Primis Financial Corp (FRST) 2022 Q2 法說會逐字稿

Good day, and welcome to the Primis Financial Corp.'s 2022 second-quarter earnings call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Matt Switzer. Please go ahead.

Good morning and thank you for joining us for Primis Financial Corp.'s second-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. Further discussion of the company's risk factors and other important information regarding our forward-looking statements are part of our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has also been posted to the Investor Relations section of our corporate website, primisbank.com.

We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. A reconciliation of the non-GAAP measures to the most comparable GAAP measures can be found in our earnings release.

I will now turn the call over to our President and Chief Executive Officer, Dennis Zember.

Thank you, Matt, and thank you to all of you that have joined our second quarter conference call. We're very excited to see the momentum in several areas of the company and really believe it sets us up well for the rest of this year and for next year. I'll highlight a few of the items here and then Matt can share some more insight into the numbers for the quarter.

It was right before COVID in 2020 that we started to restructure the company. Right out of the gate, we identified some key areas that were material drags on our market value. First was the ability to grow both sides of the balance sheet reliably. We strengthened our commercial banker team with new hires first, and then we re-crafted with some strategies that we believe will cement our reputation as a growth-oriented company.

On the loan side, we've seen four quarters now of loan growth, each with a little more momentum and from all areas of the bank. Our results this quarter alone were pretty notable. And while that forward pace of growth may not be our long-term pace, it does set us up nicely for the rest of this year.

On the funding side, we've transitioned away from CDs as our main focus in funding source, and we've worked to build momentum in checking accounts and other low-cost deposits. We've moved our cost of deposits down aggressively, very close to our peers, but in a zone that supports the growth we need for our [active] strategies.

This quarter, checking balances moved nicely to about 24% of total deposits. And while we know there's more work to do here, the success today and the momentum we are building is very encouraging about the future.

Our mortgage solution is brand new, and I believe the timing on our decision is pretty ideal. Our price was small, I mean, really negligible. And while the market activity is slowing because of higher rates, I've been around this business long enough to know that volumes will return.

Right now, large mortgage companies are shedding support, eliminating marketing resources, trimming assistant positions and looking to reset for today's reality. That's put a lot more more really good teams and originators in play than were a year ago. Simply put, the market for mortgages have slowed, but the market for originators and good teams is noticeably better.

One last thing weighing on our market value is our operating performance. Incremental improvement here, like you saw this quarter, is critical. And so I'm looking for signs that the discipline and the desire to achieve it is present. Our internal communication aligns with this unquestionably. What we celebrate at Primis and what we are incenting is also aligned. I see positive moves in the net interest margin, in checking accounts, in pipeline, I see the core revenue has grown twice as fast as core expenses.

So while I want the operating performance at our company to be wow right now, I am confident that we are doing what is necessary and that we are just a few quarters away from putting that value overhang to bed as well.

Matt's going to be more specific about where the growth came from this quarter but let me say something about the lines of business. These businesses are meant to augment our core bank, our growth rates, our credit quality, our profitability. They're not designed or meant to gut it or replace it.

I mean, an honest review of this industry would say that the industry has changed and is still changing. And I challenge anybody to show me a community bank strategy that can punch out 150 ROAs with good credit quality and with reliable growth. I just mathematically don't think it's possible. I feel like you have to augment what you're doing with something new and creative.

Finding that balance in a small bank is not easy, where to invest, where to pull back, how to transition, how fast, but let me illustrate the power of this concept.

Our company was founded in 2005. Since then we've done everything that good community banks are supposed to do. We've built relationships with professionals in our market. We've built branches. We've hired bankers, we've bought other banks, integrated them. We've advertised aggressively. We've negotiated. We've been downright street fighters to build our company and build our brand.

But right now, a review of all of our customer data and relationships shows that we're banking 50% more doctors, vets and dentists in our footprint through the Panacea franchise than we do in our core bank after 17 years. Panacea is only 18 months old, barely 18 months old. They're barely breakeven right now and we're investing hard in that business with the founders to continue harvesting this easy opportunity.

The point here is not that the core bank is unsuccessful because it's not. The point here is instead to illustrate that we are more than twice as present in the pockets of doctors, vets and dentists in Virginia, Maryland and D.C., as we were 18 months ago. And that we got here with a resource-like strategy with seemingly unlimited scale. The power on a community bank with something like that is fantastic.

