Primis Financial Corp.

Good morning. My name is David and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Primus Financial Corp second quarter earnings call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you'd like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one once again. Thank you. Matthew Switzer, Chief Financial Officer, you may begin your conference.

Good morning and thank you for joining us. Before we begin, please note that many of our comments during this call will be forward-looking statements which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Further discussion of the company's risk factors and other important information regarding our forward-looking statements are part of our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has also been posted to the investor relations section of our corporate website, firmusbank.com. We undertake no obligation to update or revise forward-looking statements to reflect change assumptions, the occurrence of unanticipated events or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. A reconciliation of the non-GAAP measures to the most comparable GAAP measures can be found in our earnings release. I will now turn the call over to our President and Chief Executive Officer, Dennis Ember.

Thank you, Matt, and thank you to all of you that have joined our second quarter conference call. I know this is a noisy quarter, but I really want to stress how excited I am for how we position the bank going forward. The cost savings initiative is pretty hard, but will make us much leaner and more profitable right away. The credit charge to move MPAs position us to have best in class credit quality with tiny concentrations in office or retail CRE. Our digital platform has gone from 50 basis points over wholesale money to about 50 basis points below wholesale money in just six months. And lastly, while a lot of the industry is implementing the needed cost saves and branch reductions to offset revenue headwinds, I think we can offset all of ours with our move to the gain on sales strategy. Let me give a little more color on all of that. First, the cost savings initiative. Since I came here in 2020, we have consolidated quite a few branches and worked pretty hard on the sales culture. After this recent consolidation is finished, we'll have 24 branches with core bank deposits of $2.5 billion. In the last three years, we've grown checking accounts in the core bank by about 12% annualized. And we have completely, 100%, run away from all brokered CDs. The quality and value of this community bank's deposit portfolio, especially in this rate environment, has never been higher than it is right now. And consolidating that value into fewer branches with the best salespeople in our region is something to be excited about. Matt's going to give more color about the cost savings initiative in his remarks, but I believe this can be a transformative moment for us, and I have seen over and over in my career how this discipline ultimately yields more savings and long-term better results. Still on the value of the community bank, our MPA levels were concentrated in just two relationships, but it still damaged our ability to distinguish ourselves. focusing on, excuse me, so closing that one loan sale that we did in the quarter and taking contracts on the others position us to have only 13 basis points of non-performing assets. We have never chased long maturity, hyper-competitive commercial real estate in our region. We've always focused on profitable owner-occupied or CNI deals in the core bank and medical professionals and cash-secured loans in the lines of business. I think we're very well positioned for whatever's ahead, and this lower level of NPA will allow us to experience the value from that. On the digital platform, we all questioned at the outset, honestly, if we could find a pathway to real value and profitability in the digital customers. And we are working very hard to make sure that value proposition becomes a reality using all of the community bank and relationship skills that we have. In just six months, we've been able to add, to be able to move almost 100 basis points from 50 basis points ahead to 50 basis points below wholesale money. Lastly, we've had virtually no account attrition from our peak, and we've rebuilt almost every service platform we have to make sure our service and experience adds to our efforts. Touching on our gain on sale, our pivot to the gain on sale model, our digital platform was meant to fully fund life premium finance and panacea and produce 325 basis points of margin. The loan businesses were meant to lessen, we went into the loan businesses simply to lessen the pressure we had to book every CRE deal that we looked at and to push higher quality credits into our book. There is no question we have done the latter, but the inverted yield curve means that on balance sheet, we're only getting about 200 to 210 basis points of incremental margin. I know that's too thin to keep leveraging, but I also know the yield curve will ultimately come back. And instead of shutting down production and waiting and having to maybe rebuild the platforms, we've been instead building interest and commitments to sell these higher quality loans. And as I sit here right now, I believe this strategy can completely neutralize all of the net interest income shrinkage that we experienced in the quarter, which is important because I think that means the cost savings that Matt's going to discuss about are more bottom line oriented than just replacement for temporary revenue declines. Mortgage force this quarter was a standout. Right now, we are slowly and methodically adding a couple producers here and there. who are very reasonable about signing bonuses and have been producing solid levels in this environment. We've grown from a $200 million shop to a $700 million shop, and we're profitable all three months in the second quarter. Being profitable right now in this industry is, honestly, it's noteworthy, but doing it as you're growing and at these lower levels is even more noteworthy. I'm really proud of what our team's doing here, cannot wait for the day that we have an industry, a normal industry to operate in. All of that takes me to page five in our slide deck where Matt has outlined the current quarter with the impact of all these changes. Importantly, our non-branch savings have already been completed as of this month. So a good portion of that will be in our third quarter run rate. What the math doesn't include is about $800,000 a quarter of expenses related to bank operations that will result from tweaking some responsibilities and risk management. And we honestly both believe this loan sale strategy is bigger than $1 million. With that loan sale strategy in place, the provisioning will fall as well, further improving the bottom line. So everything we've done here is just recalibrating the the bank to be able to produce a minimum 1% ROA in this environment. Before I turn it back over to Matt, I want to say something about the employee fraud. First, I want to stress that I am confident that the vast majority of this is coming back from our insurance. But given the timing of when we discovered it and our investigation, we did not book that receivable. I believe in short order there will be only minimal financial impact from this event. God knows I am not trying to spend this. But the fact that he spent a decade originating fake loans and stocks three years ago illustrates how important good controls and procedures are and for the need to have experts in administrative roles to maintain quality. For the last three years, he's basically just serviced the existing fraudulent loans with past proceeds until our credit and regional staff noticed a few unusual things and dug in to discover this. I expect that Matt and our forensic accountant will be done with their work shortly. We'll file the claim and work through the recovery process quickly. With that, Matt, I'll turn it back to you.