Primis Financial Q3 2024 Earnings Call Transcript

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October 25, 2024

Key Takeaways

  • We corrected an accounting error in our third-party consumer loan portfolio using the multiunit CECL method, which front-loads credit costs and defers some revenue, and we’re targeting to catch up our SEC filings by mid-November while an open consultation with the SEC’s Chief Accountant remains unresolved.
  • Our Core Bank’s cost of deposits was 2.21% in Q3—40–50 bps lower than community peers—thanks to deep customer relationships and digital platforms, and we’ve built a new commercial pipeline that’s three times the size of last year’s.
  • Panacea has evolved from a consumer loan vertical into a full digital banking hub, securing large national medical association endorsements and adding roughly $20 million in non-interest-bearing deposits this quarter.
  • Our mortgage division locked $277 million in loans in Q3, a 67% year-over-year increase that gives us a $1 billion annual run rate and the strongest recruiting pipeline since launching in 2022.
  • Divesting Life Premium Finance and onboarding a mortgage warehouse team will shrink assets by ~10%, boost our tangible common equity ratio by 75 bps, uplift net interest margin by ~20 bps and supports our goal of a sustainable 1% ROA by late 2025.
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Earnings Conference Call
Primis Financial Q3 2024
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Operator

Thank you for standing by. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Primis Financial Corp third quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by, followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. I would like to hand the call over to Matt Switzer, Chief Financial Officer. You may begin your conference.

Matthew Switzer
CFO at Primis Financial Corp

Good morning, and thank you for joining us for Primis Financial Corp's twenty twenty-four third 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 site, primisbank.com. We undertake no 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.

Matthew Switzer
CFO at Primis Financial Corp

In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. How a non-GAAP measure relates to the most comparable GAAP measure will be discussed when the non-GAAP measure is used, if not readily apparent. I will now turn the call over to our President and Chief Executive Officer, Dennis Zember.

Dennis Zember
Dennis Zember
CEO at Primis Financial Corp

Thank you, Matt. Good morning, and thank you to all of you that have joined our call. Our results this quarter reflect our correction of the accounting error on the consumer loan portfolio and the impacts for accounting for this portfolio using the multi-unit accounting method. As Matt will discuss in more detail, this method, excuse me, recognizes credit costs upfront with a full CECL reserve, and the impacts of the credit support are not recognized until they are received, which is generally in the second half of the average life of the portfolio. Additionally, not all the revenue is recognized, particularly while the loan is in a promotional period. We are in high gear working to catch up on all of our 10-Qs and targeting to be fully current on our SEC filings by the middle of November.

Dennis Zember
Dennis Zember
CEO at Primis Financial Corp

Lastly, as we've stated in our NT filings, we still have an open consultation with the chief accountant's office at the SEC regarding the accounting for this portfolio, and while we expect some resolution on that in the near future, we cannot predict the outcome. The noise from this consumer portfolio is unfortunate because these loans really only represent 5-6% of total loans. I say unfortunate because outside of this portfolio and our delayed filings, we've made a lot of progress on our strategy. A few examples are these: First, the core bank's contribution to our results continues to improve. The core bank's cost of deposits, for instance, for the quarter was 2.21%, compared to 1.97% a year ago.

Dennis Zember
Dennis Zember
CEO at Primis Financial Corp

Alongside the recent rate cut, we made the necessary adjustments immediately to keep the margin and non-interest, excuse me, net interest income steady. But coming into the quarter, we have 1.1 billion of deposits that we know are going to adjust further in the quarter. Our current bank, excuse me, our core bank's cost of deposits is consistently 40-50 basis points lower than our community bank peers in the Mid-Atlantic, and that's because of the lifetime relationships we have with our customer base, the technology that we use, like V1P, to deliver noticeable convenience to the commercial customers, and the leverage we have with our digital platform. Secondly, the core bank's building pipelines on new relationships at a very impressive pace.

