Q4 2021 Primis Financial Corp Earnings Call
Good day and welcome to <unk>.
<unk> Financial Corp, fourth quarter earnings call.
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I would now like to turn the conference over to Matt.
Chief Financial Officer. Please go ahead.
Good morning, and thank you for joining us for premise financial Corp's 2021 fourth 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 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 factor.
Factors include but are not limited to our ability to implement various strategic and growth initiatives competitive pressures economic and political conditions interest rate fluctuations regulatory changes asset values and other factors discussed in our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has been posted.
To the Investor Relations section of our corporate site.
Bank Dot com.
We undertake no obligation and specifically disclaim any obligation to update or revise forward looking statements to reflect changed assumptions.
Lines 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 effort. Thank.
Thank you, Matt and thank you to all of you have joined our call today or who will listen to it on the replay.
I'm delighted to be on the call today with HIV would you talk about significant accomplishment in the current quarter and for the full year of 2021.
As we sit here today and just a few wait a few weeks away from having my second anniversary at the company when I first joined the company.
Our vision was to create several engines for growth that can reliably and organically per days.
Could <unk> grow both sides of our balance sheet.
Granted we didn't have the multiples to even be hoping for M&A or anything strategic and further we probably shouldnt have considered anyhow as we work to strengthen our culture and our platform.
So here we are two years later and I am not calling victory yet.
Two quarters, a good loan growth, but I will tell you it feels different around here.
Given our results in the outlet for our core bank, our lines of business and our digital bank I'm starting to see the vision come together, where we can sustain mid teens or better growth in the balance sheet and even faster growth in our earnings.
It's taken a lot of time and investment to get here, but I feel so optimistic about the future direction of our operating results.
Specifically about loan growth, we saw loans, excluding PPP balances in the year at 226 billion.
While this is up only 6% from the end of 2020. It does represent annualized growth rate of about 20% in the second half of the year.
I am hopeful that another couple of couple of quarters of growth at this level and we can start redefining our sales as the growth oriented company, we hope for.
Right now we have three reliable sources of loan growth.
Our core commercial teams are producing and growing in our core markets around Richmond. The D C Metro area in the Hampton roads area.
At the same time, our payments via division and our brand New life premium Finance Division are using streamline tech technology to identify.
Underwrite and close loans in select industry very rapidly both.
These divisions operate nationally.
And I believe they are both going to have an exceptional 2022 and produced results that look good not only on our balance sheet, but more importantly on our bottom line.
The expected loan growth is is great news.
But long term I will tell you we don't have enough excess liquidity on the balance sheet to be lazy about deposit growth.
We could expect we could expect continued growth like we saw this year out of our core bank, but for us to fund our expected loan growth.
Going to need a faster source and the real engine for is our digital bank.
The digital bank is intuitive and modern and importantly, it has no geographic span.
Success in the digital bank does not require $10 billion of deposits than hundreds of thousands of customer.
We estimate that just $100 million of deposit and this nationwide strategy will produce enough revenue and spread to completely breakeven.
Obviously, we believe the strategy has more.
Potential and that we believe it will provide all the funding necessary to produce outsized margins on our loan growth and keep a steady source of funding on our balance sheet for time to come.
Lastly on the <unk> on the growth potential around here.
And importantly, I would say that occasionally slip back to my office, when Matt is working and I make pro forma and pretend to be CFO again.
Amin I keep trying to understand and document the cost to acquire a business and build a bank using these lines of business.
<unk> digital strategy.
The incremental cost to grow the bank like this are so different in many times I just don't believe.
What I am calculating.
And I'll say that right now because we're in the building stage and I promise you that I haven't got checked every time, we have a new expense.
These strategies confidently have paybacks that are short and significant.
Matt and I are both M&A oriented people.
Our whole career has been bad.
And so easy in that environment.
We have a strategy or a transaction and expect something to be accretive on day, one and I understand that this is not that but I believe in what we're doing wholeheartedly and I believe the results that are possible in the short term and long term are significant.
Two more items and I will turn it back over to Matt.
We pride ourselves on being innovative in our core values and maybe.
I would suppose not many banks have this word in their core values, but we have in our core values the word imaginative.
There's a slide in our deck on Bob which is an app that we can save totally in our bank and developed completely from beginning to end.
