Q3 2022 Primis Financial Corp Earnings Call

Good day and welcome to today's furnace Financial Corporation third quarter earnings call. All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there'll be a question and answer session.

I'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again Star one. Thank you I would now like to turn today's conference over to Mark Schwarzer Chief Financial Officer. Please go ahead Sir.

Good morning, and thank you for joining us 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 for further discussion of the company's risk factors and other.

For 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 site at Www Dot premise bank Dot 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'll now turn the call over to our President and Chief Executive Officer, Dennis number.

Thank you, Matt and thank you to all of you that have joined our third quarter conference call.

I want to take a few moments to talk about some of the trends that we referenced in the press release and then talk about how this is driving our core earnings performance in the current quarter and what we expect out into 2023.

The most notable item in the quarter is the investment in mortgage.

We are recruiting very well this quarter and landed two very strong teams and some other strong producers we brought there.

We bought excuse me we bought this group was about 250 to 300 million of production.

Capacity.

We ended the quarter very close to our $1 billion goal.

To illustrate the progress we took about 178 applications in August before we recruited in your body and in October so far the first full month, we just one of the two teams we've taken about 430 applications the.

The other change is being onboard now and at full capacity, we expect to end the quarter with about 500 to 600 applications.

Which should translate into about $75 million to $85 million per month of volume.

We paid small signing bonuses and we buy out the teams existing pipeline.

And this accounted for about 80% of the groups operating loss.

While we recruited a team in the quarter and paid the cost to onboard them the claim but no one's just built pipelines and so a lot of the revenue or all of the revenue that we expect from these teams will happen.

The fourth quarter and beyond.

The new level of production that we've built in the mortgage company too is about what we expected.

While we would like to grow.

Continue to grow we don't expect.

Continue adding costs like this into next year.

Thank the new level of production should produce EPS of about 24 cents per share and increased our return on assets by about 20 basis points.

We also began marketing the digital bank and a more pronounced fashion.

During the quarter, we spent about $500000 promoting the offerings in our core bank.

In the first month, we had traction on all of the accounts and while it's small I believe we could get to about $10 million and new customer and new customer dollars in just the first month and I believe in a couple of quarters. The digital bank will be one of our largest branches.

In the presentation that Matt put out last night, we left some of the novel features of our product set which is the first time I think we put that.

In one place together when you combined those features with the progressive look and feel of the App and the delivery capabilities from Bob we have a hyper competitive offering that unquestionably is going to grow our franchise and our core markets.

Speaking of volume this quarter, we spent about three to 400000 extra staffing up in investing in fact for two reasons. One we wanted to be in a position to expand the reach of this service and the hours, we operate and secondly, we wanted to be in a position to.

Offer the service to other banks.

The service cost a fraction, maybe 15% of what a full service branch costs.

Right now there are community banks out there that want to expand to neighboring markets, but can't stomach a two year period to breakeven there.

There are some that need to close branches, but can't risk inconvenience and customers and losing heart block or deposit customers in the day when liquidity is drawing out.

To date, we've done over 8000 deliveries generally inside of 30 minutes and we're on pace to do more than 1000 per month.

In my opinion, we need to be in a position to export this to new markets, where we estimate the breakeven to be only about one $5 million in new deposit brings.

Bringing the other banks into the concept will only help that will only help us with that strategy.

These items cost us about $1 6 million in the current quarter and even with that extra investment in these areas. We posted the highest pre tax pre provision earnings we've had in several years.

For the current quarter of 2022, we're reporting pre tax pre provision income of $9 9 million or about a one 2% ROI. This is up substantially from a year ago. When we reported $8 5 million and an associated to our way of only 72 basis points.

Driving that higher was growth in revenue of about 46% over last year, excluding PPP fees and an improvement in the margin from 287% to 357 in the current quarter.

Great resulted from the needed improvement in earning asset mix as wells are very low and controllable deposit beta.

