Primis Financial Corp. (FRST) CEO Dennis Zember on Q2 2021 Results - Earnings Call Transcript

Primis Financial Corp. (NASDAQ:FRST) Q2 2021 Earnings Conference Call July 30, 2021 10:00 AM ET

Company Participants

Matt Switzer - Chief Financial Officer

Dennis Zember - President & Chief Executive Officer

Conference Call Participants

Casey Whitman - Piper Sandler

Brody Preston - Stephens Inc

Christopher Marinac - Janney Montgomery Scott

Ross Haberman - RLH

Operator

Good day, and welcome to the Primis Financial Corp. Second Quarter Earnings Conference Call. All participants, will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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

Thank you, Sean, and good morning, everyone, and thank you for joining us for our second quarter earnings 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. These factors are 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 we specifically disclaim any obligation to update or revise forward-looking statements to reflect change the assumptions, the occurrence of unanticipated events or changes to future operating results over time.

In addition, some of the financial measures that we made discussed this morning are non-GAAP financial measures. 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

Thanks, Matt, and thank you to all of you who have joined our call today. We had a good quarter on several fronts and some really positive items ahead of us. We've also have some challenges that we can discuss here. But even those challenges pale relative to the opportunities that we all believe this franchise has going forward. Matt's going to get into the details about the quarter, and about the numbers. But at a high level, we earn $0.42 per share this quarter, which was roughly 10% higher than the same quarter -- than what we earned in the same quarter a year ago.

We've grown total assets to about $3.4 billion, mainly through very successful efforts on deposit levels. At the end of the current quarter, total deposits were $2.8 billion, which only included $388 million of CD. In the last year, we run off about 40% of our CD portfolio, pretty much all of our brokered and national CD and replace that with about $800 million of growth in transaction accounts. I know the industry is awash in liquidity and that trend has definitely held. But our work on training, sales incentives, new products and services and adding additional staff has had a tremendous impact on our deposit levels.

I'm very thankful, very grateful for the team that we have here at Primis for they're absolutely drive to be champions and the results that we're getting across the board. The quality of the team here, their results, their early results give me a lot of confidence that the results that we're seeing are sustainable.

The success on growing deposits and building our funding base has led to what is currently our biggest challenge. We finished the quarter with about $850 million of very low yielding short-term assets, which include our PPP portfolio. Deploying that in the current environment has not been easy, but we've started to make some headway and the second half of this year will be noticeably better with respect to loan growth.

Our pipelines and our commercial bank are higher and our pipeline and panacea is building very nicely with their recent move into commercial. We are still recruiting where it's possible. But the growth that we expect in the second half of the year and in 2022 has very little incremental operating expense behind it. So we expect really impressive operating leverage in the coming quarters.

Lastly, and really before I turn it back over to Matt, we continue to work towards a fourth quarter launch of our digital bank offering, that's focused on commercial and consumer checking accounts, at least initially. Our team and our partners are very close to the testing phase of the project and we are still targeting a complete project that we can go live with during the fourth quarter.

There are some elements of our work on this digital bank that are actually just a few weeks away from a lab test with elements of our existing customer base. This test will prove in a real world environment, if the features and the hooks as we like to call them are actionable, if they're meaningful enough to move business from one competitor bank to perimeter, which obviously is our goal.

I'd like to take this opportunity to say one more thing about our vision for digital. The biggest misperception is that we are going all digital, and basically going to abandon our effort to build an impressive growth and profitability machine out of this existing franchise. And that's just not true.

Everything that it takes to build a legacy franchise with the growth and profitability to earn high multiples, we're going to do. Our digital bank will just compliment our core bank, not replace it. It will further augment our future growth and I absolutely unquestionably believe that.

Traditional bankers, which I am born have suddenly dismissed digital bank efforts because they seemingly focus too much on interchanging income or low balance millennials like my two young son. Planning an entry into this space is critical. It's absolutely critical. But it's also terrifying because there are untold millions of fees and service charges in the legacy bank system that we all know cannot materialize in the digital world.

