Good day, and welcome to the Primis Financial Corporation first quarter earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. 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 Financial 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. Thank you to each of you that have dialed in this morning or later choose to listen to this on the 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 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 intangible associated with this is really almost negligible.
The company, SeaTrust, is operating at better than break even with just $25 million of monthly volume, and their recruiting pipeline promises that we'll be able to ramp that production to the 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-$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. 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 accomplish this year, and we're gonna 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. With our new mortgage solution, I believe that's a real possibility. Most importantly, Panacea has turned profitable, even with the build in staff and marketing costs, and I think 2022 is gonna 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.
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 about 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 in 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. 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.
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. I'm energized about what we're building and the future impact it should have on earnings and operating ratios. 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 Financial 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.
Non-interest-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 at 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 non-performing 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 4 basis points from the fourth quarter. 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.
Non-interest 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 non-interest income levels moving forward. Non-interest expense increased $83,000 linked-quarter, excluding the expense for recovery and 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 Financial and Life Premium Finance are approaching break even 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 Premium 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 as 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. 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.
We will now begin the question-and-answer session. To ask a question, you may press Star then One on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star then Two. At this time, we'll pause momentarily to assemble our roster. The first question will come from Casey Whitman with Piper Sandler. Please go ahead.
Hey, good morning.
Good morning.
Maybe if we could start with just digging into some of the details around the mortgage company. You know, how big is the current team there? Is it largely through hiring on that team the expected driver? 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. You know, 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 pretty substantial recruiting pipeline that they've sort of been nursing along, waiting for this announcement. 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 and Florida.
Tennessee.
Tennessee. You know, we think right now every month we probably pass off, you know, somewhere between $6 million-$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. Those we pass along to Southern Trust, who's been a fantastic partner for us. I mean, the folks at Southern Trust are not surprised at all that we're doing this. 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 sort of what powers our enthusiasm on this, Casey.
Got it. Is SeaTrust largely a purchase shop? 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 could be even the near term when you're sort of breakeven in that business.
I mean, they are about 70%-80% purchase volume right now. They have been designed or set up in their short history to focus on purchase. That's been their predominant source of volume. Their gain on sale margin, including hedges, is low threes, and that has not included the benefit. They are Fannie direct approved, and they just got their FHA approval, so that's all really brand new. They haven't gotten the full benefit of those margins yet. We should see a little bit of margin expansion here in the short- term.
Okay, switching gears, just thinking about the deposits, just given, you know, all the efforts you've made to sort of transform the deposit base, the launch of the digital bank, et cetera, you know, how should we be thinking about your deposit beta 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.
Mm-hmm.
You know, as opposed to relative to deposit betas, I can circle back with you on the assumptions we've got by deposit type. We feel pretty confident that we're gonna be able to lag deposit costs, like most of our peers, for the first couple of raises, and then it's gonna be. We'll have to see if, depending on what the Fed does, the back half of the year, but.
Understood. I'll ask one more and let someone else jump on. Just given where the stock's 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 did not have such confidence as we do about Life Premium Finance and Panacea, I think, yeah, we would probably do that. I think our core bank, you know, in the markets we serve could probably grow 10-12%. But when you add Panacea and Life Premium Finance, we have $1 billion visions on both of those lines of business.
Yep.
I just don't think it's prudent to be dialing back our capital levels. I think that's one reason, too. Yes, we like the mortgage company because of what it does for return on assets. We don't wanna be a mortgage company with a small bank, but we wanna be a bank with a, you know, average size mortgage company. We like the earnings contribution and the capital build. Matt and I are sitting here right now knowing that we've got these two lines of business and I mean a week doesn't go by that we don't have a good fintech idea call us wanting to sort of duplicate what we've done with Panacea and Life Premium Finance. I just think it's prudent to hold on to the capital.
100%. I mean, we would be buying this stock all day long if we didn't think we were gonna need that capital here pretty soon.
Yep.
You know, it's expensive to issue capital, even though we know it would be at a higher price when we get there. We need to keep that capital for now.
Understood. Thank you both.
All right.
Thanks, Casey.
The next question will come from Feddie Strickland with Janney Montgomery Scott. Please go ahead, sir.
Hi, good morning.
Morning.
Just a question. Panacea has seen pretty steady growth in, like, the past several quarters here. I know you guys talked about pipelines in the release, but just kinda 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?
Yeah, just for Panacea.
In our last quarter, we had guided for Panacea. They ended 2021 at a roughly $50 million portfolio, and we had guided to their loan growth this year of $125 million-$150 million. That would have put them at $200 million for the end of this year. I mean, everything we're seeing right now, we feel very confident that they're gonna be at the upper end of that range, and there's a very good chance that they'll be higher than that.
