Primis Financial Corp (FRST) 2021 Q4 法說會逐字稿

Good day and welcome to the Primis Financial Corp. fourth-quarter earnings call. (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.

Good morning, and thank you for joining us for Primis Financial Corp.'s 2021 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.

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 and specifically disclaim any 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.

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've joined our call today or who will listen to it on the replay. I'm delighted to be on the call today with each of you to talk about some significant accomplishments in the current quarter and for the full year of 2021. As we sit here today, I'm just a few weeks away from having my second anniversary at the company. When I first joined the company, our vision was to create several engines for growth that could reliably and organically produce -- could organically grow both sides of our balance sheet. Granted, we didn't have the multiples to even be hoping for M&A or anything strategic. And, further, we probably shouldn't have considered it anyhow as we work to strengthen our culture and our platform. But here we are, two years later.

And I'm not calling victory yet with two quarters of good loan growth. But I will tell you, it feels different around here. Given the results and the outlook for our core bank, our lines of business and our digital bank, I'm starting to see the vision come together where we can sustain mid-teen our better growth in the balance sheet and even faster growth in our earnings. It's taken a lot of time and investment to get here, but I feel so optimistic about the future direction of our operating results.

Specifically about loan growth, we saw loans, excluding PPP balances, in the year at $2.26 billion. While this is up only 6% from the end of 2020, it does represent annualized growth rate of about 20% in the second half of the year. I'm hopeful that another couple quarters of growth at this level, and we can start redefining ourself as a growth-oriented company we hope for.

Right now, we have three reliable sources of loan growth. Our core commercial teams are producing and growing in our core markets around Richmond, the D.C. Metro area and the Hampton Roads area. At the same time, our Panacea division and our brand new Life Premium Finance division are using streamlined technology to identify, underwrite and close loans in select industries very rapidly. Both of these divisions operate nationally, and I believe they're both going to have an exceptional 2022 and produce results that look good not only on our balance sheet, but more importantly on our bottom line.

The expected loan growth is great news. But long term, I'll tell you we don't have enough excess liquidity on the balance sheet to be lazy about deposit growth. We could expect continued growth like we saw this year out of our core bank. But for us to fund our expected loan growth, we're going to need a faster source, and the real engine for this is our digital bank.

The digital bank is intuitive and modern, and importantly, it has no geographic [fence]. Success in the digital bank does not require $10 billion of deposits and hundreds of thousands of customers. We estimate that just $100 million of deposits in this nationwide strategy will produce enough revenue and spread to completely break even. Obviously, we believe the strategy has more potential than that. We believe it will provide all the funding necessary to produce outsized margins on our loan growth and keep a steady source of funding on our balance sheet for time to come.

Lastly, on the growth potential around here, and importantly, I would say that occasionally I slip back in my office when Matt isn't looking, and I make pro formas and pretend to be CFO again. And I mean, I keep trying to understand and document the cost to acquire business and build a bank using these lines of business funded by digital strategy. The incremental costs to grow the bank like this are so different, and many times I just don't believe what I'm calculating. And I say this right now because we're in the building stage, and I promise you that I have a gut check every time we have a new expense.

These strategies confidently have paybacks that are short and significant. Matt and I are both M&A-oriented people. Our whole career has been that. And it's so easy in that environment to have a strategy or transaction and expect something to be accretive on day one. And I understand that this is not that, but I believe in what we are doing wholeheartedly. And I believe the results that are possible in the short term and long term are significant.

Two more items and I'll turn it back over to Matt. We pride ourselves on being innovative. In our core values -- and maybe I would suppose not many banks have this word in their core values -- but we have in our core values the word imaginative. There's a slide in our deck on V1BE, which is an app that we conceived totally in our bank and developed completely from beginning to end. V1BE essentially takes the few remaining activities that are thought to absolutely require a branch transaction -- an in-branch transaction and allows the customer to order the service directly to their home or office or current location, normally inside of 30 minutes. We rolled this out in a limited way in Richmond in the fourth quarter. The pilot's three or four months old, and we've received very good feedback from customers.