Dennis Zember
Dennis Zember
CEO at Primis Financial Corp

While we do work hard with existing clients and continue to grow with them, the majority of our push and our incentive dollars focus on new relationships to the bank, new commercial relationships to the bank. The pipeline and pace of new relationships is three times what it was a year ago, and the momentum is almost all in the second half of this year. This leads us to believe that the community bank's ability to be the noticeable driver in our growth and operating results is finally present. A comment or two about Panacea. When we started the division, this concept was built to just be a loan vertical and really a consumer loan vertical at that. Today, we have continued to tweak the model and built unique digital capabilities that equally focus on deposits as well as commercial loan activity.

Dennis Zember
Dennis Zember
CEO at Primis Financial Corp

Tyler's team this quarter had several really big wins, with continued endorsements from large national medical associations and a flurry of new commercial deposits at the end of the quarter that will probably mean up to $20 million in non-interest-bearing balances once the accounts are fully moved and funded. The development of all the ancillary financial services that we can sell alongside our loan and deposit relationships are in high gear, and the early signs about adoption are good. We experienced real momentum with our mortgage team. Our results this quarter on locked loans, we eclipsed $1 billion of annual production. Our run rate is $1 billion of locked loans for the first time. In the quarter, we locked $277 million of mortgage loans, which was up 67% against the same quarter in 2023.

Dennis Zember
Dennis Zember
CEO at Primis Financial Corp

While we expect a slower fourth quarter, obviously, than what we had in the second and third quarter, our year-over-year growth rate in production says a lot about, first, recruiting success, and second, momentum in this industry. Right now, we have the best recruiting pipeline that we have had since we launched this platform in twenty twenty-two, and combining that with the momentum that the industry is having gives us real confidence that we're going to see expansion in the contribution to our ROA and earnings per share that this division provides. Our announcement about Life Premium Finance is very positive, but bittersweet. It's very positive for the three gentlemen that we recruited in twenty twenty-one, who came to us with a lot of ambition, who built a platform and deepened their relationships and reputation in their industry to a really remarkable level.

Dennis Zember
Dennis Zember
CEO at Primis Financial Corp

The opportunity in this division is probably bigger than my entire balance sheet, and it just needed a home similar to the one we announced. We'll sweep off a similar amount of deposits immediately, and shrink total assets by probably about 10%. We expect this move by itself to improve tangible common equity ratio by about 75 basis points and improve our net interest margin immediately by six to seven basis points. We expect another five basis points of margin lift over the next several quarters as some of the remaining assets run off. The real lift with our announcement is with regards to Mortgage Warehouse. We recruited a team from a large bank that was exiting the space alongside an acquisition, and we are sprinting to onboard their client base.

Dennis Zember
Dennis Zember
CEO at Primis Financial Corp

Fortunately, we had the software already and had done significant engineering and with our small warehouse client base. But what we didn't have was leadership or a team with the relationships that this team has and their vision. I'm confident that we can replace the entire life premium portfolio over the next few quarters, and the yields we are selling in warehouse right now are 160 basis points higher than our current life premium yields. Conservatively, if we assume that only 80% of that pickup holds as we build capacity, we're talking about almost 20 basis points pickup in the margin and about 13 basis points or so pickup in our return on asset. The baseline OpEx in this division really isn't materially different than what we had in life premium, and we believe credit costs will be similar.

Dennis Zember
Dennis Zember
CEO at Primis Financial Corp

This was a very good opportunity for our company, and my line of sight to the operating ratios that Matt and I want are much clearer after this move. On credit quality, we finished the quarter with only 25 basis points of non-performing assets, which is steady, really, for the last few quarters, but half of what it was in the third quarter of 2023. We still don't have any other real estate and have had little migration between the grades. During the quarter, we did conservatively downgrade one commercial real estate property that had been slow to lease up and really affected by vacancies in close or adjacent properties.

Dennis Zember
Dennis Zember
CEO at Primis Financial Corp

Our borrower has funded all of the cost overruns, has never missed a payment, and pledged additional collateral, but our appraisals cap rate almost doubled from the origination date, and so we booked a provision for the small shortfall in collateral values. I don't expect a loss on this asset or migration into non-performing, and also believe we might have downgraded this asset right as cap rates on CRE were peaking. All right. With that, Matt, I will turn it over to you for some comment.