And with that good news, I'll turn it back to Matt for some details.

Thank you, Dennis. As a reminder, our full description of our second quarter results can be found in our earnings release and second-quarter earnings presentation, both of which can be found on our website.

Earnings from continuing operations for the second quarter were $5 million or $0.20 per basic and diluted share versus $4.6 million or $0.19 per basic and diluted share in the first quarter. Excluding onetime items, earnings in the second quarter were $6 million or $0.24 per diluted share versus $4.7 million or $0.19 per diluted share in the first quarter. Total assets were $3.24 billion at June 30, up slightly from March 31. Excluding PPP loans and loans held for sale, total loan balances grew 10.5% linked quarter or approximately 42% annualized.

Growth came from all parts of the organization in the second quarter, including almost 20% annualized growth in the core bank, while Panacea and Life Premium Finance both had growth accelerating from Q1. We have a lot of momentum currently and anticipating that approximately 31% loan growth rate for the first half of '22 to continue for the rest of the year.

Deposits were essentially flat in Q2, while the mix continues to improve. Non-interest-bearing deposits were 24.3% at quarter end and continue to be a focus while CDs have declined to 12.3% of total deposits. Cost of deposits were flat at 35 basis points in the second quarter, and cost of funds increased 1 basis point from Q1.

As expected, our robust business lines have consumed the excess liquidity we were carrying through last year. Growing low-cost core deposits is a significant focus of the bank as we look to fund this growth going forward.

Net interest income saw strong growth in the quarter, increasing to $24.6 million from $22.9 million in Q1 or 7.7% linked quarter. Our reported margin was 3.33% for the second quarter or 3.35%, excluding the effects of PPP, up 37 basis points and 39 basis points, respectively, from the first quarter driven by strong loan growth and a better earning asset mix.

Non-interest income increased to $2.6 million from $2.1 million linked quarter due to the addition of Primis Mortgage Company late in the quarter. Primis Mortgage originated $27 million in June, down slightly from May as the company transitioned to Primis.

As previously discussed, our goals for Primis Mortgage in '22 are to grow production and invest in talent versus a meaningful contribution to earnings this year. We expect mortgage to be a more meaningful contributor to earnings in 2023.

Non-interest expense included a number of items this quarter, including branch closure costs, merger-related expenses and the addition of one month of expenses for Primis Mortgage. Excluding these items and recovery or expense for unfunded commitments, noninterest expense was down slightly to $18.5 million from $18.6 million last quarter.

The provision for credit losses was $422,000 in Q2 versus $99,000 in Q1 combined with net recoveries of $408,000 in Q2, the allowance increased by $830,000 for the quarter. While economic outlook weakened, loan growth in the quarter was concentrated in categories with lower model reserve requirements. As a result, the allowance for credit losses to gross loans, excluding PPP balances and loans held for sale decreased to 1.16% at June 30 versus 1.24% at March 31.

Non-performing assets net of SBA guarantees increased $5 million in Q2, primarily due to one $8.5 million relationship on a residential property that has struggled to service the debt, but offset by the payoff of a nonaccrual development loan of $4.6 million. The LTV on the residential property is less than 50% and we aren't expecting any losses. As mentioned previously, we had net recoveries in the quarter and have now had recoveries in four of the last five quarters.

Our operating efficiency ratio was approximately 70% in the second quarter, down meaningfully from 76% in Q1. Panacea and Life Premium Finance continue to experience substantial revenue growth and increasing operating leverage as profitability of those business lines accelerates.

We consolidated six branches late in Q2 with another two branches planned to consolidate in Q3. We've also identified several opportunities that could generate $3 million to $4 million of additional savings on an annual basis that we are pursuing. Combined with continued revenue growth, we believe we could drive the operating efficiency ratio to the low 60s as we finished 2022.

Pre-tax pre-provision operating ROA was 100 basis points in Q2. We exclude PPP fee income, which was a temporary source of revenue, pre-tax pre-provision ROA is at the highest level since Q3 of 2020. Over that time period we've invested heavily in new business lines and offerings and are starting to see the returns from those investments.