The only way to avoid that is to run a parallel brand. And you're talking about companies that have decades and centuries, building brand loyalty, and bulletproof damages. Our focus, our vision is to focus elsewhere. We've looked at our core customers, and we've talked to them endlessly. We've gained real insight into what would start to move them from valuing the branch to valuing a digital platform.

Because we're looking to augment our core bank, we will only be using one brand, which is Primis, which we believe is very unique in our industry. And let's be honest, no one, everybody operating in this industry believes that future growth in earnings and balances will progressively be left centered on branches were built in the traditional fashion. We are confident that our efforts are perfectly timed to drive value in the core bank right now, and be ready for where we all know the industry is going into the future.

All right. With that, I'll turn it back to Matt for an update on the quarter.

Matt Switzer

Thank you, Dennis. Earnings for the second quarter were $10.3 million or $0.42 per basic and diluted share versus $9.4 million or $0.39 per basic share and $0.38 per diluted share in the first quarter. Total assets grew to $3.4 billion in the quarter, gross loans declined to $2.29 billion in the second quarter from $2.39 billion in the first quarter due to the decline in PPP balances. Excluding PPP loans, loan balances were essentially flat in the second quarter.

Deposits increased 2.3% versus the first quarter to $2.75 billion. As Dennis mentioned, we are proud of the progress we've made on improving our deposit mix and improving our core deposit funding. Non-interest bearing deposits are over 19% and time deposits are now less than 15% of total deposits. Liquidity continue to build an impact our results with cash and equivalents reaching $621 million at quarter end versus $480 million at the end of the first quarter. We've added some to the securities portfolio in the quarter, but do not currently intend to aggressively buy securities in anticipation of loan demand increasing in the coming quarters.

As Dennis alluded to pipelines have grown particularly later in the quarter, which gives us confidence that we will be deploying this cash in the near future. We have $240 million of PPP loans remaining and continue to work through the forgiveness process with customers. We recognize $1.8 million of net PPPs in the second quarter versus $4.9 million in the first quarter. As of June 30th,we have $5.2 million of net deferred fees remaining to be recognized.

Credit quality remains good with non-accrual stable and OREO balances continuing to decline. Losses remained muted with net recoveries in the quarter of $587,000. COVID-related deferrals declined to $26 million from $113 million at the end of the first quarter as expected, with substantially all of the remaining loans on deferral anticipated to be off by the end of the third quarter.

Improvement in the operating environment and reduction in loan deferrals led to a negative provision for the quarter of $4.2 million versus a negative provision of $1.4 million in the first quarter. The allowance for credit losses to loans excluding PPP balances is 1.52% at June 30th versus 1.7% at March 31st.

Our reported margin was 2.8% for the second quarter, down 61 basis points from the first quarter. The biggest driver of the change was the decline in PPP fee income in the second quarter. Excluding the effects of PPP, net interest margin declined 22 basis points to 2.77% in the second quarter.

Essentially all of this compression was due to higher average cash balances in the quarter. While the level of margin compression we've experienced over the past year has not been fun, we know this liquidity will be put to good use. As noted above, we're excited to see pipelines building and fully appreciate that the operating leverage as we deploy this cash is significant.

Non-interest income increased $677,000 in the second quarter, largely due to an increase contribution from our equity investment in Southern Trust Mortgage. Non-interest expense declined $783,000 in the quarter. Excluding the decline in the expense related to the unfunded commitment reserve, non-interest expense decline $220,000 in the second quarter. We closed one branch location in April and we'll be closing another location in August. We continue to be focused on managing expenses while building the capabilities and resources to manage a much larger bank.

I will now turn the call back over to Dennis.

Dennis Zember

Well, let's turn it back over for questions if we have any questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today will come from Casey Whitman with Piper Sandler. Please go ahead.

Casey Whitman

Hey, good morning.

Dennis Zember

Hi, good morning.

