Q2 2021 Primis Financial Corp Earnings Call
[music].
Good day and welcome to the premise of financial Corp, Second quarter earnings Conference call all of the.
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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 premise bank.
Dot 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.
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 <unk>.
Thanks, Matt and thank you to all of you who have joined our call today.
We had a we had a good quarter on several fronts and some really positive items.
Net of US. We've also have some challenges that we can discuss here, but even those challenges pale relative to the opportunities that we all believe this franchise going forward.
Matt is going to get into the details about the quarter.
But about on about the numbers, but at a high level. We earned <unk> 42 per share of this quarter, which was roughly.
The 10% higher than the same quarter than what we earned in the same quarter a year ago.
The growing 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 free.
Much all of our brokered and national CD.
And replace debt was 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 of <unk>, new products and services and adding additional staff that had a tremendous impact on our deposit levels.
I am very thankful very grateful for the team that we have here at premise, where theyre absolutely drive to be champions and the results that we're getting across the board the quality of the team here.
The results of the early results give me a lot of confidence that the debt.
Net 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 asset.
Which include our PPP portfolio.
Deploying that in the current environment has not been easy, but we've started to make some headway in the second half of this year will be noticeably better with respect of loan growth.
Our pipelines and our commercial bank are higher and our pipeline in panacea is building very nicely with their.
The 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.
Asset, while I turn it back over to Matt.
We continue to work towards the fourth quarter launch of our digital bank offering that's focused on commercial and consumer checking accounts at least initially our team on our partners are very close to the testing phase of the project and we are still targeting a complete project that we can.
Relative of lab during the fourth quarter.
There are some elements of our work on this digital bank debt are actually of just a few weeks away from a lot of cast with elements of our existing customer base.
This test will prove and of real world environment, If the feature and the hook as we like to call them are actionable if.
Can go full enough to move business from 1 competitor bank to permit which obviously is our goal.
I'd like to take this opportunity to say 1 more thing about our vision of digital.
Biggest miss the biggest misperception is that we are going all digital and basically going to abandon our effort to build.
There may price growth and profitability of machine out of this existing franchise and that's just not true.
Everything that it takes to build of legacy franchise with the growth and profitability of that earned high multiples.
Going to day period.
Our digital bank will just complement our core bank not replace it.
It.
On the further augment our future growth and absolutely unquestionably believe that.
Traditional bankers, which I am 1.
Suddenly dismay of digital bank efforts, because the seemingly focused too much on interchange income or low balance millennials like my 2 young sons.
Plan.
<unk> and <unk> into this space is critical it's absolutely critical.
But it's also terrifying because of their untold millions of fee and service charges and 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 Youre talking about.
It won't be that have decades and century builds.
Building brand loyalty and bullet proof of images.
Our vision is to focus elsewhere, we've looked at our core customers and we talk to them endlessly.
Again real insight into what would start to move them from valuing the branch the.
Valuing of digital.
Platform.
Because we're looking to augment our core bank, we will only be using 1 brand, which is permit which we which we believe is very unique in our industry.
And let's be honest no 1 everybody operating in this industry belief that future growth in earnings and balances will progressively be less standard.
<unk> on branches more built in the traditional fashion.
We are confident that our efforts are perfectly time to drive value in the core bank right now and be ready for where we all know the industry is going into the future.
Alright, with that I'll turn it back to Matt for.
Net debt on the quarter.
Thank you Dennis earnings for the second quarter were $10.3 million or <unk> 42 per basic and diluted share versus $9.4 million or <unk> 39 per basic share and <unk> 38 per diluted share in the first quarter.
The total assets grew to $3.4 billion in the quarter gross loans declined to 229.
Standard in the second quarter from $2.3 9 billion in the first quarter due to the decline in PPP balances, excluding PPP loans loan balances were essentially flat in the second quarter.
On deposits increased 2.3% versus the first quarter to 275 billion.
As Dennis mentioned, we are proud.
All 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.
