Primis Financial Corp. (FRST) Q3 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to the Primis Financial Corp. Third Quarter 2021 Earnings Conference Call. All participants, will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Matt Switzer, Chief Financial Officer. Please go ahead.

Thank you, and good morning. 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. Factors include but are not limited to our ability to implement various strategic and growth initiatives competitive pressures, economic and political conditions, interest rate fluctuations, regulatory changes, asset values and other factors discussed in our recent filings with the Securities and Exchange Commission, including our recently filed earnings release which has 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 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 discussed during this call 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. 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 who have joined our call today or will listen to it on replay. I apologize in advance for my voice. I have a cold, but I'm feeling fine besides that. Several things I want to highlight before Matt fills you in on some details with the financials. The most important item to note, I think in our quarter is the amount of loan growth we had. For the last year or so we've been working to permanently change the company's deposit mix, which was undoubtedly the biggest overhang on our franchise value going into the pandemic. We've accomplished that and now our biggest opportunity is to deploy this rather large amount of excess liquidity that resulted from this deposits - from the deposit success. During the quarter we had about $122 million in total loan growth, which is about 24% annualized growth rate. We are delighted with that growth rate for sure, but our target growth rate is still more mid-teens for the second half of this year and really through 2022. The growth this quarter was mostly in our core bank augmented by some purchases of mortgage loans and some growth in panacea. As we roll into 2022, we believe the growth will be equal parts, core bank, panacea and production from our newest effort in life insurance premium finance. Collectively, we feel pretty confident that this combination will permanently change the trajectory on our loan growth, which for several years has really that's been unremarkable. In my mind, knowing that we can grow both sides of this balance sheet organically with noticeable operating leverage is the critical foundation for building franchise value. Obviously, this is just one quarter of loan growth, but I believe the signs are here for the coming quarters. I mentioned it here. But our newest effort on building niche lines of business is the life insurance premium finance business. We've recruited several individuals that collectively know the credit operations, technology and sales side of this business. And we intend to be offering this niche product starting this quarter. These individuals have substantial experience in the industry and their incentives are all based on profitability and return on assets from the division. I'm particularly excited about this because in my career of hiring producers, and building lines of business, it seems like our batting average is the highest when we recruit doers versus the managers. When we recruit doers, people who actually deal with the customers, people who actually get their hands dirty, people - and then obviously people who negotiate harder on their incentives than they do get base salaries. These individuals were just that and they firmly believe they can move the needle for us in this business. During the quarter, we also announced that we were selling our ownership interest in Southern Trust Mortgage back to the principals of the business for about - for a discount of almost $3 million. Our relationship with Southern Trust has been very fruitful and profitable for the bank. We have a great relationship with the principals over there and we'll continue to portfolio some of their loans and offer warehousing services. Long-term for Primis, it just made sense to exit the ownership part of our relationship, and to better position us for solution that can be 100% under our umbrella, I don't think anybody expects us to be able to exit this relationship and find a new opportunity all in one quarter. And so we're not guiding that there is another mortgage solution around the corner. Obviously believe in this business and its impact on profitability. But short term, we will be without this kind of income. Let me make a comment or two about our digital bank effort. And in doing so, I'd like to give a lot of credit to our CIO, Cody Sheflett, and his wonderful team for having us this close to a launch. On November 15 of this year, we're going to pilot the new digital core to friends and family offering full service checking and savings accounts. I hope you can appreciate the choreography that is required with all of our excellent vendors and every department in our organization to make this happen. On time, and just mostly on time and with the products that we had initially planned. As we finished this launch on the consumer side, we are already visioning and starting to work on the commercial side. And in our pilot and market research business account customers were more interested in our unique offerings, which really excites us given the relative size of commercial versus consumer checking candles. Last thing before I turn it back to Matt, I wanted to make a comment about profitability. In this call I've highlighted how loans are up, how deposits are up, how momentum is also on both that can really sustain us for the next quarter. I've mentioned a digital bank effort that is on time and doing well. What isn't up enough is our overall profitability. A 72 basis point ROA is not enough by long stretch for anybody on this executive team of our Board. And I know we're doing all the right things and doing them quickly. Building a company with momentum with rock solid infrastructure, depth and expertise in risk management teams and processes niche lines of business that support our overall growth rate. Our pathway to a top tier ROA is simple. And that is our goal. The near term pathway is investing this excess liquidity that's only earning us eight basis points. And doing so with very limited incremental operating expense. I know that's what lies ahead. I know that our incremental operating leverage on this growth is significant. And speaking for Matt, we believe that kind of operating leverage and operating ratios are right around the corner. So now that I've spoken for him, I will turn it over to Matt.

