Primis Financial Corp. Q1 FY2026 Earnings Call

Ladies and gentlemen, thank you for standing by. My name is Colby, and I'll be your conference operator today. At this time, I would like to welcome you to the Primis Financial Corp. First Quarter Earnings Call. I will now turn the call over to Matthew Switzer. You may begin.

Good morning, and thank you for joining us for Primis Financial Corp.'s 2026 First Quarter Webcast and Conference Call. Before we begin, please note that many of our comments during the 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 changes in 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. Our non-GAAP measure, and its reconciliation to the most comparable GAAP measure, will be discussed when the non-GAAP measure is used and the reconciliation to the most comparable GAAP measure will be readily apparent. I will now turn the call over to our President and Chief Executive Officer, Dennis Zember.

Thank you, Matt. Thank you for all of you that have joined our first quarter conference call. We're excited to report that in the first quarter, we earned $7.3 million or $0.30 per share which compares to $22.6 million and $0.92 per share in the same quarter of '25. I realize that's a significant decrease. The fact of the matter is, on an operating basis, we earned $0.33 per share in the first quarter, which excluded a small tax adjustment related to 2025 results. And when you compare that to the same quarter a year ago on an operating basis, it's up 126% — operating earnings were $0.14 in the same quarter of '25. Matt may mention this, but the first quarter of '25 included a substantial gain on the deconsolidation of Panacea, which is what I'm excluding. Our key operating ratio has obviously improved alongside that earnings number I just gave you. On an operating basis, our ROA improved to 84 basis points compared to 40 basis points in the same quarter of '25. Driving that were a couple of items: margin, mostly; as well as operating expense control. Our net interest margin benefited from the securities restructure as well as the mix of earning assets and climbed to 3.43% in the first quarter compared to 3.15% in the same quarter of '25. We continue to put up nice growth numbers that are manageable, but that really distinguish us amongst our peer group. Loans ended at $3.4 billion, up 11.7% compared to the same quarter in '25. That excludes about $40 million or so that we transferred into loans held for sale related to a flow agreement with Panacea. So really, our growth was probably stronger than that. Deposit growth over the same period is really what you should look at. That came in at just better than 8% with very little of that from the digital platform, which is pretty steady state, at about $1 billion. The growth in checking accounts in our company was even more notable, with noninterest-bearing checking accounts growing to $541 million, which is almost 19% higher than where we were in '25. Checking accounts continue to be a more meaningful element of our deposit mix and were 15.9% of total deposits compared to just 14.2% in the first quarter '25. It's very important to note that we won those deposits in this strong fashion and never once felt pressured in our four-bank markets or on our digital platform to be more aggressive on rate. We're doing it with technology, with service, with people, with getting in front of customers, focusing on commercial deposits and we've had real success. All of the energy and momentum on our funds sheet really starts at our core banking. There has never been a time since I came to Primis that our core bank has had this opportunity on both sides of the balance sheet. Honestly, we're winning business that several years ago, we just wouldn't have been in the running for or maybe even had a conversation about. Virtually nothing that we're doing to win this business has to do with rates or fees. We're leaning hard into our technology, our service, our people, our existing customers who are turning out to be amazing centers of influence for us. For so long, it felt like all we were doing here was working on our factory and the stuff in the factory. But today's stuff is rolling off that production line faster and faster. I'm very encouraged by what our people are accomplishing. Primis' warehouse has fully replaced life premium finance at this point and has been well received in the marketplace. We finished the quarter with about $460 million outstanding. For a few days in the quarter, near the end of March, we crested $0.5 billion outstanding. This is before any seasonality and before the busy period for retail mortgage. Importantly, warehouse is still producing impressive yields and margins, with efficiency ratios in the 20s. The amount of scale and impact on our overall operating ratio in this business hasn't been fully captured in our current numbers. They've been scaling the business so quickly over the past year. I believe we could probably double this business in the next 12 to 18 months. And I believe the incremental impact from that scale is going to be very meaningful. Retail Mortgage had an absolute blowout quarter. Late in the quarter it was impacted by some Middle East activities and volatility in rates and fair value adjustments. But pretax income in Mortgage grew to $2.1 million in the first quarter compared to $766,000 in the same quarter a year ago. In the quarter, our earnings margin increased to 57 basis points on closed volume compared to 46 basis points in the same period a year ago. So on a profitability basis, we're up roughly 20% on closed volume. Our recruiting pipeline has never been as strong, and we're consistently doubling each month our flow volume and new files. So we have real momentum and are very positive about what the second half of the year will look like. Right now, we believe Primis Mortgage is on track to be a top 50 mortgage company nationwide in '26. And lastly, before I turn it over to Matt, I want to emphasize what's really proven successful for us and our desire to build this into a top-performing bank. In our day-to-day here, we are focused on growing checking accounts, like I mentioned earlier, to about 20% of total deposits. Secondly, we're determined to drive massive amounts of operating leverage from our consistent, reliable