As Dennis alluded to pipelines of grown, particularly later in the quarter, which gives us confidence that we will be deploying this cash in the near future.
$240 million of PPP loans remaining and continue to work through the forgiveness process with customers.
We recognized $1.8 million of net <unk> in the second quarter versus $4.9 million on the first quarter.
As of June 30, we had $5.2 million of net deferred fees remaining to be recognized.
Credit quality.
We have been as good with non accruals stable in Oreo balance is continuing to decline.
The losses remained muted with net recoveries in the quarter of 587.
Covid related deferrals declined $26 million from $113 million at the end of the first quarter as expected with substantially all of the remaining loans on deferral anticipate.
City of remain 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.
The allowance for credit losses to loans, excluding PPP balances is 1.5% to 2% at June 30.
The 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 Pvp fee income in the second quarter.
Excluding the effects of PPP net interest margin declined 22.
Basis points to 277% 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 the pipelines built.
<unk> and fully appreciate that the operating leverage as we deploy this cash is significant.
Noninterest income increased 677000 in the second quarter, largely due to an increased contribution from our equity investment in Southern Trust mortgage non.
Noninterest expense declined 783000 in the quarter, excluding the decline.
Expense related to the unfunded commitment reserve noninterest expense declined 220000 in the second quarter.
We closed 1 branch location in April and will be closing another location in August we continue to be focus on managing expenses, while building the capabilities and resources to manage of much larger bank.
I will now turn the call back over to Dennis.
Well, let's turn it back over for questions.
We have any questions.
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The first question today will come from Casey Whitman with Piper Sandler. Please go ahead.
Hey, good morning.
Hey, good morning.
Okay.
Thanks for the call this quarter.
Very helpful.
So first you talked about the pipeline improving so.
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 of this year on what sort of a reasonable equity.
The key to growth.
There over the next several years.
Yeah, I think on a consolidated basis I think Matt now were doing some reconciliations of this morning that think.
I think probably building too.
Of an annualized pace of loan growth may be end of 15.
The T 15% range. So I think I don't know that we will.
We'll be there by the end of the year, but I think we can probably be on a annualized pace maybe 10%.
Which which may not seem.
Which may not seem like it is going to absorb all of this liquidity as fast as we want it to.
And again, we've got 3 or 4 years here.
Really without any loan growth and we're just trying not to loans or have our people lunch at.
At deals to put the money to work.
And as far as part of as far as panacea.
1 more thing as far as payments day of your question on <unk> I think the.
<unk>.
Again that answer I, just gave you of may might change.
To be something higher panacea.
Initially came out we were doing consumer.
Unsecured mostly.
We.
We started doing student loan refi that was definitely accretive to their growth and now we've moved into the commercial side and Thats.
Use the word carefully thats wildly accretive to the growth rates.
And so far very very widely accepted on the doctors were costs. So.
I think we want to give that another quarter or so.
And really in 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 that makes sense alright, so it sounds like you're feeling good though about the the talent you have to drive drive the loan growth. So curious how you're thinking about the second quarter expense level. Do you think you can hold the expenses of around $70.5 million or are there.
And the incremental expenses related to the opening of the digital bank that we should consider.
Sure.
The good.
Right.
Given your growth expectations.
I think this.
This is Matt $17.5 million is still a pretty good number for the next quarter or 2.
We've got some incremental expenses that will start to.
Sidor from the digital bank really more on the fourth quarter than the third quarter.
But at the same time on some of the deposits incentives that we've talked about the last quarter or 2.
We will really start to decline less of 1 of the third quarter because of Theres, a lag effect to them.
But more and more of a.
Come on in the fourth quarter related to that so that will offset some of it so.
There will be some movement.
And some of the different line items, but overall that 17, 5 plus or minus is still a pretty good number.
Okay. Okay sounds good just 1 more sort of modeling question what was the do you have the accretion.
The club level, you guys booked this quarter.
Similar to last quarter's level.
