Primis Financial Corp.

Good day, and welcome to the Primus Financial Corp 2022 Second Quarter Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a 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 a touchtone 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 Matt Switzer. Please go ahead.

Good morning, and thank you for joining us for Primus Financial Corp's second 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. Further discussion of the company's risk factors and other important information regarding our forward-looking statements are part of our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has also been posted to the investor relations section of our corporate website, premisebank.com. We undertake no obligation to update or revise forward-looking statements to reflect change 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 Ember. Thank you, Matt, and thank you to all of you that have joined our second quarter conference call. We're very excited to see the momentum in several areas of the company and really believe it sets us up well for the rest of this year and for next year. I'll highlight a few of the items here, and then Matt can share some more insight into the numbers for the quarter. It was right before COVID in 2020 that we started to restructure the company. Right out of the gate, we identified some key areas that were material drags on our market value. First was the ability to grow both sides of the balance sheet reliably. We strengthened our commercial banker team with new hires first, and then we were crafty with some strategies that we believe will cement our reputation as a growth-oriented company. On the loan side, we've seen four quarters now of loan growth, each with a little more momentum, and from all areas of the bank. Our results this quarter alone were pretty notable, and while that toward pace of growth may not be our long-term pace, it does set us up nicely for the rest of this year. On the funding side, we've transitioned away from CD as our main focus and funding source, and we've worked to build momentum in checking accounts and other low-cost deposits. We've moved our cost of deposits down aggressively, very close to our peers, but in a zone that supports the growth we need for our asset strategies. This quarter, checking balances moved nicely to about 24% of total deposits, and while we know there's more work to do here, The success to date and the momentum we are building is very encouraging about the future. Our mortgage solution is brand new, and I believe the timing on our decision is pretty ideal. Our price was small, I mean really negligible, and while the market activity is slowing because of higher rates, I've been around this business long enough to know that volumes will return. Right now, large mortgage companies are shedding support, eliminating marketing resources, trimming assistant positions, and looking to reset for today's reality. That's put a lot more really good teams and originators in play than were a year ago. Simply put, the market for mortgages have slowed, but the market for originators and good teams is noticeably better. One last thing weighing on our market value is our operating performance. Incremental improvement here, like you saw this quarter, is critical. And so I'm looking for signs that the discipline and the desire to achieve it is present. Our internal communication aligns with this unquestionably. What we celebrate at premise and what we are incenting is also aligned. I see positive moves in the net interest margin, in checking accounts, in pipelines. I see that core revenue has grown twice as fast as core expenses. So while I want the operating performance at our company to be wow right now, I am confident that we are doing what is necessary and that we are just a few quarters away from putting that value overhang to bed as well. Matt's going to be more specific about where the growth came from this quarter, but let me say something about the lines of business. These businesses are meant to augment our core bank. Our growth rate, our credit quality, our profitability, They're not designed or meant to gut it or replace it. I mean, an honest review of this industry would say that the industry has changed and is still changing. And I challenge anybody to show me a community bank strategy that can punch out 150 ROAs with good credit quality and with reliable growth. I just mathematically don't think it's possible. I feel like you have to augment what you're doing with something new and creative. Finding that balance in a small bank is not easy. You know, where to invest, where to pull back, how to transition, how fast. But let me illustrate the power of this concept. Our company was founded in 2005. Since then, we've done everything that good community banks are supposed to do. We've built relationships with professionals in our market. We've built branches. We've hired bankers. We've bought other banks, integrated them. We've advertised aggressively. We've negotiated. We've been downright street fighters to build our company and build our brand. But right now, a review of all of our customer data and relationships shows that we're banking 50% more doctors, vets, and dentists in our footprint through the Panacea franchise than we do in our core bank after 17 years. Panacea is only 18 months old, barely 18 months old. They're barely break-even right now. And we're investing hard in that business with the founders to continue harvesting this easy opportunity. The point here is not that the core bank is unsuccessful because it's not. The point here is instead to illustrate that we are more than