Q3 2024 Primis Financial Corp Earnings Call
Yeah.
Yeah.
Operator: Thank you for standing by.
Ian: Thank you for standing by my name is Ian and I will be your conference operator today.
Ian: My name is Ian and I will be your conference operator. At this time, I would like to welcome everyone to the Primis Financial Corps third quarter earnings All lines have been placed on mute to prevent any background noise.
Ian: At this time I would like to welcome everyone to the premise financial Corps third quarter earnings call.
All lines have been placed on mute to prevent any background noise.
Operator: 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 the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you.
Ian: After the Speakers' 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 the number one on your telephone keypad.
Ian: I would like to withdraw your question again press Star one.
Ian: <unk>.
Matthew Switzer: I would like to hand the call over to Matt Switzer, Chief Financial Officer. You may begin your.
Speaker Change: I would like to hand, the call over to Matt Switzer, Chief Financial Officer, you May begin your conference.
Matthew Switzer: 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 statement.
Matt Switzer: Good morning, and thank you for joining us for premise finance 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 risks and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations.
Matt Switzer: <unk> expressed in the forward looking statements further discussion of the Companys 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 permits bank Dot com.
Matthew Switzer: 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.
Matt Switzer: We undertake no obligation to update or revise forward looking statements to reflect changed assumptions the occurrence of unanticipated unanticipated events or changes to future operating results over time in.
Matthew Switzer: In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. How a non-GAP measure relates to the most comparable GAP measure will be discussed when the non-GAP measure is used, if not readily apparent.
Matt Switzer: In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures.
Matt Switzer: The non-GAAP measure relates to the most comparable GAAP measure will be discussed when the non-GAAP measure is used is not readily apparent.
Dennis Zember: 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 multi-unit accounting method. As Matt will discuss in more detail. This method recognizes credit costs up front 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.
Speaker Change: I will now turn the call over to our President and Chief Executive Officer, Dennis <unk>.
Speaker Change: Matt Good morning, and thank you to all of you that have joined our call.
Dennis: Our results this quarter reflect our correction of the accounting error.
Dennis: On the consumer loan portfolio and the impacts for accounting for this portfolio using the multi unit accounting method.
Speaker Change: As Matt will discuss in more detail.
Speaker Change: This method. This method recognizes credit costs upfront with a full seasonal reserve and the impact of the credit support or not recognized until they are received which is generally in the second half of the average life of the portfolio. Additionally, not all the revenues recognized particularly Rob alone is that a promotional period.
Dennis Zember: 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 T&Qs and targeting to be fully current on our SEC filings by the middle of November. Lastly, as we've stated in our NP 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 to 6% of total loans.
Speaker Change: We are in high gear working to catch up on all of our turnkey and targeting can be fully current.
Speaker Change: Our SEC filings by the Middle of November.
Lastly, as we stated in our <unk> filings, we still have an open consultation with the Chief accounting officer.
Speaker Change: SEC rigs.
Speaker Change: Regarding the accounting for this portfolio.
Speaker Change: While we expect some resolution on that in the near future we cannot predict the outcome.
Speaker Change: The noise from this consumer portfolio is unfortunate because.
Speaker Change: These loans really only represent 5% to 6% of total loans.
Dennis Zember: And I say unfortunate because outside of this portfolio and our delayed filings, we've made a lot of progress on our strategy.
Speaker Change: 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 the first to core bank contribution to our results continues to improve the core bank cost of deposits for instance for the quarter was two 1% compared to just <unk>.
Dennis Zember: 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. 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 adjust further in the quarter. Our current bank, excuse me, our core bank's cost of deposits is consistently 40 to 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 Vibe to deliver noticeable convenience to the commercial customers, and the leverage we have with our digital platform.
Speaker Change: <unk> to $1 97, a year ago.
Speaker Change: Alongside the recent rate case, we made the necessary adjustments immediately to keep the margin and non interest excuse me net interest income steady.
Speaker Change: But coming into the quarter, we have $1 1 billion of deposits that we know are going to adjust burger in the quarter.
Speaker Change: Our current bank excuse me our core bank cost of deposits is consistently 40% to 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 with technology that we use like Bob to deliver noticeable convenience to the commercial customers.
