Primis Financial Corp (FRST) 2021 Q2 法說會逐字稿

Good day and welcome to the Primis Financial Corp. second-quarter 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, Sean, and good morning, everyone, and thank you for joining us for our second-quarter earnings 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. These factors are 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 we specifically disclaim any obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of on 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.

Thanks, Matt, and thank you to all of you who have joined our call today. We had a good quarter on several fronts and some really positive items ahead of us. We also have some challenges that we can discuss here, but even those challenges fail relative to the opportunities that we all believe this franchise has going forward.

Matt is going to get into the details about the quarter, but about -- and about the numbers. But at a high level, we earned $0.42 per share this quarter, which was roughly 10% higher than the same quarter -- than what we earned in the same quarter a year ago.

We've grown total assets to about $3.4 billion, mainly through very successful efforts on deposit levels. At the end of the current quarter, total deposits were $2.8 billion, which only included 388 million of CD. In the last year, we've run off about 40% of our CD portfolio, pretty much all of our brokered and national CD, and replaced that with about $800 million of growth in transaction accounts.

I know the industry is awash in liquidity and that trend has definitely helped. But our work on training, sales incentives, new products, and services and adding additional staff has had a tremendous impact on our deposit levels. I'm very thankful, very grateful for the team that we have here at Primis for they absolutely drive to be champions and the results that we are getting across the board. The quality of the team here, their results -- their early results, give me a lot of confidence that the results that we're seeing are sustainable.

The success on growing deposits and building our funding base has led to what is currently our biggest challenge. We finished the quarter with about $850 million of very low-yielding, short-term assets, which include our PPP portfolio. Deploying that in the current environment has not been easy, but we've started to make some headway and the second half of this year will be noticeably better with respect to loan growth.

Our pipelines in our commercial bank are higher and our pipeline in Panacea is building very nicely with their recent move into commercial. We are still recruiting where it's possible, but the growth that we expect in the second half of the year and in 2022 has very little incremental operating expense behind it. So we expect really impressive operating leverage in the coming quarters.

Lastly, and really before I turn it back over to Matt, we continue to work towards a fourth-quarter launch of our digital bank offering that's focused on commercial and consumer checking accounts, at least initially. Our team and our partners are very close to the testing phase of the project, and we are still targeting a complete project that we can go live with during the fourth quarter.

There are some elements of our work on this digital bank that are actually just a few weeks away from a live test with elements of our existing customer base. This test will prove in a real-world environment if the features and the hooks, as we like to call them, are actionable; if they are meaningful enough to move business from one competitor bank to Primis, which obviously is our goal.

I'd like to take this opportunity to say one more thing about our vision for digital. The biggest misperception is that we are going all digital and basically going to abandon our effort to build an impressive growth and profitability machine out of this existing franchise. And that's just not true. Everything that it takes to build a legacy franchise, with the growth and profitability to earn high multiples, you're going to do, period. Our digital bank will just complement our core bank, not reflect it. It will further augment our future growth. And I absolutely unquestionably believe that.

Traditional bankers, which I am one, have suddenly dismissed digital bank efforts because they seemingly focus too much on interchange income, or low-balance millennials like my two young son. Planning an entry into this space is critical; I mean, it's absolutely critical. But it's also terrifying because there are untold millions of fee and service charges in the legacy bank system that we all know cannot materialize in the digital world.

The only way to avoid that is to run a parallel brand. And you're talking about companies that have decades and centuries, building brand loyalty and bulletproof images. Our vision is to focus elsewhere. We've looked at our core customers and we talk to them endlessly. We've gained real insight into what would start to move them from valuing the branch to valuing the digital platform.

Because we're looking to augment our core bank, we will only be using one brand, which is Primis, which we believe is very unique in our industry. And let's be honest, no one -- everybody operating in this industry believe that future growth in earnings and balances will progressively be less centered on branches or built in the traditional fashion. We are confident that our efforts are perfectly timed to drive value in the core bank right now and be ready for where we all know the industry is going into the future.

All right. With that, I'll turn it back to Matt for an update on the quarter.

Thank you, Denis. Earnings for the second quarter were $10.3 million or $0.42 per basic and diluted share versus $9.4 million, or $0.39 per basic share and $0.38 per diluted share in the first quarter. Total assets grew to $3.4 billion in the quarter.

Gross loans declined to $2.29 billion in the second quarter from $2.39 billion in the first quarter due to the decline in PPP balances. Excluding PPP loans, loan balances were essentially flat in the second quarter.