Thank you Dennis. Because of the Southern Trust Mortgage agreement that Dennis just discussed, the investment in STM has been classified as a discontinued operation and prior period financial information has been retrospectively adjusted for the impact. Unless otherwise noted, my comments will refer to results from continuing operations. Earnings for the second quarter was $6.2 million or $0.25 per basic and diluted share versus $8.8 million or $0.36 per basic and diluted share in the second quarter. Total assets grew to $3.45 billion in the quarter. Gross loans increased to $2.31 billion from $2.29 billion in the previous quarter, with core loan growth offsetting declines in PPP balances. Excluding PPP loans, loan balances grew 5.9% linked quarter almost 24% annualized. As Dennis discussed, we are extremely pleased with growth this quarter as investments and bankers and business lines have all contributed to the growth. We believe that momentum in our loan portfolio is sustainable and are anticipating robust growth through the rest of next - this year and into next year. Deposits increased 2% versus the second quarter to $2.81 billion. Non-interest bearing deposits remain over 19% and we continue To focus on growing those balances. Time deposits continued to decline and then around less than 14% of total deposits. Even with excess liquidity we discussed further in a few minutes, we believe core deposits from good customers drive long-term value and intend to continue pursuing deposit growth from these customers. We've added some to the securities portfolio in the quarter, with the recent move in market rates, we intend to add to the securities portfolio at a more rapid pace than we have the last couple quarters subject to market conditions absorb some of the excess liquidity that we continue to experience. Credit quality remains good with non-performing assets less SBA guaranteed portions increasing $1.8 million in the third quarter. Net charge-offs were $2 million in the quarter, with three quarters of that tied to loans that we had rated doubtful last quarter and which had reserves already put up against them. COVID related deferrals continue to decline and were $7 million this quarter tied to one relationship that move to interest only from full deferral - with full P&I payment schedule to restart in the fourth quarter. Due to the robust loan growth highlighted above, we've recorded a provision for credit losses of $1.1 million in the quarter. Improvement in the operating environment led to a reduction in our allowance coverage or allowance to gross loans excluding PPP to 1.40% at September 30, versus 1.52% at the end of June. Our reported GAAP margin was 2.87% for the quarter up 7 basis points, excluding the effects of PPP margin declined 11 basis points to 2.66% in the quarter, again, similar to last quarter substantially all of this compression was due to higher average balances, which were up over $100 million in the quarter. As noted above, we are excited to see loan growth materialize and fully expect operating leverage to be meaningful as we deploy liquidity. Non-interest income was up modestly in the third quarter versus the prior quarter. For non-interest expense excluding the recovery and reserve for unfunded commitments non-interest expense increased to $120,000 in the third quarter. As we look to next year, we expect incremental increases in expense levels related to our growth initiatives, including the new digital bank, panacea, and the new life premium finance business that we just announced. We have a number of areas we will pursue to offset some of these increases, including repositioning some existing positions, consolidating branch locations, and leveraging other efficiency improvements that we have in the pipeline. With all that we believe the net result will be a low single digit growth rate in expenses in 2022. Still below the overall growth rate and revenue for next year. With that, operator, we'll open it up to Q&A.

[Operator Instructions] Our first question comes from Casey Whitman with Piper Sandler. Please go ahead.

Hey, good morning. My first question just quickly, do you have the accretion number this quarter?

It was 469,000, Casey.