Matthew Switzer
CFO at Primis Financial Corp

Thanks, Dennis. As a reminder, a summary of our financial results can be found in our press release and investor presentation, both of which can be found in our 8-K filed with the SEC last evening and placed on our corporate website. This quarter, instead of repeating information found in those sources, I'm going to attempt to walk through some of the impacts of the recent accounting changes in order to help highlight underlying trends in our results. As Dennis mentioned, our results for the current period and prior periods include the impact of corrected accounting for a third-party originated consumer loan portfolio. As detailed in our recently filed 10-K, these changes require the following: The subset of loans with promotional features don't accrue interest until the end of the promotional period.

Matthew Switzer
CFO at Primis Financial Corp

Deferred interest on these loans that exit the promotional phase is largely recognized all at once, with a modest discount that is accreted over time. Third-party reimbursement for waived interest under our agreement on promotional loans that pay off early is recorded in fee income instead of interest income. We record a derivative value representing the fair value of expected interest reimbursements, mark-to-market each period, with changes in that value recognized through non-interest income. All credit costs are fully recognized, including estimated life to loan losses under CECL, while potential credit enhancements from the consumer program are recognized as received. Reported pre-tax, pre-provision earnings can be found in our earnings release and includes the effects of the Panacea Financial Holdings consolidation, as in previous periods.

Matthew Switzer
CFO at Primis Financial Corp

Adjusting for effects of this consolidation and non-recurring items, core pre-tax, pre-provision earnings were $10 million in the third quarter versus $9.4 million before changes per the change in accounting in the second quarter. Adjustment amounts for both, PFH consolidation and non-recurring items can both be found in our press release and investor presentation. This quarter, the various interest income and expense items for the consumer program we've previously discussed, contributed a net of $4.5 million to pre-tax, pre-provision earnings in the third quarter versus $3.2 million in the second quarter. Under our previous accounting, contribution from this portfolio would have been $3.8 million, or $700,000 less than reported this quarter. Last quarter, that would have been $4.5 million or $1.3 million higher than reported.

Matthew Switzer
CFO at Primis Financial Corp

Adjusting for these differences, core pre-tax, pre-provision earnings were $9.3 million in the third quarter versus $10.6 million last quarter. A substantial portion of the volatility in reported earnings is due to the timing of interest recognition on promotional loans, where we are required to defer to the end of the promotion. We recognized $3 million of interest catch up in the third quarter for promotional loans that exited the period and began amortizing, up substantially from $500,000 in the second quarter. As a result, our reported margin was 2.97% in the third quarter, up from 2.72% in the second quarter. Adjusting for the effects of the timing differences, our margin would have been 2.83% in the third quarter, down only three basis points from the second quarter.

Matthew Switzer
CFO at Primis Financial Corp

We also recognized $2.5 million of interest reimbursement from our third-party partner for promotional loans that paid off early in the third quarter, up from $1.5 million last quarter, all of which is reflected in non-interest income and not in interest income or margin. We have $60 million of promotional loans deferring interest at September thirty, with $17 million and $21 million reaching the end of their promotional periods in the fourth quarter and first quarter of 2025, respectively. Lastly, I do want to spend a minute on non-interest expense. As we highlighted in our earnings release and investor presentation, reported non-interest expense was $31 million, which included $2.7 million of consolidated PFH expenses, or $28.4 million net, compared to $27.4 million last quarter.

Matthew Switzer
CFO at Primis Financial Corp

Mortgage expenses were $6.4 million in the third quarter, up from $6.1 million last quarter on higher volume. Excluding these expenses, as well as non-recurring items, core bank expenses were $19.8 million, down from $20.1 million last quarter and in line with our five-quarter average. We are laser focused on controlling expenses and generating operating leverage as we move past our accounting noise and look to grow revenue meaningfully in 2025. With that, operator, we can now open the line for questions.

Operator

Thank you. Once again, as a reminder, if you would like to ask a question, please press star, followed by the number one on your telephone keypad. Once again, that is star followed by the number one. Our first question comes from the line of Russell Gunther with Stephens Inc. Your line is open.

