Q3 2021 Primis Financial Corp Earnings Call

Good morning, and welcome to the premise Financial Corporation third quarter 2021 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.

Please note this event is being recorded.

I would now like to turn the conference over to Mats Whats, our Chief Financial Officer. Please go ahead.

Thank you and good morning.

We begin please note that many of our comments during this call will be forward looking statements, which involve risks 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 very 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 premise bank Dot com.

We undertake no obligation to update or revise forward looking statements to reflect changed assumptions the occurrence of the occurrence of unanticipated events or changes to future operating results over time.

Okay.

So we may discuss during this call 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'll now turn the call over to our President and Chief Executive Officer, Dennis number.

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 fields 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 teens.

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 payments 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 been unremarkable.

In my mind, knowing that we can grow both sides of this balance sheet organically with.

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 sign are here for.

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 operation technology and sales side of this business and we intend to be offering this niche product starting this quarter. These.

These individuals have substantial experience in the industry.

And their incentives are all based on profitability and return on assets from the division.

I'm, particularly excited about this because in my career of hiring producers.

And building lines of business it.

It seems like our batting average is the highest when we recruit doers.

Versus.

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 then they do their base salaries.

These individuals were just that and I firmly believe that 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 backed to the principles of the business for about a dip for a discount of almost $3 million.

Our relationship with Southern Trust has been very fruitful and profitable for the bank, we have a great relationship with the principals over there and we will continue to portfolio some of their loans and offer warehousing services long term for premise. It just made sense to exit the ownership part of our relationship and to better position us for.

Our 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 CEO CIO.

<unk>.

And his wonderful team for having us disclose to a launch on November 15th 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 in every department in our organization to make this happen.

On time, and mostly on time and with the products that we had initially planned.

As we finish this launch on the consumer side, we are already visiting and starting to work on the commercial side and in our pilot and market research business account customers.

We're 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.

This call Ive highlighted how loans are up our deposits are up.

POW momentum is up honestly on boats that can really sustain us for the next quarter.

Mentioned, a digital bank effort that is up.

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 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 in risk management teams.

And processes niche lines of business that support our overall growth rate.

Our pathway to a top tier ROI is simple and that is our goal.

The near term the near term pathway is investing this excess liquidity.

That's only earning us eight basis points and doing so with very limited incremental operating expense.

I know that that's what lies ahead I'd note that our incremental operating leverage on this growth is significant and.

And speaking for Matt, we believe that that kind of operating leverage and operating ratios are right around the corner. So now that outspoken forum 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 on <unk>.

Yes, otherwise noted my comments will refer to results from continuing operations earnings for the second quarter were $6 2 million or 25 per basic and diluted share versus $8 8 million or <unk> 36 per basic and diluted share in the second quarter.

Total assets grew to 345 billion in the quarter gross loans increased to $2 31 billion from $2. Two 9 billion in the previous quarter with core loan growth offsetting declines in Pvp balances.

<unk> PPP loans loan balances grew five 9% linked quarter, almost 24% annualized as dense 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 are sustainable and are anticipating robust growth through the.

The rest of this year and into next year.

Deposits increased 2% versus the second quarter to $2 81 billion noninterest bearing deposits remain over 19% and we continue to focus on growing those balances time deposits continued to decline and then earn out less than 14% of total deposits.

Even with the excess liquidity, we 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 had in the last couple of quarters.

Subject to market conditions to absorb some of the excess liquidity buildup, we continued 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 three quarters of that tied to loans that we had rated doubtful last quarter in 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.

Move 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 and improvement in the operating environment led to a reduction in our allowance coverage or allowance to gross loans, excluding PPP two 140% at September 30 versus 152%.

At the end of June.

Our reported GAAP margin was 287% for the quarter up seven basis points, excluding the effects of PPP margin declined 11 basis points to 266% in the quarter again <unk>.

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 deploy liquidity.

Noninterest income was up modestly in the third quarter versus the prior quarter for.

For noninterest expense, excluding the recovery in reserve for unfunded commitments noninterest expense increased 120000 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.

Patients 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.

Differences in 2022.

Still below the overall growth rate and revenue for next year.

With that.

Operator, we will open it up to Q&A.

We will now begin the question and answer session.

To ask a question you May press Star then one on your telephone keypad.

If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Casey Whitman with Piper Sandler. Please go ahead.

Hey, good morning.

Okay.

My first question just quickly do you have the accretion number this quarter.

I'd do it was 469000 cases.

Okay, great. Thank you.

Alright, and then I guess bigger picture Denis Denis you touched on the profitability and kind of getting the top tier.

Target what do you think is a reasonable time frame to get there.

Instead of all the things fall into line with the growth in the mid mid double digit to hold expense go up in the low single digits.

How should we think about the timeframe to get to get to that part of it to get to those profitability targets you discussed.

Yeah.

I think approaching Matt and I want to approach the 1% target.

Second half next year, and then as we go into 2023 hopefully.

<unk>.

Our mortgage solution or some other noninterest income solutions.

Right now we don't have.

That would give us a little more profitability so probably early 2023.

The sort of materially above 1% sort of peer level.