When you grow the 40 foot clear.
The accretion of this my last 500.
Yeah. It was 581000 last.
It was 481000.
Perfect Perfect and my last question on we 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 alright, thanks Casey.
The next question today will come from Brody Preston with Stephens, Inc. Please go ahead.
Hey, good morning, everyone.
Good morning.
I wanted to circle back to.
On the panacea, so just for the.
On the ship.
Shifting.
On the commercial that you all are are executing on right now.
I guess, maybe could you talk a little bit about how quickly you could see that.
That effort kind of ramp of the gentleman the hired from Wells Fargo, just thinking about visibility to bring on relationships and anything related to a noncompete.
Quickly do you think that commercial effort can ramp from here.
Yeah.
Yeah.
Let me say it this way he has been we've been here a month.
The board of months, maybe maybe a week or 2 longer than that.
I mean as pipeline I don't want to say the <unk>.
I don't want side of the exact number of pipeline is pipeline.
Ramped extremely fast Okay got you.
I would expect that when you bring on new people, but.
The first 3 or 4 things he put on his pipeline are closing here in the next 2 or 3 weeks on me I think is.
He has probably had.
How can the 5% hit rate on the first few things you put in the pipeline.
I think the bigger.
I'm pretty confident nobody wells fargo's listening, but the bigger.
The bigger.
Opportunity, yes, I mean, he is bringing in customers and you bring in relationship.
<unk> had of separating of referral sources I mean, those are all critical.
And.
As growth in his success here I think the other thing is his ability to influence other healthcare of bankers.
Debt.
Those are niche lenders I mean, those arent generalists.
There's niche lenders that are doing.
Shifting blending of niche lenders that are doing equipment lending.
<unk>.
Is he is pretty well known in the industry his ability to influence some of those especially of peace successful booking deals.
As is.
He is going to be meaningful and it already has been I think I think we could probably finished the quarter.
Doing where another couple.
Another 1 or 2.
Commercial oriented healthcare lenders.
Commercial is still it is still a little guerrilla warfare is still a lot more human relationship oriented a lot of the other stuff we're doing in panacea. He is digital oriented.
With social media drives a lot of the social media and sponsorships with organization.
Drive the.
The volume there, but on the commercial side, it's still banker oriented.
Yeah.
Right now we think we might have struck gold with the first commercial banker we.
It is.
And Brian just to clarify he does not have a noncompete.
Okay great.
So all of those folks from wells coming down on you.
So youre going to have to not we're not publishing the script.
Yeah.
So you gave the stat just around.
Round around the penetration on the checking account span of about 45%, which I'm assuming is mostly consumer at this point just given just given what the what the product set while the panacea 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.
We brought on the growth in the commercial side I'm, just trying to get a sense for how the commercial side will shape up from a deposit perspective.
Yes that.
Likely.
<unk>.
We would expect.
The tower was here he'd be like we're getting on but I would until we're able to rollout.
The digital bank and again focused on having the digital bank focused on commercial.
I mean thats 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.
And the pie.
The deposit side of some of these relationships.
I mean, we're coming to them.
Sort of in a digital framework of little bit on the loan side I don't think its going to be of heart sale to win them over on the deposit side, but I've got to come to them with something that competitive and convenient.
And and reliable and that's really what's not I don't believe that's existing.
Don't believe that exists.
In this space.
I think theres there are commercial enterprises debt bank digitally.
But the commercial enterprises debt.
Sort of bank locally and bank with a branch of a 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 1 more on the on.
So on the C on the digital bank.
Understanding of the digital bank still hasn't launched yet, but Dennis since you come in you know you've kind of quickly launched 2 kind of nationwide initiatives between the panacea of partnership and getting ready to launch. This digital bank later in the year. So maybe if you could provide some color on your.
Your willingness or desire maybe the.
Launch here I guess, maybe move premise into and the other nationwide niche verticals if you will.
I mean, we see a lot of value there.
To the degree debt.
On the we can kind of look beyond the hour.