Casey Whitman

First, thanks, thanks for hosting call this quarter. Very helpful. So, first, you talked about the pipeline improving, so -- now how should we think about the pace of loan growth over the back half of the year? Are we talking low, mid, high single-digits? And then also, did you expect Panacea to become like a meaningful contributor this year, or what sort of reasonable expectation for growth there over the next several years?

Dennis Zember

Yes, I think -- on a consolidated basis, I think, Matt and I were doing some reconciliations this morning. I think probably building to sort of an annualized pace of loan growth, maybe in the 15 -- 10% to 15% range. So I think, I don't know that we'll be there by the end of the year.

But I think we can probably be on a -- annualized pace so maybe 10%, which may not seem like it's going to absorb all this liquidity as fast as we want it to. But again, we've gone three years or four years here, really without any loan growth and, you know, we're just trying not to learn or have our people learn at deals to put your money to work.

And as far as Panacea -- one more times -- as far as Panacea -- your question on Panacea, I think, the -- and again, that answer I just gave you may change. To be something higher, Panacea, initially came out, we were doing consumer unsecured mostly. We started doing student loan refi that was definitely creative to their growth and now we've moved into the commercial side and that's, use this word carefully, that's wildly accretive to their growth rate.

And, and so far, very, very widely accepted from the [indiscernible] calling. So I think we want to give that another quarter or so. And really, in the pipeline, there has grown nicely because of that, let's close some of those loans and sort of see what we're booking and I think we might have a different story, really with respect to total loan growth maybe even a quarter from now take it.

Casey Whitman

Okay, okay. Makes sense. All right, so sounds like you're feeling good, though about the talent you have to drive the loan growth. So curious how you're thinking about the second quarter expense level? Do you think you can hold the expenses at around 17.5 million, or are there I guess some incremental expenses related to the opening of the digital bank that we should consider, or is this just a good rate given your growth expectations for expenses?

Matt Switzer

I think -- Casey, this is Matt. 17.5 million is still a pretty good number for the next quarter two. We've got some incremental expenses that will start to come on from the digital bank really more in the fourth quarter than the third quarter. But at the same time, some of the positive incentives that we've talked about the last quarter or two will really start to decline, less so in the third quarter because of there's a lag effect to them, but more of a decline in the fourth quarter related to that. So that offset some of it. So there will be some movement in some of the different line items, but overall, that is 17.5 plus or minus is still a pretty good number.

Casey Whitman

Okay. Sounds good. Just one more, sort of, modeling question. What was the – do you have the accretion level that you guys book this quarter, is similar to last quarters level? My last…

Matt Switzer

The accretion is close, yes -- 581,000. Last quarter, it was 481,000.

Casey Whitman

Perfect. Perfect. And my last question will be just do you have the amount left in deferred origination fees for the PPP program?

Matt Switzer

Yes, it's 5.2 million.

Casey Whitman

Awesome. Thank you guys for the -- for hosting the call. We appreciate it.

Matt Switzer

All right. Thanks, Casey.

Operator

The next question today will come from Brody Preston with Stephens Inc. Please go ahead.

Brody Preston

Hi. Good morning, everyone.

Matt Switzer

Good morning.

Brody Preston

Yes, I want to circle back to Panacea. So just with the shift in the commercial that you all are executing on right now. Just maybe could you talk a little bit about how quickly you could see that that effort kind of ramp, the gentleman you hired from Wells Fargo just thinking about his ability to bring on relationships and anything related to a non-compete. So just how quickly you in that commercial effort to ramp from here?

Dennis Zember

Yes. Let me say this way, he’s been here a month, Board a month, maybe, maybe a week or two longer than that. I mean, his pipeline, I don't want to say the number. I don't want to say the exact number of his pipeline. His pipeline ramped extremely fast. Okay? That you kind of expect that when you bring on new people, but the first three or four things he put on his pipeline are closing here in the next two or three weeks. Oh, man, I think he's probably had a 75% hit rate on the first few things he put in his pipeline.

I think the bigger -- I’m pretty confident nobody in Wells Fargo is listening, but the bigger opportunity, yes, I mean, he is bring in customers and he’s bring in relationships, he's bring a referral sources. I mean, those are all critical in his growth and his success here.