Similar to the efficiency ratio discussion, we are confident pre-tax pre-provision ROA will continue to see meaningful improvement in the near future. We are pleased with the progress we have made and are excited by our momentum. We're confident profitability will continue to improve in the near future as we drive towards top quartile results.

With that, operator, we can now open the line for Q&A.

(Operator Instructions) Andrew Terrell, Stephens.

Hey, Good morning, Dennis, Matt. Maybe just to start, I think it was really good to see the deposit growth come in this quarter, seems like you were able to buck kind of a more negative trend across the industry. I was hoping you could just speak to kind of pipeline on the deposit side and just expectations for deposit growth in the back half of the year.

And then as part of that -- I saw you went live with the digital bank this quarter, just deposit growth expectations within that division specifically. And then can you remind us, do you have any kind of deposit account opening goals or any kind of metrics that you're targeting for that business?

I'd start from the back of that question. I think our metrics are -- what we'd really like to see is checking accounts keep moving higher up to the 30% range. Now I mean, is that -- that's probably of all the goals we have around here, the ratios that we measure and sort of answer to the Board on, that's clearly the hardest. And I think especially in the current environment, it's not going to be easy but I think it's critical. I think that's where our whole franchise value comes from. So we're focused there.

As far as the strategies to get there, I mean, I would tell you, yes, the digital bank. No question about it. It's something we're hoping is going to move us there. The digital bank is named Primis Bank. It offers the exact same products and services that the core bank offers. So there's really no differentiation there.

But when we market it in our core footprint and really beyond, it's easy to market it as the most convenient solution out there. We marketed that it's -- we're going to market it that it's not run by bots, I mean, there's still access to bankers.

Now when we start marketing that outside of our footprint, clearly, that market or that idea will change. But that concept, that digital bank concept in our footprint will make us a better bank, here in our footprint.

The outside of that, I think, internally, we're focused on changing incentives or enhancing incentives. The biggest incentive we pay here is still on a checking account. I think on the deposit pricing, we have, like I said, we've moved cost of funds or cost of deposits down aggressively. I think we probably could have gone a little further.

But just knowing what the pipelines look like on the asset side and the opportunity, we've sort of stayed a little aggressive. And I think we would continue to stay aggressive there. That really drives home why the checking account strategy is so important, sort of to augment or make the growth a little more reasonably priced. Does that answer all of the questions there?

Yes. No, that's helpful. Just overall net deposit growth expectations for the back half, if you have them?

I would answer it this way, Andrew. I mean, at our current loan-to-deposit ratio, that's about as high as we want to take it. So we're looking to fund dollar for dollar the loan growth for the rest of the year. So that will be, call it, $300 million of growth we're going to need to have on the deposit side.

Got it. Okay. Perfect. Thank you. Maybe just think about it, Matt. I think it was good to see in the release and then I think you discussed it briefly in the commentary, the $3 million to $4 million of potential cost savings that you discussed. It was really good to see.

Can you just elaborate a little bit more on where those sales are coming from? And then is it fair to think that timeline for recognition is fully loaded in the back half run rate? And then just overall expectations for expenses in 3Q?

Sure. It will come from a variety of areas, branch consolidation, some of which we've talked about, some additional ones. So additional ones above what we've talked about would be in that number, some back office restructuring and consolidation of some positions that we can have some visibility to and then some other operating efficiencies, contracts and stuff that we can renegotiate that we see some opportunities to reduce costs.

In terms of run rate, I would say -- so this is going to be excluding any onetime costs related to branch closures, et cetera, and excluding Primis Mortgage, just so it's apples-to-apples with what we've reported the last couple of quarters. So we were at $18.5 million this quarter. That should be probably closer to $18 million in Q3, give or take.

And then for this $3 million to $4 million saves that you've identified, once we work past the back half of this year, do you think there's kind of any more potential cost-cutting efforts as you look into 2023? Or is it more just going to be on kind of tweaking things here and there and reinvesting in the franchise?

I think it's going to be -- I mean, we're always looking for efficiencies, but I think it will be more tweaking things here and there. And look, we still -- and that's kind of a net number, right? We still have some investments we need to make in Panacea and Life Premium Finance, maybe some more to do in the digital side. So it's really trying to reallocate resources.

