Primis Financial Corp. Q3 FY2025 Earnings Call

Thank you for joining us. My name is Abby, and I will be your conference operator today. I would like to welcome everyone to the Primis Financial Corp. Third Quarter Earnings Call. I will now turn the conference over to Matt Switzer, Chief Financial Officer. You may begin.

Good morning, and thank you for joining us for Primis Financial Corp.'s 2025 Third Quarter Webcast and Conference Call. Before we begin, please note that many of our comments during this call will be forward-looking statements, which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Further discussion of the company's risk factors and other important information regarding our forward-looking statements are part of our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has also been posted to the Investor Relations section of our corporate site, primisbank.com. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. How a non-GAAP measure relates to the most comparable GAAP measure will be discussed when the non-GAAP measure is used, if not readily apparent. I will now turn the call over to our President and Chief Executive Officer, Dennis Zember.

Thank you, Matt for that introduction, and thank you to everybody that's joined our conference call this morning. We believe our third quarter results reflect much of what we've been talking about in recent quarters, and we're excited to see the improvement and the lack of noise honestly in the current quarter. For the current quarter, we are reporting $6.8 million in net earnings and about $0.28 per share, which compares to core income of $2 million and $0.08 per share in the same quarter in '24. Our ROA and ROTCE in the current quarter improved to 70 basis points and 9.45%, respectively. We mentioned this in the press release, and I know Matt's going to give more details on that. But our current profitability levels are higher than what we're reporting. When we adjust for certain items that we know aren't permanent, we see a core ROA that's closer to 90 basis points, which puts us right in line to be successful reaching the 1% ROA that we've been targeting. I know Matt is going to give more details on that. But from a high level, I want to recap some of the impactful things that happened this quarter and that give us the confidence that a 1% ROA is within reach. First, we're reporting our core margin in the quarter at 3.15%, which is up from 3.12% in the second quarter of this year, but up about 35 basis points compared to a year ago. At this point, we've replaced about half of the loans that we sold with the life premium business a year ago at yields that are at least 200 basis points higher. Importantly, we have the pipeline and the momentum to get the remaining portfolio replaced. And with current levels and margins that we see across our business, we expect that to add another 6 to 8 basis points of ROA and about $1.6 million of improved pretax earnings per quarter. We've also driven results on the deposit side. Compared to a year ago, we've grown noninterest-bearing checking accounts by about 16%, which has materially improved our deposit mix and taken our cost of deposits down by almost 20%. At the end of the quarter, alongside the rate cut by the FOMC, we were able to move lower again on the deposit side across our footprint, both digital and in our core business. Thanks to our focus on core relationships, we've experienced very strong retention across the bank. Very little of this last move is reflected in our results due to the timing at the end of the quarter, but we expect this to be meaningfully positive to our margin and our results in the fourth quarter. When I look through the improvement in margin, I see new asset yields holding in strong, being funded incrementally at very attractive levels. Matt, I know it has more details on this. But in the current quarter, our new and renewed loans came in at about 7.16% compared to 7.57% in the second quarter of this year. New deposit business is a mix of us competing hard on new businesses, commercial businesses and driving down the overall cost with new checking accounts. New deposit business came in at around 2.51%. And so taken together, our new activity across the entire bank, all of our divisions produced spreads of about 4.65%. These kinds of incremental margins on balance sheet growth are important because we're still relying on operating leverage to drive our results to where we know they should be. Our table in the press release reflects how steady we have been on operating expenses, showing that we came in at just $100,000 or so from our 5-quarter average. Looking ahead, we are confident that we can continue to hold growth in OpEx to a very minimal level, managing very tight in this environment and letting the investment that we've made in past quarters pay dividends with growth at the attractive levels we talked about. On our operating divisions, real quickly, I'm getting pretty excited about the investments we've made that are tied to residential mortgage. We've built our mortgage division from about $20 million a month of production to about $100 million to $120 million a month over the past few