Earnings Call Transcript - FRST Q4 2021

Operator, Operator

Good day, and welcome to the Primis Financial Corp. Fourth Quarter Earnings Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Matt Switzer, Chief Financial Officer. Please go ahead.

Matt Switzer, CFO

Good morning, and thank you for joining us for Primis 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 uncertainties. 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, 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.

Dennis Zember, CEO

Thank you, Matt. And thank you to all of you who've joined our call today or who will listen to it on the replay. I'm delighted to be on the call today with each of you to talk about some significant accomplishments in the current quarter and for the full-year of 2021. As we sit here today, I'm just 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 could reliably and organically produce — could organically 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 shouldn't have considered it anyhow as we work to strengthen our culture and our platform. But here we are two years later. And I'm not calling victory yet with two quarters of good loan growth, but I will tell you it feels different around here. Given the results and the outlook 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, maintain, or achieve 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, at the year-end of $2.26 billion. While this is up only 6% from the end of 2020, it does represent an annualized growth rate of about 20% in the second half of the year. I'm hopeful that with another couple of quarters of growth at this level, we can start redefining ourselves as the growth-oriented company we hoped to be. 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 DC Metro area, and the Hampton Roads area. At the same time, our Panacea division and our brand new Life Premium Finance division are using streamlined technology to identify, underwrite, and close loans in select industries very rapidly. Most of these divisions operate nationally. And I believe they're both going to have an exceptional 2022 and produce results that look good not only on our balance sheet, but more importantly, on our bottom line. The expected loan growth 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 continued growth like we saw this year out of our core bank, but for us to fund our expected loan growth, we're going to need a faster source and the real engine for this is our digital bank. The digital bank is intuitive and modern, and importantly, it has no geographic limitations. Success in the digital bank does not require $10 billion of deposits and hundreds of thousands of customers. We estimate that just $100 million of deposit in this nationwide strategy will produce enough revenue and spread to completely breakeven. Obviously, we believe the strategy has more potential than 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 growth potential around here, and importantly, I would say that on occasion, I have slipped back to my office when Matt isn't working, and I made proforma and pretended to be CFO again. I keep trying to understand and document the cost to acquire business and build a bank using these lines of business, funded by digital strategy. The incremental costs to grow the bank this way are so different, and many times I just don't believe what I'm calculating. I say this right now because we're in the building stage and I promise you that I do a gut check 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 careers have been in that space. And it’s so easy in that environment to have a strategy or a transaction and expect something to be accretive on day one. 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 both 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 V1BE, which is an app that we conceived totally in our bank and developed completely from beginning to end. V1BE essentially takes the few remaining activities that are thought to absolutely require an in-branch transaction and allows the customer to order the service directly to their home or office or current location, normally inside of 30 minutes. We rolled this out in a limited way in Richmond in the fourth quarter. The pilot is three or four months old, and we've received very good feedback from customers. We've opened about $20 million of mostly new checking accounts, all from super-regional banks. I mean, being a community banker myself, I know that many community banks tout their customer service and customer experience relative to the super-regionals as the differentiating factor, the fact that we can move business from one bank to another. But usually that customer experience difference is so nuanced, it doesn't actually move business. I believe this buyback changes that for us and puts us in a competitive position with lots of new customers. Lastly, Primis was like every other employer in 2021 in a very tight labor market. Staffing was tight 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 Primis Works. This program focuses on single mothers 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 had five wonderful ladies who dedicated themselves to learning all the skills necessary for a job in our bank. In return, we paid a competitive wage along with childcare and healthcare costs. This last week, all five of these ladies that came into the program graduated, and I am unquestionably sure that we will now have loyal employees. They are constantly talking about our company and the difference we've made. We absolutely know that we run a for-profit company, and we absolutely know what distinguishes us in the industry and builds market value. But I'm so proud of our staff for finding alternative solutions to problems that make our bank better and serve the community like we did with Primis Works. Be sure to watch our social media and our website for content about this program and the success we will showcase in the near future if you're interested. All right. With that, I will turn it back to Matt for his report.