Bob essentially takes the fee remaining activities that are thought to absolutely require a branch transaction and in branch transaction and allows the customer to order the service directly to their home or office, our current location normally inside of 30 minutes.
We rolled this out in a limited way enrichment in the fourth quarter, the pallet three or four months old and we've received very good feedback from customers.
We've opened about $20 million of mostly new checking account all from Super Regional Bank.
I think being a community banker myself I know that many community banks their customer service their customer experience relative.
Relative to the Superregionals as the differentiating factor the the fact that we'll move business from one bank to another but usually that customer experience. So nuance differences so nuance it doesn't actually move business.
I believe this buyback changes that for us and puts us in a competitive place with lots of new customers.
Lastly.
Premise was like every other employer in 2021, and a very tight labor market staffing was high and hard to come by.
While we continued our normal recruiting efforts, we stepped out and did something different.
In August we launched something called premise work. This program focuses on single mothers.
They were looking for a job who are looking for job training and life skills that can put them in a much better position to care for their families.
Our first class pad five wonderful, ladies who have dedicated themselves to learning all the skills necessary or job.
Our job in our bank.
In return, we paid a competitive wage along with childcare and health care call.
This last week all five of these ladies that came into the program graduated and Im unquestionably sure that we have loyal we will now have loyal employees you are constantly talking about our company and the difference with Mike.
And we absolutely know that we run a for profit company and we absolutely know what distinguishes us in the industry and market value.
But I am so proud of our staff for finding alternative solutions to problems that make our bank better and serve the community like we did with premise work.
Be watching our social media and our web site for content about this program and the success, we pay it in the near future if you're interested alright.
Alright, with that I will turn it back to Matt for.
For his report.
Thanks Dennis.
As a reminder, a full description of our fourth quarter and full year results can be found in our earnings release and our earnings presentation, both of which can be found on our website and as.
As part of the 8-K filed with the SEC.
Also in addition, our previously announced transaction to exit our common ownership interest and Southern Trust mortgage was completed late in the fourth quarter. The historical investment in STM has been classified as a discontinued operation and prior period financials, unless otherwise noted my comments will refer to results from continuing operations.
Yes.
Earnings for the fourth quarter were $7 7 million or <unk> 31 per basic and diluted share versus $6 2 million or 25 per basic and diluted share in the third quarter.
Total assets were $3 4 billion at December 31.
<unk> loans increased to 234 billion in Q4 from $2 $31 billion. In Q3 is strong core loan growth offset the decline in PDP balances, excluding PPP loan balances grew 4% linked quarter or approximately 16% annualized.
Growth came from all parts of the organization in the fourth quarter, which was very encouraging and included robust growth from both <unk> and our new life premium Finance Division.
We have a lot of momentum currently and are anticipating robust growth through 2022.
Deposits decreased slightly to end the year to $2 76 billion due to the seasonal decline in mortgage escrow related deposits of approximately $125 million.
Excluding that decline we would have seen further core deposit growth non interest bearing deposits are 19, 2% of total deposits at year end and grew 23% for the year.
While Cds have declined to 13% of total deposits.
Cost of deposits declined to 39 basis points in the fourth quarter for 45 basis points in Q3.
While we continue to have excess cash on the balance sheet, we believe our momentum on the lending side will consume this liquidity in the near future and continue to prioritize core deposit growth.
Credit quality remains solid with nonperforming assets less guaranteed SBA guaranteed portions decreasing $1 2 million in the fourth quarter. We also had net recoveries in the quarter of 18.
For the fourth quarter with six basis points of net charge offs for the year.
Improvement in the operating environment led to a negative provision of $1 3 million and reduction in the allowance for credit losses to gross loans, excluding PPP. The one 9% at December 31 from 140% at September 30.
Our reported margin was 3% for the fourth quarter up 13 basis points linked quarter, excluding PPP effects coordinate interest margin increased 13 basis points to 279% in the fourth quarter.
As noted above we are excited to see loan growth materialize and fully expect operating leverage to continue to be meaningful as we deploy that liquidity.
Excluding a gain from Delek Englishman this quarter and the effects of STM, which is now recorded in discontinued operations.
Noninterest income was largely flat quarter over quarter.
Noninterest expense increased $1 7 million linked quarter, excluding the recovery in reserve for unfunded commitments.
In both Q3 Q4.
As we discussed in our earnings release and presentation and as Dennis alluded to most of the increase this quarter was tied to the talent acquisition costs and getting new initiatives off the ground, particularly life premium finance and Bob.