Nicholas Bellman
Nicholas Bellman
Managing Director in the Investment Banking at Stephens Inc

Hey, this is Nick filling in for Russell Gunther. I just wanted to start off with your core expense outlook. Could you give a little guidance on that, given the puts and takes of the premium finance sale and new hires around Mortgage Warehouse?

Matthew Switzer
CFO at Primis Financial Corp

Should be relatively flat, Nick.

Nicholas Bellman
Nicholas Bellman
Managing Director in the Investment Banking at Stephens Inc

Okay, and then going on Mortgage Warehouse, do you plan to break that- those loans out separately from a modeling perspective?

Matthew Switzer
CFO at Primis Financial Corp

Modeling, I think we would similar to everything else we've done, we'd probably display it kind of like, you know, an operating segment. When you say modeling, you mean for maybe loan loss reserving or for interest rate risk stuff?

Matthew Switzer
CFO at Primis Financial Corp

Or margin?

Nicholas Bellman
Nicholas Bellman
Managing Director in the Investment Banking at Stephens Inc

Yes. Yes, that's what I mean, loan loss reserve.

Matthew Switzer
CFO at Primis Financial Corp

Yeah, I mean, it's going to be not that material in the fourth quarter, depending on how the next couple of weeks go. But, as we move through 2025, we'll, we will certainly break out as much information as possible, so you can get a sense for the trends.

Nicholas Bellman
Nicholas Bellman
Managing Director in the Investment Banking at Stephens Inc

Okay, that makes sense. And if I remember correctly, I believe the deck said it will be either in 4Q of 2024 or 1Q of 2025. And I was just curious if you guys had a good growth rate on those mortgage warehouse loans.

Matthew Switzer
CFO at Primis Financial Corp

What are you referring to in the fourth quarter or first quarter?

Nicholas Bellman
Nicholas Bellman
Managing Director in the Investment Banking at Stephens Inc

When you start breaking out and disclosing the Mortgage Warehouse loans.

Matthew Switzer
CFO at Primis Financial Corp

Yeah.

Nicholas Bellman
Nicholas Bellman
Managing Director in the Investment Banking at Stephens Inc

That's what I-

Matthew Switzer
CFO at Primis Financial Corp

I would say that I think, I mean, we're sprinting to sort of add their customers. And, you know, the fourth quarter and the first quarter are slower in the mortgage industry, generally. So this is really a good time to be contacting the customers. I think they left their former bank with about 215 customers. They've been employed here for about three weeks. I think we're close to 24 customers now. We're trying to get maybe to 75 by the end of the year, and I think we'll just, you know, sort of sprint into that, and then maybe as we get into the first part of the year, we'd, you know, continue to add. I mean, again, we're moving off $375 million or so of life premium loans...

Matthew Switzer
CFO at Primis Financial Corp

We think there's gonna be another probably $50 million or so that runs off through the middle of next year. So really, we're looking to replace, call it, let's say, $400-$450 million of Life Premium loans with these Mortgage Warehouse loans. I think for the for next year, I think the average Mortgage Warehouse book, I think I feel comfortable at $400 million for the whole year.

Nicholas Bellman
Nicholas Bellman
Managing Director in the Investment Banking at Stephens Inc

Okay, great. That makes sense. And now on to ROA. So you previously laid out a target for a sustainable 1% ROA. Can you walk us or walk me through the glide path to when you think you guys are gonna get there?

Matthew Switzer
CFO at Primis Financial Corp

I think we've got a reasonable shot to get there in the second half of twenty twenty-five, second half to late twenty twenty-five. Part of that, Nick, is gonna be, you know, we're going through. We're either gonna get the change in accounting that we're hoping for and take out some of the volatility. Otherwise, we're gonna be experiencing volatility, but really only for largely a couple more quarters, potentially. 'Cause most of the volatility is tied to these promotional loans, and they bleed off pretty fast in the next two to three quarters. So setting all that aside, you know, we're moving off a pretty good-sized portfolio, but gonna be replacing it, almost dollar for dollar by the middle of twenty-five. And we think at higher rates and incrementally better profitability.

