Primis Financial Corp. Q2 FY2025 Earnings Call

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Primis Financial Corp. Second Quarter Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Matt Switzer, Chief Financial Officer. Please go ahead.

Good morning, and thank you for joining us for Primis Financial Corp.'s 2025 Second Quarter Webcast and Conference Call. Before we begin, please note that many of our comments during this call will be forward-looking statements, which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Further discussion of the company's risk factors and other important information regarding our forward-looking statements are part of our recent filings with the Securities and Exchange Commission, including our recently filed earnings release and investor presentation, 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, and thank you to all of you who have joined our second quarter conference call. Today, I want to cover several items as succinctly as I can. First, our quarter results and where I see our recurring earnings, how our operating leverage is boosting our results, a recap on our operating divisions, and then lastly, a very subtle pitch on our stock. For the second quarter, we're showing about $8.4 million in net income or $0.34 per share. This quarter included an additional pretax gain of $7.5 million on a portion of our interest in PFH. We offset that gain with about $1.2 million of support on our new teams in Primis Mortgage. We had the last write-off of noticeable interest on the maturing promo loans of about $2 million and then some other expenses that Matt highlighted on the slide in our deck on Slide 6. When you do all that, we get back to about $8.4 million of pretax pre-provision earnings. And then also on the slide, there are some items that we think are going to affect and improve future quarters, and outline our continued path higher. The number one thing driving our results right now is very wide operating leverage. Quickly, the math is that we're getting incremental margins in the mid-4% range, and we're holding operating expenses in a steady to declining state. When we sold the Life premium portfolio, we moved off about $375 million of very safe earning assets, but had no related decline in operating expenses. We concurrently added the warehouse lending team at that time and have been moving aggressively on the core bank's pipeline. The graph and data in our investor presentation on Slide 7 show how high our incremental margins are and how that's fueling our spread income. Importantly, I would point out, as I have in the past, the power of this digital platform alongside a strong community bank. The table shows that digital raised $36 million nationwide at 4.06%, which is right on top of the rate specials I'm seeing on regional bank and national bank websites. The difference is ours is targeted. It's barely marketed and it's massively scalable. That means any strategy we have on digital does not affect the very profitable relationship pricing in my core franchise. Consequently, we priced about $120 million of deposits in the second quarter and our effective cost was only 2.89%, which is 32% lower than it was the same quarter a year ago. We're beating the competition on incremental yields and cost of deposits, and we're doing it with a national deposit platform supporting a core bank. For the year, we've grown checking accounts by almost 18% annualized, and we had some real needle movers here pushed to the third quarter. The point of all this is that while our incremental loan yields are really good, we're getting just as much of our margin results and net interest income growth from the deposit side. Slide 15 shows that our operating expenses are contained and my belief here is that we can hold this level or lower through the end of 2026. That's supported by a few key items that I'll talk about here. First, as we noted in the press release, we've negotiated with our core provider a solution that would save us about $300,000 a month starting in August. There are some additional technology-oriented savings scattered through the next 8 quarters from other vendor consolidation and amortization runoff that will move this savings to about $600,000 per month in early 2027. Secondly, given that our company has grown exclusively from organic efforts, Matt is going to smile about this. Given that our company has grown exclusively from organic efforts, and has done no M&A since 2018 or earlier 2017. We have officially amortized off the last remaining portion of our deposit intangible. In the second quarter, that amounted to about $290,000, and I'll go off comments here and say this is the first time in my banking career that I have not had deposit intangible amortization. So a new stage of my career. Anyway, lastly, back on the note, the company continues to slowly and methodically restructure by leaning harder on our ambitious and technical experts and consolidating roles where we can for more than 2 years, even through raises and team builds and all, we're essentially flat on base compensation in the company outside of mortgage. And as we have turnover, we are very successful reallocating duties to our ambitious and technical champions in the company. And I believe that strategy is something we can sustain for about another 4 to 6 quarters before it's fully exhausted. A quick recap on our operating divisions and their results. First is the core bank. The core bank is still almost 70% of our total balance sheet and really our workhorse. On Slide 8, we're showing the core bank's return on assets of about 1.38%, which is supported by a very low cost of deposits in the 1.75% range. The core bank sales efforts on the loan side are only minimally centered on investor commercial real estate and on the deposit side are centered almost exclusively on low-cost deposits using our branch network and our proprietary delivery app called VIBE. Mortgage warehouse continues to build lines and relationships and volume. Slide 9 shows the amount of pretax contribution with key operating ratios. The fact that we're only 6 months into this strategy and realizing these kind of ratios and contribution is pretty exciting. And at scale, this strategy will materially move virtually every operating ratio we track and push out a monthly contribution that will move the needle for us. Primis Mortgage closed about $323 million in the quarter, which is up about 52% from the same quarter in 2024. We did support our new teams with about $1.2 million of draws and pricing concessions, which is only about 35 basis points of acquisition cost. A lot of our new volume is FHA oriented with higher yields, much higher yields and construction perm, which we believe is important to smooth out the earnings in this business as it is naturally slower in the fourth quarter. Without the support of the new teams, I have the mortgage company profitability at about 46 basis points on closed loans, which is about the same level we had last year. Panacea, lastly, is just so impressive, rated the number one bank for doctors on Google. It's endorsed by about anyone that's important in this industry to doctors. Their digital solutions are compelling and reliable, but they still bank doctors, vets and dentists with real attention and humans. For the quarter, they grew to over $500 million of outstanding credit and really focused hard on the deposit side, closing some pretty big deposits at the end of the quarter. And to illustrate the momentum here, I looked this morning, Panacea had cracked $150 million of total deposits and had moved to over 30% coverage ratio on their total loans. As I close, I want to go back in the presentation to Slide 5, why should you own FRST right now? And I'll be honest and say it's been hard over the past year to be able to put out a slide like this because I knew the volatility in our results that the consumer book would cause. But with that behind us, I'm compelled again to have a slide like this. In our comp peer group, we're the fourth cheapest stock. And it's hard to say that as an advantage. But we're the fourth cheapest stock, barely over tangible book value. So the entry point here is attractive. We are an organic growth story. So all of the work that we've done to build really scalable engines that can move earnings and move the balance sheet will benefit current shareholders. The operating leverage I noted that we outlined is absolutely unique and a real driver to earnings this quarter and beyond. Importantly, we have no negative influences on our company that would cause earnings pressure or risk issues. And that's a real critical element for a CEO who's trying to help his staff build what shareholders really want. And lastly, maybe most importantly, I think we're unique and not in a bad way. We, in our region, are 100% core funded. We have very little concentrations in commercial real estate. And I really don't see the pressures that would cause that to change. All right, Matt, with that succinct summary on our quarter, I'll turn it over to you.