Existing footprint I think we can may be 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.
Asset classes and verticals.
The and ideas 1 debt will grow market value for sure will not be dilutive to market value.
<unk>.
And those of our packing Cherry pick.
The healthcare assets, if I have to only cherry pick those in northern Virginia, DC in southern Maryland, enrichment, and Tidewater I mean debt.
Difficult now all of that being said.
Nichols.
We are.
We are mildly.
Attentive to our core value right now in our core value is a legacy footprint, we're not abandoning it we're not stripping it down we're not closing all of our branches were not.
<unk>.
Sort of running away from these customers who on.
It more legacy oriented so.
I think what we want to do is just be ready for I don't know the even that the mainstream of banking is ready for you.
All digital net 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 1 more caveat I think.
Got $800 million $850 million of liquidity, where scale growing deposits faster than loans and we are going to have a good second half of the year on loan growth.
But.
Matt and I haven't I'm waiting.
The safe Matt shakes his head I think the second half of the year will be better on deposit growth then on loan growth.
We're going to need to have some more verticals and some more ideas.
On on how to put this money to work and I think the panacea concepts sort of where we partner with Fintech.
In an environment that sort of gives us the good return on assets of good return on equity.
Debt, we're kind of focusing on that maybe as we look for quote unquote national verticals.
But we are being slow we don't.
We don't think right.
Time to.
Cross the Rubicon so to speak.
Understood and then maybe just on that traditional lending front.
You all have a nice uptick in true.
The 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 of shaping up.
Yeah.
Yeah.
<unk> brought in some of the C&I growth was early wins on that medical front.
Okay.
On the rest of it was just.
More blocking and tackling and are in the.
The main footprint.
Got it and how is the how is the team that you hired on on Northern Virginia go on.
Where they are coming along building I mean building pipelines of few of them worse.
Subject to the noncompete and so those are those of burning off here this quarter.
On their pipelines.
So of their pipelines accordingly, our building because of that.
Got it and then last 1 for me could we get a sense of what new loan yields are coming on.
The book at.
In the round.
Free and a half to 4.
Got it. Thank you very much for taking my questions everyone.
Alright next question next question will come from Christopher Marina <unk> with Janney Montgomery Scott. Please go ahead.
Hey, Thanks, Good morning, Dennis and Matt Thanks for all of the disclosure on the information you provided this morning.
I wanted to circle up on the profitability from the slide deck and when we look at the pre tax pre provision.
Returns is it fair to expect that that is kind of bottoming here and that as it stabilizes that will start to reverse upward over time as.
As you deploy liquidity and continue to growth the company.
No absolutely no question about it.
Bottomed I think bottoming.
All right.
Net were better than bottomed and I say that because.
I want to finish the quarter, where we're able to actually sort of put.
Some of the money to work and see the.
The.
<unk> flow to the bottom line I mean, I know, Chris where the.
Where the balances are coming from.
I know that the expenses are already there the staff is already in place the.
Systems.
So I know that the opera.
And the 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 not I mean, we're used to much higher pre tax pre provision on ROA.
And we've led our board to expect higher is just we're so.
Operating on.
It's approaching $1 billion of liquidity.
And I don't want us to get again, we're in a bank debt transitioning and we're way down the road, but I mean, we went years without really having meaningful loan growth and kind of mindful of just.
Water debt.
Waking up 1 day and going from sort.
The slow growth 2 to really aggressive growth, we don't want a day that we want to be a little more methodical as we move into something faster pace.
Got it makes sense and just a follow up on the on the panacea in.
The digital bank build out how much of those processes are you using at the at the.
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 the what we're about to start beta testing.
In.
In the lab environment with existing customers.
That that actually is on the existing core system of faster. So we did.
We did build something what we think is wholly unique debt, we think we might be announcing in another quarter or so.
All of the faster of platform the army.
It can be done.
The the new platform is really all.
On the <unk> and with those related partners. The product set is we're slowly migrating the product set to be exactly.