We've opened about $20 million of mostly new checking accounts, all from super regional bank. I mean, being a community banker myself, I know that many community banks tout their customer service, their customer experience relative to the super regionals as the differentiating factor, the fact that will move business from one bank to another. But usually that customer experience is so nuanced -- the difference is so nuanced that it doesn't actually move business. I believe this V1BE app changes that for us and puts us in a competitive place with lots of new customers.

Lastly, Primis was like every other employer in 2021 in a very tight labor market. Staffing was tight and hard to come by. While we continued our normal recruiting efforts, we stepped out and did something different. In August, we launched something called Primis Works. This program focuses on single mothers who are looking for job training and life skills that can put them in a much better position to care for their families. Our first class had five wonderful ladies who dedicated themselves to learning all the skills necessary for a job in our bank. In return, we paid a competitive wage along with childcare and healthcare cost.

This last week, all five of these ladies that came into the program graduated, and I'm unquestionably sure that we have loyal -- we will now have loyal employees who are constantly talking about our company and the difference we've made. And we absolutely know that we run a for-profit company, and we absolutely know what distinguishes us in the industry and builds market value, but I'm so proud of our staff for finding alternative solutions to problems that make our bank better and serve the community like we did with Primis Works. Be watching our social media and our website for content about this program and the success we've had in the near future if you're interested.

All right. With that, I will turn it back to Matt for his report.

Thanks, Dennis. As a reminder, a full description of our fourth-quarter and full-year results can be found in our earnings release in our earnings presentation, both of which can be found on our website and as part of the 8-K filed with the SEC.

Also, in addition, our previously announced transaction to exit our common ownership interest in Southern Trust Mortgage was completed late in the fourth quarter. The historical investment in STM has been classified as a discontinued operation in prior period financials. Unless otherwise noted, my comments will refer to results from continuing operation.

Earnings for the fourth quarter were $7.7 million or $0.31 per basic and diluted share versus $6.2 million or $0.25 per basic and diluted share in the third quarter. Total assets were $3.4 billion at December 31. Gross loans increased to $2.34 billion in Q4 from $2.31 billion in Q3, as strong core loan growth offset the decline in PPP balances. Excluding PPP, loan balances grew 4% linked-quarter or approximately 16% annualized. Growth came from all parts of the organization in the fourth quarter, which was very encouraging and included robust growth from both Panacea and our new Life Premium Finance division.

We have a lot of momentum currently and are anticipating robust growth through 2022. Deposits decreased slightly to end the year to $2.76 billion due to the seasonal decline in mortgage escrow-related deposits of approximately $125 million. Excluding that decline, we would have seen further core deposit growth. Non-interest bearing deposits are 19.2% of total deposits at year end and grew 20.3% for the year while CDs have declined to 13% of total deposits. Cost of deposits declined to 39 basis points in the fourth quarter from 45 basis points in Q3. While we continue to have excess cash on the balance sheet, we believe our momentum on the lending side will consume this liquidity in the near future and continue to prioritize core deposit growth.

Credit quality remains solid with nonperforming assets less guaranteed -- SBA guaranteed portions, decreasing $1.2 million in the fourth quarter. We also had net recoveries in the quarter of $18,000 for the fourth quarter with 6 basis points of net charge-offs for the year. Improvement in the operating environment led to a negative provision of $1.3 million and reduction in the allowance for credit losses to gross loans, excluding PPP, to 1.29% at December 31 from 1.40% at September 30.

Our reported margin was 3% for the fourth quarter, up 13 basis points linked-quarter, excluding PPP effects. And core net interest margin increased 13 basis points to 2.79% in the fourth quarter. As noted above, we are excited to see loan growth materialize and fully expect operating leverage to continue to be meaningful as we deploy that liquidity.

Excluding a gain from debt extinguishment this quarter and the effects of STM, which is now recorded in discontinued operations, non-interest income was largely flat quarter over quarter. Non-interest expense increased $1.7 million linked-quarter, excluding the recovery and reserve for unfunded commitments in both Q3 and Q4.

