Primis Financial Corp. (FRST) Q2 2025 Earnings Call Transcript

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 Premise 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 will be a question and answer session. If you would like to ask a question during this time, simply press the star key, followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. At this time, I would like to turn the conference over to Matt Schleitzer, Chief Financial Officer. Please go ahead.

Good morning, and thank you for joining us for Premise 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, premisebank.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 Semper 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's 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 pre-tax gain of $7.5 million dollars on a portion of our interest in pfh we offset that game with about a million two of support on our new teams in the in premise mortgage we had the last write-off of noticeable interest on the maturing promo loans of about two million dollars and then some other expenses that matt highlighted on the slide in our deck on slide six when you do all that we get back to about 8.4 million of pre-tax 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 four percent range and we're holding OPEX 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 shows 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 their 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 289 which is 32 percent 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 percent 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 NII growth from the deposit side. Slide 15 shows that our OpEx is contained and my belief here is that we can hold this or hold this level or lower through the end of 26. 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 three hundred thousand dollars a month starting in august there are some additional technology oriented savings scattered through the next eight quarters from other vendor consolidation and amortization runoff that will move this savings to about six hundred thousand dollars per month in early 27. secondly given that our company has grown exclusively from organic efforts matt's 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 deposited tangible and possession so a new stage of my career uh anyway lastly back on the note the company continues to slowly and methodically restructure by leaning harder on our ambitious and techno and technical experts and consolidating roles where we can for more than two years even through uh raises and team builds and all we're essentially flat on base comp in the company outside and base 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 four to six 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 eight we're showing the core bank's ROA of about 138 which is supported by 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 CRE 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 pre-tax contribution with key operating ratios. The fact that we're only six 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 premise mortgage closed about 323 million in the quarter which is up about 52 percent from the same quarter in 24. we did support our new teams with about 1.2 million dollars 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's naturally slower fourth quarter. Without the support on 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 is just so impressive rated the number one bank for doctors on google it's endorsed by about as a the banking solution for about anybody 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. And as I close, I want to go back into the presentation to slide five, the 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 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, 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 that's trying to hurt his staff to 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 we are 100% core funded we have very little concentrations in commercial real estate and I really don't see the I don't see any again the pressures I don't see any 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 mean thanks no it's the same because i wanted it yeah uh 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 ak followed with the sec uh dennis covered a lot of these points so i will be brief uh and encourage you to review both of those documents for more information as previously previously disclosed we deconsolidated panacea financial holdings or pfh as of march 31st 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 25 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 31st to June 30th. 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, non-interest-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 ROA 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 percent, up from a reported 3.13 percent 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 provision for the consumer program this quarter and are working hard with our own team to drive down delinquencies and losses in that portfolio. Non-interest 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 30th. 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've 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 non-recurring 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 non-recurring for reporting purposes, and totaled approximately $1.7 million. Normalizing for these, core non-interest expense was approximately $21 million in the second quarter. The technology saves we've 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 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 pre-tax 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% ROA 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 in our ability to generate attractive earnings in the coming quarters. With that, operator, we can now open the line for Q&A.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again.

We'll go first to Russell Gunther at Stevens. hey guys this is nick filling in for russell hey nick 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 the um i think warehouse for the quarter i think we ended at 180 i think the average for 180 or four i think for i mean scale you can see on the graph there

we're thinking that uh we sort of show what 250 million 350 and 500 i don't think we're going to try to push that to 500 million next year but i think being somewhere in the 250 to 350 range next year is is very realistic um the team i'm sure is listening and and they want to um they want to reach for the moon or mars and but i think 250 to 350 is probably um for the average for next year is is pretty realistic get slower in the first quarter and the fourth um panacea could uh I mean, Panacea could, of course, blow the top off. I mean, the pipelines are massive. The adoption is really good. Their salespeople are – their bankers are really every day increasingly recognized in the industry. Telephone rings a good bit. But their growth is clearly more than our balance sheet can handle, And so Panacea has been reaching out, finding some capital market solutions, some pretty big banks over $50 billion that are pretty interested in their paper. And so I suppose we could probably mute a little bit of their growth or a little bit of their pipeline. If I had to guess, we probably could have somewhere in the $100 to $150 million range next year. And that, whereas in the past, that's been 100% of their growth, it might only be 30-40% of their growth next year, hitting our balance sheet. I think the core bank has some opportunities. They're focused a little more. I know we say that we're minimally focused on CRE. Really, all the CRE we're focused on is doing a little bit of residential construction to support the mortgage company. um and so i think the core bank probably is something that's in the you know five percent range overall we're going to have some shrinkage in life premium the consumer book is still going to shrink so i think you know you boil all that together i think we're probably maybe high single digits would you say for next year for next and probably for the rest of this year maybe low to mid single digits yes uh because mortgage warehouse will moderate in the fourth quarter.