years. We've done this profitably too, slowly reinvesting enough of our earnings to build our production staff to what it is today. We've focused on culture and service as well as just products and pricing, and all of this work continues to pay dividends. In the third quarter, we had continued recruiting success that built annual production by about another $120 million or 10% of where we stood at the beginning of the quarter. Core results for the quarter showed pretax earnings of about $1.9 million, which is 58 basis points on closed volume and our strongest quarter yet. For core results in mortgage, we are excluding some legal fees associated with recent hires that totaled about $900,000, and we expect this to moderate back to normal levels very rapidly. Mortgage warehouse continued to grow nicely and continues to show real growth for the bank and for our earnings. To illustrate this, we had average balances in the quarter of about $210 million, but ending balances of about $327 million. Today, we have over $1 billion of uncommitted lines approved and in place and a pipeline of new opportunities working through the system of about $300 million. For the quarter, the warehouse group showed pretax earnings of about $1.6 million and moved their efficiency ratio down to about 27%. Long term and at scale, this business can be 2 to 3 times its current size on our balance sheet with operating ratios that are accretive across the board and taken together with our mortgage company, we have ideal and sustainable exposure to residential mortgage that produces fee income and balance sheet growth that nicely augments what our core bank is doing. Panacea continues to gain steam and momentum. Loan balances moved higher in the current quarter to $530 million on average compared to $385 million in the same quarter a year ago. Deposits were really impressive, growing at a faster rate, ending at about $132 million in the current quarter, which is about 50% higher than they were a year ago. Importantly, Panacea's cost of deposits reflect a blend of technology, customer service, and deep brand endorsement. For the current quarter, their cost of deposits came in at 1.37%, lower than our core banks and compares very nicely to 2.28% in the same quarter a year ago. I obviously have a lot of conviction about the kind of value that we're creating here because the industry deeply values traditional community and commercial banking, and honestly, rightfully so. And while Panacea and what we're doing here does have somewhat of a fintech flare to it, operating nationwide with deep embedded technology versus physical branches, it's producing exceptional credit results focused on C&I and owner-occupied CRE with excellent yields to one of the most, if not the most coveted customers out there. And it's funding the balance sheet at extremely attractive levels, lower than most established community banks. Strategies like this in the past didn't garner meaningful value because they focus on easily accessible credit and funded with flimsy or expensive solutions like CDs or institutional borrowings. But Tyler and his team are focused on relationships and technology and a customer experience that's proven to be more meaningful. And lastly, before I turn it to Matt for some more details, a few comments on credit. We noted in the last quarter that we've had a few downgrades that were centered on loans that weren't delinquent but did have weaker prospects and weaker guarantor support. Our negative exposure to two office real estate properties in the Northern Virginia market is reflected in our quality numbers, with both being in substandard and one being in nonaccrual. Both properties have improving NOI and strong leasing activity, but tenant improvements, leasing commissions, and rent abatement have stressed the borrowers' cash levels and their ability to support the property. These properties are ideally situated outside of the district in very desirable locations. It's important to note that the market here is stable to slightly improving compared to areas inside the District of Columbia. The remainder of our nonaccruals are centered in two loans. One is a $7.5 million loan to a private equity-backed company with proven value. Recent capital raises for the company indicate a strong enterprise value that puts us at about 35% loan-to-value. Matt's impairment testing on the company using deeply discounted cash flows continues to show no impairment on this loan. The other loan is a nationwide operating business with positive debt coverage, that's working on several strategic opportunities to either be recapitalized or sold. On both of these loans, the bank is working with the borrowers to exit the relationships through sales or refinance. At this point, we don't believe there's additional losses or costs to be incurred. Outside of these properties, we really have virtually no exposure to office in any of our markets, but especially the D.C. metro area that is still not operating ideally. I don't want to minimize or gloss over any credit issue, but I don't believe we have exposures that should be causing problems or costs going forward. Okay. With that, Matt, I'll turn it to you.