If I could sneak just one more in for Dennis. Heard some of your comments on kind of dislocation in the mortgage market and maybe that provides you an opportunity to kind of capitalize from a talent perspective. Can you just discuss the -- your outlook for hiring within the mortgage division. And then I know the mortgage backdrops changed quite a bit over the past few months. What do you think is kind of an achievable target for mortgage production in 2023?

I think the 30-year mortgage is now kind of 6%, maybe come off that just to touch, I mean, yes, definitely yes and that's going to slow mortgage volumes -- has slowed mortgage volumes. I mean, it will reset and the mindset, the American homeowner mindset will reset and volumes will come in at some level.

Right now there's just so many mortgage companies and I'm not faulting anybody. I mean, the volumes were mind blowing and you just had to staff up and now that reset is sort of changing the day to day for a lot of originators. I remember when we started looking at this and we were looking at some other strategies, I mean, we talked to some decent size teams that wanted $1 million to make the move.

I mean, back then you probably could have justified it. I mean, we're doing enough volume, a couple of hundred million dollars of volume, you're maybe paying them six months of bottom-line profitability. That's changed right now.

I mean, again, for us, that's good because I think even back then I don't think Matt and I wanted to be cutting a lot of million-dollar checks for new teams given you really only have one month of sight on what mortgage will do. So I think that's a very -- that's a positive for us.

There are teams out there. There are definitely teams out there that maybe the culture where they are isn't good. The enthusiasm for the mortgage feels different in their company. I mean, the enthusiasm for mortgage here is very high. It's fever pitch.

Matt and I both know this business and I think that sort of helps too when we start talking to bankers. I think as far as what we can expect, I'd say probably, I think comfortably, I would say maybe $500 million, just what I know now. I think we bought probably $300 million. I think comfortably I can say $500 million, knowing that there is kind of -- even at these levels, there will be a reset, there'll be some activity, there'll be some recruiting.

I think if we can get -- I don't even want to say lucky, I don't know what the word is, but if we can be successful on some of the recruiting that we're doing, if we can get some reasonably priced teams and negotiate well and exploit our position here, being kind of one of the few offensive mortgage companies. Maybe we can get that to $1 billion.

And just to add to that, I mean, Primis Mortgage was a purchase-focused shop. They were not refi-heavy at all. And the markets that they're in are still seeing robust purchase activity. And then you combine that with -- which should continue.

I mean, there's still a lot of housing demand even at these mortgage rates. And then we highlighted in the release, a gentleman that joined us as a regional executive, came from a much larger shop and ran a very large region and he's excited about what the team at Primis Mortgage is building, and he's already hit the ground running on the recruiting side.

And he gets it. I mean, we're looking for teams that are purchase-oriented, not refi-oriented so that they can still generate volume in this market. So we're highly confident we're going to get volume going into '23. Great.

Okay. I'll step back. I appreciate you taking my questions. And congrats on your quarter.

Thank you, Andrew.

(Operator Instructions) Christopher Marinac, Janney Montgomery Scott.

Hey, guys, good morning. Dennis and Matt, I wanted to kind of start with credit. The information you gave in the release and deck was very helpful. So I just kind of wanted to extend beyond the one loan that you talked about. What other credit indicators are you seeing on classified and criticized, any early warning things at this point in the cycle?

I mean, early warning signs, weaknesses in credit or underwriting terms coming through that I don't think we're seeing that. I think we are -- anything that exhibits a little bit of weakness, we are probably moving harder on right now. I will tell you that. Is that wholesale across the footprint? No. I mean, I think the value -- this is one thing I would say, the values of anything that shows up a little weak, the collateral values are strong and resolvable.

I think they're at resolvable levels. That's probably something that's different -- where we are right now, people want to know what's different now than back in 2007 and '08. I think that is a big difference. Collateral values right now are resolvable on credit.

Credit might exhibit a little bit of cash flow weakness but the collateral values are there. I think the one loan that Matt was talking about that went nonaccrual, I mean, we're at like a 40-something percent loan-to-value. There are two or three mortgages behind us. I mean, there's no loss in that. It kind of contaminates your asset quality story but there's just no loss there. It's just a cash flow problem, the person -- and this is a famous person, has just -- they just don't have the cash flow to support the mortgage.