Speaker Change: And the leverage we have with our digital platform.
Dennis Zember: Secondly, the core bank building pipelines on new relationships at a very impressive pace. 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.
Speaker Change: Secondly, the core bank building pipelines of new relationships that are very impressive tight.
Speaker Change: While while we do work hard with existing clients and continue to grow with them. The majority of our push in our incentive dollars focused 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 <unk>.
Speaker Change: Second half of this year.
Speaker Change: This leads us to believe that the community bank's ability to be noticeable driver in our growth and operating results is finally present.
Dennis Zember: 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've continued to tweak the model and build unique digital capabilities that equally focus on deposits. As well as commercial loan activity. 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 $20M in non-interest bearing balances once the accounts are fully moved and funded.
A comment or two about panacea. When we started the division. This concept was built to just be alone vertical and really a consumer loan vertical at that to date. We've continued to tweak the model and build unique digital capabilities that equally focused on deposits as well as commercial loan activity.
Speaker Change: Power's team this quarter had several really big wins with continued endorsements from large national Medical Association and a flurry of new commercial deposits at the end of the quarter that will probably mean up to $20 million and noninterest bearing balances what the accounts are fully moved in funding.
Dennis Zember: 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. While we expect a slower fourth quarter, obviously, than what we had in the second third quarter, our year over year growth rate in production says a lot about first recruiting success and second momentum in this industry.
Speaker Change: The development of all the ancillary financial services that we can sail alongside our loan and deposit relationships are in high gear and the early signs about adoption are good.
Speaker Change: We experienced real momentum with our mortgage team.
Our results this quarter.
Speaker Change: 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 lost $277 million of mortgage loans, which was up 67% against the same quarter in 2023.
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.
Dennis Zember: Right now we have the best recruiting pipeline that we have had since we launched this platform in 2022. And combining that Combining that with the momentum that the industry is having gives us real confidence that we're gonna see expansion in the contribution to our ROA and earnings per share that this division provides.
Speaker Change: Right now we have the best recruiting pipeline that we have had since we launched this platform in 2022 and combining that.
Speaker Change: Combining that with the momentum.
Speaker Change: The industry is having gives us real confidence that we're going to see expansion and contribution to our ROA and earnings per share that this division provides.
Dennis Zember: Our announcement about LIFE Premium Finance is very positive but bittersweet. It's very positive for the three gentlemen that we recruited in 2021 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. 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. will 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.
Speaker Change: Our announcement about life premium finance is very positive, but bitter sweet.
Speaker Change: It's very positive for the three gentlemen that we recruited in 2021.
Speaker Change: <unk> came to us with a lot of ambition, who built a platform and deepen their relationships and reputation in dairy industry to a really remarkable level.
The opportunity in this division is probably bigger than my entire balance sheet.
Speaker Change: And it just needed a home similar to the one we announced.
Speaker Change: We will sweep off a similar amount of deposits immediately and.
And shrink total assets by probably about 10%.
Speaker Change: We expect this move by sales to improve tangible common equity ratio by about 75 basis points and improve our net interest margin immediately by six to seven basis points.
Dennis Zember: We expect another five basis points of margin lift over the next several quarters as some of the remaining assets run off.
Speaker Change: We expect another five basis points of margin lift over the next several quarters as some of the remaining assets run off.
Dennis Zember: 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. Fortunately, we had the software already and had done significant engineering 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 yield.
The real lift with our announcement is with regards to mortgage warehouse.
We recruited came from a large bank that was exiting the space alongside an acquisition and we are springing to onboard their client base.
Speaker Change: Fortunately, we had the software already and had done significant engineering.
Speaker Change: And with our small warehouse client base, but what we didn't have was leadership or attained 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.
Dennis Zember: 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. 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.
Speaker Change: Conservatively, if we assume that only 80% of that pickup holds as we build capacity, we're talking about almost 20 basis points pick up in the margin and about 13 basis points or so pickup in our return on asset the.
Speaker Change: The baseline Opex integration really is that materially different than what we had in life premium and we believe credit costs will be similar.
This was a very good opportunity for our company and my line of sight to the operating ratios that Matt and I are are much clearer. After this mode.