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.

Mike, but we think we can offset enough of that so that the operating leverage on.

Six 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 overall balance sheet would state would stay flat as you deploy that liquidity into securities and loans versus continued.

Yes.

Yes.

Okay.

So all I had thanks for taking my questions.

The next question excuse me. The next question is from Brody Preston with Stephens Inc. Please go ahead.

Hey, good morning, everyone.

Good morning, Brian.

I just wanted to maybe first on loan growth.

So.

In the in the press release.

Noted that you.

I think you noted in your prepared remarks, too which is.

You called out through 2022, you're going to be looking to grow loans at a mid teens or higher rate.

Forward and you know you've got.

Different things going on between the new team hires.

Premium finance business in the life insurance side and panacea ramping up.

And so.

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.

I think the core bank.

I really believe the core bank, probably about a third of that.

And I think panacea and the life insurance business is our probably each a third and it's not that the banks not growing the core bank isn't growing I think they just got.

We're starting $2 billion ahead of these other divisions and so I think the growth rate at least percentage wise looks better out of paying a fee in 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 have been having a normal growth rate out of the core bank.

Is something that were I guess, a normal from peer group standpoint, it's something that we feel like we've achieved.

Again, that's not something that the bank was known for we didn't grow the 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.

With P&C and life insurance.

Idea.

Which we honestly believe are.

Incrementally positive too.

Long term credit quality.

Got it okay.

With the.

The branch in the life insurance premium finance.

Maybe medium term Dennis is there any consideration given to go on in the commercial insurance premium finance Max.

I think it would.

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 exciting part about what we've just done here is one of the individuals we've recruited.

No.

Our master integrator of sorts technology wise, so when it comes to offering a take a lending solution and a more technology forward fashion that speed.

Underwriting and the.

Closing.

One of the individuals' is just that so I believe.

Could you give us a few months I think six months or so I think we will have a solution.

And.

That will help us move into that a little quicker.

I think and Brody.

To go on and on about this.

The bank.

Im talking about.

Panacea in the life insurance business I set a third and a third I think the opportunity for.

Surprises on the upside for both of those is good I think.

Make surprises to the upside.

But again, just sort of being muted a little about what we think the opportunity is I think the banks, we're confident about what the bank can do at sale.

And then pretty excited about the opportunity for upside on those other two.

Got it and Dennis you all linked.

Our partnership with.

With a home improvement.

Kind of point of sale.

Fintech artists during the quarter as well I think this is a business model that you.

Do you have experience with it.

Prior bank.

And you kind of help ring fence, what the expectations for growth.

From that partnership looks like for 2022.

Thank you.

Yes.

I don't want to say a number.

But we do have some experience on this.

You can go out and try to.

And sort of build this on your own but I think the the inroads that some of the folks like Arctic 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 an Oregon another organization, but.

Yes, I think the underwriting.

The sourcing of deals in the underwriting there is far ahead of what we could do it I think.

Im a big fan of building in our sale.

Maybe cutting out the middleman to some degree, but sometimes its just better to.

Came up with some folks in the Gaza artist the folks at Rs.

Outstanding salespeople.

Or just sort of getting.

Going theres really not a lot of that in our current run rate effect I don't think there was any really and this and this quarter's growth. So anything we get from artists is probably even more incremental too.

Two or three items, we just mentioned.

Got it.

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.

Or on a blended basis between the core bank panacea.

And going forward, what you are thinking of upper premium finance.

Okay.

Okay.

You might have I mean panacea in payments that you were doing basically two kinds of loans the consumer side.

The consumer side got consumer.

Hi.

And then consumer type credit quality, but consumer type yields.

And then.

In the commercial side, we're doing.

We're doing practice loans.

And these are.

Mature.

Easy to underwrite.

Medical practice loans and our yields on those are.

Typical commercial type step the blended rate there I think is the.

The blended rate on that right now is probably.

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.

<unk>.

The life premium finance it depends on what kind of.

Okay.

How big the relationship is and I think right out of the gate, we're going to be aggressive.

Okay.

As maybe it does maybe say 50 basis points below the curve.

Current level.

A lot of the opportunities we're seeing in the core bank.

I don't believe I mean, they're they're high threes low fours. So I don't see that there is a lot of dilution and what the core bank is doing to exist and you can really see how steady yields have been there to sort of prove that out.

Got it.

Thank you for that and then on the expense side you. All noted that you were doing some things.

Repositioning and solid hitting some of the branch infrastructure and so I wanted to ask have you taken an initial cut at that.

Any potential branch cuts.

That we could expect going forward.

We are working on a broader <unk>.

Not prepared to announce any specific branch cuts at this time, but.

Obviously as we've discussed in previous calls with 40 branches.

Have some opportunities too.

Reduced that number without impacting the overall organization.

And mass mass.

Max being.

We are.

We're being pretty scientific I mean, we know what incremental build we have left.

With the digital bank with.

Leadership.

The production side.

<unk>.

Life gas for instance, coming out.

And what we're doing is going through the rest of the organization looking for as much.

Leverages, we can get on or reduction this sort of next year's growth. So that again a lot of the incremental net interest net interest income go straight to the bottom line.