I think the other thing is, his ability to influence other healthcare bankers, I mean, that's, that's a -- those are niche lenders. I mean, those aren't generalists. It's -- those niche lenders that are doing warehouse lending and niche lenders that are doing equipment lending. And he's pretty well known in the industry, his ability to influence some of those, especially these successful booking deals, is it's going to be meaningful. I mean, I it already has been. I think we could probably finish the quarter with another couple -- another one or two commercial oriented healthcare lenders.

In a commercial, it's still -- it is still of guerrilla warfare. It is still a lot more human and relationship oriented. A lot of the other stuff we're doing in Panacea is digital oriented. Its social media drives a lot of this. The social media and sponsorships with organizations drive the volume there. But on the commercial side, its still banker oriented. And we -- right now, we think we might have struck gold with the first commercial banker we brought up.

Matt Switzer

And Brody, just to clarify, he does not have a non-compete.

Brody Preston

Okay, great. Don't want those folks from Wells coming down on you.

Dennis Zember

We have – we’re going to have to not -- we’re not publishing this script.

Brody Preston

So you gave the stat just around the penetration on a checking account spent about 45%, which I'm assuming is mostly consumer, this point just given what the products that was at Panacea, since it's been open. But I wanted to get a sense for how that penetration rate might change. You expect to kind of see a similar level of account opening and deposit growth in the commercial side, just trying to get a sense for how the commercial side will shape up from a deposit perspective?

Dennis Zember

Yes. That likely, I would expect, Tower [ph] was here, he'd be like we're getting, but I would -- until we're able to roll out the digital bank. And again, focus -- having the digital bank focused on commercial one and that's unique. But having the digital bank focused on commercial with commercial products and services and tools and access is important will drive -- will better position us to get the deposit side of some of these relationships. I mean, we're coming to them sort of in a digital framework a little bit on the loan side, I don't think it's going to be a hard sale to win them over on the deposit side, but I've got to come to them with something that's competitive and convenient and reliable. And that's really what's not -- I don't believe that's existing. I don't believe that exists in this space. I mean, I think there's -- there are commercial enterprises that bank digitally. But the commercial enterprises that sort of bank locally and bank with a branch and bank with a banker, moving those into a digital environment, I don't think the products and services that are in this space are compelling enough right now to do that. We're hoping to change that.

Brody Preston

Okay. Understood. I guess, maybe just one more on the on the NSE and the digital bank. Understanding that the digital bank still hasn't launched yet, but Dennis since you come in, you've kind of quickly launched two kind of nationwide initiatives between the Panacea partnership and getting ready to launch this digital bank later in the year. So maybe if you can provide some color on your willingness or your desire, maybe to launch -- I guess, maybe move Primis into other nationwide niche verticals, if you will?

Dennis Zember

I mean, we see a lot of value there. I think to the degree that we can kind of look beyond our existing footprint, I think we can maybe more cherry pick and we've got limited capital, I mean, I can't grow to $30 billion, with what we have right now. So we've got limited capital. We're going to deploy that capital, I feel like the safest way is to pick niche, asset classes and verticals and ideas, one that will grow market value, for sure will not be diluted to market value. And those are -- if I can cherry pick healthcare assets, if I have to only cherry pick those in Northern Virginia and DC and Southern Maryland and Richmond and Tidewater, I mean, that's difficult.

Now, all that being said, we are mildly attentive to our core value right now. And our core value is a legacy footprint, we're not abandoning it, we're not stripping it down, we're not closing all of our branches, we're not sort of running away from these customers who are more legacy oriented. So I think what we want to do is just be ready for -- I don't know that even that the mainstream of banking is ready for all digital, that sort of not focused on low balance millennials, so to speak, but we think it's going that direction and we want to be ready.