We'll have shrinkage in those runoff books. Panacea may have some opportunities to put some stuff off the balance sheet this year. Our expectation is not to have 12-15% growth for the back half of this year. It'll be much slower.

Okay, awesome. Thank you. That's great.

Next, so with your core in sitting around what was it 315 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 two basis points a month in margin expansion and with the reduction in digital platform and incremental growth and repricing them and we're still expecting that to creep up for the rest of the year, probably into the mid-320s, by the time we get to the end of the year. Okay, awesome.

All right, thank you for taking my question.

We'll move next to Christopher Maranek at Jannie Montgomery Scott.

Hey, good morning. 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, you know, beyond Q3 and how much of that growth in the core bank is going to be local versus your digital changes.

On the deposit side, Chris?

It's really deposits and loans. I mean, so both sides would be helpful.

I think on the deposit side I don't think uh I mean I think digital probably for the rest of the years it's flat and then maybe next year could be up 10 maybe 100 million dollars I think the core bank will outgrow the digital I'm confident the core bank actually will outgrow digital on the deposit side just given the the pipeline for um for that growth and some of the way they're using Vibe and other treasury services and how focused we are across the bank on the deposit strategy. I mean, our, and I'm not trying to get off your question, but our whole strategy over here on improving core earnings is operating margins. And we see low cost deposit growth or keeping incremental deposit yields sort of in the twos mid twos low twos as key to that so I think the core bank unquestionably will outgrow digital and I just don't see any pressures on the company at all that would make us want to get more aggressive on the digital side we lowered rates on the digital uh deposits this last week and we've seen like very minimal not even one percent runoff in deposits but that probably has caused a little bit of um pressure on the upside growth so so there and on the and on the loan side again we're i mean if we stepped pretty hard on local projects i mean when you do that you have to focus a little more on investor cre and right now we're just not willing to step out and do that office multi-family just really the only investor cre that we like right now is residential construction and most of that's because we we paired up with our mortgage company cni growth we've got i think a decent pipeline on some cni business but when you look at the core banks portfolio right now, the amortizations and the payoffs and so forth, I think 5% is growth on the core bank is just upside. I just don't think it can do more than that without us letting them loose in investor CRE world.

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

That's where we think we are right now. If you look at our team, especially with the new teams and new recruits that we've added in the first half of the year, that's where we are right now I think if and so I would tell you Chris that's probably volume that we could expect with you know the 30-year mortgage probably approaching 675 I mean north of six and a half but probably closer to seven than six and a half that's probably the volume you could expect I think the volume would be a 30 to 40 percent if we got in low sixes and probably 60 to 70 percent if we got in the fives again because you just refi boom um

impacts coming in there got it and then uh two i guess other follow-up questions just you know one on sort of the the um the change in criticizing classifies 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 out loud about going forward i think i don't know that they can get much lower net charge-offs yeah we on a core basis we really didn't have a high level of charge-offs anyway i mean i think our our net charge-offs are really i think in what the industry is i think it's

probably around 10 probably so no i mean the answers we like seeing that go down but i don't think it's going to pretend lower charge-offs. I mean, if you know what's really going to drive charge-offs here is the fact that we're pretty much through promo loans. I mean, we've had a year ago, Chris, we were in that consumer book. We had $90 million of promo loans, all types, and we're down 90. We plowed through 90 percent of that with immense noise in our results and charge offs and um we're we're i mean we're through all but nine million of that right now and i think that nine million is probably even over the next six quarters yeah and it's not like we're going to charge off all that yeah exactly so i mean so that that that mid-team global we see on slide 16 you know give or take that that's kind of where you're 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 six to seven 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 to 18 and a half million level with the tech savings and some other initiatives um from there we would expect kind of normal uh inflation call it three to four percent three to four percent 18 18 is probably about as low as we could go i mean 18 i show that 18 if we got to 18 million with our sort of core banks If you get to that level, excluding mortgage, and you look at the core bank's non-interest income, it's not as big as maybe $7 million a year. You really have us at about $155 million or $160 million on net overhead. We're still a little tech-heavy and tech-forward. That's probably about as low as we could go. So I think if we got to somewhere around there, 18, I think at that point you would see us, like Matt's saying, moving a little higher.

And if you don't get that far down, that will be because you've grown faster or done more, and that just will take care of itself on the earning side.

Yeah, correct. And I think probably, I mean, we want to get to somewhere in the 160 range on net overhead, 150 to 160. and then that's probably the level we maintain sort of going forward great that's helpful thanks for everything in the disclosures here and for taking our questions this morning all right thank you thanks Chris and that concludes our Q&A session I will now turn the conference back over to Dennis Sember 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 are available. All right, talk to you soon.

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