And I think we probably could have worked with them like this or worked with them like that or -- but I just think right now it's not in our best interest to push off any kind of credit problem, especially right now when asset values are resolvable. I think it's in our best interest to deal with something. I don't know.

Christopher, I mean, we see stuff moving around but nothing that we would characterize as systemic. Just kind of we're in the business of allocating risk, some stuff is going to go bad. So we've had some movements in and out, but nothing earth shattering at this point.

Great. And then I had a related question on Panacea, just to sort of remind us on kind of how the business is being built from a guardrail perspective and just how you sort of think of credit as you expand and as they continue to have success?

Each quarter, the offerings are a little more varied. I mean, commercial is probably -- was commercial. I mean, commercial right now 60%, 70% of volume of production.

55%.

55%. Okay. But trending higher. I mean, the commercial production is so right down the line. I mean, the commercial production, what we're doing in the bank underwriting style, if it were to come through the bank versus coming through Panacea, there's really no difference there.

Not at all. In fact, our commercial production, the people that are doing the commercial production, reviewing the commercial production, approving it all Wells Fargo, TD Bank, big bank. But, I mean, that's -- our strategy is that.

On the consumer side, which is what really got us started here and I think what differentiates us, I mean, we're banking fourth year medical students, residents, fellows. I mean, the fact is I think a lot of those don't have the proven credit background that you look. I mean, if you're trying to bank those doctors on a 750 Beacon, you're probably going to -- or A Beacon, probably going to -- that's just not how you bank those doctors. Most of them don't have established credit. They may be 30 years old. They just don't have established credit yet.

And that doesn't mean -- absolutely, it does not mean that we're slinging consumer credit to unqualified borrowers, period. I mean, our credit trends there are fantastic. There's nothing has gone wrong in Panacea. We've got 2,000 doctors. And I would say the past due ratios, the charge-off ratios, the losses, the credit problem indicators there are fine, maybe as good as what we expected or better.

I mean, on the consumer side, we're not -- what I know is a focus right now given the economic outlook. I mean, we're not offering consumer loans to technicians or nurses or its doctors, vets, dentists, these are folks that are at the upper end of the income bracket when they get out of school. So these are bridge loans basically to very high-earning people, and that's how they're underwritten.

Great. And then, I guess, one more question for me, just it goes back to slide 12. The deposits you have been driving in at LPF and Panacea. Is there anything unique you have to do on rate for those deposits as we move through this environment in the next couple of quarters?

I would say those deposits probably are maybe more reasonably priced than the rest of the bank.

I mean, Life Premium Finance, it's immaterial at this point. They only have, I think, less than $3 million of deposits tied to Life Premium Finance. And then for Panacea, I think its $10 million or $11 million. And a lot of that is coming on the commercial side. So when we make a loan to a practice, or what have you, we require an operating account. Some of it is consumer for our consumer borrowers. But I think most of the dollars are tied to those operating accounts. So it's, again, low interest rate.

We probably have room, we do have room to be more aggressive on the price side, on the -- pricing those deposits and probably sort of move the deposit flows up in those businesses.

Right. And I presume you can do that within kind of how you want your betas to look as you bring in new money. So that all makes sense.

Exactly.

Great. And then, I guess, I know you covered a lot on expenses on the prior question. But just curious if you have any kind of longer-term goals about where you'd like to see the expense ratio to assets or efficiency in general. It's not a guide for next quarter as much as it is just kind of big picture goals for the organization.

I mean, we had Board meeting yesterday and we told the Board, look, right now the goal is to get to the 160s as fast as possible. And the ROA, our ROA that Matt and I want, is probably 135 range and moving higher. But 135, probably short-term goal. I mean, efficiency ratio in the 160s and moving lower and margin being driven by good yields and good deposits is critical as well.

So I think the first goal, I would tell you, Chris, is to see 160s. And then as we do that, let these lines of business that I think both are going to operate with, I mean, I didn't say in my comments, but I think both of these lines of business are going to ultimately operate probably 20s and 30s in the efficiency ratio, sort of let them pull us down a little lower into the 50s.

Great, guys, thank you for all the background this morning. We appreciate it.

All right, thanks, Chris.

Thanks, Chris.

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

All right. Thank you. I appreciate everybody on the call today. If you have any questions or comments, feel free to reach out to me, or Matt, any time. We appreciate it. Have a good weekend.

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