Matt Switzer, CFO

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 part of the 8-K filed with the SEC. Additionally, our previously announced transaction to exit our common ownership interest in Southern Trust Mortgage was completed late in the fourth quarter. The historical investment in STM has been classified as a discontinued operation in prior period financials; unless otherwise noted, my comments will refer to results from continuing operations. Earnings for the fourth quarter were $7.7 million or $0.31 per basic and diluted share versus $6.2 million or $0.25 per basic and diluted share in the third quarter. Total assets were $3.4 billion at December 31. Gross loans increased to $2.34 billion in Q4 from $2.31 billion in Q3, a strong core loan growth offset the decline in PPP 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 Panacea 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 at $2.76 billion due to the seasonal decline in mortgage escrow-related deposits of approximately $125 million. Excluding the net decline, we would've seen further core deposit growth. Non-interest-bearing deposits are 19.2% of total deposits at year-end and grew 20.3% for the year, while CDs have declined to 13% of total deposits. Also, deposits declined to 39 basis points in the fourth quarter from 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 non-performing assets, less guaranteed portions, decreasing by $1.2 million in the fourth quarter. We also had net recoveries in the quarter of $18,000 with 6 basis points of net charge-offs for the year. Improvement in the operating environment led to a negative provision of $1.3 million and a reduction in the allowance for credit losses to gross loans, excluding PPP, to 1.29% at December 31 from 1.40% at September 30. Our reported margin was 3% for the fourth quarter, up 13 basis points linked-quarter, excluding PPP effects, and core net interest margin increased 13 basis points to 2.79% 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 debt extinguishment this quarter and the effects of STM, which is now recorded in discontinued operations. Non-interest income was largely flat quarter-over-quarter. Non-interest expenses increased by $1.7 million linked quarter, excluding the recovery in reserve for unfunded commitments in both Q3 and Q4. As we discussed in our earnings release and presentation, and as Dennis alluded to, much of the increase this quarter was tied to talent acquisition costs and getting new initiatives off the ground, particularly in life premium finance. We expect much of those expenses to moderate in the first quarter. Additionally, certain expenses related to our growth initiatives, including the new digital bank, Panacea, and Life Premium Finance, will increase in 2022. We've 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're excited by the momentum we have in the bank and the substantial upside we see from our strategic initiatives. We believe we're on the cusp of strong earnings growth, particularly as Panacea and Premium Finance turn profitable this year and begin to generate substantial earnings growth thereafter. With that, operator, we can now open the line for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. At this time, we will pause momentarily to assemble our roster. Our first question comes from Casey Whitman with Piper Sandler. Please go ahead.

Casey Whitman, Analyst

Thanks. Good morning.

Dennis Zember, CEO

Good morning.

Casey Whitman, Analyst

Hi. So maybe we start off. I think in the past you've talked about a third of the growth coming from each of the lines of business. Is that expectations change or is that still how we should look at it?

Matt Switzer, CFO

I think that's still our expectation for this year. Yes.

Casey Whitman, Analyst

Okay. And can you remind us where the yields are coming in from each of the lines between the Panacea life insurance products and your commercial production? Is there a big variance in how those are coming in this quarter?

Matt Switzer, CFO

So Life Premium Finance, the portfolio we ended the year with, which was obviously small, had, I think, the yield on that was about 3.5%. Now that included one of the credits that had a very substantial fee associated with it that was amortizing and adding to that yield. Their production, especially on the variable rate products, is probably in the 2.5 to 2.75 range. So that effective yield will trend down depending on how many fees they get and other factors. But that's what they’re putting on right now and positions us well as prices go up, which we all think they will with Panacea. In the investor presentation for Panacea, their portfolio at the end of the year was weighted average in the low 5, 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 refinance fees and all that. In the Core Bank, I would say our production in the commercials is probably in the high threes. So we feel pretty good about how all those fit together.

Casey Whitman, Analyst

Okay. So would your expectation then be for the core margin to continue to stand here as you put on that loan growth, forgetting about rate hikes for now?

Matt Switzer, CFO

Yes, absolutely.

Casey Whitman, Analyst

Okay.

Dennis Zember, CEO

I would add that when considering everything related to our deposit growth, we see a clear path forward. While the premium finance area, especially variable loans, is slightly below three, when we consider all aspects of our funding growth, we believe the margin we aim to operate the company at is likely in the range of 3.25% to 3.5%. Ultimately, we are confident that our current strategy will place us in that margin range long term.

Casey Whitman, Analyst

Okay. Congrats on the growth. Looks promising then.

Dennis Zember, CEO

All right.

Operator, Operator

Our next question comes from Brody Preston with Stephens Inc. Please go ahead.