So I'm pleased with all of the progress, we're making there and I'm pleased with the move in revenue and pretax pre provision.

But the fact is we have to move their reported ROI higher and I see in all honesty, a clear pathway to do that.

Our mortgage team I know, we will move to profitable very quickly panacea will continue to move up the ladder with its returns our growth our provision for loan losses associated with growth will moderate we're not going to have provisions for model changes much longer.

<unk> is a slam dunk. These days in this industry, but I feel very confident that all of these strategies are jailing and will produce the higher returns we will.

Last thing before I turn it back to Matt I want to comment on the loan to deposit ratio and where I see that headed.

We've spent the last two years being flushed with liquidity and benefiting from absolutely wonderful growth in deposits.

At the same time, we were building new strategies in five and with the digital bank that could position us to grow deposits when the easy money disappeared.

I know, we finished the quarter at 101% loan to deposit, but I feel our deposit strategies have just as much or more honestly more potential than our loan strategy and.

And given the rate and liquidity environment. The industry is facing I believe these are coming online at just the right moment.

The digital bank will continue to grow alongside the core bank and I don't expect loan to deposit ratios over 100% for much longer.

Okay with Matt with that I'll turn it over to Matt for some comment on the numbers.

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

Earnings from continuing operations for the third quarter were $5 1 million or <unk> 20 per diluted share versus $5 million or <unk> 20 per diluted share in the second quarter. Excluding one time items earnings in the third quarter were $5 3 million or 21 per diluted share versus $6 million or 24 in the second quarter.

Total assets were $3 36 billion at September 30 up slightly from June 30, excluding PPP loans and loans held for sale loan balances grew 18% annualized in the quarter.

It was primarily driven by a panacea and life premium finance in Q3.

We expect growth in the fourth quarter in the loan portfolio, albeit at a seasonally slower pace.

Deposits were up almost 4% annualized in Q3, while the mix continued to improve noninterest bearing deposits are 25, 4%, which is a record for our bank.

As we look out the next few quarters. We are confident we have the ability to keep growing deposits in the face of NFC industry pressures as.

As Dennis alluded to we have branches in strong markets enhanced by our Bob service digital platform with unique deposit account features in a nationwide, Brian and panacea, all of which we plan to leverage for funding.

Net interest income salt stronger strong growth in the quarter, increasing to $27 5 million from $24 $6 million in Q2 were 11, 6% linked quarter growth.

Our reported margin was three 7% for the third quarter or three 5%, 8%, excluding the effects of Pvp up 24 basis points and 23 basis points, respectively from the second quarter.

Yield on earning assets expanded 42 basis points, while cost of deposits and cost of funds increased 13 basis points to 18 basis points, respectively from Q2.

Our deposit beta this year remains low at only 4% cycle to date.

Noninterest income increased to $5 6 million from $2 6 million linked quarter, largely due to a full quarter of premise mortgage.

The permits mortgage management team has done an incredible job recruiting to the platform with two substantial teams in particular added largely in the third quarter.

With these additions we are projecting originations of over $1 billion next year up from roughly $300 million this year with meaningful additions to noninterest income and overall profitability.

Noninterest income also included a gain this quarter for an increase in our credit indemnification asset of approximately $1 2 million tied to a segment of our loan portfolio.

Noninterest expense included a number of items this quarter, including 308000 and branch closure costs of 311000 expense for unfunded commitment reserve and a full quarter of mortgage expenses, which included the build out of origination teams as Dennis discussed previously.

Excluding these items and recovery ore expense for unfunded commitments noninterest expense was $20 million up from $18 5 million last quarter.

The increase was driven by lower deferred costs from lower commercial lending volumes in Q3, which was roughly 500000 impact.

An increase in fraud losses of roughly 250000 increased marketing and advertising for the new digital platform and vibe and a customer mailing, which combined was roughly 300000.

Increased professional costs of roughly 250000, plus additional investments in our lines of business.

