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. [Operator Instructions] I'd like to hand the call over to Matt Switzer, Chief Financial Officer. You may begin your conference.

Good morning, and thank you for joining us for Primis Financial Corp's. 2024 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. 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.

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 multiunit accounting method. As Matt will discuss in more detail, this method 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. Lastly, as we've stated in our NT filings, we still have an open consultation with the Chief Accountants 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% to 6% of total loans. And 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 just -- compared to 1.97% a year ago. Alongside the recent rate cut, we made the necessary adjustments immediately to keep the margin and net interest income steady. But coming into the quarter, we have $1.1 billion of deposits that we know are going to…

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. 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 noninterest income. And all credit costs are fully recognized, including estimated life-of-loan losses under CECL, while potential credit enhancements from the consumer program are recognized as received. Reported pretax pre-provision earnings can be found in our earnings release and includes the effects of the Panacea Financial Holdings consolidation as in previous periods. Adjusting for effects of this consolidation and nonrecurring items, core pretax pre-provision earnings were $10 million in the third quarter versus $9.4 million before changes for the change in accounting in the second quarter. Adjustment amounts for both PFH consolidation and nonrecurring items can…

[Operator Instructions] Our first question comes from the line of Russell Gunther with Stephens Inc. Your line is open.

Hi, 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?

Should be relatively flat, Nick.

Okay. And then going on mortgage warehouse, do you plan to break that -- those loans out separately from a modeling perspective?

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

…or margin?

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

Yes. I mean it's going to be not that material in the fourth quarter, depending on how the next couple of weeks ago. But as we move through '25, we will certainly break out as much information as possible so you can get a sense for the trends.

Okay. That makes sense. And if I remember correctly, I believe the deck said it will be either in 4Q of '24 or 1Q of '25. And I was just curious if there was going to be -- if you guys had a good growth rate on those mortgage warehouse loans.

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

When you start breaking out and disclosing the mortgage warehouse loans. That's what I...

I would tell you that I think -- I mean, we're sprinting to sort of add their customers. I 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 sort of sprinting to that. And then maybe as we get into the first part of the year, we continue to add. I mean, again, we're moving off $375 million or so of Life Premium loans. We think there's going to 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 million to $450 million of Life Premium loans with these mortgage warehouse loans. And 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.

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 going to get there?

I think we've got a reasonable shot to get there in the second half of 2025 -- second half to late 2025. Part of that, Nick, is going to be -- we're going through -- we're either going to get the change in accounting that we're hoping for and take out some of the volatility. Otherwise, we're going to be experiencing volatility, but really only for largely a couple more quarters, potentially because 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, we're moving off a pretty good-sized portfolio, but going to be replacing it almost dollar for dollar by the middle of '25, and we think at higher rates and incrementally better profitability. 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 going to add up. But as we look at kind of how all that combines, we think that gets us to at least 1%.

I mean you can't -- there are so many moving parts, but I mean, the mortgage -- the momentum we have in mortgage, 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 7 or 8 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 the sensitivity to falling rates on our liability side is going to power more margin and more ROA. 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 it at that.

No, that's perfect. That helps a lot. And that's it all my questions. Thanks for answering them.

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

Hi, 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 going to -- those reflect sort of the new information and that will be kind of verified once the Qs are filed. Do I have that right?

Yes. And those are all the quarters restated for the change in accounting. So it's all been pushed backwards.

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

No. Those are not reflected in those. It's -- those loans are typical consumer loans, they get to 90 days and they charge off.

That's what I thought. Okay. And then the trends on just general coming and goings on commercial criticized and special -- or substandard?

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 not -- still not seeing a whole lot of inflows. And both of these credits, we've been watching for a while. So it's not like this came out of the blue but with 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 continue to pay. So unfortunately, you still have to use their appraisal when it comes in. 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 rating curve that we weren't already aware of or have been watching.

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 then it works itself down? And do you have a thought, I guess, in terms of how betas may play out looking forward the next four to five quarters?

For the first part of your question, yes, I mean, we saw cost of funds ticked down in September. So it 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 have 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. If they do cut again, we're still going to cut, but somewhat -- some of it is 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.

Chris, 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 or $920 million there. One, we're doing a little bit of a -- we're doing a small sort of upgrade/conversion on the 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 paying them aggressively. So I mean that's that plus some broker deposits that we have that are coming up in December. 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 is going to do and get past our conversion. So I mean, I know -- I mean your question about have we peaked, there's no question we peaked. I think how much we can get out of that ahead of maybe having an earning asset opportunity with mortgage warehouse, we just want to be smart and cautious there. But no, we're going to -- you're going to see some noticeable improvement in cost of funds.

And even on the digital bank, and what Dennis is referring to, we were -- we've been appropriately measured in like how we deal with existing deposits on that, but we did lower rates for new money coming in, and we're still attracting money at those newer rates. So we're averaging down the cost of the digital platform even without being real aggressive for existing ones.

Okay. Great. Yes, I was going to ask about the new inflows that you saw, 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 a few more quarters and sort of circle back on how the experience is.

Yes.

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

Thanks Chris.

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

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 e-mail, and we'll get back to you. Thank you. Have a great weekend.

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