Thank you, Dennis. As a reminder, a discussion of our financial results can be found in our press release and investor presentation located on our website and in our 8-K filed with the SEC. Beginning with the balance sheet. Gross loans held for investment increased almost 9% annualized from June 30 to September 30, including the Panacea loans reclassified to held for sale; gross loans would have increased approximately 15% annualized, led by growth in Panacea and mortgage warehouse. Importantly, average earning assets increased 10% annualized in the third quarter, positioning us to fully replace earning assets sold a year ago with the Life Premium Finance sale. Deposits were flat in Q3 due to limited runoff at the end of the quarter after the Fed rate cut, but we're still up 7% annualized using average balances for the quarter. Even more impressive, noninterest-bearing deposits increased 10% annualized in the quarter, with a strong contribution from the core bank and mortgage warehouse. As Dennis discussed, our focus has been making sure we execute on the strategies that drive the ROA higher from here, which we've done. Our net interest margin in the third quarter was 3.18%, up from a reported 2.86% last quarter and 2.97% in the year-ago period. We had limited impacts on net interest margin this quarter from the consumer program and expect that to be the norm from here. The margin was impacted by interest reversals on loans moving to nonaccrual in the quarter and would have been 3.23% on an adjusted basis without those reversals. We're still booking new loans with yields near 7%, and we have a substantial amount of loans repricing later this year and next that will continue to move yields higher and help the margin. The core bank cost of deposits remains very attractive at 173 basis points in the quarter, down 6 basis points linked quarter. In addition, we used the Fed cut in late September as an opportunity to move digital rates down more aggressively by lowering rates of 35 basis points at that time, which should benefit us meaningfully in the fourth quarter. Our provision this quarter was a small release driven by growth in the loan portfolio tied to categories with lower reserve requirements, low core charge-off activity, and the release of reserves for moving a portion of the Panacea loans to held for sale. Noninterest income was $12 million in the quarter versus $10.6 million in the second quarter when excluding PFH stock sale-related gains with increased mortgage revenue as the primary driver. Mortgage revenue and profitability bounced back in Q3 with pretax income of approximately $1.9 million versus $0.1 million in the second quarter, which had been impacted by costs tied to new teams onboarded at the end of March. To give you a sense of the scale we're building in mortgage, we funded 59% more loans in September of 2025 than we did in September of 2024. We also closed $26 million of construction to permanent loans in the quarter, where we won't see material profitability at closing but generate attractive gain on sale revenue in a couple of quarters. On the expense side, when you exclude mortgage and Panacea division volatility and nonrecurring items, our core expenses were $21.6 million versus $22.3 million in the second quarter. There are a handful of items described in the earnings release that are onetime in nature but don't rise to the definition of nonrecurring for reporting purposes and totaled approximately $1.8 million, including one more month of technology contract savings. Normalizing for these items, core noninterest expense was approximately $19.8 million, putting us only slightly higher than the year-ago quarter. We are laser-focused on driving that number down further even in the face of inflationary pressures that would otherwise move it higher. In summary, as we detailed in the earnings release and investor presentation, our reported ROA was 70 basis points in the third quarter. Adjusting for the expense items we just highlighted, pretax earnings were close to $11 million, and ROA would have been approximately 90 basis points in Q3. With growth and repricing of earning assets, pretax earnings will grow to over $13 million in the near term, which equates to our 1% ROA goal with upside still from there. We're pleased that the third quarter showed meaningful progress on profitability with many fewer onetime items that have masked our core earnings power before. As I stated last quarter, we have substantial tailwinds from here that get us to strong profitability ratios without Herculean efforts, just straightforward blocking and tackling. We recognize that one quarter is not considered a trend, but we firmly believe that we are seeing that trend play out and look forward to demonstrating our earnings power from here. With that, operator, we can now open the line for Q&A.

I wanted to begin on loan growth, please. And it would be helpful to get your thoughts on how you're thinking about overall growth for the fourth quarter, given maybe some potential mortgage warehouse seasonality, continued consumer runoff and then thinking ahead into '26 as well in terms of order of magnitude and mix.