I appreciate that, Dennis. As a reminder, a discussion of our financial results can be found in our press release and investor presentation found on our website and in our 8-K filed with the SEC. Dennis covered a lot of these points, so I will be brief and encourage you to review both of those documents for more information. As previously disclosed, we deconsolidated Panacea Financial Holdings or PFH, as of March 31, which means PFH's balance sheet is not included in our consolidated balance sheet at the end of the first quarter and thereafter. PFH's income was included for the first quarter of 2025 and prior quarters but was not part of our consolidated financials beginning with the second quarter of 2025. We also disclosed we sold down some of our investment in PFH in the second quarter, yielding proceeds of approximately $22 million and an additional gain of $7.4 million in the quarter. The second quarter included a number of items, both positive and negative, but on balance, we're on track to achieving the results in the second half of 2025 that we've been driving towards. Gross loans held for investment increased almost 12% annualized from March 31 to June 30. Excluding runoff of life premium finance and consumer program portfolios, gross loans would have increased approximately 15% annualized, led by growth in Panacea and mortgage warehouse. This growth is moving us towards our target level of earning assets with strong yields. Importantly, noninterest-bearing deposits increased $22 million or 19% annualized in the quarter, with a strong contribution from the core bank and mortgage warehouse. Our strategies on that front are meaningful, and we believe are going to continue driving low-cost deposit growth. As Dennis discussed, our focus has been making sure we execute on the strategies that drive our return on assets higher from here, which we've done. Core net interest margin, excluding the effects of the consumer program in the second quarter was 3.15% and up from a reported 3.13% last quarter and 280 basis points in the year ago period. Because this quarter had significant interest reversals on the consumer program promo loans without offsetting interest recognition, reported net interest income declined in the quarter. However, excluding interest reversals on consumer program loans in the second quarter, net interest income would have been $27.5 million versus $26.4 million in the first quarter and $24.9 million a year ago. As described further in our earnings release, our level of promo activity is substantially lower from here, so we should not see the large reductions to interest income from this point forward. We are still booking new loans with yields well over 7%, and we have a substantial amount of loans repricing later this year and next, below that level that will continue to help the margin. Core bank cost of deposits remains very attractive at 179 basis points in the quarter, and we recently lowered rates on the digital platform 15 basis points and believe that we have an opportunity to lower further on that platform in the coming months. Our provision expense this quarter was $1.2 million, driven by growth in the portfolio and moderate charge-off activity. We are pleased to report that we did not require a provision for the consumer program this quarter and are working hard with our own team to drive down delinquencies and losses in that portfolio. Noninterest income was $10.6 million in the quarter versus $8.5 million last quarter when excluding PFH-related gains with increased mortgage revenue as the primary driver. Mortgage revenue and profitability was impacted by the expansion in late Q1, driven by temporary pricing concessions and compensation report, as Dennis described, all of which is done at June 30. We also closed $26 million of construction-to-perm loans in the quarter, where we won't see gain on sale revenue until later this year. Lastly, we are in the early stages of ramping up our SBA lending activities and realized gains of $210,000 in the second quarter. While small, these are the first SBA gains we have recorded in roughly a year, and we expect that revenue to build the rest of this year and into 2026. On the expense side, when you exclude mortgage volatility and nonrecurring items, our core expenses were approximately $22.7 million versus $20.4 million in the first quarter. There are a handful of items described in the earnings release that are one-time in nature, but don't rise to the definition of nonrecurring for reporting purposes and totaled approximately $1.7 million. Normalizing for these core noninterest expenses was approximately $21 million in the second quarter. The technology savings we have discussed, combined with the ending of our CDI amortization are expected to lower our run rate by $1.5 million per quarter with approximately $900,000 of that expected in the third quarter. We have other opportunities, as Dennis alluded to, that we are chasing from an efficiency and vendor consolidation standpoint that we believe can get that run rate down to $18 million to $18.5 million per quarter in 2026. In summary, as we have detailed in the earnings release and investor presentation, the second quarter is the last quarter to bear significant noise due to the consumer program and the associated catching up on filings. Normalizing for those items, our run rate pretax pre-provision earnings were approximately $8.4 million in the second quarter. With mortgage bouncing back, expense savings from technology contracts and growth and repricing of earning assets, that number is expected to grow to over $13 million heading into 2026, which equates to our 1% return on assets goal. We have consistently pointed to the end of 2025 as our target for getting to our profitability goals. We have substantial tailwinds from here that get us there without Herculean efforts, just straightforward blocking and tackling. We cannot be more optimistic about how we are positioned and our ability to generate attractive earnings in the coming quarters. With that, operator, we can now open the line for Q&A.