Many of these expenses will be lower going forward. We will also start to benefit by approximately 500000, starting in the fourth quarter from the renegotiation of our main data processing contract.

Our provision for credit losses was $2 $89 million in Q3 versus 408000 in Q2. The provision was driven by three things loan growth we experienced in the quarter.

Weakening economic forecasts included in our seasonal models and an increase in specific reserves tied to one non accrual loan.

We also had net charge offs in Q3 of $1 1 million largely tied to one credit that had already specific reserves established against that.

In previous quarters.

As a result of our allowance for credit losses to gross loans, excluding PPP increased slightly to one 7% at September 30 versus 116% at June 30.

Nonperforming assets net of SBA guarantees increased $17 $3 million in Q3, primarily due to one relationship one relationship largely comprised of three assisted living facilities. This relationship was rated special mentioned last quarter and was downgraded and placed on non accrual in Q3.

We are working with the borrower to dispose of the properties and current appraisals indicate we are fully collateralized.

Our operating efficiency ratio was approximately approximately 71% in the third quarter essentially flat from Q2.

Excluding the impact of mortgage our operating efficiency ratio would've been approximately 65% in Q3.

We consolidated two branches in Q3, bringing the total for the year to eight.

With the data processing savings highlighted above plus additional efficiency improvements. We're pursuing we continue to believe we can drive operating efficiency on a combined basis below 65% as we finished 2022.

As Dennis mentioned pretax pre provision operating ROA was 120 basis points in Q3 up from a 100 basis points in Q2.

Excluding the investment in mortgage this ratio would've been approximately 10 basis points higher in the quarter.

Our various business lines continue to ramp profitability quickly.

Similar to the efficiency ratio discussion, we're confident pre tax pre provision ROA and return on assets will continue to see meaningful improvement in the near future.

With that operator, we can now open the line to questions.

At this time like to remind everyone in order to ask a question press. The Star then the number one telephone Keith.

Pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Betty strict Global Janney Montgomery Scott Your line is open.

Hey, good morning.

Good morning.

I just wanted to start with deposit trends I know you guys gave a little bit of color.

With the digital bank, but was just curious in terms of new deposit trends and finding new accounts do you have visibility.

New core funding going into next year.

And how much of that comes from the digital bank versus kind of regular bank operations.

That's a great question for Nick So the digital bank as you recall went live to the broader public.

The very end of July and then we.

We're slow to advertise it heavily while we made sure all the final bugs are worked out of it. So we really didn't start advertising.

The digital bank and that those products until kind of midway through the third mid to late in the third quarter.

As we sit here today I think we're at approximately $8 million in deposits in the in that platform already.

No.

Pretty good that the.

Products that we've got there some of the novel features combined with five and how we've set up those accounts that we're going to see some pretty good growth in the digital platform in the fourth quarter and then into next year.

And standard on checking accounts, yes, and I would point out right now the only products live our consumer accounts. So we don't even have business live yet so that $8 million is all consumer funding.

Business should be live early next year.

I think.

To your question <unk> I think the.

Core Bank, Scott, Let's just say almost $3 billion of deposits little under that.

I think in a normal year given.

Our exposure in Richmond.

In Northern Virginia, DC Southern Maryland.

The Hampton roads area.

Those are good markets I feel like in a normal year, you would expect us to grow.

It.

Looking at Matt probably seven.

Eight 9%.

That being too aggressive and without being centered on rates.

The industry is.

Probably facing a 10%.

Traction in deposit so the core bank it might be hard for the core bank to grow I think all core banks are going to struggle grown I think <unk> seen that this quarter. This digital bank I think it's different.

Thank you I really I believe I don't want to sit here and BSA, John I don't want to.

I don't want to declare victory early but.

I think it's the one thing that's going to change the tenor of what we gave next year on the liability side.

If you look at the I know, it's only approaching $10 million, but if you look at the cost of funds into new customers and the digital bank.

Against the against where we are loaning money, we're pushing net interest margins that are higher than what we reported this quarter.