Brody Preston, Analyst

Hey, good morning, everyone.

Matt Switzer, CFO

Hey, good morning.

Brody Preston, Analyst

I wanted to start maybe on the digital bank. I appreciate you all putting a target out there of $100 million, and that coming from this year. I wanted to ask what gives you confidence in that number? Why do you pick — what's driving the $100 million, Dennis?

Dennis Zember, CEO

A little bit of laughing in the room right now because Matt and I have gone back and forth and back and forth. Right now, we're — I just want to tell you, but right now we're in the friends and family stage of it. And we're getting very close to the end of it. We're close enough that we are lining up real commercial opportunities just on the outside of this. Two or three — just two or three opportunities here I know of are $13 million, $14 million, and again, it's all checking accounts, it's all low-cost deposits. I think over time, really what drives a digital bank is the technology and the seamless, intuitive feel to it — all that is important. What really drives digital banks, I mean, we can't legitimately expect somebody in Sacramento or Santa Fe, New Mexico to choose our digital bank until they've heard about our brand. So for us, we don't expect or even let ourselves hope 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 is our first target is just to get enough deposit in here as fast as we can to pay for it, and that's the $100 million. I think Matt likes to say I over-promised, he skips to the over-delivered. That's fine. But I think the goal here is that. I think that's our first goal. Pay for this, and $100 million of deposits will do it.

Brody Preston, Analyst

Got it. Okay.

Dennis Zember, CEO

Which honestly is not much worse or much different than a standalone branch. If we were to go just to Raleigh-Durham or go to somewhere out in Northern Virginia. So okay. Anyway, I'm actually going —

Matt Switzer, CFO

Are you going to be rolling out? I guess are you going to be rolling out V1BE as part of the digital banking effort at some point? Like would you expect to kind of set up the ability to deploy V1BE in other markets if you've reached, say you got to $50 million in Raleigh-Durham through this digital bank effort, would you set up the ability to deliver those services via V1BE to those customers?

Dennis Zember, CEO

Yes, absolutely. Instead of — the V1BE with our legacy mobile banking offering, the V1BE functionality is actually in a separate app, but with the new digital offering, they'll be embedded in the mobile banking offering. We can add the ability to turn it off and on. So in markets where — if we're raising deposits and we don't have the service available we'll have to turn it off. But to your point, if we get enough momentum in a market and we think that it would increase that momentum, the technology's designed that it's completely transportable. We can utilize it anywhere.

Matt Switzer, CFO

And low cost. We could probably — we're just using Raleigh-Durham as an example, but we could probably spend next year a $100,000 a year and have pretty much around-the-clock in-person customer service. I think that's a distinguishing factor. That's more about— that's more of 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.

Brody Preston, Analyst

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 have three commercial bankers now. Within that vertical, you've got a great support team that supports the underwriting. How should we think about your expectations for commercial production for that team this year, trying to set aside the student loan refis in the PRN?

Dennis Zember, CEO

Tyler's — I think he 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. Tyler's bankers are coming on and producing almost within two weeks, so they're real fast to being breakeven. I think that's critical for Tyler to capture the value of his brand. If there's one thing — I like what we've done with the commercial bankers and I like how we've moved into that space. But the one thing about Panacea is that the brand that sort of by doctors for doctors, the fact that two distinguished medical professionals are involved in running this business makes a difference, and I think really in the third and fourth quarters their brand and their image started catching on. 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's going to continue to grow his commercial banker rank. I know there's another product or service or two that he wants to add and we're working on that right now, but I'll augment that. And I think what did you put in there for growth?

Matt Switzer, CFO

We've set expectations of $125 million to $150 million for the year. We also disclosed in the presentation the current makeup of the portfolio. Now, understanding that student refis won't really — we're doing some, but it won't become a real, meaningful product until the deferral ends in May, so you only get really half a year of that activity. The PRN loans, the consumer loans are relatively small balance loans. So I would expect a lot of the growth in '22 to skew more toward commercial just because those are larger credits.

Brody Preston, Analyst

Got it. And then on the Premium Finance loans, just a few questions on this: 1. Could you help me understand what the commitments are? I think it was like you've got $13.6 million outstanding with $69 million in commitments? Help me better understand what that means. 2. Are all of these loans a 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?

