of Russell Gunther with Stephens.
I just wanted to start on the loan growth commentary about 10% for 2024, just about a minute touch on the mix, maybe particularly addressable Life Premium Finance and Panacea as well.
I mean I think Life Premium and Panacea both could -- if we let them out of the barn, I think they could probably get good enough growth to move the needle for a much larger bank. So some of what I'd tell you here is muted relative to what their real opportunity could be. But Tyler has got great production capabilities, but he's also working on flow agreements and loan sale opportunities. So I don't know that as much of that will hit the balance sheet, probably $100 million to $150 million on our balance sheet for Tyler for Panacea. I think Life Premium finance probably in the $150 million range probably, Life Premium is getting yields that are just remarkable, the expense burden is just unimaginably low.
And then I think the core bank probably could do the same as either of those divisions. I just think the -- I don't know for sure that the market is there. So kind of what gets us back. It's probably $150 million in each of the divisions and probably somewhere around $75 million to $100 million in the core bank.
Long term, obviously -- yes, long term, I'll just make sure everybody knows. Long term, we would love to be driving more activity through the core bank, and there is the potential there, and we've got the horses I think we're all just realistic. I don't know that the market or the economy is going to be there for that.
That's really helpful color, Dennis. And then maybe just switching gears to the margin. So again, you guys talked about the success you have with new deposits at a much lower rate than where the loan yields are coming on and we're looking at 10% loan growth. So could you spend a second just thinking through how that core margin trends in 2024, maybe set expectations for us, what you're thinking with regard to Fed funds in that expectation as well?
I don't know that we have a core fit. There's a heated debate internally over the passive Fed funds, Russell.
Matt is laughing because he won the bet last year .
Yes. I won the bet. I feel like I'm going to win it this year. I mean, I'll give you scenario, if rates were flat, we think margin would continue to grind higher from repricing and we think we could continue to moderate deposit costs. And on the balance sheet growth that Dennis just alluded to, I mean, we've already got $100 million of that essentially funded. So we think margin will continue to grind up probably by the end of the year to the mid-330s, 335 range. a couple of rate cuts depending on when they came in the year arguably may cost us a couple of basis points.
And I think that's going to be true for the whole industry. I don't think we get as an industry, a whole lot of benefit from 2 rates cuts because of the shape of the curve. So maybe we're 325 to 330 if we get a couple of rate cuts but that's all. It's hard to predict, but that's kind of what we're thinking.
I think overall, we're -- I wrote this in my comments, and then I deleted it because it was just numbers on the way I wrote it. But I think we're positioned really well. Rates going up, rates going down. Matt and I both believe that a couple of rate cuts is not going to bring any relief.
I mean a 5% Fed fund is not going to bring relief on deposit costs. I mean, because deposit cost for the industry is still in the 2s mostly. So I just don't think that deposit costs are going to start drifting lower dollar for dollar. I don't think we're going to have a pretty high beta on the first couple of rate cuts anyway. So...
Well, that's helpful, guys. I appreciate just framing that narrative. The follow-up would be that margin guide is relative to that core $309 million from this quarter?
Yes. Yes.
Okay. Great. And then just last one. It seems like you're getting increased capital flexibility here. I'd just love some comments on buyback expectations and hurdles to getting that done.
Matt and I, I mean, we come on these calls and obviously, we've built some engines that can grow the balance sheet. And so we're real, real cognizant of capital and capital levels and capital opportunities. And especially when the stock is trading at or even for a lot of '23 below tangible book, we are even more determined to see capital levels moving higher. We just don't have the flexibility to go grab new capital.
So that being said, yes, Matt and I are pretty confident in where operating ratios are going, where earnings per share is going, where our capital build is about to start coming in. So if we were to be able to deconsolidate and get the gain that we -- and the stock has not moved off of tangible book, we anticipate getting pretty active with that capital.
I think our story is starting to get a little bit of obvious legs to it.
So Matt and I are thinking that it might end up being capital that lets us grow a little more, Russell, but if not, we're prepared to own a lot more of our stock.
[Operator Instructions] and your next question will come from the line of Christopher Marinac with Janney Montgomery Scott.
Dennis and Matt, you may have kind of partially answered this in previous callers, but I wanted to understand, is the pretax pre-provision that we talk about on an operating basis this quarter, can we further adjust that back for the operating expenses, the $18.7 million that you called out, is the PPNR kind of higher than it appears because of that operating expense change?
Yes. It is a touch higher given what Matt was saying. So you probably need to add -- Matt was saying $19% million to $19.5 million. And I would guide to the lower end of that range, Matt might guide to the higher end. But -- so yes, you probably could add $300,000, $400,000 to that, Chris. .
Okay. And that's on expenses. Would there be any adjustments on the revenue side to kind of get a true apples and apples?
No.
Because all the third party is netting against each other, so we don't have to be too concerned about that.
On the pretax pre-provision.
Well, I take that back. In pretax pre-provision, there is a third-party effect through noninterest income that if you wanted to take all the third-party, I would come out. And there's a line item on customer...
Okay. So you use that to kind of net that, which would therefore be a reduction to get to kind of a run rate?
Yes. But if you're using the noninterest expense above the line, obviously, that's got the Panacea consolidated expenses in there. So you got to adjust that out as well. So if you use the table for our noninterest expense, that's adjusting out the consolidated expenses from Panacea.
Yes. Understood. Okay. And then when we talk about deposit costs, and I appreciate the angles that you've got in the release. What is the most important one that you're focusing on as you manage this business quarter-to-quarter.
On incremental -- on deposit cost as a whole or...
Correct. And should -- yes. Thinking going forward, should we be focused on that core bank number? Or are you looking at all 3 and trying to turn dials on each of them?
All 3. All 3 for sure. I mean the fact that our -- I mean we -- I think coming into this rate cycle, this inverted yield curve, Chris, people did not think about Primis is having the strongest core bank deposit portfolio. So it's remarkable that we've moved all the way through this. And really in our region, we have one of the lower core bank deposit costs. And part of the reason is, I mean, we're just not as desperate for every single dollar because we have so much flexibility on the digital platform. I mean I remember the digital platform, it was for like 30 days, it seemed like pretty expensive money.
And then for the next 11 months, it seemed different. I think some of the things that we're doing now on the platform, whereas we had a lot of sort of rapid growth. I feel like right now we're really getting into a sweet spot where the growth on the digital platform is really at the right level for, say, a $4 billion balance sheet. It's not anything that's really accelerated by remarkable rates. It's really leveraging the technology and leveraging referrals and so I think the growth there is a little muted, and it really is letting the core banks advantages shine through.
That's really why we -- why and how we get to such a remarkable level of incremental deposit costs.
Got it. And then incrementally, would we expect to just all things being equal that the digital costs would come down quarter-over-quarter again in Q1?
I mean I think the cost probably 90% of the balances on the digital platform, I think, are probably have a pretty high beta to Fed funds versus our core bank that Matt and I are saying, probably has a pretty low beta on the first couple rate moves. So I think falling rates might affect the digital platform faster, which you'd expect given the higher cost. I think what's going to bring the weighted average cost on the digital platform down are some of the new incremental products that we're selling, have lower betas -- or excuse me, lower spreads to Fed funds and/or are just noninterest-bearing sort of on the business side.
We have no further questions at this time. I'll turn the call back over to Dennis Zember for closing remarks.
Thank you again for joining our call. Matt and I are available all day if you have any more questions or comments. With that, I hope you have a great weekend. Talk to you soon.
That will conclude today's meeting. We thank you all for joining, and you may now disconnect.