Primis Financial Corp. Q1 FY2022 Earnings Call

Good day, and welcome to the Primis Financial Corporation First Quarter Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Mr. Matt Switzer, Chief Financial Officer. Please go ahead, sir.

Good morning, and thank you for joining us for Primis Finance Corp.'s 2022 first quarter webcast and conference call. Before we begin, please note that many of our comments during this call will be forward-looking statements, which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. 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, www.primisbank.com. We undertake no obligation and 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 Zember.

Thank you, Matt, and thank you to each of you that have dialed in this morning or chose to listen to this on replay. I'm very grateful for your interest in our company and what we're going to discuss today. There are several things I'd like to highlight today in our announcement and in our press release. The first is our mortgage announcement. We have not been too coy over the last couple of years about the fact that we want to add a mortgage solution to our company to help boost operating returns and earnings growth. SeaTrust was a great option for us for several reasons. Most importantly, the purchase price is small. The intangibles associated with this are really almost negligible. The company SeaTrust is operating at better than breakeven with just $25 million of monthly volume and their recruiting pipeline promises that we'll be able to ramp that production to levels that we need. Our short-term goal with SeaTrust, renamed Primis Mortgage, is to build production to a level that we can expect about $1 billion to $1.2 billion in 2023, which we expect would add 20 basis points to our return on assets and about $0.25 to earnings per share. Secondly, we've had very strong growth in loans in the first quarter, which is normally a slow quarter for us. One of our bank's biggest overhangs over the last few years has been really slow to no growth in the balance sheet. And I believe we're just another quarter or two from putting that behind us for good. We've issued pretty strong guidance for what we expect on loan growth this year. And given the kind of start we had and our pipelines and momentum, I feel very good that we're going to impress our investors with what we accomplished this year, and we're going to redefine ourselves as a growth company. Our growth in loans was across the board. Our lines of business are complementing the core bank very well. Panacea has built a real brand that is producing good deal flow and growth at the pace that we need to hit our targets. Right now, we're tracking towards about 1,000 doctor applications a month from all 50 states that we expect sometime in 2022, and with our new mortgage solution, I believe that's a real possibility. Most importantly, Panacea has turned profitable even with the build and staff and marketing costs, and I think 2022 is going to end up being a great year for this division. The Life Premium Finance Group is just as impressive. They've onboarded dozens of insurance carriers and just as many top-tier brokers and agencies. Our turn times are hovering around 20 days with systems that are technology-oriented and digital. At the end of the quarter, we saw weekly applications more than triple what they were at the beginning of the quarter. And so we're expecting a really big second quarter and a strong second half of the year, really when the majority of insurance premium finance occurs. We're so close to being live to the public with our digital bank, and because of that, we've ramped up our efforts at finding ways to leverage that platform. Obviously, we intend to market the solution in our existing markets and more broadly but the faster approach that we are chasing is to find other fintechs and financial concepts that need a progressive banking solution for their customers. We've got several of these concepts on the hook and using our Panacea blueprint, we believe we can be up and going quickly for these firms and then profitable for our shareholders very fast. We hope to have some good news on this soon, maybe by the end of the quarter. Lastly, a quick comment about our results before I turn it over to Matt regarding our operating ratios. I see our ROA and I see our efficiency ratio and the only thing that keeps me cool and calm when I'm in Matt's office is knowing what we're building. The fact is we're a $3 billion bank. We're not $30 billion. At our size, anything more than a new branch in an obscure location and some tertiary market is going to be a noticeable drag on earnings. Our stock price just won't allow us to buy our way into profitability and EPS growth. So instead, we've built some very impressive growth engines on our own. I fully expect that as we move forward, both of these lines of business and anything else we do is going to contribute significantly to earnings. And at maturity, these two lines of business should be operating in the high 30s, low 40s on efficiency ratios and contributing about $0.50 per share annually to earnings. Of course, both of these lines of business produce superior asset classes that will change our credit risk profile materially. So I'm energized about what we're building and the future impact it should have on earnings and operating ratios. So with that, I'll turn it over to Matt for a discussion on our results.