Yeah, one thing too, you know, the Panacea concept, I mean, we started out with just one small consumer loan and sort of unsecured loan, and then we constantly are adding more products and more services. Of course, everything is digital, everything is geared towards quickly identifying a customer, you know, processing, underwriting, closing, funding, you know, in super rapid fashion, building the brand. Really, we just keep adding products and services. The fact that, I mean, Tyler, to his credit, is uncovering enormous opportunities. I think we don't even have a mortgage solution in Panacea. I mean, we're about to, and I think Tyler could. Once Tyler has this mortgage solution, there's no telling what Tyler can do with it. We don't have SBA in Panacea. Tyler's out looking for for an SBA solution.
I mean, really, when Matt's giving you this guidance, it's really on products and services that we already have. I think as we keep adding another product or another service, and we get the same kind of engagement and customer adoption that he's been getting on commercial and consumer, I think the sky's the limit on this.
Got it. On the deposit side, how much of overall deposits are related to Panacea?
Right now, it's not. Right now, it's not big. I think in the presentation, in Matt's presentation, the investor presentation, I think we talk about customer adoption or adoption rates on checking accounts. On the commercial side, it's really good. I think when we are selling something, we're putting in Treasury and such and getting decent deposits. On the consumer side, I think we're getting good adoption, but I don't know that we have the balances there have not grown as much. Again, the consumer side of Panacea is really geared towards fourth-year medical students, fellows, residents. It's not doctors and medical professionals that are in their, you know, financial prime yet.
I think at March 31, they had funded about 10% of their balance sheet. And that's with good penetration in terms of deposit accounts and increasing penetration on treasury services. We think that funding percentage for them specifically should go up over time.
Got it. 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 kinda what opportunities you see there and how that could help the bank.
Yeah. I mean, I don't know how familiar folks on the phone are with USDF, but this is really early stage technology. It's a blockchain-based basically method of moving money either for payments or P2P, business to business, et cetera. We think, you know, if you look at what merchants are paying to accept Visa, Mastercard, Amex, et cetera, you look at the slowness of ACH rails, et cetera, there's a lot of disruption that's taking place in the payment space and moving money around. We think it's all ripe for change and ripe for opportunity. We're excited to be part of USDF. We think the underpinnings of it will, when we get it stood up and launched, and our first use case, we're targeting the payment side.
Other banks that are in the consortium are targeting P2P or other use cases. Sky's the limit in terms of how it could be deployed. We wanna focus on. We've talked a number of times about our small business offerings and strategies there. We think using something like this to lower the costs that merchants absorb to accept payments would be a real competitive advantage, so we're racing hard to get that incorporated into our digital banking offerings. I mean, just for illustrative purposes, so if a merchant's paying 300+ basis points to accept payments at the register, for example, with this system, that could be as little as 100 basis points. It clears instantaneously. It's all real time.
We think it's really fascinating technology, and could lead to a real advantage for us when we go talk to these small business customers and try and convince them to bank with us. Again, this is all early stuff, but we're excited about the possibilities of it.
Got it. Thanks for taking my questions.
All right. Thank you.
The next question will come from Todd Porter with Primis. Please go ahead.
Hi, it's Todd Porter. My wife is Georgia Derrico. 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 more to lose on Primis than the board as a whole. We had concerns we've talked about with Dennis, and we've kept quiet, hoping the bank will turn things around. Our principal concern is that there does not seem to be any attention paid to-
Our next question will come from Samuel Varga with Stephens. Please go ahead.
Good morning, guys.
Morning. Hello?
Pardon me, it seems that Samuel has disconnected. Our next question will come from Brody Preston with Stephens Inc.
Hey, guys. Good morning. How are you?
Hi, Brody. Good.
You know, 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 wanna achieve, in the back half of this year in 2023 as it relates to improving your profitability. I guess, Dennis, I wanted to ask you know, 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. Let me ask a couple questions here. Are we talking team lift-outs, and what production levels are you targeting for 2023?
The answer would be yes on team lift-outs if we could do that. I think onesies and twosies, we'd be happy with that as well. I think here in the early stage, I'm sort of a little cognizant to walk before we run and, you know, the platform we bought at $25 million is break even because they've been very careful and cautious with building the back room, so I don't wanna sort of outrun them. I think as we get through the year and have the platform built out and have some recruiting success and sort of establish our name, I think bigger team lift-outs will probably come, probably through next year.
The idea that we could get to $1 billion or $1.2 billion. I feel pretty good about that on total production for next year. I'm conservatively thinking that we can get 60 basis points of that after-tax bottom line given Fannie Mae and FHA and some of the cost controls we have here. That's kind of how I get to 25 basis points in the ROA and how I, excuse me, 20 in the ROA and 25 basis points from an earnings per share standpoint.