Dennis Zember: 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 great 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 property. Our borrower has funded all of the cost overrun, has never missed a payment, and pledged additional collateral, but our appraisals cap rate Our appraisals cap rate almost doubled from the origination date, and so we booked a provision for the small shortfall in collateral values.
On credit quality, we finished the quarter with only 25 basis points of nonperforming assets, which is steady really for the last few quarters, but half of what it was in the third quarter of 2023.
Speaker Change: We still don't have any other real estate and have had little migration between the great during.
Speaker Change: During the quarter, we did conservatively downgrade one commercial real estate property that had been slow to lease up and really affected by vacancy and close or adjacent properties.
Speaker Change: Our borrower has funded all of the cost overruns has never missed a payment and placed additional collateral, but our appraisals cap rate.
Our appraisals cap rate almost doubled from the origination date, and so we booked a provision for the small shortfall in collateral values.
Dennis Zember: 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.
Speaker Change: I don't expect a loss on this asset or migration into nonperforming and also believe we might have downgraded this asset right as cap rates on CRE or we're taking.
Matthew Switzer: With that, Matt, I will turn it over to you. Thank you, 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 8K filed with the SEC last evening and placed on our corporate website.
Matt Switzer: Alright with that Matt I'll turn it over to you for some comments thanks Dennis.
Matt Switzer: 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.
Matthew Switzer: 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.
Matt: This quarter instead of repeating information found in those sources im 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.
Speaker Change: As Dennis mentioned our results for the current period and prior periods include the impact of corrected accounting for third party originated consumer loan portfolio portfolio.
Speaker Change: As detailed in our recently filed 10-K these changes require the following.
Speaker Change: And 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 as accretive over time third party.
Matthew Switzer: 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-interesting and all credit calls are fully recognized, including estimated life-to-loan loss. under Cecil, while potential credit enhancements from the consumer program are recognized as 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.
Speaker Change: Reimbursement for waived interest under our agreement on promotional loans that pay off early as recorded and fee income instead of interest income.
Speaker Change: We recorded 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.
Speaker Change: And all credit costs are fully recognize including estimated life of loan losses under Cecil while potential credit enhancements from the consumer program are recognized as received.
Speaker Change: 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: Adjusting for effects of disconsolidation and non-recurring items, core pre-tax 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 non-recurring items can both be found in our press release and investor 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.
Adjusting for FX 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.
Speaker Change: Adjustment amounts for both PFS consolidation and nonrecurring items can both be found in our press release and Investor presentation.
Speaker Change: This quarter the various interest income and expense items for the consumer program. We've previously discussed contributed.
Speaker Change: <unk> contributed a net of $4 5 million to pretax pre provision earnings in the third quarter versus $3 2 million in the second quarter.
Speaker Change: Under our previous accounting.
Speaker Change: <unk> from this portfolio would have been $3 8 million or 700000 less than reported this quarter.
Matthew Switzer: Last quarter, that would have been 4.5 million or 1.3 million higher than reported. 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 recognize $3 million of interest catch up in the third quarter for promotional loans that exited the period and began amortizing, up substantially from a half million 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.
Last quarter that would've been $4 5 million or $1 3 million higher than reported.
Speaker Change: Adjusting for these differences core pretax pre provision earnings were $9 3 million in the third quarter versus $10 6 million last quarter.
Speaker Change: 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.
Speaker Change: We recognized $3 million of interest catch up in the third quarter for promotional loans that exited the period and mechanic began amortizing.
Speaker Change: Up substantially from $5 million in the second quarter.
Speaker Change: As a result, our reported margin was 297% in the third quarter up from $2, 72% in the second quarter.
Matthew Switzer: 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. We also recognize two and a half million of interest reimbursement from our third party partner for promotional loans that paid off early in the third quarter, up from one and a half million last quarter. all of which is reflected in non-interest income and not in interest income or market. We have $60 million of promotional loans deferring interest of September 30, with $17 million and $21 million reaching the end of their promotional periods in the fourth quarter and first quarter of 2025 respectively.
Speaker Change: Adjusting for the effects of the timing differences our margin would have been 283% in the third quarter down only three basis points from the second quarter.
Speaker Change: 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 one 5 million last quarter.
Speaker Change: All of which is reflected of noninterest income and not in interest income or margin.