balance sheet growth while also decreasing OpEx. I know I've been saying this for several quarters. As the quarter ended, I was pretty delighted to start playing with the numbers and see what I'm about to tell you here. If you look at the last year — from the first quarter of '24 to the first quarter of '25 and into this year — we were reporting core revenue of about $45.6 million, which is higher by roughly 34% over a year ago. Reported operating expenses straight off of the income statement, no adjustments, came in at $33.8 million, which is only 4% higher than the same time a year ago. That's 34% growth in revenue and only 4% growth in OpEx. I had in my comments that I thought that we could do that for a couple more years, but I refrained from saying it with Primis, so I'll just tick that out. But this is an extraordinary level of operating leverage and really the driver of our results. We have several strategies, of course, to continue getting this result. One of those is AI. I don't want to steal Matt's comments — he's going to speak more to this — but AI is the same kind of opportunity and catalyst that you would expect me to report if we were doing M&A transactions. We already have the tools we need for this and expect hardly any additional investments other than the deep training we'll give our staff to be effective. We believe that this year we will be the undisputed leader among banks under $10 billion in using AI to drive operating results, sales efficiency, customer satisfaction experience and, importantly, fraud prevention. When you combine that with our work toward converting our core bank to a fully digital core, we are on the edge of being a uniquely positioned bank with technology that has figured out how to keep our customers. With that, Matt, I'll turn it over 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 approximately 14% annualized from December 31 to March 31, led by growth in Panacea and Mortgage Warehouse. Average earning assets increased 6% annualized in the first quarter, with a slower growth rate versus period end growth due to the ramp in mortgage warehouse later in the period. Average deposits were up 4% annualized in the quarter, while average noninterest-bearing deposits were up 7% from year-end. Net interest income was approximately $32 million, a substantial improvement from $26 million a year ago. Our net interest margin in the first quarter was 3.43%, up from 3.2% last quarter and 3.15% in the year-ago period. And we have expectations for further margin expansion as we progress through 2026. We completed a reduction of $27 million of subordinated debt at the end of January, so that was only partially reflected in the quarter. We also have approximately $400 million of loans repricing in the second half of 2026 and early '27 with a weighted average yield of 4.81% that will add to loan yields. The cost of core bank deposits remains very attractive at 159 basis points for the quarter, flat from the fourth quarter. Cost of total deposits was 223 basis points in Q1, down 3 basis points from the prior quarter. Our focus on growing noninterest-bearing deposits is a key part of our strategy to continue driving funding costs lower. Our provision this quarter was $1.5 million, partially driven by growth in the loan portfolio described above. Approximately $0.7 million of the provision was due to specific reserving on impaired loans, while another $0.4 million related to activities in the consumer portfolio. Core net charge-offs remained low at 6 basis points in the first quarter of 2026. Noninterest income was $13.6 million in the quarter versus $12.8 million in the fourth quarter after adjusting for the sale-leaseback gain, investment portfolio restructuring and Panacea loan pool sale in the fourth quarter. Mortgage revenue was solid in Q1 at $10.8 million versus $10 million in the fourth quarter and would have been even better in the first quarter if not for the impact of market volatility late in the quarter. Year-over-year, Retail Mortgage production was 122% higher in the first quarter of '26 versus the first quarter of '25, showing strong momentum as we head into the busy homebuying season. Also included in that production was $26 million of attractive construction-to-permanent loans in the first quarter, up from $4 million in the first quarter last year. On the expense side, when you exclude Mortgage and Primis division volatility and nonrecurring items, our core expenses were $22 million in the first quarter versus $20.8 million a year ago. Absent the increased occupancy expense from our recent sale-leaseback transaction, core expenses on this basis would have actually been down year-over-year. We've been focused on controlling expenses to maximize operating leverage and feel like we are in a good spot on that front so far in 2026. I would also like to take a moment to briefly touch on how we are thinking about AI. As mentioned in the earnings release, we have canvassed the bank looking for opportunities to deploy AI tools to reduce repetitive and time-consuming tasks and generate efficiencies. Our first pass has identified hundreds of hours of opportunity and there is almost certainly more that can be found as we start tackling these projects. We view this as a key part of our strategy to keep expense growth to a minimum, while maximizing operating leverage. Equally exciting from where I sit, our in-house talent in this area, combined with the robust tools built into our existing products such as Microsoft Copilot, should allow us to get the vast majority of efficiencies without expensive consultants. In summary, we are excited to report a solid first quarter in line with our expectations and believe we are still on track to hit our profitability goal in '26. With that, operator, we can now open the line for Q&A.

And your first question comes from Woody Lay with KBW.

Wanted to start on Mortgage. And as you mentioned, it was a blowout quarter in what's typically a seasonally weaker quarter. We're now entering the stronger quarters ahead. What are your expectations for production in the near term? And then also in the Mortgage expenses, was there additional hiring that was done in 1Q '26 or elevated legal expenses, anything that sort of propped that up?

Nothing unusual on the expense side.