We'll now turn it over to Russell Gunther at Stephens for questions.

This is Nick filling in for Russell. So to start off, I wanted to see if you guys could provide some more color around your loan growth expectations just for the back half of this year and overall '26, but maybe particularly touch a little bit on growth expectations for Panacea and mortgage warehouse.

I believe the warehouse for the quarter ended at $180 million. For the following year, I think a range of $250 million to $350 million is very realistic, rather than aiming for $500 million. We anticipate growth to be slower in the first and fourth quarters. Panacea has significant potential with a large pipeline and good adoption rates. Their sales team is becoming more recognized, which is positively impacting their performance. However, their growth may exceed what our balance sheet can accommodate. They've been exploring capital market solutions and engaging large banks that are interested in their offerings. I estimate we could see growth in the $100 million to $150 million range next year, but this might only contribute 30% or 40% of their overall growth to our balance sheet. The core bank should see some opportunities, particularly in residential construction to support the mortgage sector. Overall, I think we might aim for high single-digit growth next year, considering factors like shrinkage in life premiums and consumer lending.

For next year and likely for the remainder of this year, growth may be in the low to mid-single digits as the mortgage warehouse is expected to moderate in the fourth quarter. We anticipate some reduction in those runoff books. Panacea might find opportunities to move some items off the balance sheet this year. Therefore, our expectation is that we will not see 12% to 15% growth in the second half of this year; it will be much slower.