Speaker Change: We have $60 million of promotional loans deferring interest at September 30 was $17 million and $21 million, reaching the end of their promotional periods in the fourth quarter and first quarter of 2025, respectively.
Matthew Switzer: 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 expenses $31 million, which included $2.7 million of consolidated PFH expenses, or $28.4 million net compared to $27.4 million last quarter. 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.
Speaker Change: Lastly, I do want to spend a minute on noninterest expense.
Speaker Change: As we highlighted in our earnings release and Investor presentation.
Speaker Change: Reported noninterest expense was 31 million, which included $2 7 million of consolidated <unk> expenses or 28, four net compared to $27 4 million last quarter.
Speaker Change: Mortgage expenses were $6 4 million in the third quarter up from $6 1 million last quarter on higher volume.
Speaker Change: Excluding these expenses as well as nonrecurring 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.
Speaker Change: And meaningfully in 2025.
Operator: With that, Operator, we can now open the line for questions. 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.
Speaker Change: With that operator, we can now open the line for questions.
Speaker Change: Thank you once again as a reminder, if you would like to ask a question. Please press star followed that number one on your telephone keypad. Once again that is star followed by the number one.
Russell Gunther: Our first question comes from the line of Russell Gunther with Stevens Inc. Your line is open.
Speaker Change: Our first question comes from the line of Russell Gunther with Stephens, Inc. Your line is open.
Nicholas Lorenzoni: 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?
Speaker Change: Hey, this is Nick filling in for Russell bounce there 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.
Nicholas Lorenzoni: should be relatively flat. 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, we would similar to everything else we've done, we probably display it kind of like you know, an operating segment.
Speaker Change: Should be relatively flat net.
Speaker Change: Okay, and then going on mortgage warehouse do you plan to break it that those loans out separately from a modeling perspective.
Speaker Change: Okay.
Speaker Change: Modeling I think we would.
Speaker Change: Similar to everything else, we've done we probably displace kind of light.
Speaker Change: And operating segment.
Nicholas Lorenzoni: When you say modeling, you mean for maybe for for loan loss reserving or for interest rate risk. Margin. Yes, that's what I mean, no loss reserved. Yeah, I mean, it's going to be not that material in the fourth quarter, depending on how the next couple weeks go. But as we move through 25, we'll we will certainly breakout as much information as possible so you can get a sense. 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.
Speaker Change: When you say modeling you made for maybe firm.
Speaker Change: For loan loss reserving or for interest rate risk.
Speaker Change: Or margin yet.
Speaker Change: Yes, that's what I mean, the loss reserve.
Yes, I mean, it's going to be.
Speaker Change: Not that material in the fourth quarter.
Speaker Change: Spending on our next couple of weeks ago, but.
Speaker Change: As we move through 'twenty five we will certainly.
Speaker Change: Break out as much information as possible. So you can get a sense for the trends.
Speaker Change: Okay that makes sense and if I remember correctly I believe the deck.
Speaker Change: It will be either in the <unk> 24 to <unk> 25, and I was just curious if there was going to be thank.
Speaker Change: If you guys had a good growth rate on those mortgage warehouse loans.
Nicholas Lorenzoni: What was, what are you referring to in the fourth quarter or first quarter? when you when you start breaking out when you start breaking out and disclosing the mortgage warehouse loan. I would tell you that I think, I mean, we're sprinting to sort of add their, their, 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.
Speaker Change: What was why are you furniture in the fourth quarter or first quarter.
Speaker Change: When you when you start breaking out when you start breaking out in disclosing the mortgage warehouse loans.
Speaker Change: Yes, that's right.
Speaker Change: I think I mean, we're sprinting to sort of add there.
Are customers in the fourth quarter.
Speaker Change: In the first quarter are slower in the mortgage industry generally.
Speaker Change: This is really a good time to be contacting the customers.
I think Dave.
Speaker Change: They left their former bank with about 215 customers they've been employed here for about three weeks I think we are close to 24 customers now.
Nicholas Lorenzoni: We're trying to get maybe to 75 by the end of the year. And I think we'll just, you know, sort of sprinting to 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. 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 to 450 million of life premium loans with these mortgage warehouse loans.