<unk> the same and I think that is.
It's hard to express the people the advantage of having a digital products that in the legacy bank product set that are similar.
That's why we're able to use 1 brand.
<unk>.
But ultimately ultimately we.
2.
Proved that the the.
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.
All of our assets all of our customers of 1 or the other.
The 1 core 1 of the other.
Got it and then if you can continue to customize the experience for both the digital 1 of the legacy of bank of all the way and keep extracting costs.
Exactly no question and I think that's important to do because.
Ultimately I do believe.
<unk> industry is moving more digital what's incumbent on the industry really has 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 sort of introduce technology.
Allergy and sort of show customers what it can do that is what the lab test of this coming quarter is a balance.
Great and the last question just has to do with all of the consolidation around the both the Canadian banks on large national banks of like how.
How much of that is going to be a focus for you just the kind of win new business.
That the curves 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 <unk>.
I'll give credit where credit is due to the <unk>.
Amenity banks and us mid Atlantic region around us.
For the bank.
Tenacious.
Protecting their customer base on.
You probably wouldn't expect anything else.
But the disruption, especially where some of them.
We're moving into.
Larger institutions on there's absolutely going to be.
Our directions in the <unk> merger of equals I mean this bank is a good example on it's a big distraction.
Easy to take you out of the ball.
We are probably now just coming out of I mean, we changed our name and while we didn't have a.
A merger or anything like that we sort of had our own little disruption.
And I think we're coming out of that probably just the best at the best time, we 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 and the best place right.
Now.
To win for some of that in our digital efforts.
Are going to I think position us to sort of differentiate our sales and give people a compelling reason.
To consider us.
Great. Thanks for all of the background. We appreciate it thank you Matt as well.
Alright.
Okay, and if you would like to ask a question. Please press Star then 1 the next question will come from Ross Haberman with <unk>. Please go ahead.
Good morning, gentlemen, nice quarter I, just most of my questions have been answered I just had a quick question or 2 for Matt Matt.
Yeah, the big exposure to hospitality and hotels could you just give the sense of.
How youre viewing that how are they sort.
We are re emerging.
Do you want to reduce that over time that concentration. Thank you.
Sure. So we have.
About $269 million in hotels at the end of the quarter.
$14 million of them were on deferrals of about 5% of the portfolio, both and Thats really 2 hotels, both of which are scheduled to come off deferral in the third quarter on track.
Jack.
<unk> and revenue.
Revpar.
All of the key stats for our hotel portfolio.
<unk> and all of those metrics are vastly improved from 4.
At the beginning of the year so.
Much better about our portfolio.
And.
To your point about the.
Concentration.
I think given hotels are still kind of coming out of the woods theres a whole lot of demand of refinance hotels.
We're unlikely to see a lot of the leave the bank on an organic basis, but I don't think youre going to see us.
Building that hotel book in the short.
Term, while the rest of the portfolio growth.
And just a quick question for Dennis.
<unk> wise.
Any plans to close or relocate any of the branches.
Given your.
The new sort of digital.
The emphasis thank you.
Yes good.
Good question we are.
On.
I mean, we're constantly looking at the branch footprint you know go back to what we were saying about.
1 of my earlier comments.
Being determined to build market value and franchise value and and all of that in the legacy Bank.
To generate high quality of our high performing results debt.
We've got to get branches.
Into a very profitable state I don't think I can.
Without question, we are not looking to leave any of the communities that we currently serve.
We are constantly looking at the branch footprint, but right now.
Maybe some onesie twosies, but even that I think we're just being real cautious with.
The test that we're going to run this coming quarter, maybe for the next couple.
Couple of quarters.
Might give us a sense for how many of those customers would like to or except our digital footprint on our digital.
Offering.
And so I think as we get near the end of the year I think we would 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 I 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 mats with sort of for any closing remarks.
Thank you everybody for joining us and we.
Some upcoming conferences, we will be interact with the 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.