Now, that being said, one more caveat, I think you've got $800 million or $850 million of liquidity. We're still growing deposits faster than loans. And I mean, we're going to have a good second half of the year on loan growth. But I don't Matt and I haven't and I'm wondering waiting to see if Matt shakes his head, I think the second half of the year will be better on deposit growth than on loan growth. So we're going to need to have some more verticals and some more ideas on how to put this money to work. And I think the Panacea concept sort of where we partner with Fintech, in an environment that sort of gives us a good return on equity that's we're kind of focusing on that maybe as we look for, “national verticals”. We're – but we're being slow. We don't – We don't think right now is the time to cross the Rubicon, so to speak.

Brody Preston

Understood. And then maybe just on that traditional lending front, you all had a nice uptick in -- in core CNI loans this quarter, when they get a sense for what drove that and then secondarily ask how the new team that you're hired up in Northern Virginia is doing how their pipelines are shaping up?

Dennis Zember

Brody, some of the C&I growth was early wins on that medical front.

Brody Preston

Okay.

Dennis Zember

And the rest of it was just more blocking and tackling in our – in the main footprint.

Brody Preston

Got it. And how's the – how's the team that you hired out in the Northern Virginia doing?

Matt Switzer

They're coming along building, I mean building pipelines, a few of them were subject to non-compete. And so those are – those are burning off here this quarter, their pipelines and so their pipelines accordingly are building because of that.

Brody Preston

Got it. And then last one for me, could it be – could we get a sense for what new loan yields are coming on the book at?

Dennis Zember

Still around 3.5 to 4.

Brody Preston

Got it. Thank you very much taking my questions everyone.

Dennis Zember

All night. Next question, please.

Operator

The next question will come from Christopher Marinac with Janney Montgomery Scott. Please go ahead.

Christopher Marinac

Hey, thanks. Good morning, Dennis and Matt. Thanks for all the disclosure and the information you're providing this morning. Want to circle up on the profitability from the slide back? And when we looked at the pre-tax pre provision returns? Is it fair to expect that that's kind of bottoming here and that as it stabilizes that will start to revert upward over time as you deploy liquidity and continue to grow the company?

Dennis Zember

No, absolutely no question about it. Now, I will say bottom, I know I think bottoming. I like – I like that word better than bottomed. And I'd say that, because I want to finish a quarter where we're able to actually sort of put some of the money to work and see the results flow to the bottom line. I mean, I know, Chris, where the where the balances are coming from. And I know that, the expenses are already there, the staff is already in place, the systems. So I know that the operating leverage – from I know, we're going to have significant operating leverage from that. I just want to see some of that be put to work. I mean, Matt, and I, I mean, we're used to much higher pre-tax pre-provision ROA. We've let our Board to expect higher, its just we're so watered down by, what's approaching a billion dollars of liquidity. And I don't want us to get again, that's – we're in a bank that's transitioning. And we're way down the road. But I mean, we went years without really having meaningful loan growth, and kind of mindful of just sort of, waking up one day and going from sort of slow growth to really aggressive growth. We don't want to do that, we want to be a little more methodical as we move into something faster paced.

Christopher Marinac

Got it. Makes sense. And just to follow-up on – on the Panacea and Digital Bank build-out, how much of those processes are you using at the core bank, or do you envision apply those to the core bank over time?

Matt Switzer

Well, the rollout as it -- that's a very good question, Chris. The rollout the -- what we're about to start beta testing in a lab environment with existing customers, that actually is on the existing core system of Pfizer. So we did build something, what we think is wholly unique, that we think we may be announcing in another quarter or so on the Pfizer platform, so I mean, it can be done.

The new platform is really all on FinTech and with those related partners. The product set is, we're slowly migrating the product set to be exactly the same. And I think that is -- it's hard to express to people the advantage of having a digital product set and a legacy bank product set that are similar. Again, that's why we're able to use one brand. But ultimately, we intend to prove that the new modern core and work, build it out the exact way we'd like to do it. And I think long term, we would probably have all of our assets -- all of our customers have one or the other, one core, one or the other.

Christopher Marinac

Got it. But you can continue to customize the experience for both the digital and the legacy bank along the way and keep extracting cost?