Speaker Change: We're trying to get maybe 275 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.
Speaker Change: <unk> continued to add.
Speaker Change: I mean again, we're moving off $375 million or so of <unk>.
Speaker Change: Life premium loans, we think theres going to be another probably $50 million or so that runs off.
Through the middle of next year.
Speaker Change: So really we're looking to replace call it, let's say $400 million to $450 million of life premium volumes with these mortgage warehouse loans and I think for the.
Nicholas Lorenzoni: 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 Okay, great. That makes sense.
Speaker Change: For next year I think the average.
Mortgage warehouse book ethane.
Speaker Change: After a comfortable at $400 million for the whole year.
Speaker Change: Okay, great that makes sense and now on ROA.
Nicholas Lorenzoni: 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 slide path of to when you think you guys are going to get 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. You know, 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.
Speaker Change: Previously laid out a target for a sustainable 1% ROA can you.
Walk us or walk me through the glide path of when you think you guys are going to get there.
Speaker Change: Yeah.
Speaker Change: I think.
Speaker Change: 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.
Speaker Change: 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 experienced volatility, but really only for <unk>.
Nicholas Lorenzoni: largely a couple more quarters, potentially, because most of the volatility is tied promotional loans, and they bleed off pretty fast for the next two to three quarters. So setting all that aside, you know, we're moving off a pretty good-sized portfolio but going to be replacing it almost dollar-for-dollar by the middle of 2025, and we think at higher rates and incrementally better profitability. So you combine that with some decent expense, say, or cost controls, or 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.
Speaker Change: Largely a couple more quarters potentially because most of the volatility is tied to these promotional loans in there they bleed off pretty fast for the next two to three quarters.
Speaker Change: So setting all that aside.
Speaker Change: We're moving off a pretty good sized portfolio, but going to be replacing it.
Speaker Change: Almost dollar for dollar by the middle of 'twenty five.
Speaker Change: And we think at higher rates.
Speaker Change: Incrementally better profitability.
Speaker Change: So you combine that with us.
Speaker Change: Expense say are.
Speaker Change: Cost controls.
Our normal retail mortgage operation, we're predicting projecting that to do better next year.
Speaker Change: And we expect the core bank.
Speaker Change: Tribute more next year and to see some market margin expansion on low.
Nicholas Lorenzoni: Incorporated. 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 how all that combines, we think that gets us to At least 1%. Yeah, maybe more. I mean, you can't, 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 that's probably another seven or eight to 10 basis points.
Speaker Change: A core basis, I mean I can't.
Speaker Change: Layout all the.
Speaker Change: Basis points contribution that all of those puts and takes are going to add up but we as we look at at how all of that combines we think that gets us to.
Speaker Change: At least 1% yet maybe more I mean, you can't.
Speaker Change: There are so many moving parts, but I mean, I think the mortgage.
Speaker Change: The momentum we have in mortgage.
Speaker Change: Talking about quarter over quarter growth and locked loans and revenues and all that.
Speaker Change: I mean, if that holds into next year, that's probably.
That's probably another seven or eight to 10 basis points.
Nicholas Lorenzoni: Life Premium, Trading Life Premium. for the warehouse opportunity. Like we said, it's probably 13 basis points. The core bank, no question rates falling, like I said, with a billion dollars 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 going to power more margin and more ROA. So, again, like I'm, like I was saying, I mean, the, the energy and enthusiasm we have for the line of sight to the, to the numbers you're talking about or better. It's really good. It's, it's Anyway, I'll leave it.
Speaker Change: <unk> premium trading life premium.
Speaker Change: For the warehouse.
Speaker Change: Opportunity like we said, it's probably 13 basis points.
Speaker Change: The core bank.
Speaker Change: No question rates falling like I said with $1 billion of.
Speaker Change: Deposits still left to be repriced this quarter.
Speaker Change: There is no doubt that the sensitivity to falling rates on our liability side is going to power more margin and more ROI.
Speaker Change: Again, like I was saying I mean, the energy and enthusiasm we have for that line of sight.
Speaker Change: The numbers you are talking about or better.
Speaker Change: It is really good.
Yes.
Speaker Change: Anyway, I'll leave you there.