Thank you, Dennis. As a reminder, a full description of our first quarter results can be found in our earnings release and first quarter earnings presentation, both of which can be found on our website. Earnings from continuing operations for the first quarter were $4.6 million or $0.19 per basic and diluted share versus $7.7 million or $0.31 per basic and diluted share in the fourth quarter. Excluding one-time items, earnings in the first quarter were $4.7 million or $0.19 versus $7.2 million or $0.29 in the fourth quarter. Total assets were $3.22 billion at March 31. Gross loans increased to $2.39 billion in Q1 from $2.34 billion as strong core loan growth offset the decline in PPP balances. Excluding PPP loans, loan balances grew 4.4% linked quarter or almost 18% annualized. Growth came from all parts of the organization in the first quarter, including almost 11% annualized in the core bank. Panacea and Life Premium Finance had particularly strong starts to the year and accounted for approximately 40% of our loan growth in the quarter. We have a lot of momentum currently and are anticipating continuing this robust growth through 2022. Deposits decreased slightly in the first quarter to $2.69 billion, largely due to a mortgage-related deposit that shrunk by a little over $100 million in the quarter and is expected to rebound in the second quarter. Excluding that decline, we would have seen further core deposit growth. Noninterest-bearing deposits are almost 21% of total deposits at quarter end and continue to be a focus, while CDs have declined to 12.6% of total deposits. Cost of deposits declined 35 basis points in the first quarter from 39 basis points last quarter. 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 SBA guarantees roughly flat in the first quarter, while substandard loans declined materially largely due to the upgrade of one relationship. Net recoveries were $175,000 for the first quarter, robust loan growth and, to a lesser extent, slightly weaker economic outlook led to a provision for credit losses of roughly $100,000 versus recovery of $1.3 million in the fourth quarter. The allowance for credit losses to gross loans, excluding PPP balances decreased to 1.24% at March 31 from 1.29% at December 31. Our reported margin was 2.96% for the first quarter, down four basis points from the fourth quarter. But excluding the effects of PPP, net interest margin increased 17 basis points to 2.96% 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 this liquidity. Noninterest income was down quarter-over-quarter to $2.1 million from $2.3 million last quarter, excluding a one-time gain. We are excited for SeaTrust to join us in the second quarter and look forward to higher noninterest income levels moving forward. Noninterest expense increased $83,000 linked quarter, excluding the expense or recovery in reserve for unfunded commitments. As we discussed last quarter, talent acquisition costs and start-up costs for new initiatives moderated in Q1 as expected, but were offset by planned expenses for growth initiatives. Our operating efficiency ratio this quarter was approximately 76%. There are a number of reasons why we feel confident that this ratio will be materially lower in the near future. Panacea and Life Premium Finance are approaching breakeven faster than anticipated. Panacea, in particular, was pre-provision profitable in March, and we expect Life Premium Finance to be the same early in the second quarter. As discussed, we have planned for branch consolidation this year with six branches planned to close in the second quarter and another two in the third quarter. This should generate on a run rate basis, roughly $3 million in savings with about $1.5 million of that realized in 2022. If we adjusted for the impact of Panacea, Life Finance and our digital bank and recognize our full expected branch cost saves, our Q1 efficiency ratio would have been approximately 60%. Lastly, we have seen good margin expansion and sustained loan growth changes our earning asset mix, and we expect this to continue and benefit the efficiency ratio going forward. Pre-tax pre-provision operating ROA was 77 basis points in the first quarter. Similar to the efficiency ratio discussion, we are confident pre-tax pre-provision ROA will see meaningful improvement in the near future. With the same adjustments as noted before, related to business lines and branch savings, pre-tax pre-provision ROA would have been approximately 1.2% in the first quarter. This does not include any ROA pickup, as Dennis highlighted, from our new mortgage acquisition. With that, we are excited by the momentum we have in the bank and the substantial upside we see from our strategic initiatives and we believe we are on the cusp of strong earnings growth through 2022 and thereafter. With that, operator, we can now open the line for Q&A.

The first question will come from Casey Whitman with Piper Sandler. Please go ahead.