Got it and then last one for me and I. Appreciate you taking all my questions.

You all noted that you had one downgrade.

From a credit perspective in the quarter I just wanted to get some details as to.

What industry that was in if it was CRE C&I.

CRE is at a hotel.

Just talking.

Talking points there.

It was there were a couple of downgrades one was significant.

And it was an acquisition and development loans.

Property, where the existing structures there'll be knocked down and then redeveloped.

And the project is stalled but.

That a good LTV.

Scott well healed.

Borrowers, they're just taking.

<unk> taken a little bit longer.

Do something with the property or refi nance it out sort of an abundance of caution.

Downgrade in the quarter.

Got it thank you very much everyone and I appreciate it.

Alright.

Again, if you have a question. Please press Star then one the next question is from Christopher <unk> with Janney Montgomery Scott. Please go ahead.

Hey, Thanks, Good morning, Dennis.

And that I kind of want to elaborate on the branch question that floating just asking I guess 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 of expenses that you outlined.

Slide 15.

Yes.

I guess the short answer Chris is yes, I mean, we're looking at everything.

We can wear.

We can be more.

But better users of technology be more efficient through the organization.

Redeploy people, where we may have excess capacity in one area, but need.

<unk> and others, so making sure that our organization is deployed correctly.

So there is there is a number of areas. We're looking at I can't point to specific line items.

We are pursuing at any given time, but it's a lot.

Nickel-and-dime stuff that we're open will add up over the next year.

Yes.

Okay.

Great.

I think.

May have surprised people being slower to sort of consolidate some of our branch infrastructure I think.

That's not as being timid I think when you look at the development of our digital bank.

We're going to be unique in that we have a digital bank debt <unk> premise.

Our digital bank is going to offer the same products and services with the same fee schedules and everything as our core bank and it's not that we don't believe.

Firmly state we do not believe that we're going to take the digital bank wallet 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.

<unk>.

With a lot of fanfare.

We will provide our customers with a full service branch type solution digital based that will allow us we 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 why I think leads us to be positive about there being some.

Opportunity for that next year.

We're just kind of wanted 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 a fourth quarter available the beta test friends and family and then it gets into a different gear in first half of next year.

So I guess my follow up question on all of this is are there solutions to products like mortgage that you might be able to do in the digital channel again I know you are still developing some of these but it sounds like that's a potential solution is 22 comes into greater focus.

First yes, absolutely.

For sure I think the.

Now that we're at this stage.

I really I mean.

Everything I thought I knew about digital and Fintech.

No.

From Investor reports and talking to leaders Fintech leaders in <unk> 10-K.

I mean, I really don't feel like our new anything until we got inherent.

Started actually building something.

But now.

Great.

It's really coming into focus the advantage of just what you were saying having.

<unk> digital solutions and wont give when we say digital means you can do everything on your phone or your tablet you don't.

I have to find a PC.

Log in with your <unk>.

Your face not your user name.

That I mean, Chris the advantages that we're going to have and I mean, I am excited about where we are right now and our folks are tired.

But still working hard and I hope I.

I am 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 Youre, 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 is so much profitability consumer lending.

But it's all being driven by Fintech 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 Theres not a lot of <unk>.

Focus on small business, but we think that's a good niche that we're going to be able to fill.

We're just.

As another example, I mean this is not an existing part of the bank, it's the new part, but Dennis alluded to earlier.

One individuals' part of the management team for this new laser.

Life premium finance business is more operationally.

I mean, if you look at that business or know anything about it it is intensely inefficient.

Inefficient paper, driven shoveling stuff back in for.

It is right 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 liked about this team as they have a real vision for <unk>.

Reinventing how that space gets done.

And they want to do it on our on our platform. So we think thats going to be a huge advantage for us as we rollout that product.

Thanks, I actually had that that same point that because I mean, it feels can be like starting from scratch and is going to allow you to scale better and be more profitable than buying someone else's business like other banks. So that's a whole different.

Approach.

And so I guess to that point on the premium finance business that has a spread opportunity. In addition to fee income opportunity you guys are sub becomes comes to be.

Yes, yes.

And.

Long term.

Given my I just.

Experienced with this.

Incredibly efficient.

I mean long term wildly accretive to our efficiency ratios.

Very low losses, if any so wildly accretive to credit quality.

In our credit profile.

And Matt.

I think what's going to nobody thinks about life premium finance being a fintech business.

I am not.

Column that necessarily but our approach here is to bring technology and innovation to.

Rapidly.

Find these opportunities underwrite and close them and distinguish ourselves there versus.

Doing so with.

Everybody's offering is at LIBOR $2 50, and we have to come in at LIBOR 150, that's not what we do.

No.

That answer your debt.

Does 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 <unk> for any closing remarks.

Okay. Thank you for again for everybody who has joined our call.

Matt and I are available really anytime to take your questions or comments or get on the phone to discuss it with you. If there is something.

Separately, you won't discuss or give us a call otherwise have a good weekend and we will see shortly.

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

Okay.

Yes.

Yes.

Okay.

Okay.

Yes.

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