twice as present in the pockets of doctors, vets, and dentists in Virginia, Maryland, and D.C. as we were 18 months ago and that we got here with a resource-like strategy with seemingly unlimited scale. The power on a community bank with something like that is fantastic. With that good news, I'll turn it back to Matt for some details. Thank you, Dennis. As a reminder, a full description of our second quarter results can be found in our earnings release and second quarter earnings presentation, both of which can be found on our website. Earnings from continuing operations for the second quarter were $5 million or $0.20 per basic and diluted share versus $4.6 million or $0.19 per basic and diluted share in the first quarter. Excluding one-time items, earnings in the second quarter were $6 million or $0.24 per diluted share versus $4.7 million or $0.19 per diluted share in the first quarter. Total assets were $3.24 billion at June 30, up slightly from March 31. Excluding PPP loans and loans held for sale, total loan balances grew 10.5% linked quarter or approximately 42% annualized. Growth came from all parts of the organization in the second quarter, including almost 20% annualized growth in the core bank, while Panacea and Life Premium Finance both had growth accelerating from Q1. We have a lot of momentum currently in anticipating the approximately 31% loan growth rate for the first half of 2022 to continue for the rest of the year. Deposits were essentially flat in Q2 while the mix continues to improve. Non-interest-bearing deposits are 24.3% at quarter end, and continue to be a focus, while CDs have declined to 12.3% of total deposits. Cost of deposits were flat at 35 basis points in the second quarter, and cost of funds increased one basis point from Q1. As expected, our robust business lines have consumed the excess liquidity we were carrying through last year. Growing low-cost core deposits is a significant focus of the bank as we look to fund this growth going forward. Net interest income saw strong growth in the quarter, increasing to $24.6 million from $22.9 million in Q1, or 7.7% linked quarter. Our reported margin was 3.33% for the second quarter, or $3.35, excluding the effects of PPP, up 37 basis points and 39 basis points, respectively, from the first quarter, driven by strong loan growth and a better earning asset mix. Non-interest income increased to $2.6 million from $2.1 million linked quarter due to the addition of Premise Mortgage Company late in the quarter. Premise Mortgage originated $27 million in June, down slightly from May as the company transitioned to Premise. As previously discussed, our goals for Premise Mortgage in 2022 are to grow production and invest in talent versus a meaningful contribution to earnings this year. We expect mortgage to be a more meaningful contributor to earnings in 2023. Non-interest expense included a number of items this quarter, including branch closure costs, merger-related expenses, and the addition of one month of expenses for premise mortgage. Excluding these items and recovery or expense for unfunded commitments, non-interest expense was down slightly to $18.5 million from $18.6 million last quarter. The provision for credit losses was $422,000 in Q2 versus $99,000 in Q1. Combined with net recoveries of $408,000 in Q2, the allowance increased by $830,000 for the quarter. While economic outlook weakened, loan growth in the quarter was concentrated in categories with lower model reserve requirements. As a result, the allowance for credit losses to gross loans, excluding PPP balances and loans held for sale, decreased to 1.16% at June 30 versus 1.24% at March 31. Non-performing assets net of SBA guarantees increased $5 million in Q2, primarily due to one $8.5 million relationship on a residential property that has struggled to service the debt, but offset by the payoff of a non-accrual development loan of $4.6 million. The LTV on the residential property is less than 50%, and we aren't expecting any losses. As mentioned previously, we had net recoveries in the quarter and have now had recoveries in four of the last five quarters. Our operating efficiency ratio was approximately 70 percent in the second quarter, down meaningfully from 76 percent in Q1. Panacea and Life Premium Finance continue to experience substantial revenue growth and increasing operating leverage as profitability of those business lines accelerates. We consolidated six branches late in Q2, with another two branches planned to consolidate in Q3. We've also identified several opportunities that could generate three to four million of additional savings on an annual basis that we are pursuing. Combined with continued revenue growth, we believe we could drive the operating efficiency ratio to the low 60s as we finish 2022. Pre-tax pre-provision operating ROA was 100 basis points in Q2. The excluded PPP fee income, which was a temporary source of revenue, pre-tax pre-provision ROA is at the highest level since Q3 of 2020. Over that time period, we've invested heavily in new business lines and offerings and are starting to see the returns from those investments. Similar to the efficiency ratio discussion, we are confident pre-tax, pre-provision ROA will continue to see meaningful improvement in the near future. We are pleased with the progress we have made and are excited by our momentum. We are confident profitability will continue to improve in the near future as we drive towards top quartile results. 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 1 on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Andrew Terrell with Stevens. Please go ahead with your question.