Maybe if we could start with just digging into some of the details around the mortgage company. How big is the current team there and is it largely through hiring on that team that you expect to drive, I think you mentioned like $1 billion in volume in 2023. I guess how big of a team do you anticipate getting to?

Right now, they have about 70 employees. They've got probably 25 or 30 producers. The bank that they've come from, or that we're buying them from, has really put the brakes on recruiting. And so they have a substantial recruiting pipeline that they've sort of been nursing along waiting for this announcement. So that's one of the reasons we have a little bit of confidence as to growing the production base. They really operate mostly in North Carolina, Florida, and Tennessee. So we think right now, we probably pass off somewhere between $6 million to $10 million of mortgage opportunities that we find in Panacea. We probably pass off another $5 million or $6 million, maybe $10 million out of our core bank. And those we pass along to Southern Trust, who's been a fantastic partner for us. And I mean the folks at Southern Trust are not surprised at all that we're doing this. So I think between what we can do out of Panacea and out of our core bank, plus some of the recruiting that's sort of been on hold, that's kind of what powers our enthusiasm on this, Casey.

Got it. Is SeaTrust largely a purchase shop and maybe help us out with kind of what gain on sale margins look like I guess, just sort of trying to get to what the sort of revenue expense contribution would be even in the near term when you're sort of breakeven in that business?

They are about 70% to 80% purchase volume right now. And they have been designed or set up in their short history to focus on purchase. So that's been their predominant source of volume. Their gain on sale margin, including hedges, is in the low 3s, and that has not included the benefit. So they are Fannie direct approved, and they just got their FHA approval. So that's all really brand new. So they haven't gotten the full benefit of those margins yet. So we should see a little bit of margin expansion here in the short term.

Okay. Switching gears, just thinking about the deposits, just given all the efforts you've made to sort of transform the deposit base, the launch of the digital bank, etc., how should we be thinking about your deposit betas and how that might fare with the rising rate cycle and just more generally about your asset sensitivity here?

We are definitely asset sensitive in the short term, especially with all the cash on the balance sheet. As opposed to relative to deposit betas, I can circle back with you on the assumptions we've got by deposit type. We feel particularly confident that we're going to be able to lag deposit costs like most of our peers for the first couple of raises and then it's going to depend on what the Fed does in the back half of the year.

Understood. I'll ask one more and let someone else jump on. But just given where the stock is trading today, weighing this against sort of all your growth expectations, I mean, is there any appetite or potential to buy back your stock here?

If we didn't have the confidence we have in Life Premium Finance and Panacea, we might consider that. I believe that our primary bank in the market we serve could grow by 10% or 12%, but with Panacea and Life Premium Finance, we have $1 billion ambitions for both areas. I don’t think it’s wise to reduce our capital levels. One reason for this is that we appreciate the mortgage company for its return on assets. We don’t aspire to be a small bank solely focused on mortgages; rather, we want to be a bank complemented by a reasonably sized mortgage company, valuing its earnings contribution and capital growth. Matt and I are currently aware that these two lines of business are in play, and it seems like each week brings a promising fintech idea that seeks to replicate our success with Panacea and Life Premium Finance. Therefore, I believe it's wise to maintain our capital.

100%. I mean we would be buying the stock all day long if we didn't think we were going to need that capital here pretty soon. But it's expensive to issue capital, even though we know it would be at a higher price when we get there. But we need to keep that capital for now.

Next question will come from Feddie Strickland with Janney Montgomery Scott. Please go ahead.

So Panacea seems pretty steady growth in past several quarters here. And I know you guys talked about pipelines in the lease. But just kind of wondering, where do you see that overall business in the next 18, 24 months and what's kind of a realistic size for the portfolio overall?

For Panacea specifically?

Yes, just for Panacea.

In our last quarter, we guided for Panacea. They ended 2021 with a portfolio of about $50 million, and we projected their loan growth this year to be between $125 million and $150 million. This would place them at around $200 million by the end of this year. Based on current trends, we are very confident that they will reach the upper end of that range, and there is a strong possibility that they could exceed it.