Matthew Switzer
CFO at Primis Financial Corp

So you combine that with some decent expense save or cost controls, our normal retail mortgage operation, we're projecting that to do better next year. And we expect the core bank to contribute more next year and to see some margin expansion on the core basis. So, I mean, I can't lay out all the basis points of contribution that all those puts and takes are gonna add up, but we as we look at kind of how all that combines, we think that gets us to at least 1%.

Dennis Zember
Dennis Zember
CEO at Primis Financial Corp

Yeah, maybe more. I mean, there are so many moving parts, but I mean, the mortgage, the momentum we have in mortgage, you know, talking about quarter over quarter growth in locked loans and in revenues and all that, I mean, if that holds into next year, that's probably another seven or eight to 10 basis points. Life premium, trading life premium for the warehouse opportunity, like we said, is probably 13 basis points. The core bank, no question, rates falling, like I said, with $1 billion of deposits still left to be repriced this quarter. There's no doubt that, you know, the sensitivity to falling rates on our liability side is gonna power more margin and more ROA.

Dennis Zember
Dennis Zember
CEO at Primis Financial Corp

So again, like I was saying, I mean, the energy and enthusiasm we have for the line of sight to the numbers you're talking about or better, is really good. It's. Anyway, I'll leave you at that.

Nicholas Bellman
Nicholas Bellman
Managing Director in the Investment Banking at Stephens Inc

No, that's perfect. That helps a lot, and that's it on my questions. Thanks, thanks for answering them.

Dennis Zember
Dennis Zember
CEO at Primis Financial Corp

Thanks.

Operator

Your next question comes from the line of Christopher Marinac with Janney Montgomery Scott.

Christopher Marinac
Christopher Marinac
Director of Research at Janney Montgomery Scott

Hey, good morning. Thanks for hosting us. Matt, just a quick housekeeping question. So the numbers we see in the press release and the quarterlies, those are gonna reflect toward the new information, and that will be kind of verified once the Qs are filed. Do I have that right?

Matthew Switzer
CFO at Primis Financial Corp

Yes, and those are all the quarters restated for the change in accounting. So it's all been-

Christopher Marinac
Christopher Marinac
Director of Research at Janney Montgomery Scott

Got it.

Matthew Switzer
CFO at Primis Financial Corp

Push backwards.

Christopher Marinac
Christopher Marinac
Director of Research at Janney Montgomery Scott

Perfect. That's what I thought. Okay, great. Just wanted to be 100% sure. The criticized loan numbers, you know, were stable this quarter. Do you see any movement from that? And does the way that the consumer portfolio behave impact those at all?

Matthew Switzer
CFO at Primis Financial Corp

No, those are not, those are not reflected in this. It's those loans, you know, are typical consumer loans. They get to ninety days, and they charge off.

Christopher Marinac
Christopher Marinac
Director of Research at Janney Montgomery Scott

That's what I thought. Okay. And then the trend on just general, you know, comings and goings on, you know, commercial, criticized and special mention or substandard?

Matthew Switzer
CFO at Primis Financial Corp

I mean, outside of the two credits, the more significant one and a much smaller one, in the quarter that went from special mention to substandard, we're still not seeing a whole lot of inflow, and both of these credits, we've been watching for a while, so it's not like this came out of the blue or was some surprise. Maybe the valuation that we had to rely on when we put the reserve on the bigger loan was a little bit of a surprise, but we think that's very, very conservative, and the customers continued to pay, so unfortunately, you still have to use their appraisal when it comes in.

Matthew Switzer
CFO at Primis Financial Corp

But otherwise, I can't think of any credits that have moved into a problem bucket or started to creep up the risk curve, risk-weighting curve, that we weren't already aware of or have been watching.

Christopher Marinac
Christopher Marinac
Director of Research at Janney Montgomery Scott

... Great. Thank you for that color. And then, another question just goes back to the cost of funds. Should that rate that we see this quarter be sort of a peak and it works itself down? And, do you have a thought, I guess, in terms of how betas may play out, you know, looking forward the next, you know, four to five quarters?