Deposits increased 2.3% versus the first quarter to $2.75 billion. As Dennis mentioned, we are proud of the progress we've made on improving our deposit mix and improving our core deposit funding. Non-interest-bearing deposits are over 19% and time deposits are now less than 15% of total deposits.

Liquidity continued to build and impact our results with cash and equivalents reaching $621 million at quarter end versus $480 million at the end of the first quarter. We've added some to the securities portfolio in the quarter, but do not currently intend to aggressively buy securities in anticipation of loan demand increasing in the coming quarters. As Dennis alluded to, pipelines have grown particularly later in the quarter, which gives us confidence that we will be deploying this cash in the near future.

We have $240 million of PPP loans remaining and continue to work through the forgiveness process with customers. We recognized $1.8 million of net PPP fees in the second quarter versus $4.9 million in the first quarter. As of June 30, we had $5.2 million of net deferred fees remaining to be recognized.

Credit quality remains good, with non-accruals stable and OREO balances continuing to decline. Losses remain muted with net recoveries in the quarter of $587,000. COVID-related deferrals declined to $26 million from $113 million at the end of the first quarter as expected, with substantially all of the remaining loans on deferral anticipated to be off by the end of the third quarter.

The improvement in the operating environment and reduction in loan deferrals led to a negative provision for the quarter of $4.2 million versus a negative provision of $1.4 million in the first quarter. The allowance for credit losses to loans, excluding PPP balances, is 1.52% at June 30 versus 1.7% at March 31.

Our reported margin was 2.8% for the second quarter, down 61 basis points from the first quarter. The biggest driver of the change was the decline in PPP fee income in the second quarter. Excluding the effects of PPP, net interest margin declined 22 basis points to 2.77% in the second quarter.

Essentially, all of this compression was due to higher average cash balances in the quarter. While the level of margin compression we've experienced over the past year has not been fun, we know this liquidity will be put to good use. As noted above, we are excited to see pipelines building and fully appreciate that the operating leverage, as we deploy this cash, is significant.

Non-interest income increased $677,000 in the second quarter, largely due to an increased contribution from our equity investment in Southern Trust Mortgage. Non-interest expense declined $783,000 in the quarter, excluding the decline in the expense related to the unfunded commitment reserve. Non-interest expense declined $220,000 in the second quarter.

We closed one branch location in April, and we'll be closing another location in August. We continue to be focused on managing expenses while building the capabilities and resources to manage a much larger bank.

I will now turn the call back over to Dennis.

Well, let's turn it back over for questions, if we have any questions.

(Operator Instructions)

Casey Whitman, Piper Sandler.

Good morning. First, thanks for the call this quarter. Very helpful. So, first, you talked about the pipeline improving. So how should we think about the pace of loan growth over the back half of the year? Are we talking low-, mid-, high-single digits? And then also, do you expect Panacea to become like a meaningful contributor this year? Or what's sort of a reasonable expectation for growth there over the several years?

Yes. I think on a consolidated basis, I think Matt and I were doing some reconciliations this morning. I think probably building to sort of an annualized pace of loan growth, maybe in the 15%, 10% to 15% range. So I think -- I don't know that we'll be there by the end of the year, but I think we can probably be on an annualized pace, say maybe 10%, which may not seem like it's going to absorb all this liquidity as fast as we want it to. But again, we've gone three or four years here really without any loan growth, and we're just trying not to lunge or have our people lunge at deals to put that money to work.

And as far as Panacea -- one more thing, as far as Panacea, your question on Panacea, I think the -- again, that answer I just gave you may change to be something higher. Panacea initially came out, we were doing consumer, unsecured mostly. We started doing student loan refi; that was definitely accretive to their growth.

And now we've moved into the commercial side, and that's -- I'll use this word carefully -- that's wildly accretive to their growth rate and so far, very, very widely accepted on the doctors [calling]. So I think we want to give that another quarter or so. And really -- and the pipeline there has grown nicely. Because of that, let's close some of those loans and sort of see what we're booking. And I think we might have a different story really with respect to total loan growth maybe even a quarter from now, Casey.

Okay. Okay. Makes sense. So it sounds like you're feeling good, though, about the talent you have to drive the loan growth. So curious how you're thinking about the second-quarter expense level. Do you think you can hold the expenses at around $17.5 million? Or are there, I guess, some incremental expenses related to the opening of the digital bank that we should consider? Or is this just a good rate given your growth expectations?