Dennis Zember, CEO

The reason the committed balance is so much higher is generally the port-like. For these loans right now, this is the first year's premium. The premiums are broken up into three to five-year installments, so you don't actually take down the whole life insurance premium all at one time. The total amount of premium that we would finance if the borrower elects to finance all five of those payments would be that $69 million. So far, it's just the first-year amount of $13.6 million.

Brody Preston, Analyst

Got it.

Dennis Zember, CEO

These are generally Primis yields. So the 2.5% to 2.75% that I referenced earlier, it's Primis. From a reserve standpoint, we're assuming very little in the way of provisioning for these spreads, because to the extent that life insurance cash balance or cash surrender value is securing the full amount, the borrowers are supplying their letter of credit or marketable securities or other cash sources to secure the rest of it. So we're very, very secured on this credit.

Brody Preston, Analyst

Got it.

Dennis Zember, CEO

Matt's going to probably kill me here. But the $69 million or so of committed balances — I mean, the full rate is not a 100%, but it's also not 20%. The $69 million, you could probably expect that good $50 million of that is going to materialize on the balance sheet. I mean, there's some built-in growth here in the next few years. What Matt is going to probably reach over and hit me for is while we only closed these five loans, while we closed these five loans and these five loans had balances, we closed some other loans 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. 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 looking out how Matt and I are so confident that loan growth is going to materialize on the balance sheet, that's part of the reason why.

Brody Preston, Analyst

Got it. And do you know what loan segment the Life Insurance Premium Finance loans went into, what bucket, Matt?

Matt Switzer, CFO

I think most of it actually went into commercial, CNI, and then the rest of it went into consumer.

Brody Preston, Analyst

Okay. Okay. And maybe just, Dennis, in the press release, you noted that you are expecting to fund a wholly-owned solution to mortgage shortly. You put out as little as a billion would add 20 to 25 basis points to the ROA and 200 basis points to the — I'm assuming you wouldn't say shortly if you didn't have something planned. So: 1. Could you give us a sense of how soon you plan to announce something in the mortgage space? 2. If that's currently baked into your expense guidance, the mid-single-digit growth guidance that you all put out? 3. I guess how quickly could you get to that $1 billion?

Dennis Zember, CEO

When I say shortly, I mean I would like for us to do that this year. Right now, we are too much of a spread-oriented organization. Our future strategy uses the Core Bank and the digital bank does not rely on service charges, which I think are going to go away anyhow. We need a non-interest income source. The one we had was fine. It was 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 it. Don't expect a press release in the next couple of weeks. That's not what I was saying. I wasn't really leading anything with that other than wanting investors to know that I know that that's missing, that and some other non-interest income sources. I'm not going to try to — I don't think it's possible to push a 1.5% ROA and a 16, 17 return on tangible capital if you're just doing straight core community banking. The way you get there is with several lines of business that produce outsized earnings relative to their assets or the leverage that's as required. I know that that's first. The $1 billion really is Matt and I looking at what the core bank with all these strategies we think can produce ROA wise and where we — in order to get to some of our targets, what kind of production do we need? 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 I was maybe putting that out there that that's probably what we would be looking for. I’m hopeful that timing may 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 for 10 times book in times earnings. I don’t know, some probably do. But I think Matt will be able to find something that's right for our organization that quickly accretive to everything that we would want it to be. I think another question was if it's baked into earnings — nothing's baked into it.

Brody Preston, Analyst

Okay. So it should be clear this is — this would be something that if the right company comes along on the mortgage side, you would look to do again to do tuck-in acquisition and make it your own. And the billion number is what you think you would need to achieve the financial targets. Do you have in mind that?

Matt Switzer, CFO

Yes.

Brody Preston, Analyst

Okay. And then last one for me, just on the branch consolidation, I just wanted to confirm, the $1.5 million that's realized in 2022. Does that mean that there's another $1.5 million that's coming through in the first half of '23, Matt, or would you just expect the 4Q run rate to have all of the cost savings baked in, but that results in half of it being realized in '23?

Matt Switzer, CFO

Yeah, it's the latter. So most of these principal savings won't show up until the back half of this year. So by the fourth quarter, the full run rate should be in then.

Brody Preston, Analyst

Awesome. Thank you very much for taking my questions. I appreciate it.

Dennis Zember, CEO

All right. Thanks, Brody.

Matt Switzer, CFO

Thanks, Brody.

Operator, Operator

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.