As we discussed in our earnings release and presentation and as Dennis alluded to, much of the increase this quarter was tied to the talent acquisition costs and getting new initiatives off the ground, particularly Life Premium Finance and V1BE. We expect much of those particular expenses to moderate in the first quarter. Also discussed in our earnings release and presentation, certain expenses related to our growth initiatives, including the new digital bank, Panacea and Life Premium Finance, will increase in 2022. We've also disclosed our intention to consolidate branches in 2022 to offset some of these costs. We believe the net result will be a mid-single digit growth rate in expenses this year versus '21.

To wrap up, we're excited by the momentum we have in the bank and substantial upside we see from our strategic initiatives. We believe we're on the cusp of strong earnings growth, particularly as Panacea and Premium Finance turn profitable this year and begin to generate substantial earnings growth after that.

With that, operator, we can now open the line for questions.

Thank you. (Operator Instructions) Casey Whitman, Piper Sandler.

Thanks. Good morning.

Good morning.

Hi. So maybe we start off -- I think in the past you've talked about a third of the growth coming from each of the lines of business. Is that expectation changed or is that still how we should look at it?

I think that's still our expectation for this year, yes.

Okay. And can you remind us where the yields are coming in from each of the lines between the Panacea life insurance product and with your commercial production? Is there a big variance in how those are coming in the quarter?

So Life Premium Finance, the portfolio we ended the year with, which was obviously small, I think the effective yield on that was about 3.5%. That included one of the credits that had a pretty substantial fee associated with it that's amortizing and adding to that yield. Their production, especially on the variable rate products, are probably in the 2.5 to 2.75 range. So that effective yield will trend down depending on how many fees they get associated with it. But that's kind of what they're putting on right now. And positions us well as rates go up, which we all think they will with Panacea.

And I think in the investor presentation for Panacea, their portfolio at the end of the year was weighted average in the low 5, I believe. So depending on the mix of their production this year, that may come down a little bit, but still pretty good yields especially with the consumer and the student loan refi fees [that go with it]. In the core bank, I would say our production -- our commercial's probably in the high 3s. So we feel pretty good about how all those fit together.

Okay. And so would your expectation then be for the core margin to continue to expand here as you put on those loan growth, as you get rid of some cash, minus -- forgetting the rate hikes for now?

Yes, absolutely.

Okay.

I would also say, Casey, I'd add, if you look at the combination of everything relative to where we think we'll be growing deposits, I mean, we see pretty clear pathway, yes, the premium finance stuff is -- especially the variable stuff is slightly below 3. But when you put all of it together relative to where we're growing the funding side, Matt and I would see everything we need to get to the margin that we think we want to operate the company at, which is probably somewhere around -- somewhere a little south of 3.5% -- 3.25% to 3.5%. So long term, we believe what we're doing definitely puts us in that area.

Okay. Congrats on the growth [of the commercial loans].

All right.

Operator

(Operator Instructions) Brody Preston, Stephens, Inc.

Hey, good morning, everyone.

Hey, good morning.

I wanted to start maybe on the digital bank. I appreciate y'all putting a target out there of $100 million in that -- coming from that this year. I guess, I wanted to ask what gives you confidence in that number? Why did you pick like -- what's driving the $100 million, Dennis?

There's a little bit of laughing in the room right now because Matt and I have gone back and forth and back and forth. Right now, we're -- his is what I'll tell you, Brody. Right now we're in the friends and family stage a bit, and we're getting very close to the end of it. We're kind of close enough that we are sort of lining up for real commercial opportunity just on the outside of this. And two or three -- just two or three opportunities here I know of are $13 million, $14 million. And again, it's all checking account. It's all low-cost deposits.

I think over time, really what drives a digital bank, the technology and the seamless and intuitive feel to it, all that's important. What really drives digital banks -- I mean, we can't legitimately expect somebody in Sacramento or Santa Fe, New Mexico, to choose our digital bank until they've heard about our brand. And so really until -- for us, we don't expect or even let ourselves hope for the explosive growth that would come along with that.

Now we're not abandoning that either, but right now, all we're looking for is -- our first target is just to get enough deposit in here as fast as we can to pay for it. And that's the $100 million. I think Matt likes to say I overpromise, and he skips the overdeliver. (laughter) That's fine. But I think the goal here is that. Well, I think that's our first goal. Pay for this and $100 million of deposits will do it.

Got it. Okay.