We expect much of those particular expenses to moderate in the first quarter.
Also discussed in our earnings release and presentation certain expenses related to our growth initiatives, including the new digital bank and the life premium finance will increase in 2022.
We've also disclosed our intention to consolidate branches in 2022 to offset some of these costs.
We believe the net result will be a mid single digit growth rate in expenses this year versus 21.
To wrap up we are excited by the momentum we have in the bank and substantial upside would be from our strategic initiatives we.
We believe we are on the cusp of strong earnings growth, particularly as paying a fee and premium finance turn profitable this year and begin to generate substantial earnings growth after that.
With that operator, we can now open the line for questions.
Thank you we.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
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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, Thanks, good morning.
Good morning.
Alright, maybe.
Start off I think in the past you've talked about sort of a third of that growth.
Coming from each of the lines of businesses that has that expectation changed or is that.
So it's about how we should look at it.
I think thats still our expectation for this year, yes.
Okay.
Okay, and can you remind us sort of where the yields are coming in from each of the lines between the panacea life insurance product and future commercial production as they are big.
Berrien instead.
Those are coming in this quarter.
So life premium finance.
The portfolio, we ended the year with which was obviously small I think effective yield on that was about three and a half.
Percent now that included.
One of the credits that are pretty substantial fee associated with it that's amortizing and adding to that yield.
There are production, especially on the variable rate products.
Probably in the.
Two and a half to two to three quarter range.
So.
Beautiful.
Print down depending on how many fees they get associated with it but that's kind of what they're putting on right now and position us well to go.
Go up which we all think they will.
And I think in the investor presentation for payments there.
Their portfolio at the end of the year was weighted average in the low Bob I believe.
So depending on the mix of their production this year that may come down a little bit, but still pretty good yields, especially with the consumer.
And the student loan refi pieces of it.
In the core bank I would say our production.
<unk> probably in the high threes.
So we feel pretty good about how all of those together.
Okay and what's your expectation then for the core margin to continue to expand.
And here at <unk>.
But on this loan growth as you get rid of some cash.
Minus.
Forgetting that rate hikes for now.
Yes, absolutely.
Okay.
I'd also cite case yet.
If you look at the combination of everything.
Relative to where we think we will be growing deposit.
I mean, we see pretty clear pathway, yet the premium finance step is.
Especially the variable stuff, that's slightly below three but.
When you put all of it together.
Relative to where we're growing the funding side Matt.
<unk>.
Everything we need to sort of get to the margin that we think we want to operate the company at which is probably <unk>.
Somewhere around somewhere a little south of three 5% 325 to three 5%.
But long term, we believe what we're doing.
It puts us in that in that.
Area.
Okay. Congrats on all the growth look for myself.
Alright.
Again, if you'd like to ask a question. Please press Star then one our next question comes from Brody Preston with Stephens Inc. Please go ahead.
Hey, good morning, everyone.
Hey, good morning.
I wanted to start maybe on the digital Bank I appreciate you all put in the.
A target out there of $100 million.
And that come.
Coming from that this year.
I guess.
Yeah.
What I guess I wanted to ask just what gives you confidence in that number why did you pick.
What's driving the $100 million.
Yes.
So a little bit of lapping in the room right now.
Matt.
Matt and I have gone back and forth and back and forth.
Right now were.
This is what I would tell you, but right now we're in the <unk>.
<unk> family.
Stage, a bit and we're getting very close to it in debit close enough that we are sort of lining up.
So the real commercial opportunity just on the outside of this.
And.
Two or three tier three opportunities here are.
13, $14 million and again it all checking accounts, it's all low cost deposit.
Yes.
I think over time really what drives a digital bank the technology and the seamless.
And intuitive feel to it.
All of that's important.
What really drives digital banks I mean, we can't legitimately expect somebody in Sacramento, where Santa Fe, New Mexico to choose our digital bank until they've heard about our brand.
So really until.
We don't expect or.
Even let our sales for the explosive growth that would come along with that now.
We're not abandoning that either but right now all we're looking for.
Yes.
Our first target is just to get enough deposits in here as fast as we can to pay for it and thats the $100 million.
I think.
Matt likes to say out over promise, we skipped the over deliver that's fine but.
I think the I think the goal here is that.