Okay. Awesome. That's great. Next, so with your core NIM sitting around, what was it, 3.15 in this quarter, how much improvement or even compression do you guys anticipate over the next few quarters if you're assuming no rate cuts?

We're still assuming, call it, we've been seeing about 2 basis points a month in margin expansion. And with the reduction in the digital platform and incremental growth and repricing, I mean we're still expecting that to creep up for the rest of the year probably into the mid-3.20s by the time we get to the end of the year, maybe 3%.

I kind of want to continue along the same lines of questions. I want to go back, I guess, to the general bank or the core bank and compare kind of how that growth is going to be as a percentage of the overall earning asset growth, not just this next quarter, but also thinking beyond Q3? And how much of that growth in the core bank is going to be local versus your digital changes?

I believe that on the deposit side, digital is likely to remain flat for the rest of the year, but it could see a 10% increase next year, around $100 million. I am confident that the core bank will outpace digital growth in deposits due to our growth pipeline and how effectively we're implementing VIBE and other treasury services, along with our focused deposit strategy. Our main goal for enhancing core earnings is improving operating margins, and we consider maintaining low-cost deposit growth, keeping incremental deposit yields in the low to mid-2% range, to be essential for that. Therefore, I firmly believe that the core bank will definitely outgrow digital. Additionally, I don’t perceive any pressures that would prompt us to be more aggressive on the digital side. Recently, we reduced rates on digital deposits, and we've experienced very little runoff, not even 1%. However, this may have slightly impacted our upside growth.

Okay. Super. And then launching VIBE in other markets, that's still part of the core bank as you account for that. That's not included at all in the digital activity. Okay. That's what I thought. The growth in the mortgage side that you mentioned in the slides before by year-end, does that predicate any drop in interest rates? Or can you do that without external help?

We believe this is our current position. Looking at our team, particularly with the new members and hires we've made in the first half of the year, this is where we stand. I would say that we can expect volume related to the 30-year mortgage to be around 675, likely above 6.5%, but probably closer to 7%. This is the volume we anticipate. If interest rates drop to the low 6s, we might see a volume increase of 30% to 40%, and if we reach the 5s, the increase could be 60% to 70%, primarily due to the impact of a refinancing boom.

Got it. And then two, I guess, other follow-up questions. Just one on sort of the change in criticized and classified improving. Does that portend lower charge-offs? Or is there kind of a base level of charge-offs we should just sort of think out loud about going forward?

I think I don't know that they can get much lower net charge-offs.

On a core basis, we really didn't have a high level of charge-offs anyway.

I think our net charge-offs are in line with industry standards, probably around 10. We appreciate seeing that figure decline, but I don't expect it to indicate significantly lower charge-offs in the future. What will really impact charge-offs is that we've mostly moved past promotional loans. A year ago, we had $90 million in various types of promotional loans, and we've managed to reduce that by about 90% despite considerable fluctuations in our results and charge-offs. Right now, we're left with just $9 million of those loans, which I believe will be resolved over the next six quarters.

And it's not like we're going to charge off all that.

Okay. So I mean, so that mid-teens level we see on Slide 16, give or take, that's kind of where you're at?

Yes.

And then on core expenses, what would be kind of an appropriate growth rate in general? It's not necessarily looking at next quarter per se, but just thinking out loud the next 6 to 7 quarters as you continue to grow the whole enterprise.

Well, we're trying to get that negative in the short term. But if we get down to our kind of $18 million to $18.5 million level with the tech savings and some other initiatives. From there, we would expect kind of normal inflation, call it, 3% to 4%.

Eighteen million is probably about as low as we could go. I mean, $18 million, if we reached that level with our core banks, excluding mortgage, the noninterest income from the core banks isn't significant. It's maybe $7 million a year. You would have us at about $155 million or $160 million in net overhead. We're still somewhat tech-heavy and tech-forward. That's likely about the lowest we could achieve. So I think if we got to around $18 million, at that point, you would see us, as Matt mentioned, moving a bit higher.

And that concludes our Q&A session. I will now turn the conference back over to Dennis Zember for closing remarks.

All right. Thank you, everybody that's joined our call. I hope you have a good and safe weekend. If you have any questions or comments, Matt and I are available. All right. Talk to you soon.

And that concludes today's conference call. Thank you for your participation. You may now disconnect.