Primis Financial Corp (FRST) 2021 Q3 法說會逐字稿

Good morning, and welcome to the Primis Financial Corporation third-quarter 2021 earnings conference 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.

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 changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

In addition, we may discuss during this call our 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 deposit -- 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-10s 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, at best, 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 own 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 honestly people who negotiate harder on their incentives than they do their 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 a discount of almost $3 million. Our relationship with Southern Trust has been very fruitful and profitable for the bank. We have great relationship with the principals over there and will 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 a 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. I 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 -- mostly on time and with the product set we had initially planned.

As we finish 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 accounts.

Last thing before I turn it back to Matt, I wanted to make a comment about profitability. On this call, I've highlighted how loans are up, how deposits are up, how momentum is up honestly on both. That can really sustain us for the next quarter.

I mentioned the digital bank effort that is quite -- 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 a long stretch for anybody on this executive team or 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 and 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 8 basis points -- and doing so with very limited incremental operating expense.

I noted that's what lies ahead. I know that our incremental operating leverage on this growth is significant. And you know, speaking for Matt, we believe that that kind of operating leverage and operating ratios are right around the corner.

So now that I've spoken for him, I'll 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 were $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're extremely pleased with growth this quarter as investments in bankers and business lines have all contributed to the growth. We believe the momentum in our loan portfolio is sustainable and are anticipating robust growth through the rest of 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 are now less than 14% of total deposits. Even with the excess liquidity we'll discuss 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 of quarters subject to market conditions to absorb some of the excess liquidity build that we continue to experience.

Credit quality remains good with nonperforming assets, less SBA guaranteed portions, increasing $1.8 million in the third quarter. Net charge-offs were $2 million in the quarter, with 3/4 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 in this quarter, tied to one relationship that moved to interest-only from full deferral with full P&I payments scheduled to restart in the fourth quarter.

Due to the robust loan growth highlighted above, we recorded a provision for credit losses of $1.1 million in the quarter. The 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 $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 of that, we believe the net result will be a low, single-digit growth rate in expenses in 2022, still below the overall growth rate in revenue for next year.

With that, operator, we'll open it up to Q&A.

(Operator Instructions)

Casey Whitman, Piper Sandler.

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

I do. It was at $469,000, Casey.

Okay. Great. Thank you. All right. And then, I guess, bigger picture, Dennis, you touched on the profitability and kind of getting to the top-tier targets. What do you think is a reasonable timeframe to get there? If sort of all the things fall into line with the growth in the mid-double digits, you hold expense growth in the low-single digits. So how should we think about the timeframe to get to that -- to get to those profitability targets you discussed?

I think approaching -- Matt and I 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 that right now we don't have, that would give us a little more profitability. So probably early 2023 would be sort of materially above 1%, sort of peer level.

And 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 $600 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 to grow?

Yes.

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

Brody Preston, Stephens Inc.

Hey, good morning, everyone. I just wanted to -- maybe first on loan growth. So in the press release, you noted that -- 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 loans at a mid-teens or higher rate going forward. And you've got a lot of different things going on between the new team hires, the Premium Finance business and the life insurance side and Panacea ramping up.

And so, you know, could you help us kind of think about where that mid-teens growth is going to come from core bank versus Panacea versus Premium Finance?

I mean, I think the core bank is -- having the core bank up -- I really believe the core bank is probably about a third of that. And I think Panacea and the life insurance businesses are probably each a third. And it's not that the bank is not growing; the core bank isn't growing. I think they 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 fueled 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 where I kind of say normal from a peer group standpoint. It's something that we feel like we've achieved.

And again, that's not something that the bank was known for. We didn't 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, you know, maybe medium term, Dennis, is there any consideration given to going in the 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 lending solution in a more technology forward fashion that speeds the underwriting and the closing. 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, not to go on and on about this, you know, I think the bank -- I'm talking about (technical difficulty) 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 surprise us to the upside. But again, just sort of being muted a little about what we think the opportunity is. I think the banks feel 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 linked -- you are into a partnership with a home improvement kind of point of sale fintech, Artis, 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 -- 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 Artis 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's far ahead of what we could do. And I think I'm a big fan of building in our sale, maybe cutting out the middleman to some degree. But sometimes it's better to team up with some folks.