Russell, I’ll start, and Matt can add if needed. Regarding mortgage warehouse, we have significant potential and ongoing developments. I believe that at scale, we might see more runoff in the fourth quarter, but I don't expect the same level of runoff as before. We averaged around $200 to $210 million in the third quarter, which I think we can maintain, although we might not sustain our ending quarter levels. Matt has a better understanding of this. For Panacea, we could handle the loans at any level we choose. I estimate their annual production capacity aligns with their balance sheet. Other parties will take some of that production, and we don't want Panacea to dominate the balance sheet. We are ending at $550 million and may sell some loans in the fourth quarter to engage in flow agreements with larger banks. Looking ahead to next year, a production of about $150 million seems feasible. For the core bank, I believe we could achieve 7% to 8% growth, and by this time next year, a comfortable increase of around 10% to 12% might be possible. Matt, what are your thoughts?

Yes, I agree with all that. I mean a lot of our growth this quarter was mortgage warehouse related. We would normally expect seasonality, but as Dennis mentioned, I mean, they're still on the growth path in terms of adding customers and loans. So even though utilization may drop some in the fourth quarter, the additional lines they're bringing on is going to offset some of that growth. So they'll probably be up some on an average basis in the fourth quarter.

Okay. That's great color, guys. And then my next question was in regard to Slide 11 of the deck, kind of 2 parts. One, the timing of when you'd expect to get to that 3.30% margin that you said is average earning asset driven. I think maybe just expand upon what you are referring to when you talk about continued shifts in deposit mix will then become focused.

Go ahead, Matt.

I believe we will be closer to a 3.30% margin as we finish this year, likely by the first quarter of next year. The change in our deposit mix has been a topic for a few quarters now, and you can observe it in the balance sheet results. We are entirely committed to increasing our share of noninterest-bearing deposits. While we don’t have a long-term goal, we aim for a medium-term objective to have that ratio around 20% of total deposits. It’s approximately 20% in our core bank, and we want to achieve that 20% for the whole institution. By 2026, this will remain a priority for us, just as it has been in 2025, focusing on increasing noninterest-bearing percentages. This is the remixing we are referring to.

If you consider the bank as a whole, we definitely have more technology and strategies aimed at boosting low-cost deposits at a rapid pace compared to our lending efforts. We have strong loan strategies in place, including warehouse and Panacea, as well as our life premium business that we sold. However, V1BE in our markets is generating significant pipelines and success. Our peer group has seen a 5% increase in checking accounts, while we have achieved a 16% increase. I attribute some of that growth to our business lines and our core footprint. We truly believe that our unique long-term value lies more in deposits than in loans. Currently, we are achieving real success in margins and replacing earning assets, as illustrated in the graph. I believe that once we finish replacing those assets, our focus will shift to what Matt mentioned about optimizing the deposit mix, aided by the technology we have in place.

And our next question comes from Christopher Marinac with Janney Montgomery Scott.

I wanted to ask about deposits. And Dennis, the point you made on deposit costs incrementally with interest rates going down, does that get harder to do? Or does it get more easier or flexible for you to drive more deposits in at kind of the appropriate rate to push up margins?

It could really go either way. When we consider our competition, many are anticipating falling rates and Fed cuts, which they hope will help restore some of our margins. Matt and I believe the competition will likely leverage that to maximize their beta. The fact that we are bringing in a significant number of checking accounts allows us to be more aggressive with business money markets, business checking, consumer accounts, and even CDs while maintaining a cost of deposits that is at or below our period. We are a growth bank, so we need to balance our pricing strategies with a focus on profitability. The growth of checking accounts is crucial for us to sustain healthy deposit flows. Matt and I prefer not to rely on brokered CDs or institutional borrowings like the Federal Home Loan Bank; we want to be core funded. We aim to ensure these strategies do not negatively impact our margins or operating leverage. To remain competitive, especially in terms of checking accounts, if we continue to grow checking accounts by more than 10%, we believe we can effectively compete on rate-sensitive products while still achieving robust growth and profitability.