Okay, great. Thank you. Alright, and then I guess, bigger picture Dennis, Dennis you touched on the profitability and kind of getting to the top tier targets? What do you think is a reasonable time frame to get there? If it's sort of all the things fall into line with the growth in the mid double-digits to hold expense growth for the low single digit, sort of? How should we think about the timeframe to get to those profitability targets you discussed?

I think approaching Matt now want to approach the 1% target, second half next year. And then as we go into 2023, hopefully have a mortgage solution or some other non-interest income solutions. But right now we don't have that would give us a little more profitability. So probably early 2023 could be sort of materially above - sort of pair level. Right now really there is no we do have several levers we can pull on the operating expense side, we do have a little bit more investment to make. But we think we can offset enough of that, so that the operating leverage on this $600 million or $700 million of cash on the balance sheet is easily twice the current ROA.

Yes. So I'm assuming - you're kind of assuming the balance sheet, the overall balance sheet would stay flat as you deploy that liquidity into securities and loans versus continuing?

Yes.

Okay. That's all I had. Thanks for taking my questions.

The next question is from Brody Preston with Stephens Inc. Please go ahead.

Hey, good morning, everyone.

Good morning, Brody.

I just wanted to maybe first on loan growth. So in the press release, you noted that you - I think you noted in your prepared remarks too which you called out that, through 2022, you're going to be looking to kind of grow along to mid-teens or higher rate going forward. And you've got a lot of different things going on between the new team hires, premium finance business and the life insurance side and panacea, ramping up. And so could you help us kind of think about where that mid-teens growth is going to come from core bank verse panacea, verse premium finance.

I mean, I think the core bank is - I think the core bank really believed the core bank, probably about a third of that. And I think panacea, and the life insurance business is probably each a third. And it's not that the banks not growing, the core bank isn't growing, I think they've just got - they're starting with a $2 billion. They're starting $2 billion ahead of these other divisions. And so I think the growth rate at least percentage wise looks better out of panacea and the life insurance business. I mean, the core bank, really fuel almost all of the growth this quarter, and the pipeline is pretty solid there. So I think having a normal growth rate out of the core bank, is something that we're act as normal for our peer group standpoint, it's something that we feel like we've achieved. And, again, that's not something that bank was known for, we can grow core loans at peer level. But I think, just our teams and everything that we're offering, and some of the inroads we've made, we've got that up to a core level. And we're just augmenting that with panacea and the life insurance idea, both of which we honestly believe are incrementally positive to long -term credit quality.

Got it. Okay. And with the branch in the life insurance, premium finance, maybe medium term Dennis is there any consideration given to going into commercial insurance, premium finance next?

I think it would be logical that we might find our way into that, but I think initially, we want to sort of get this built out. One of the - an exciting part about what we've just done here is one of the individuals we've recruited is a Master integrator of sorts, technology wise. So when it comes to offering a tech - a lending solution, in a more technology forward fashion, that speeds the underwriting and the closing. We, one of the individuals is just that. So I believe, if you give us a few months, I think, six months or so I think we'll have a solution. And that will help us move into that a little quicker. I think and Brody I not to go on and on about this. I think the bank I'm [technical difficulty] 0:19:37 about why panacea and the life insurance business, I said a third and a third. I think the opportunity for surprises on the upside for both of those is good. I think they both may surprises to the upside. But again, just sort of being muted a little about what we think the opportunity is, I think the banks are confident about what the bank can do itself. And then pretty excited about the opportunity for upside on those other two.

Got it and Dennis, you all into a partnership with a home improvement kind of point of sale FinTech artists during the quarter as well. I think this is a business model that you have experienced with your prior bank. Can you kind of help ring fence what the expectations for growth from that partnership looks like for 2022?

I think it's, if I don't want to say a number. But I do - we do have some experience on this. You can go out and try to sort of build this on your own. But I think the inroads that some of the folks like artists have made, and I'll say service finance, I think is an outstanding organization and has produced outstanding results. And has been gobbled up by another organization. But yes I think the underwriting, the sourcing of deals and the underwriting there as far ahead of what we could do. I think I'm a big fan of building it up so. Maybe cutting out the middleman to some degree, but sometimes it's better to team up with some folks that the guy that artists, the folks that artist are all outstanding salespeople, and there's they are just sort of getting going, there's really not a lot of that in our current run rate effect. I don't think there was any really in this quarter. So anything we get from artists, is probably even more incremental to the two or three items we just mentioned.