Yes. The Panacea concept started with just one small unsecured consumer loan, and we are continuously adding more products and services. Everything is digital and designed for quick customer identification, processing, underwriting, and funding in a very fast manner. We're focused on building the brand while expanding our offerings. Tyler is discovering significant opportunities for us. For instance, we currently do not have a mortgage solution in Panacea, but that is on the horizon. Once we introduce this mortgage solution, the potential is limitless. Additionally, we do not have an SBA solution in Panacea, but Tyler is actively seeking one. When Matt provides guidance, it reflects the products and services we currently have. As we continue to add more offerings and achieve similar levels of customer engagement and adoption as we've seen with our commercial and consumer products, I believe the possibilities are endless.

Got it. And then on the deposit side, how much of overall deposits are related to Panacea?

Currently, the impact is small. In Matt's investor presentation, we discussed customer adoption rates for checking accounts. On the commercial side, the results are strong; we are successfully selling and securing decent deposits through treasury services. On the consumer side, adoption is good, although the balance growth hasn't been significant. It's important to note that the consumer aspect of Panacea primarily targets fourth-year medical students, fellows, and residents, who are not yet in their financial prime.

I think at March 31, they had funded about 10% of their balance sheet and that's with good penetration in terms of deposit counts and increasing penetration on treasury services. So we think that funding percentage for them specifically should go up over time.

Got it. And then just one last one for me. I was just wondering if you could elaborate a little bit more on what kind of opportunities you see? I know you just joined the USDF consortium, but just kind of what opportunities do you see there and how that could help the bank.

Yes. I'm not sure how familiar everyone is with USDF, but this is an early-stage technology that uses blockchain to facilitate money transfers for payments or peer-to-peer and business-to-business transactions. If you consider the costs that merchants incur to accept cards like Visa, Mastercard, and Amex, and the delays associated with ACH transfers, there is significant disruption happening in the payment industry, presenting numerous opportunities for change. We are excited to be involved with USDF, as we believe its foundation will be beneficial when we fully launch it and implement our initial use case, which will be focused on payments. Other banks in the consortium are exploring peer-to-peer applications and additional use cases. The deployment potential is enormous, but we want to emphasize our small business initiatives. We think employing this technology to reduce the costs merchants face when accepting payments will give us a competitive edge. We are working diligently to integrate this into our digital banking services. For example, if a merchant currently pays over 300 basis points to process payments at the register, with this system, it could drop to as low as 100 basis points, with instant processing. This technology is compelling and could greatly benefit us when approaching small business clients and encouraging them to choose our bank. While we are still in the early stages, we are enthusiastic about the opportunities ahead.

Next question will come from Todd Porter with Primis. Please go ahead.

Hi, it's Todd Porter, my wife is Georgia Dariko. We are the founders of the bank, which became Primis. Together, we own 456,000 shares outright and control another 100,000. As a result, we have a greater loss on Primis than the Board as a whole, and we had concerns that we've discussed with Dennis. We've remained quiet, hoping the bank will improve, but our main concern is that there seems to be a lack of attention given to this issue.

Our next question will come from Samuel Varga with Stephens. Please go ahead. Pardon me. It seems that Samuel has disconnected. Our next question will come from Brody Preston with Stephens Inc.

So I thought it was a pretty strong quarter, guys, as it relates to growth, and I think you're clearly on track to achieve the things that you want to achieve in the back half of this year and 2023 as it relates to improving your profitability. So I guess, Dennis, I wanted to ask you, within the press release, you mentioned the recruiting ops on the mortgage side and mentioned the significant earnings and ROA contribution you expect in 2023. So let me ask a couple of questions here. Are we talking team lift-outs and what production levels are you targeting for 2023?

Yes, we would definitely consider team lift-outs if possible. However, we would also be satisfied with smaller additions. At this early stage, I believe it's important to take our time and not rush into things. The platform we acquired for $25 million is currently breaking even because they have been cautious in building up the infrastructure. I want to ensure we don't move ahead too quickly. However, as we progress through the year, successfully build out the platform, and enhance our recruiting efforts along with our brand recognition, I anticipate larger team lift-outs will likely happen, probably next year. I am optimistic about reaching $1 billion or $1.2 billion in total production for the upcoming year. Conservatively, I believe we can achieve 60 basis points of that in after-tax profit, considering the impact of Fannie and FHA as well as the cost controls we have in place. This leads me to expect 20 basis points in return on assets and 25 basis points in earnings per share.