And the guys at Artis, the folks at Artis are all outstanding salespeople. And they are just sort of getting -- going. There's really not a lot of that in our current run rate. In fact, I don't think there was any, really, in this quarter. So anything we get from Artis is probably even more incremental to the two or three items we just mentioned.

Got it. I just had a couple of more questions here. You guys noted 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 are you 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, we got consumer type -- I think there has been consumer-type credit quality, but consumer-type yields.

And then the commercial side 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 rate there I think is -- the blended rate on that right now is probably, you know, 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.

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 3s, low 4s. So I don't see that there's a lot of dilution in what the core banks doing to this, and you can really see how steady yields have been there to sort of prove that out.

Got it. Okay. Thank you for that. And then 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 taken an initial cut at any potential branch cuts that we can 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 Matt's been -- we're being pretty scientific. I mean, we know what incremental build we have left with the digital bank, with leadership, with the production side. The life guys, for instance, coming up. And what we're doing is going through the rest of the organization, looking for as much leverage as we can get on our reduction to 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 taking all my questions. You all noted that you had one downgrade from a credit perspective in the quarter. Just wanted to get some details as to what industry that was in? If it was CRE? C&I? If it's CRE? Is it hotel? Just some talking points there.

It was -- there were a couple of downgrades; one was significant. And it was an acquisition and development loan. It was a property where the existing structure is 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, sort of an abundance of caution we downgraded in the quarter.

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

(Operator Instructions)

Christopher Marinac, Janney Montgomery Scott.

Hey, thanks. Good morning. Dennis and Matt, I kind of want to elaborate on the branch question that Brady just asked. I guess, you know, 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 and expenses that you outlined on slide 16.

I guess the short answer, Chris, 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 in others. So making sure that our organization is deployed correctly.

So there's a number of areas we're looking at. I 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 we're hoping will add up for the next year.

And, Chris, I think it may have surprise 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 --and we're going to be unique in that we have a digital bank that's named Primis. And our digital bank is going to offer the same products and services with the same fee schedules and everything as our core bank.

It's not that we don't believe -- I'll firmly state -- we do not believe that we're going to take this digital bank, roll it out in our footprint, close all of our branches, and convert sort of land-based 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 -- with a lot of fanfare yet, we'll 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.

No, I understand completely. So it's almost as if fourth quarter is a little bit of a beta test, friends and family, and then it gets into a different gear in the 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 the digital channel? Again, I know you're still developing some of these, but it sounds like that's a potential solution as 2022 comes into greater focus.

Chris, 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 you know -- from investor reports and talking to leaders, fintech leaders and reading 10-Ks, I mean, I really don't feel like I knew anything until we got in here and started actually building something.

But now that we're at the stage, it's really coming into focus the advantage of just what you were saying: having full digital solutions. And, again, when we say digital, I mean, you can do everything on your phone or your tablet. You don't have to find a PC. Login with your face, not your username.

I mean, Chris, the advantages that we're going to have, and I mean -- 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 in consumer lending, but it's all been driven by fintechs and digital solutions and point of sale. And the only way we would ever be able to get into that really is through this digital solution.

So I 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 on the -- 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 --

I 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 that's part of the management team for this new Life Premium finance business is more operationally [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 for, 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 huge advantage for us as we roll out that product.

Thanks. I actually had that same point on that. Because I mean, it feels to me like starting 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.

Yes.

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 on term, given my -- I just experience with this, it's incredibly efficient. I mean, long term, wildly accretive to our efficiency ratios, very low losses, if any. So wildly accretive to credit quality on our 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 with -- you know, everybody is offering this at LIBOR 250, and we have to come in at LIBOR 150. That's not what we're doing. So does that -- did that help, Chris?

Yes. 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 Zember for any closing remarks.

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

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