Matthew Switzer
CFO at Primis Financial Corp

So the first part of your question, yes. I mean, we saw cost of funds tick down in September. So it had basically peaked in August. As to betas, some of it's going to depend on, I think, what happens with the next Fed cut. It feels like competitors have lower rates, and we have to, particularly in the core bank for the higher rate stuff, that had been kind of the upper end of the cost structure. We were pretty aggressive moving some of those down. I think our overall beta for the core bank is probably 20% maybe after the last move. If the Fed doesn't cut, I think we'll have an opportunity actually to continue to incrementally keep moving stuff down and get some more beta on the first Fed cut.

Matthew Switzer
CFO at Primis Financial Corp

If they do cut again, we're still gonna cut, but somewhat, you know, some of it's dictated by the competitive environment and what they're doing with their rates. Not as many people seem to have been aggressive cutting after that first move.

Dennis Zember
Dennis Zember
CEO at Primis Financial Corp

Great, and one more thing. Matt and I have been watching our digital deposits, and we did make a few moves on the digital side, but generally, we did not make a lot of adjustments on the digital deposits. There's $915 million-$920 million there. We're doing a small sort of upgrade/conversion on the digital customer experience here in about a month, and we think there's another rate move coming, or if there is another rate move coming, we did not want to be pinging them aggressively. So, I mean, that's that plus, you know, some broker deposits that we have that are coming up in December.

Dennis Zember
Dennis Zember
CEO at Primis Financial Corp

I mean, there's $1 billion of deposits on our balance sheet that never really got moved on this last rate cut, that we are going to move this quarter. Just want a little more line of sight into what the Fed's gonna do and get past our conversion. So, I mean, I know you when your question about have we peaked, there's no question we've peaked. I think how much we can get out of that ahead of, you know, maybe having an earning asset opportunity with Mortgage Warehouse, we just want to be smart and cautious there. But no, we're gonna... You're gonna see some noticeable improvement in cost of funds.

Matthew Switzer
CFO at Primis Financial Corp

And even on the digital bank, and what Dennis is referring to, we've been, you know, appropriately, measured in, like, how we deal with existing deposits on that. But we did lower rates for new money coming in.

Dennis Zember
Dennis Zember
CEO at Primis Financial Corp

Yeah.

Matthew Switzer
CFO at Primis Financial Corp

and we're still attracting money-

Dennis Zember
Dennis Zember
CEO at Primis Financial Corp

Yeah

Matthew Switzer
CFO at Primis Financial Corp

- at those newer rates. So we're averaging down the cost of the digital platform, even without being real aggressive for existing money.

Christopher Marinac
Christopher Marinac
Director of Research at Janney Montgomery Scott

Okay, great. Yeah, I was gonna ask about the new inflows that you saw. So you sort of addressed that, and it sounds like if there is a difference on beta versus digital versus the core bank, it's hard to really talk about that today. Give it a few more quarters and sort of circle back on how the experience is.

Matthew Switzer
CFO at Primis Financial Corp

Yeah.

Christopher Marinac
Christopher Marinac
Director of Research at Janney Montgomery Scott

Okay, great. Thanks for all the information today, as always, and I appreciate you hosting the call.

Matthew Switzer
CFO at Primis Financial Corp

Thanks, Chris.

Operator

There are no further questions at this time. I'll hand things back over to Dennis Zember, CEO, for some final remarks.

Dennis Zember
Dennis Zember
CEO at Primis Financial Corp

All right. Thank you again for your participation and your interest. If you have any questions or comments, of course, Matt and I are around all the time, so just give us a call, text, or email, and we'll get back to you. Thank you. Have a great weekend.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

Executives
    • Dennis Zember
      Dennis Zember
      CEO
Analysts
    • Christopher Marinac
      Director of Research at Janney Montgomery Scott
    • Matthew Switzer
      CFO at Primis Financial Corp
    • Nicholas Bellman
      Managing Director in the Investment Banking at Stephens Inc
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