Got it. I just had a couple more questions here. You guys noted in the in the release that you think you can achieve the growth goals without substantial dilution of the total portfolio yields. So I wanted to ask what the new origination yields are on a blended basis between the core bank, panacea, and going forward what you're thinking about for premium finance?

Matt, you might have.

I mean, in panacea we're doing basically two kinds of loans, the consumer side is the consumer side got consumer type, I think they are consumer type credit quality. But consumer type yield. And then the commercial side we're doing, we're doing practice loans. And these are mature, easy to underwrite medical practice loans, and our yields on those are typical commercial type stuff, the blended right there, I think is the blended right on that right now is probably, well on that. But the blended between the consumer and that I think might be a touch, real close to where our overall portfolio yields are. Looking at the life premium finance, it depends on what kind of - how big the relationship is. And I think right out of the gate, we're going to be aggressive. Those may be, say, 50 basis points below the current level. A lot of the opportunities we're seeing in the core bank. I don't believe I mean, they're high threes, low fours. So I don't see that there's a lot of dilution in what the core banks doing to exist. And you can really see up steady yields have been there to sort of prove that out.

Okay, thank you for that. And on the expense side, you all noted that you were doing some things between repositioning and consolidating some of the branch infrastructure. And so I wanted to ask, have you have you taken an initial cut at any potential branch cuts, that we could expect going forward.

We're working on it Brody. We're not prepared to announce any specific branch cuts at this time. But obviously, as we've discussed in previous calls, with 40 branches, we have some opportunities to reduce that number without impacting the overall organization.

And that's being we're being pretty scientific. I mean, we know what incremental build we have left with digital bank with leadership with the production side these the life guys, for instance coming up. And what we're doing is going through the rest of the organization looking for as much leverages we can get on or reduction, this sort of meet next year's growth so that again, a lot of the incremental net interest income goes straight to the bottom line.

Got it. And then last one for me. And I appreciate you taking all my questions. You all know that you had one downgrade, from a credit perspective in the quarter just want to get some details as to what industry that was in if it was CRE C&I, if it CRE is at hotel, just some talking points there?

It was, - there were a couple downgrades one was significant. And it was an acquisition and development loan, it was a property where the existing structure was going to be knocked down and then redeveloped and the project is stalled. But that a good LTV. It's got well-heeled borrowers, they're just taking a little bit longer to do something with the property or refinance it out. So out of an abundance of caution, we downgraded it in the quarter.

Got it. Thank you very much, everyone. I appreciate it.

[Operator Instructions] The next question is from Christopher Marinac, with Janney Montgomery Scott. Please go ahead.

Hey, thanks. Good morning. Dennis and Matt, I kind of want to elaborate on the branch question that Brody just asked. And I guess from a bigger picture, do you see opportunities to cut costs, not just on branches, but other parts of your organization? And then kind of reinvest it. So I'm wondering if that offset some of the growth of expenses that you outlined in slide 16.

I guess the short answer is yes. I mean, we're looking at everything we can where we can be more, better users of technology be more efficient through the organization, redeploy people, where we may have excess capacity in one area, but need capacity and others. So making sure that our organization is deployed correctly. So there's a number of areas we're looking at can't point to specific line items that we're pursuing at any given time, but it's a lot of nickel and dime stuff that were opened will add up for the next year.