Which honestly is -- that's not much worse or much different than a standalone branch. If we were to go to Raleigh-Durham or go to somewhere out in Northern Virginia. So, okay. Anyway, Matt, you got --?

Are you going to be rolling out -- I guess, are you going to be rolling out V1BE as part of the digital banking effort at some point? Like would you expect to kind of set up the ability to deploy V1BE in other markets if you reach -- like say you got to $50 million in Raleigh-Durham through the digital bank effort, would you set up the ability to kind of deliver those services via V1BE to those customers?

Yes, absolutely. The V1BE with our legacy mobile bank offering -- the V1BE functionality is actually in a separate app, but with the new digital offering, it will be embedded in the mobile banking offering. And we could have the ability to turn it off and on. So in markets where [people] raising deposits and we don't have that service available, we'll possibly turn it off. But to your point, we get enough momentum in a market, and we think that it would increase that momentum. The technology is designed that it's completely transportable. We can utilize it anywhere.

And low cost. I mean, you can -- we could probably -- I mean, we're just using Raleigh-Durham as an example, but I mean, we could probably spend an extra $100,000 a year and have pretty much around-the-clock, in-person customer service. And I think that's a distinguishing factor that -- I think that's more about -- that's more what a small business would want out of a digital bank. That's more what a high-end professional would want out of a digital bank. And so I think it's a distinguishing factor.

Got it. And then maybe just turning to the business lines. Thank you for breaking out the different expectations and where the balances are. Maybe if I could start on Panacea. You all have three commercial bankers now within that vertical. You've got a great support team to support the underwriting. How should we be thinking about your expectations for commercial production for that team this year, kind of trying to set aside the student loan refis and the PRN?

We -- Tyler, I think he's got a signed offer letter on another banker, and I know he was -- and he is in the middle of recruiting another. I think Tyler would probably like to finish this year with 10 commercial bankers if he can get Matt to agree. (laughter) But I mean, Tyler's -- bankers are coming on and producing almost within two weeks. So there's -- they're real fast to being breakeven. And I think that's critical for Tyler to capture the value of his brand.

That I think is what -- if there's one thing -- I mean, I like what we've done with the commercial bankers, and I like how we've sort of moved into that space. But the one thing about Panacea is that the brand -- the sort of by doctors, for doctors effect that to distinguished medical professionals are involved running this business makes a difference. And I think really in the third and fourth quarter, their brand and their image started catching on.

And I think as we roll through the year, it will not just be hand-to-hand combat with commercial bankers that's producing business here. I think the brand will actually start paying off as well. But Tyler is going to continue to grow in his commercial banker rank. I know there's another product or service or two that he wants to add, and we're working on that right now that will augment that. And I think -- what did you put in there for growth?

We've set expectations of $125 million to $150 million for the year. And we also disclosed in the presentation the current makeup of the portfolio. Now, understanding that student refis won't really -- we're doing some, but it won't become a real meaningful product until the deferral ends in May. So that will -- we only get really half a year of that activity. And then the PRN loans, the consumer loans are relatively small balance loans. So I would expect a lot of the growth in '22 to skew more towards commercial business or larger credit.

Got it. And then on the premium finance loans, just a few questions on this. I'll just try to wrap it into one. One, could you help me understand what the commitments are? I think it was like, you got $13.6 million outstanding with $69 million in commitments. Like help me better understand what that means. And then, two, are all of these loans kind of like a 12-month or prime -- 12-month LIBOR Prime Plus kind of product and is there going to be much in the way of provision associated with these loans just given the low loss rates?

So the reason the committed balance is so much higher is generally the -- like so for these loans right now, this is the first year's premium. The premium's broken up into three- to five-year installments. So you don't actually take down the whole life insurance premium all at one time. So the total amount of premium that we would finance if the borrower elects to finance all five of those payments would be that $69 million. But so far, it's just the first year amount of $13.6 million.

Got it.

These are nearly prime minus yield. So that's the 2.5 to 2.75 that I've referenced earlier. It's prime minus. And from a reserve standpoint, we're assuming very little in the way of provisioning for these spreads because they're to the extent that -- like through cash balance or cash surrender value is securing the full amount, the borrowers supplying their letter of credit or marketable securities or cash -- other cash sources to secure the rest of it. So we're very, very secured on the spreads.