Got it. Maybe just, you know, just given that you're one of the primary architects of a, of a highly efficient mortgage operation at your last bank, do you have an efficiency ratio target in mind for Primis Mortgage, Dennis, over the next couple of years?
I mean, I'd like to see it sort of low 60s%. As we again, you know, you have to be diversified. We're gonna have to, you know, be good at servicing or subservicing. We're gonna have to be good at portfolio products. There's a ways to go, but I think between here and there, I think we're probably gonna be upper 60s% or low 70s%, probably until we get to $1 billion or $2 billion. I think.
Got it.
Yeah, I like the question because I think when you combine what we have here with what we're doing in Panacea and Life Premium Finance, I think it's. From an efficiency ratio, I think the company consolidated would still be something that we would still be punching out impressive numbers.
Got it. Okay. Then are there any synergies between Panacea and Primis Mortgage? Are those included within that 2023, you know, $1-$1.2 billion, you know, origination target?
Right now, I mean, Tyler is passing all of his mortgage opportunities on to another bank. Those are kind of the opportunities that he stumbles on. Those aren't, you know, where he's out marketing and, I mean, nothing on our Panacea website or anything on our promotions mentions or talks about mortgage. These are just kinda stumbles that we find. I think once Tyler starts marketing it and this is an active product, I think Tyler's not just given what he's already done. I don't even wanna say a number, but I think Tyler could be a meaningful contributor to what we do on mortgage.
Got it. Okay. Just while we're on Panacea, you know, 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 from Panacea?
The fees from Panacea?
Yeah, on the treasury management side, specifically, Dennis.
That's not going to be very impressive because we have no infrastructure, no bricks and mortar. We sort of are passing a lot of those savings on to the customers. The fee structure, I mean, there will be some fees, Brody, but it won't be. It will not be a material driver of their results.
Got it. Okay. On those Panacea consumer applications, is it split pretty similarly to what the 1Q originations look like in terms of, like, 50/50? What does the average funding look like for each product?
What was the question? Yeah, the consumer applications. If we track to 1,000 consumer applications. I think, yeah, it's mostly going to be the PRN loans. I think probably by the time we get to 1,000, I'm betting you that there's 100 of those that are mortgage. Yeah, I mean, the average loan there, I'm not sure, but it's probably, you know, in the $30,000-$50,000 range. The yields are probably 7% or 8% or so. I'd say PRN. At 1,000, it'd probably be 10%-20% would be mortgage, probably 20% would be student loan refi, and then the rest would be the PRN loan.
Got it. Okay. Do you have any line of sight on what premium finance growth could look like in the second quarter, Dennis?
Yeah, I do. Matt doesn't want me to say. You know, I mean, let me just take a minute. I'm not too irritated here, but this Life Premium Finance division, the Panacea division, the other things that we've been working on for two years to build an energetic culture and a growth engine. I think this Life Premium Finance division is a perfect example of that. I'm sitting here right now. This is a line of business. I'm not gonna guarantee anything, but the level of confidence I have that this division can get to $1 billion, punching out a 1.5 or better ROA on riskless assets.
I mean, why in the world would this company be able to recruit something like that, to build something like that? That's the kind of organization we're building. I mean, we're not buying it. Right now, we're building it from scratch. I mean, if you think we can build organizations like that, something that's got that much promise and that much potential, and it not have a quarter or two drag, I mean, Like I said, we're not $30 billion. I'm not trying to go on and on here, but that is a division that can be $1 billion, punching out a 1.5 ROA. Right now, they're gonna. I think they could probably get to.
I think we're looking at the pipelines, if things close, if we have the success we want, I think that could maybe get to $70 million-$80 million in the second quarter. I mean, it'll be cumulatively profitable probably by June. I'm sorry, that's pretty badass. six months on a product like that. I think we can be there by June. I think second half of the year is when the majority of Life Premium Finance is underwritten and booked. I think where we're gonna finish the year on that and Panacea, we're gonna get to the end of the year, and whatever reputation this company had as a no-growth, slow-growth company will absolutely be behind us. It feels like you kinda set me up for that question. Thank you.
Yeah, you know, I guess turnaround efforts take time, Dennis.
Yeah.
I completely understand that, especially given what you inherited. My last question would just be on the branch closures. Wanted to ask if any of that was gonna be falling to the bottom line in the near term, or if Matt, we should plan on those getting reinvested.
No, we expect that to fall to the bottom line, largely in the back half of the year. Yeah, as we guided too last quarter, the first half of the year will be a little bit heavy, until those consolidations occur, but then we'll see expenses moderate in the back half of the year.
Awesome. Thank you very much for taking the question, guys. Great quarter.
All right. Thank you.
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 I. Have a great weekend. All right. Bye.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.