Nicholas Lorenzoni: No, that's perfect. That helps a lot.
Speaker Change: No thats perfect that helps a lot and thats. It on my questions. Thanks, Thanks for answering them.
Nicholas Lorenzoni: And that's it on my questions. Thanks. Thanks for answering.
Speaker Change: Okay.
Christopher Marinac: Your next question comes from the line of Christopher Marinac with Jannie Montgomery Stock. Hey, good morning. Thanks for hosting us. Matt, just a quick housekeeping question. So the numbers we see in the press release and the core release, those are going to those reflect toward the new information and that will be kind of verified once the cues are filed. Do I have that right? Yes, and those are all all the quarters restated for the change in accounting. So it's all been got it. Perfect. That's what I thought. Okay, great. Just wanted to be 100% sure.
Speaker Change: Your next question comes from the line of Christopher Merrimack with Janney Montgomery stock.
Christopher Merrimack: Hey, good morning, Thanks for hosting us.
Christopher Merrimack: Matt just a quick housekeeping question. So the numbers, we see in the press release and the quarterly as those are going to those reflect towards the new information and that will be kind of verified once the accuser file do I do I have that right.
Yes, and those are all all of the quarters restated for the change in accounting. So it's all of them got it.
Christopher Merrimack: Pushed backwards.
Speaker Change: Perfect. That's what I thought okay, great just wanted to be 100% sure.
Christopher Marinac: The criticized loan numbers were stable this quarter. Do you see any movement from that? And does the way that the consumer portfolio behaves impact those at all? No, those are not those are not reflected in those. It's those loans, you know, are typical consumer loans, they get the 90 days and they charge off. That's what I thought. Okay. And then the trend on just general, you know, coming and going is on, you know, commercial criticized and 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.
Speaker Change: The criticized loan numbers were stable this quarter do you see any movement from that and does the way that the consumer portfolio behaved impact those at all.
Speaker Change: No those are not those are not reflected in those.
Those loans are typical consumer loans as they get to 90 days on the charge off.
Speaker Change: That's what I thought okay, and then the trend on just general coming and goings on.
Speaker Change: Commercial.
Criticized and special about our substandard.
I mean outside of the two credits the more significant one and a much smaller one in the.
Speaker Change: Quarter that went from special mention to substandard.
Christopher Marinac: 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 with some surprise. Maybe the. evaluation that we had to rely on when we put the reserve on the bigger one was a little bit of a surprise, but we think that very, very conservative. And the customers continue to pay. So Unfortunately, you still have to use their appraisal when it. and others. Thank you.
Speaker Change: We're not 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 where this came out of the blue.
Speaker Change: Some surprise maybe the.
Valuation.
Speaker Change: That we had to rely on one way, but the.
Speaker Change: From a reserve on the <unk> was a little bit of a surprise, but we think thats.
Speaker Change: Very very conservative.
Speaker Change: And the customers continued to pay so.
Speaker Change: And unfortunately, they will have to use their appraisal when it comes in.
Speaker Change: But otherwise.
Christopher Marinac: I can't think of any credits that have moved into a problem bucket or started to creep up the risk rating curve that we weren't already aware of or have been watching. Great, thank you for that color.
Speaker Change: I can't think of any credits that have.
Speaker Change: Moved into a problem bucket or started to creep up the risk curve risk rating curve.
Speaker Change: We weren't already aware of or.
I have been watching.
Speaker Change: Great. Thank you for that color and then another question just goes back to the cost of funds should should that rate that we see this quarter.
Christopher Marinac: 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. So the first part of your question, yes, I mean, we saw cost of funds tick 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.
Speaker Change: 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.
Speaker Change: Looking forward the next four to five quarters.
Speaker Change: For the first part of your question, Yes, I mean, we saw cost of funds ticked down in September.
Speaker Change: So it.
Speaker Change: Basically peaked in August.
Speaker Change: As to betas.
Speaker Change: Some of it is going to depend on.
What happens with the next.
Matthew Switzer: FedCut, field-wide competitors have Lower rights, 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. our overall data for the core bank. 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 FedCut. They do cut again. We're still going to talk, but somewhat. Some of it's dictated by the competitive environment.
Fed cut feels like competitors have.
Speaker Change: Lower right. So we have to.