Got it.

Matt's going to probably kill me here, but the $69 million or so of committed balances on that -- I mean, the pull-through rate is not 100%, but it's also not 20%. I mean, you could probably -- the $69 million, you could probably expect that a good $50 million of that is going to materialize on the balance sheet. So I mean, there's some built-in growth here for the next few years.

What Matt's going to probably reach over and hit me for is while we only closed these five loans -- or while we closed these five loans, and these five loans had balances, we closed some other ones as well that had no outstandings. And I think as of right now, we're probably up to about maybe a little over $150 million of committed balances. So some of those are -- some of those have funded since the end of the year. Some of those have closed but not funded. But when we start talking about why we're excited about this and why we believe, kind of looking out -- how Matt and I are so confident that loan growth is going to materialize on the balance sheet, that's part of the reason why.

Got it. And do you know what loan segment the life insurance premium finance loans went into what bucket, Matt?

I think most of it actually went into commercial C&I and then the rest of it went into consumer.

Okay. And maybe just, Dennis, in the press release, you noted that you are expecting to find a wholly owned solution to mortgage shortly. And you put out as little as $1 billion would add 20 to 25 basis points to the ROA and 200 bps to the ROTCE. I'm assuming you wouldn't say shortly if you didn't have something planned. And so, one, could you give us a sense for how soon you plan to announce something in the mortgage space? Two, if that's currently baked into your expense guidance -- the mid-single digit growth guidance that you all put out? And three, I guess how quickly could you get to that $1 billion?

When I say shortly I think I mean, I would like for us to do -- I would like for us to do that this year. I mean, right now, we -- right now we're too much of a spread-oriented organization. And our future strategy, growing the core bank and the digital bank, does not center on service charges, which I think are going to go away anyhow. But so we need a non-interest income source, and the one we had was fine. I mean, it was a good organization. It just wasn't what we needed long term. I would like to do something this year.

So I mean short term, don't expect a press release in the next couple of weeks. That's not what I was saying. And I wasn't really leading anything with that, other than wanting investors to know that -- I know that that's missing -- that and some other non-interest income sources.

And I'm not going to try to -- I don't think it's possible to push a 1.5% ROA and a 16%, 17% return on tangible capital if you're just doing straight core community banking. And the way you get there is with several lines of business that produce sort of outsized earnings relative to their assets or the leverage that is required. I know that -- the $1 billion really is -- Matt and I are looking at what the core bank, with all these strategies, we think can produce ROA-wise, and kind of where we -- in order to get to some of our target, what kind of production do we need.

So we don't necessarily want to look at a $200 million mortgage company, but we also don't need to look at a $10 billion mortgage company. So I was kind of just maybe putting that out there that that's probably what we would be looking for. And the last thing I'd say is, I'm kind of hopeful that timing may be on our side here. Because I think with rates moving up, mortgage companies -- or at least maybe mortgage companies don't think they are worth 10 times book and 10 times earnings, I don't know. Some probably do. But I think Matt and I will be able to find something that's right for our organization that's quickly accretive to everything that we would want it to be. So I think the other question was if it's baked into our --

Nothing's baked into [that or mortgage].

Okay. So to be clear, this is -- this would be something that if the right company comes along on the mortgage side, it would -- you would look to kind of do a tuck-in acquisition and make it your own, and the $1 billion number is what you kind of think you would need to achieve the financial targets that you have in mind then?

Yes.

Okay. And then last one for me, just on the branch consolidation. I just wanted to confirm the $1.5 million that's realized in 2022. Does that mean that there's another $1.5 million that's coming through in like the first half of '23, Matt? Or would you just kind of expect the 4Q run rate to have all of the cost savings baked in, but that results in half of it being realized in '23?

Yes, it's the latter. So most of the savings won't show up until the back half of this year. So by the fourth quarter, the full run rate should be in there.

Awesome. Thank you very much for taking my questions. I appreciate it.

All right. Thanks, Brody.

Matt Switzer

Thanks, Brody.

This concludes our question-and-answer session as well as our conference for today. Thank you for attending today's presentation. You may now disconnect.