I think -- Casey, this is Matt -- $17.5 million is still a pretty good number for the next quarter or two. We've got some incremental expenses that we'll start to come on from the digital bank really more in the fourth quarter than the third quarter.

But at the same time, some of the deposit incentives that we've talked about the last quarter or two will really start to decline less so in the third quarter because there's a lag effect to them, but more of a decline in the fourth quarter related to that. So that will offset some of it.

So there will be some movement in some of the different line items. But overall, that $17.5 million, plus or minus, is still a pretty good number.

Okay. Sounds good. Just one more modeling question. What was the -- do you have the accretion level that you guys booked this quarter similar to last quarter's level?

Let me grab that for you real quick.

The accretion this quarter was $581,000. Last quarter, it was $481,000.

Perfect. Perfect. And my last question would be just, do you have the amount left in deferred origination fees for the PPP program?

Yes, it's $5.2 million.

Awesome. Thank you, guys, for the -- for hosting the call. We appreciate it.

All right. Thanks, Casey.

Next question today will come from Brody Preston with Stephens Inc., please go ahead.

Hey, good morning, everyone. I wanted to circle back to Panacea. So just with the shift in the commercial that you all are executing on right now. Just maybe could you talk a little bit about how quickly you could see that effort kind of ramp. You know, the gentleman you hired from Wells Fargo, just thinking about his ability to bring on relationships and anything related to a noncompete. So just how quickly you think that commercial effort can ramp from here?

Let me say this, he's been here a month, on board a month, maybe a week or two longer than that. I mean, his pipeline -- I don't want to say the number. I don't know say the exact number of his pipeline. His pipeline ramped extremely fast. Okay. You kind of expect that when you bring on new people. But the first three or four things he put on his pipeline are closing here in the next two or three weeks. I mean, I think he's probably had a 75% hit rate on the first few things he put in his pipeline.

I think the bigger -- I'm pretty confident nobody in Wells Fargo's listening, but the bigger opportunity, yes, I mean, you bring in customers and you bring in relationships and bring in referral sources. I mean, those are all critical in his growth and his success here.

I think the other thing is his ability to influence other healthcare bankers. I mean, you know, those are niche lenders. I mean, those aren't generalists. You know, those niche lenders that are doing warehouse lending and niche lenders that are doing equipment lending. And he is pretty well known in the industry; his ability to influence some of those, especially his successful booking deals, is going to be meaningful, I mean, and already has been.

I think we could probably finish the quarter with another couple -- another one or two commercial-oriented healthcare lenders. And our commercial is still -- it is still a little guerrilla warfare. It is still a lot more human and relationship oriented. A lot of the other stuff we're doing in Panacea is digital oriented, and social media drives a lot of -- social media and sponsorships with organization drives the volume there.

But on the commercial side, it's still banker oriented. Right now, we think we might have struck gold with the first commercial banker we brought up.

And, Brody, just to clarify, he does not have a noncompete.

Okay, great. So don't want those folks from Wells coming down on you.

(technical difficulty) We're not publishing this script. (laughing)

So you gave the stat just around the penetration on the checking accounts being about 45%, which I'm assuming is mostly consumer at this point, just given what the product set was at Panacea, you know, since it's been open.

But I wanted to get a sense for how that penetration rate might change. Do you expect to kind of see a similar level of account opening and deposit growth in the commercial side? Just trying to get a sense for how the commercial side will shape up from a deposit perspective.

Yes. That, likely, I would expect -- if Tyler was here, he'd be like, we're getting them. But I would -- until we're able to roll out the digital bank, and again, focus -- having the digital bank focused on commercial, one, that's unique. But having the digital bank focused on commercial with commercial products and services and tools, and access is important, will drive -- will better position us to get the deposit side of some of these relationships.

I mean, we're coming to some sort of in a digital framework a little bit on the loan side. I don't think it's going to be a hard sell to win them over on the deposit side, but I've got to come to them with something that's competitive and convenient and reliable. And that's really what's not -- I don't believe that's existing. I don't believe that exists in this space.

I mean, I think there's -- there are commercial enterprises that bank digitally. But the commercial enterprises that sort of bank locally and bank with a branch and bank with a banker, moving those into a digital environment, I don't think the products and services that are in the space are compelling enough right now to do that. We're hoping to change that.