So the whole strategy itself is is incremental to our margins.

It's going to increase our growth rate in deposits.

I think it's going to make a big difference.

Friday, one last comment on that when we're talking about deposits.

I highlighted it a little bit in my remarks, but.

Panacea.

<unk> got little over 13 million of deposits at the end of the third quarter.

Deposit gathering.

They push for deposits, especially with commercial customers I think they all have almost 100% penetration with <unk>.

Deposit account with our commercial customers.

But it has not been as great of a focus is building out their business in other areas to date.

However, they've got a massive built in customer base and eyeballs that they can market to them.

We intend to lever that leverage that more aggressively here.

Short order.

Got it.

Really helpful. I appreciate all the color.

And just switching gears to expenses.

It is the expense growth we saw in the third quarter continue or do we see sort of a slowdown on that line from here I know you've guided towards 65% I think you said in the fourth quarter.

I was just also curious where do you think efficiency can go in the longer term.

Just as revenues start to rise as well.

I guess two parts of that so yes.

Not only should we not see growth in the fourth quarter, we're expecting to bring expenses down the fourth quarter has a number of those items were not.

Nonrecurring, but should not be.

Shown up on a regular basis.

And our financials.

Longer term we have.

Our stated goal of being.

Below 60 mid fifties in the core bank, excluding mortgage by mortgage by definition is up higher efficiency business additive to ROA because of that.

Heavy on assets, but higher efficiency, so stripping that out.

Driving the community bank and the rest of our business lines to low to mid fifties.

And <unk> should be below 50 life premium finance should be well below 50, and then kind of a standard community bank efficiency ratio of.

Mid fifties combined.

This.

The environment of that range.

Got it.

That's helpful.

And speaking of mortgage.

I know you provided a little bit of.

Guidance on what you think youre going to see there do you see opportunities there just as other banks are trading from the space to pick up.

So I mean, it sounds like you have that you did this past quarter is there is there more of that.

Out there just given.

Kind of a downturn in mortgage and was just curious if you can also explain.

How mortgage expands just absent an external market shift in rates and whatnot.

Okay.

Okay.

There's a lot of opportunity to.

To grow mortgage.

Honestly I think we've got a great team I think we've got good leadership.

I think we've got good infrastructure, that's on its way to being great infrastructure and systems.

I love the mortgage industry I don't know how much we can stomach.

And I think we picked up two dynamite teams.

In great markets.

I felt like we could probably do that seven or eight more times probably grew for June of next year, but I don't think we should.

I just I think what we need to do is sort of incubate. These two teams get them to profitability sort of let it drive there.

The results that we expected and make a good name for our sales and then sort of start building from there.

If if we were further along.

The digital bank and further along with pain of CN further along.

With some other profitable profitability ideas.

We might invest harder here, but I just don't think its.

I don't think we ought to keep investing.

Before we start putting up some returns.

I mean, the industry is just retracting our contracting.

And.

Again, a good team that I mean, a year ago I think either of these teams. We just for Craig duty would've taken a couple million dollars I don't even know that you could have mobile <unk>.

<unk> taken a couple million dollar signing bonuses plus on top of what we paid.

And.

Today mortgage companies, especially the independents.

Our slashing backroom slashing marketing.

No no ability to portfolio anything.

And so a lot of these teams R. R.

Our available right now I mean, the nation's best mortgage companies right now started in 2008.

And so this is what happens in a pullback.

The best mortgage teams look for good homes and I think that's what we're benefiting from at least answer the phone.

Exactly exactly.

Got it no that makes sense that makes sense and kind of along that same line.

Can you talk a little bit about what you see on the interplay of profitability over time further out in 2023 2024 within the various subsidiaries, whether it's panacea the premium finance division mortgage.

Obviously mortgage is a little more or less talks about mortgage is a little harder to forecast did not knowing exactly what the fed is going to do.

I was just curious what across the different segments.