Got it. And maybe just given that you're one of the primary architects of a highly efficient mortgage operation in your last bank, do you have an efficiency ratio target in mind for Primis mortgage, Dennis, over the next couple of years?

I would like to see the efficiency ratio in the low 60s because we need to be diversified. We need to excel in servicing and subservicing, as well as in portfolio products. There is still progress to be made, but I believe we will likely remain in the upper 60s or low 70s until we reach $1 billion or $2 billion. I appreciate the question, and when I consider what we have combined with our initiatives in Panacea and Life Premium Finance, I think that, from an efficiency ratio perspective, the consolidated company will continue to deliver impressive results.

Got it. Okay. And then are there any synergies between Panacea and Primis mortgage and are those included within that 2023 $1 billion to $1.2 billion coordination target?

Right now, Tyler is passing all of his mortgage opportunities on to another bank. These opportunities are ones he just happens to find, not ones we are actively marketing. There is nothing on our Panacea website or in our promotions related to mortgages. Once Tyler starts marketing this as an active product, I believe he could be a significant contributor to our mortgage efforts, based on what he has already accomplished.

Got it. Okay. And then just while we're on Panacea, I think you've had pretty good penetration as it relates to DDA and treasury management. Could you give us a sense for what the treasury management fees will look like for Panacea?

The fees from Panacea?

On the treasury-managed side specifically, Dennis.

Yes, it may not look very impressive because we lack physical infrastructure. We are passing a lot of those savings on to the customers. There will be some fees, but they will not significantly impact the results.

Got it. Okay. For the Panacea consumer applications, is the split similar to what we see in the first quarter originations, around 50-50, and what is the average split for each product?

What was the question?

The consumer applications, if we reach 1,000, will primarily consist of PRN loans. I would estimate that around 100 of those will be mortgages. The average loan amount is likely between $30,000 and $50,000, with yields around 7% to 8%. Out of the 1,000 applications, approximately 10% to 20% would likely be mortgages, around 20% would be for student loan refinancing, and the remainder would be PRN loans.

Got it. Okay. And then do you have any line of sight on what Premium Finance growth could look like in the second quarter then?

Yes, I do. Matt prefers I don't say too much, but I want to take a moment to address our Life Premium Finance division, known as Panacea, and the other initiatives we've been developing for two years to cultivate a dynamic culture and a growth engine. The Life Premium Finance division embodies this vision. I believe this business can potentially reach $1 billion, achieving around 1.5% return on assets with low-risk investments. It's remarkable that our company has the capability to establish something like this from the ground up. If you think we can create organizations with such promise and potential without facing a couple of challenging quarters, that might be an overestimation of the hurdles we face. We're not at $30 billion just yet. I don't mean to go on too much, but this division can indeed reach $1 billion with a 1.5% ROA. I anticipate they might achieve around $70 million to $80 million in the second quarter. It should be profitable cumulatively by June, which is quite impressive for a product like this in just six months. I believe we can reach that milestone by mid-year. The second half of the year will likely see the majority of Life Premium Finance underwritten and recorded. As we approach the end of the year, I am confident that the perception of our company as slow-growing will be a thing of the past. It seems like you anticipated this question, so thank you.

I guess, turnaround efforts take time, Dennis. So I completely understand that, especially given what you inherited. My last question would just be on the branch closures. I wanted to ask if any of that was going to fall into the bottom line in the near term or net of official plans on those getting reinvested?

No, we expect that to impact the bottom line mainly in the latter part of the year. As we indicated last quarter, the first half of the year will be a bit challenging until the consolidations take place, but we anticipate expenses to level off in the latter half of the year.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Matt Switzer for any closing remarks. Please go ahead, sir.

We appreciate everybody's time and attention this morning. If you have follow-up questions, feel free to reach out to Dennis or me. Have a great weekend. All right. Bye.

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