Okay. Understood. I guess maybe just one more on the Panacea and the digital bank. You know, understanding that the digital bank still hasn't launched yet, but, Dennis, since you've come in, you've kind of quickly launched two kind of nationwide initiatives between the Panacea partnership and get ready to launch this digital bank later in the year.

So maybe if you could provide some color on your willingness or your desire maybe to launch your -- I guess, maybe move Primis into another nationwide nice verticals, if you will.

I mean, we see a lot of value there. I think to the degree that we can kind of look beyond our existing footprint, I think we can maybe more cherry-pick, and we've got limited capital. I mean, I can't grow to $30 billion with what we have right now. So we've got limited capital.

We're going to deploy that capital. I feel like it's the safest way to pick niche, you know, asset classes and verticals and ideas, one that will grow market value -- for sure will not be dilutive to market value, and you know, those are -- you know, if I can cherry-pick healthcare assets, if I have to only cherry-pick those in Northern Virginia and DC and Southern Maryland and Richmond and Tidewater, I mean, that's difficult.

Now all that being said, we are mildly attentive to our core value right now. And our core value is a legacy footprint, and we're not abandoning it. We're not stripping it down. We're not closing all of our branches. We're not sort of running away from these customers who are more legacy oriented.

So I think what we want to do is just be ready for -- I don't know, even the mainstream of banking is ready for all digital. That's sort of not focused on low-balance millennials, so to speak. But we think it's going that direction and we want to be ready.

Now that being said, one more caveat, I think. We've got $800 million or $850 million of liquidity. We're still growing deposits faster than loans. And I mean, we're going to have a good second half of the year on loan growth. But I don't -- Matt and I have it. And I'm wondering -- I'm waiting to see if Matt shakes his head. I think the second half of the year will be better on deposit growth than on loan growth. So we're going to need to have some more verticals and some more ideas on how to put this money to work.

And I think the Panacea concept sort of where we partner with fintechs, you know, in an environment that sort of gives us a good return on assets, a good return on equity, that's -- we're kind of focusing on that, maybe, as we look for, quote-unquote, national verticals. But we are being slow; we don't think right now is the time to cross the Rubicon, so to speak.

Understood. And then maybe just on that traditional lending front. You all had a nice uptick core C&I loans this quarter. Wanted to get a sense for what drove that.

And then secondarily ask how the new team that you hired up in Northern Virginia is doing? How their pipelines are shaping up?

Brody, some of the C&I growth was early wins on that medical front.

Okay.

And then the rest of it was just more blocking and tackling in our -- in the main footprint.

Got it. And how's the team that you hired on the Northern Virginia doing?

Well, they're coming along, building pipelines. A few of them were subject to noncompete. And so those are burning off here this quarter, their pipelines. And so their pipelines accordingly are building because of that.

Got it. And then last one for me, could we get a sense for what new loan yields are coming on book at?

Still around 3.5 to 4.

Got it. Thank you very much taking the questions, everyone.

Christopher Marinac, Janney Montgomery Scott.

Hey, thanks. Good morning, Dennis and Matt. Thanks for all the disclosure and the information you're providing this morning. I wanted to circle up on the profitability from the slide deck. And when we look at the pretax, pre-provision returns, is it fair to expect that that's kind of bottoming here? And that as it stabilizes, that will start to revert upward over time as you deploy liquidity and continue to grow the company?

No, absolutely no question about it. Now, say, bottom, I know I think bottoming. I like that word better than bottomed. And I say that because I want to finish a quarter where we're able to actually sort of put some of the money to work and see that the results flow to the bottom line.

I mean, I know, Chris, where the balances are coming from, and I know that, you know, the expenses are already there, the staff is already in place, the systems. So I know that the operating leverage from -- I know we're going to have significant operating leverage from that. I just want to see some of that be put to work.

I mean, Matt and I, we're used to much higher pretax, pre-provision ROA, and we've led our Board to expect higher. It's just we're so watered down by, you know, what's -- approaching $1 billion of liquidity. And I don't want us to get -- again, we're in a bank that's transitioning and we're way down the road. But I mean, we went years without really having meaningful loan growth and we're kind of mindful of just sort of waking up one day and going from slow growth to really aggressive growth. We don't want to do that. We want to be a little more methodical as we move into something faster paced.

Got it. Makes sense. And just to follow up on the Panacea and digital base build-out, how much of those processes are you using at the core bank? Or do you envision applying those to the core bank over time?