What's the different level of opportunity.

The GC.

I think our outlook.

I think the core bank.

As it is in.

In a normal credit environment should probably do we'll do probably about a 1% to $1 15 ROI.

I think the I think premium finance, our premium finance folks will.

We will do a $1 50 to $1 75.

ROA.

Matt Kibbe below 50% efficiency ratio.

They're going to probably around a 20% efficiency ratio I think that could get to $1 billion outstand.

Outstanding with <unk>.

Seven or eight people.

Panacea payments they are probably 125 to 150 ROA.

We might be longer getting there because what we wanted to do is invest.

And their deposit.

Infrastructure.

<unk>.

I think long term is probably going to look like it is going to look like really the nation's first full service digital bank both sides of the balance sheet to doctors vets and Dennis may be expanding that to medical staff, but at.

At least for the deposit side.

I mean mortgage I think would probably per days.

Pre tax somewhere in the 75 to 80 basis points on production.

So I think if we do $1 billion of production I think we should do $7 5 million of pretax.

I think if you take mortgage from 1 billion to $3 billion. I think you probably can get closer to the higher end of that because you can do you can do more things with servicing and MSR Zane and secondary.

<unk>.

And adding a little bit here and there to profitability, but I think for <unk> next year $1 billion should produce.

Somewhere in the 75 basis point pretax.

<unk>.

I think the digital bank.

I have the digital bank is mostly deposit focus.

I think it's going to produce.

A lot of deposits that probably have a cost of funds that might be a touch ahead of.

I had an established core bank.

But it will have no infrastructure.

Very very low opex associated with it.

And so I think the bottom line impact from that will be will be significant.

Got it.

That's exactly I was looking for so I appreciate it.

And just last question for me.

Just kind of more broadly speaking can you speak a little bit to customer sentiment on economic outlook have you seen any incremental change.

Just and talk about customers or customer behavior.

With all the talk of recession was just curious if you've seen.

Any any customers that might be looking at doing an expansion not doing expansion or just even any discussion.

Just anything there.

Hi, Lee.

I think right now.

I'm thinking of a couple of customers that ive spoken to in the last few weeks I think they are probably more.

Just sort of hyper aware of what might be coming I don't think I think this is the investors and bankers and we're all kind of in the same boat I think we are afraid of a recession, but we but we haven't seen all of the.

And yet we're afraid of credit.

Slowdown, but we've not seen anything yet.

<unk>.

We were in our board meeting just last week, we were talking about.

Credit that we resolved in the third quarter.

That.

<unk>.

Quit paying.

LIBOR closed we sold it we got out of the Aladdin.

100%.

That's not really what we are that's not what everybody is afraid that burden bodies afraid of.

Being underwater $10, 20% on.

On credit and that has not happened yet.

Yeah.

That's just not happened yet.

Customers.

Our fright, I think because they've heard stuff on the news, but I don't think they see anything.

I don't see anything anecdotal too.

Sort of guard against.

But yes, they are aware and they are I think.

We've seen some good investors that are commercial real estate investors and customers.

From private equity venture capital people that we bank that are just.

Sort of on the sideline.

They don't know with valuations are coming down.

But I.

I don't know if that answers. Your question is a little rambling gang thing.

Okay.

No I think that answers. It I was just kind of looking for like a broad overview, because thats similar to what I've heard other banks, which is just that.

It sounds like everyones aware and there is the here and what's going on in the news that they are not necessarily seeing.

Seeing anything going on down the street that sounds like that's.

What you said in a nutshell right.

Alright.

Got it thanks for taking all my questions I really appreciate it.

Thank you thanks, Craig Thanks, Brad.

There are no further questions.

I would like to turn the call back over to formal farmer.

I appreciate everybody's attendance today, if you have any questions or comments matter are Matt <unk> will be available.

Just reach out E mail or Calpine, new Google do what we can thank you and have a good weekend.

This concludes today's conference call you may now disconnect.

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