Got it. That's helpful, Dennis. And I guess, just kind of another point because you've now been doing the digital bank process for several quarters, a couple of years now, are you finding evidence that these are more sticky customers, which is really differentiating Primis in the rest of the pack?

Our average customer has over $50,000, and we're close to having an average deposit relationship of two years. More than 90% of our customers either have multiple deposit accounts with us, multiple products, or have referred others to us. These customers tend to be more loyal than industry norms. However, I want to emphasize that these customers primarily use a digital platform that outperforms what many banks are offering. They are still more sensitive to rates compared to traditional community bank customers, so we won't be lowering our rates significantly. We've adjusted rates several times, and our retention rates remain above 90%. Matt, please confirm that I’ve captured everything correctly.

You're 100% right. And as I've mentioned in my remarks, Chris, we were aggressive after this last Fed cut because we were seeing still growth in balances without any advertising, and based on our read of the deposit base, it looked like we were probably a little bit high relative to the rest of the market. So we actually cut rates a little bit more than the Fed cut in September, and we did see a little bit of runoff, but nowhere near the runoff you would have expected from a deposit base that was truly hot money based or rate-sensitive. I mean there were some rate-sensitive customers in there, but frankly, no more than we would have in the core franchise. So we're pleasantly surprised with how sticky these deposits have been as we've lowered rates with the Fed and it's been a very valuable funding source for us. As we talked about in previous quarters, it has allowed us to protect the core bank deposit base, which is still very low-cost and very sticky.

Chris, I want to add one more point. A few weeks ago, while speaking on a panel, there were questions about digital banking. I have to admit, the industry tends to think that digital customers, whom you never see or interact with, carry a kind of allure because of their supposed high-value deposits. However, we serve around 20,000 to 25,000 customers across various business lines, and every one of them has a personal banker. Each banker is reachable on their cell phone 24/7, which is part of our service. We provide a range of premium banking products, including something for everyone, from loans to deposits and mortgages. While we do have digital products focused on deposits, we're fully equipped to assist any customer who needs anything. This is why our relationships remain strong. I don’t believe the industry is mistaken about customer loyalty or their sensitivity to interest rates. We combat that by actively working to foster strong relationships with our customers in a somewhat community bank manner. This approach has proven successful, as evidenced by what Matt mentioned.

I have a question about asset quality. Given the information about a couple of loans, do you expect any issues to be resolved in the next two, three, or four quarters? Additionally, even though the margin difference is minimal, do you think it will positively impact your results in the coming quarters?

The larger C&I property is part of the operating business. There is a possibility it could be resolved or sold, which would improve the margin since it has been on nonaccrual for the whole quarter. We are still receiving payments and working with other borrowers. The real estate deals in Alexandria are unlikely to be resolved this quarter, but given the leasing activity and our personal involvement, we believe that by mid-next year, those properties could achieve strong enough debt coverage to move off nonaccrual. Currently, both properties have a debt coverage ratio of 1x for interest on principal and interest. One is slightly above 1 and the other is below. By June of next year, we believe we can get the property that is on nonaccrual above 1x debt coverage on a principal and interest basis. So, we have one property that might resolve this quarter, while the others are in nonaccrual, but I believe we are in the best position possible with those assets.

Great. That's good background. And then just the last question, just to connect that what you said at the beginning of the call, but the expense number should continue to get better given the operating difference as you outlined in the release, and we'll just see that quarter-to-quarter. I suspect it's not just a fourth quarter phenomenon, but it will go over the next few quarters.

Yes. Yes.

And with no further questions, I will now turn the conference back over to Mr. Dennis Zember for closing remarks.

Okay. Thank you, everybody that's joined our call. Matt and I are available if you have any further comments or questions. And if you don't, I hope everyone has a safe and happy weekend, and we'll talk to you soon.

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.