Well, the rollout -- that's a very good question, Chris. The rollout, what we're about to start beta testing in -- I think, in a lab environment with existing customers. That actually is on the existing core system of Fiserv. So we did build something what we think is wholly unique that we think we might be announcing in another quarter or so on the Fiserv platform. So I mean, it can be done.

The new platform is really all on fintech and with those related partners. The product set is -- we're slowly migrating the product set to be exactly the same. And I think that is -- it's hard to express to people the advantage of having a digital product set and a legacy bank product set that are similar. Again, that's why we're able to use one brand.

But ultimately, we intend to prove that the new modern core can work, build it out the exact way we'd like to do it. And I think long term, we would probably have on all of our assets, all of our customers, of one or the other, one core, one or the other.

Got it. But you can continue to customize the experience for both the digital and the legacy bank along the way and keep extracting costs?

Exactly. No question. And I think that's important to do because, you know, ultimately -- I mean, I do believe that the industry is moving more digital. What's incumbent on the industry really is to sort of move the mainstream and sort of get customers more comfortable with banking in a digital environment.

And so it's important for us to customize the core system, and you know, sort of introduce technology and sort of show customers what it can do. That is what the lab test this coming quarter is about.

Great. And last question just has to do with all the consolidation around you, both at community banks and large national banks alike. How much of that is going to be a focus for you just to kind of win new business from bankers as well as customers? And how much is out there for you in the near term on that?

I think there can be a substantial amount. I mean, outside the -- I'll give credit where credit is due; the community banks and it's mid-Atlantic region around us are tenacious at protecting their customer base. And you probably wouldn't expect anything else. But the disruption, especially where some of them find or moving into larger institutions, there's absolutely going to be disruptions and merger vehicles. I mean, this bank is a good example; it's a big distraction. Easy to take your eye off the ball.

We are probably now just coming out of -- I mean, we changed our name. And while we didn't have a merger or anything like that, we sort of had our own little disruption. And I think we're coming out of that probably at just the best -- at the best time. We've sort of established our new brand up here and got really good marks and commentary from customers and the community.

So I think we're in -- we're probably positioned at -- in the best place right now to win for some of that. And our digital efforts are going to, I think, position us to sort of differentiate ourselves and give people a compelling reason to consider us.

Great. Dennis, thanks for all the background. We appreciate it. Thank you, Matt, as well.

(Operator Instructions)

Ross Haberman, RLH.

Morning, gentlemen. Nice quarter. Most of my questions have been answered. I just had a quick question or two for Matt. Matt, you had a big exposure to hospitality and hotels. Could you just give us a sense of how you're viewing that? How are they sort of reemerging? And do you want to reduce that over time, that concentration? Thank you.

Sure. So we had about $269 million in hotels at the end of the quarter, $14 million of them were on deferral, so about 5% of the portfolio, both. And that's really two hotels, both of which are scheduled to come off deferral in the third quarter. (technical difficulty) and RevPAR and all the key stats for our hotel portfolio constantly. And all those metrics are vastly improved from where we're at the beginning of the year, so much better about our portfolio.

And to your point about the concentration, I don't think -- given hotels are still kind of coming out of the woods, there's a whole lot of demand to refinance hotels. So we're unlikely to see a lot of these leave the bank on an organic basis. But I don't think you're going to see us building that hotel book in the short term while the rest of portfolio grows.

And just a quick question for Dennis. Branch-wise, any plans to close or relocate any of the branches given your new sort of digital emphasis? Thank you.

Yes. Ross, it's a good question. We are -- I mean, we're constantly looking at the branch footprint. Go back to what we were saying about -- one of my earlier comments about being determined to build market value and franchise value and all that in a legacy bank to generate high-quality or high-performing results. That, we've got to get branches into a very profitable state. I don't think we're -- I can say without question, we're not looking to leave any of the communities that we currently serve. We are constantly looking at the branch footprint.

But right now, you know, maybe some onesie, twosies. But even that, I think we're just being real cautious with. The tests that we're going to run this coming quarter, maybe for the next couple of quarters, might give us a sense for how many of those customers would like to or accept our digital footprint, our digital offering.

And so I think as we get near the end of the year, I think we'll probably have a more definitive answer. Right now, I would just tell you we're not looking at doing that.

Okay. Thanks, guys. The best of luck. Appreciate the help.

At this time, there are no further questions, and this will conclude today's question-and-answer session.

I would now like to turn the conference back over to Matt Switzer for any closing remarks.

Thank you, everybody, for joining us. And we have some upcoming conferences; we'll be interacting with investors and look forward to seeing folks in-person.

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