I think that's our first goal pay for this and $100 million of deposits, we will do it.
Got it okay.
Well honestly is.
That's not much worse or much different than a <unk>.
Standalone branch.
If we were to go just to Raleigh, Durham or go to somewhere out in.
In Northern Virginia.
So.
Okay anyway.
Hi.
Are you going to be rolling out.
I guess are you going to be rolling out five as part of the digital banking effort at some point like what do you expect to kind of set up.
The ability to deploy vibe and other markets if you reach like.
Say, you got to $50 million in.
Raleigh Durham through this through the through the digital bank effort would you.
Would you set up.
The ability to kind of deliver those services to those customers.
Yes, absolutely.
So the Bob with our.
Legacy mobile bank offering the <unk> functionality is actually in a separate app, but with the new digital offering will be embedded in the.
And the mobile banking offering.
And we could have the ability to turn it off and on so in markets where.
With the rate of deposits and we don't have the service available off the turn it off.
But to your point.
Can we get enough.
Mental middle market, and we think that it would increase that momentum the technologies designed that it's completely transportable, we can utilize it anywhere.
And low cost I mean, you can.
We could probably I mean, we're just used in Raleigh Durham as an example, but I mean, we could probably spend.
Next year, $100000, a year and half pretty much around the clock.
In person customer service.
And I think that's a distinguishing factor that that.
I think that's more.
That's more what a small business would want out of a digital bank that's more what a high end professional would want out of a digital bank.
And so I think it's a distinguishing factor.
Got it.
And then maybe just turning to the business lines.
Thank you for breaking out the different expectations and where the balances are.
Maybe if I could start on panacea.
You'll have three commercial bankers now within that vertical you have got a great support.
Support team to support the underwriting.
How should we be thinking about your expectations for.
Kind of commercial production.
For that team.
This year kind of trying to set aside the student loan refis in the PRN.
Okay.
Towers.
<unk> got a signed offer letter on another banker and I know he was.
And he's in the middle of recruiting another I think Tyler would probably like to finish this year with $10.
Commercial bankers, if he can get Matt to agree.
But I mean.
<unk>.
Bankers are coming on and producing almost within two weeks. So there is a real fast to being breakeven and I think that's critical for Tyler.
To capture the value of his brand that I think is what if theres one thing I like what we've done with the commercial bankers and I like how we sort of moved into that space, but the one thing about paying a fee is that the brand sort of by doctors for doctors, the fact that too.
Distinguished Medical professionals are involved running this business makes it different than that and I think really in the third and fourth quarter their brand and their image started catching on and I think as we roll through the year.
It will not just be hand to hand combat with commercial bankers, that's producing business here I think the brand will actually start paying off as well.
But tyler is going to continue to grow.
Is commercial banker ranks I know there is another product or service or two that he wants to add and we're working on that right now.
Augment that but.
<unk>.
And I think we can.
You put in there for growth.
Yes.
Expectations of $125 million to $150 million for the year.
We also disclosed in the presentation of the current makeup of the portfolio now.
Understanding that student Refis will really.
We're doing some but it wont become a real meaningful product until the.
Deferral, and then may so that'll you're only getting really half a year of that activity.
And then the PRN loans consumer loans are relatively small balance loans. So I would expect a lot of the growth in 'twenty two to skew more towards commercial just because those are larger.
Larger credits.
Got it and then on the premium finance loans.
Just a few a few questions on this so I'm just trying to wrap it into one one could you help me understand.
What the.
Nick.
The.
What the commitments are I think it was like you got 13, six outstanding was $69 million in commitments like help me better understand.
What what that means and then.
Two are all of these loans kind of like a 12 month or prime 12 month, LIBOR or prime plus kind of product and is there going to be much in the way of.
Provision associated with these loans, just given the low loss rates.
So the reason the committed balance is so much higher.
Generally the.
Like so for these loans right now this is the first year's premium the premium broken up into three to five year installments.
So you don't actually take down the whole life insurance framework all at one time.
So the total amount of.
Premium that we would finance if the borrower to finance all five of those payments would be that $69 million, but so far it's just the first year amount of $13 6 million.
Got it.
Prime minus.
Yield so thats kind of two and a half.
Three quarters that I referenced earlier.
Hi, Manav.
And then from a reserve standpoint.
We're assuming very little in the way.
Provisioning for credit due to.
To the extent the.