Matt Switzer

Exactly, no question. And I think that's important to do because ultimately, I mean, I do believe that the industry is moving more digital. What's the incumbent on the industry really is to sort of move the mainstream and sort of get customers more comfortable here, banking in a digital environment. And so, it's important for us to customize the core system and sort of introduce technology and sort of show customers what it can do. That is what the lab test is -- this coming quarter is about.

Christopher Marinac

Great. And last question just has to do with all the consolidation around you both at community banks and large national banks alike, how much of that is going to be a focus for you just to kind of win new business from bankers as well as customers and how much is out there for you in the near term on that?

Matt Switzer

I think there can be a substantial amount. I mean outside the -- I'll give credit where credit is due, the community banks in Mid-Atlantic region around us are tenacious at protecting their customer base. And you probably wouldn't expect anything else. But the disruption, especially where some of them find are moving into larger institutions and there's absolutely going to be disruptions and a merger of equals. I mean this bank is a good example. And it's a big distraction. Easy to take your eye off the ball. We are probably now just coming out of I mean, we changed our name.

And while we didn't have a merger or anything like that, we sort of had our own little distraction. And I think we're coming out of that probably at just the best. At the best time, we sort of established our new brand up here and got really good marks and commentary from customers and the community. So I think we're in -- we're probably positioned at in the best place right now to win for some of that. And our digital efforts are `going to I think, positioned us to sort of differentiate ourselves and give people a compelling reason to consider us.

Christopher Marinac

Great, Dennis. Thanks for all the background. We appreciate it. Thank you, Matt as well.

Dennis Zember

All right.

Matt Switzer

You bet.

Operator

[Operator Instructions] The next question will come from Ross Haberman with RLH. Please go ahead.

Ross Haberman

Good morning, gentlemen. Nice quarter. I just -- most of my questions have been answered. And just have a quick question or two for Matt. Matt, you had a big exposure to hospitality and hotels. Could you just give us a sense of how you viewing that? How are they sort of, reemerging? And do you want to reduce that over time that concentration? Thank you.

Matt Switzer

Sure. So, we had about 269 million in hotels at the end of the quarter, 14 million of them were on deferral, so about 5% of the portfolio both. And that's really two hotels, both of which are scheduled to come off deferral in the third quarter, crack, cheese and red bar -- them all the key stats for our hotel portfolio constantly. And all those metrics are vastly improved from where we’re at the beginning of the year, so, much better about our portfolio.

And to your point about the concentration, I don't think given hotels are still kind of coming out of the woods there's a whole lot of demand to refinance hotels. So we're unlikely to see a lot of these leave the bank on an organic basis. But I don't think you're going to see us building that hotel book in the short-term while the rest of portfolio grows.

Ross Haberman

And just a quick question for Dennis. Branch-wise, any plans to close or relocate any of the branches given your new sort of digital emphasis? Thank you.

Dennis Zember

Yes. Ross, it’s a good question. We are -- I mean, we're constantly looking at the branch footprint. Go back to what we were saying about -- one of my earlier comments about being determined to build market value and franchise value and all that in a legacy bank to generate high quality or high performing results that we've got to get branches into a very profitable state. I don't think we're -- I can say without question, we're not looking to leave any of the communities that we currently serve.

We are constantly looking at the branch footprint, but right now maybe some ones, twos. But even that, I think we're just being real cautious. With the tasks that we're going to run this coming quarter, maybe for the next couple quarters might give us a sense for how many of those customers would like to or accept our digital footprint or digital offering. And so, I think as we get near the end of the year, I think we probably have a more definitive answer. Right now, I would just tell you, we're not looking at doing that.

Ross Haberman

Okay. Thanks, guys and best of luck. Appreciate the help.

Dennis Zember

All right.

Matt Switzer

Thank you.

Operator

At this time, there are no further questions, and this will conclude today's question-and-answer session. I would now like to turn the conference back over to Matt Switzer for any closing remarks.

Matt Switzer

Thank you everybody for joining us, and we have some upcoming conferences, we’ll be interact with investors and look forward to seeing folks in person.

Operator

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