You know, Steve and Chris I think, may have surprised people being slower to sort of consolidate some of our branch infrastructure. I think that's not us being timid. I think when you look at the development of our digital bank, we're going to be unique in that we have a digital bank, that's named Primise. And now our digital bank is going to offer the same products and services with the bank, same fee schedules and everything as our core bank, and not that we don't believe out firmly state, we do not believe that we're going to take the digital bank, roll it out in our footprint, close all of our branches and convert sort of land bank customers to the digital world. We don't. But there is no question that some of what we're working on that we've not announced in a in a lot of fanfare, yet will provide our customers with a full service branch type solution, digital based, that will allow us that will take some pressure off the branches and allow us to consolidate some of the branches. So we do anticipate that I think we're just sort of trying to time it a little more with the rollout of the digital bank and some of the digital solutions. That's what I think leads us to be positive about there being some opportunity for that next year. We're just kind of wanting to get through the friends and family launch and sort of be able to be in a position to more broadly announce exactly what we're doing.

Nope, I understand completely. So it's almost as if fourth quarter is a little bit of a beta test for friends and family and then it gets into a different gear and first half of next year. So I guess my follow up question on all this is, are there solutions to products like mortgage that you might be able to do in a digital channel again, I know you're still developing some of these but it sounds like that's a potential solution as 22 comes in a greater focus.

First, yes, absolutely. For sure, I think the now that we're at this stage, and I really, I mean, everything I thought I knew about digital and FinTech and from investor reports and talking to leaders, FinTech leaders, and reading 10,-K, I mean, I really don't feel like I knew anything until we got inherent started actually building something. But now that at that we're at the age is really coming into focus, the advantage of just what you were saying, having full digital solutions and won't get when we say digital means you can do everything on your phone or your tablet, you don't have to find a PC. Login with your, your face, not your username. That I mean, Chris, the advantages that we're going to have. And I mean, I'm excited about where we are right now. And our folks are tired, but still working hard. And I hope I'm sure some of them are listening, they all know that we're really just at the beginning, developing this and coming up with solutions, like just like you're saying, whether it's on the mortgage side, or whether it's the consumer, I mean, banks essentially got out of consumer lending. And there's so much profitability, consumer lending. But it's all being driven by FinTechs, and digital solutions, and point of sale, the only way we would ever be able to get into that really is through this digital solution. So think opening up stuff like that the mortgage side. And again, the things that we're doing commercially, right now, there is a lot of competition for consumer checking accounts in the digital world. There's not a lot of focus on small business, but we think that's a good niche that we're going to be able to fill. I mean, we're just mean as another example, I mean, this is not an existing part of the bank, it's the new part. But Dennis alluded to earlier, the one individual's part of the management team for this new life, finance business is more operationally and managed. I mean if you look at that business or know anything about it, it is intensely inefficient. And paper driven shuffling stuff back and forth. It is ripe for better technology and using modern ways of conducting business electronically instead of over paper and telephone. And that's one of the keys we really liked about this team is they have a real vision for reinventing how that space gets done. And they want to do it on our platform. So we think that's going to be a huge advantage for us as we roll out that product.

Thanks, I actually had that same point. Because it feels to be like he started from scratch is going to allow you to scale better and be more profitable than buying someone else's business like other banks have done. So that's a whole different approach. Yep, and so I guess, to that point on the premium finance business that is a spread opportunity, in addition to fee income opportunity as this comes to be.

Yes, yes.

And, one term, given my just experience with this, it's incredibly efficient. I mean, long-term, wildly creative to our efficiency ratios. Very low losses, if any, so wildly accretive to credit quality, and a credit profile. And, Matt, I think what's going to just nobody thinks about life premium finance being a FinTech business. I'm not calling it that necessarily, but our approach here is to bring technology and innovation to rapidly find these opportunities, underwrite them, and close them and distinguish ourselves there versus doing so was, you know, everybody's offering this at LIBOR. 250. And we'd have to come in at LIBOR 150. That's not what we're doing. So that answer - that helped Chris. Yeah. No, it does. I appreciate all the background this morning. It's very helpful.

This concludes our question and answer session. I would like to turn the conference back over to Dennis Ember for any closing remarks.

Okay, thank you for again for everybody who's joined our call. Matt and I are available really anytime to take your questions or comments or get on phone to discuss it with you if there's something separately you want to discuss, so give us a call. Otherwise, have a good weekend and we will see you shortly.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.