Speaker Change: Particularly in the core bank.
Speaker Change: Before the higher rate stuff that had been.
Speaker Change: Kind of at the upper end of the.
Speaker Change: Cost structure, we were pretty aggressive movement in some of those down.
Speaker Change: Again, our overall data for the core bank is probably.
Speaker Change: 20%, maybe after the last move.
Speaker Change: If the fed doesn't cut.
Speaker Change: I think we'll have an opportunity actually to continue to incrementally teeth, Lulu and stuff down and get some more data on the FERC fed cut.
Speaker Change: If they do cut again.
Speaker Change: We're still going to clock, but somewhat.
Speaker Change: Some of it's dictated by the competitive environment.
Matthew Switzer: Unknown Speaker, Matthew Switzer, Nicholas Lorenzoni, Cheryl Wood, William Cook, Primis Financial 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 deposit. There's 915 or 920 million dollars there. One, we're doing a little bit of a, we're doing a small sort of upgrade slash conversion on the customer experience here in about a month. And we think there's another right move coming, or if there is another right move coming, we did not want to be pinging them aggressively.
And what they're doing with their rates not as many people seem to have been aggressive cutting after that first move.
Speaker Change: Great and one more thing Matt.
Matt and I have been watching.
Speaker Change: Our digital <unk>.
Speaker Change: 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 deposit there is 915 or $920 million there.
One were doing a little bit of we're doing a small sort of upgrade slash conversion on the date on the customer experience here in about a month.
Speaker Change: And we think there is another rate move come in or if there is another right move come in we did not want to be.
Speaker Change: Painting them.
Speaker Change: Aggressively so.
Matthew Switzer: I mean, that's that plus, you know, some broker deposits that we have that are coming up in December. I mean, there's a billion dollars 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 going to do and get past our conversion. So, I mean, I know you and 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 a an earning asset opportunity with Mortgage Warehouse.
Speaker Change: I mean, that's that plus some broker deposits that we have that are coming up in December I mean, theres, a $1 billion of deposits on our balance sheet and it never really got moved on this last rate cut that we are going to move this quarter.
Speaker Change: Just want a little more line of sight into what the fed is going to do.
Sure.
Speaker Change: Get past our conversion.
So I mean I know your question about have we paid so there is no question, we paid I think.
How much we can get out of that.
Ahead of maybe having on.
Speaker Change: Earning asset opportunity with mortgage warehouse, we just want to be smart and cautious there, but now we're going to.
Christopher Marinac: We just want to be smart and cautious there but now we're going to you're going to see some some noticeable improvement in cost of funds. And even on the digital bank what Dennis is referring to we were we've been You know, appropriately measured and 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. the digital platform. without being real aggressive. Okay, great.
Speaker Change: Youre going to see some some noticeable improvement in cost of funds and even on the digital bank.
Speaker Change: Dennis is referring to we were we've been.
Speaker Change: Appropriately measured in 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 were averaging down the cost of the <unk>.
Speaker Change: Digital platform.
Speaker Change: Even without being real aggressive for existing money.
Christopher Marinac: Yeah, I was gonna ask about the new inflows that you saw. So you sort of address 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. Okay, great. Thanks for all the information today as always, and I appreciate you hosting the call. Thanks, Chris.
Speaker Change: Okay, Great Yeah, I was going to ask about the new inflows that you saw so you sort of address 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 experiences.
Speaker Change: Yes.
Speaker Change: Okay, great. Thanks for all the information today as always and I appreciate you hosting the call.
Speaker Change: Thanks, Chris.
Operator: There are no further questions at this time.
Speaker Change: There are no further questions at this time, I'll hand things back over to Dennis Zimbra CEO.
Dennis Zember: 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 email, and we'll get back to you. Thank you. Have a great weekend. Thank you.
Speaker Change: For some final remarks.
Dennis Zimbra: Alright. Thank you again for your for your participation and your interest if you have any questions or comments of course, Matt Matt.
Dennis Zimbra: Our 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.
Operator: This concludes today's conference call. You may now disconnect.
Speaker Change: Thank you. This concludes today's conference call you may now disconnect.
Yeah.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Sure.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: [music].
Sure.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Sure.
Sure.