Life insurance cash balance our cash surrender value is securing the full amount.
The borrowers supplying.
Letter of credit or marketable securities or cash other cash sources to secure the rest of it.
We're very very.
Secured on these credits.
<unk> got it Patrick on probably kill me here, but.
The $69 million or so of committed balances on that.
I mean, the pull through rate is not 100%.
But it's also not 20% I mean, you could probably.
The $69 million you could probably expect that.
$50 million of that is going to.
Materialize on the balance sheet.
Some built in growth here for the next few years.
What Matt is going to probably reach over and hit me for it.
While we only closed these five lines, while we closed these five loans in these five loans had balances we closed some other volumes as well that had no outstanding and I think as of right now, we're probably up to about maybe a little over $150 million of committed balances.
So some of those are some of those have funded since the end of the year. Some of those have closed but not funded.
But when we start talking about why we're excited about this and why we believe kind of looking out.
Matt and I are so confident that loan growth is going to materialize on the balance sheet.
As part of the reason why.
Got it.
Do you know do you know what.
Do you know what loan segment.
The life insurance premium finance loans.
Went into what bucket Matt.
I think most of it actually went into commercial C&I and then the rest of it went into consumer.
Okay.
Yes.
And maybe just Dennis in the press release.
You noted.
You noted that you are expecting to find a wholly owned solution to mortgage.
Shortly.
You put out you know as little as $1 billion would add 20 to 25 basis points ROA in 200 bps.
The ROTC.
I'm, assuming you wouldn't you would.
Didn't say shortly if you didnt have something planned and so one can you give us a sense for how soon do you plan to announce something in the mortgage space.
Two if thats currently baked into your expense guidance.
The mid single digit growth guidance that you all put out.
And three I guess, how quickly could you get to that $1 billion.
Hi.
When I say shortly I think I mean I.
I would like for us to do I would like for us to do that this year.
Right now we right now we are.
Too much of a spread oriented.
Organization.
And our future strategy growing the core bank and the digital bank does not sooner.
<unk>.
Service charges, which I think are going to go away anyhow, but so we need a noninterest income source and the one we had was fine.
A good organization. It just wasn't what we needed long term I would like to do something this year. So I mean short term.
So don't expect a press release in the next couple of weeks, that's not what I was saying and I wasn't really leading.
Anything with that other than.
Good morning investors to know that.
Missing that and some other noninterest income sources.
And.
I am not going to try to I don't think its possible to push of one 5% ROA.
16, 17 return on tangible capital if you're just doing straight core community banking.
And the way you get there with several lines of business that produced sort of outsized earnings relative to.
Their assets are the leverage that's required.
The $1 billion really is.
Now looking at what the core bank with all of these strategies, we think can produce ROA Roe wavelengths.
And kind of.
Where we are in order to get to some of our target what kind of production do we need so we're not.
We don't necessarily want to look at a $200 million mortgage company, but we also don't need to look at a $10 billion mortgage company. So it's kind of just maybe putting that out there.
Probably what we'd be looking for and I'm Blessed I think I would say is.
Yes.
I'm kind of hopeful that.
Timing might be on our side here.
Because I think with rates moving up.
Mortgage companies or at least maybe mortgage companies don't think they are.
Tim Tampa booking in terms of I mean, I don't know some probably Dave, but I think Matt Matt will be able to find something that like for our organization that quickly accretive to everything that we would want it to be.
So I think the question was baked into earn nothing's baked into it.
Okay. So so to be clear. This is this would be something that.
If the right company comes along on the mortgage side. It would you would look to do a tuck in acquisition.
Make it your own.
And the $1 billion number is what you kind of think you would need to achieve the financial targets that you have in mind.
Yes.
Okay, and then last one for me just on the branch consolidation I just wanted to confirm.
One 5 million that's realized in 2022 does that mean that there is another one and a half thats coming through in like the first half of 'twenty three Matt or would you just kind of expect the <unk> run rate to have all of the cost savings baked in but that results in <unk>.
Some of it being realized in 'twenty three.
Yes, its the latter so.
Most of the expenses the savings won't show up until the back half of this year, so by the fourth quarter.
Run rate should be in there.
Awesome. Thank you very much for taking my questions I appreciate it.
Alright, Thank you Brian .
This concludes our question and answer session as well as our conference for today. Thank you for attending today's presentation. You may now disconnect.