I think when we came into the year, after closing $1.2 billion last year and with a lot of momentum in the fourth quarter, I thought we'd probably be a $1.6 billion to $1.7 billion mortgage company. Through the first quarter it felt like it could be a little higher — maybe $1.8 billion, maybe even $2 billion. As things stand now, April has been very strong and reflecting what we thought, and I think we're probably still somewhere in the $1.8 billion range on closed volume for the year as things look right now. What's important is that we've scaled and improved profitability: we were at 46 basis points a year ago and we're at 57 basis points now on closed volume. What's impacting that is obviously a lot more scale on fixed expenses as we get closer to $2 billion. There's also been more focus on construction-to-permanent production. We have a base construction-to-permanent focus here that's centered on government-guaranteed programs to get higher yields, and we've been building that for the last year. These deals are probably 6 to 9 months, and so that's starting to flow. We think we'll do about $1.8 billion or so this year, and profitability may trend somewhere closer to a touch over 60 basis points. The Middle East event probably hit us for a few basis points, 5 or 6 basis points, on profitability through fair value adjustments — that's something that can happen in Mortgage through mark-to-market and hedging volatility.

Yes. That's helpful color. And then maybe shifting over to the net interest margin outlook, Matt, you noted some of the loan repricing tailwinds through the remainder of the year, growth is expected to remain strong. You're going to have to fund that growth. Do you think you can continue to post strong growth and see margin expansion? Or will it be more of flat margin with the incremental growth?

I think we'll see a little bit more margin expansion because of the subordinated debt payoff I mentioned, and we also had a little bit of a drag in the margin this quarter from moving some loans to held for sale. We reversed some deferred costs that ran through the margin — it was only about one basis point — so we'll see some margin expansion next quarter and then probably inch up from there. I would not expect margin to hit 3.6%, but I would expect it to be in the high 3.4s to 3.5% range as we go through the year, most likely.

Got it. And then maybe just last for me on the credit. I appreciate the comments on pay downs of those 90-day past due items subsequent to quarter end. But just on some of those larger relationships that are still on NPA, any update on those and when we could see possible resolution?

There are two commercial real estate office relationships that are on NPA. Both had pretty good quarters on new leasing, so I think the trend there is positive. Two things are helping: one, there is more leasing activity overall, although the sales and leasing cycle for office is longer than we'd like; but the fact that they are talking to prospective tenants and there is a leasing pathway is a positive. Second, cap rates are improving — they're not falling as we'd like, but they are improving. So as time goes by, we feel somewhat safer on their current positions. These situations could change, of course, but right now the trends are moving in a more positive direction.

Your next question comes from the line of Russell Gunther with Stephens, Inc.

I wanted to start — maybe just a quick follow-up on the margin commentary. I appreciate the directional guide, but maybe some of the underpinning assumptions. It would be helpful to get a sense for kind of where new commercial loan origination yields are today? And then, Matt, within the guide, how are you thinking about deposit costs from here? Is there room to move those lower? Or is there kind of a flat to upward bias within your margin expectations?

I'll start with the deposit side. I think on the deposit side it's probably flat, up or down a couple of basis points, but I don't expect any substantial moves in the cost of deposits in the near term. On the production side, in the core bank, yields are a function of mix and tenor, but I'll let Dennis add color from the origination perspective.

On new loan origination yields, we're seeing core commercial originations roughly in the mid-to-high single digits — generally around 5% on average today, with variability by product and term. Mortgage warehouse financing is short-term pricing — think roughly one-month benchmark plus spreads in the low- to mid-300s basis points (for example, 315 to 320 basis points depending on the profile). Panacea's production is also getting strong pricing given the niche they've established and their credit profile — their production yields are relatively attractive. On funding, Matt and I debate this regularly: across the bank, I believe we could probably take digital deposit pricing down 25 or 30 basis points and not lose too many customers. We could probably take the core bank down 5 or 10 basis points given how low it already is. There are some savings available on the deposit side, but the trade-off is competitiveness and growth. We don't want to be the bank that cuts rates aggressively and then has to rely on wholesale funding. Right now, we have growth opportunities — Panacea could do $200 million for us this year, warehouse could grow $300 million to $400 million, and the core bank could add a couple hundred million. So we want to remain competitive on price while balancing the benefit of slightly lower funding costs.

I appreciate the color there. And Dennis, you kind of took my next question in terms of how that loan growth shakes out from a vertical perspective. Maybe I would then switch gears to the expense front. How are you guys thinking about directionally the overall expense base inclusive of the mortgage banking vertical as well?

It's hard to split mortgage out because it's so tied to volume — mortgage noninterest income and noninterest expense move with production. Think of mortgage net as likely to net us roughly $5 million to $6 million for the year at current volumes, and you can back into the implied noninterest expense from there. Outside of mortgage volatility and nonrecurring items, our core expense number is about $22 million, and I think we'll stay in that kind of $22 million to $23 million range for the year.

Okay. Understood. And then just last one for me guys, would be an update on your ROA glide path — you mentioned in your remarks I would expect to hit your targets, which I think are 1% ROA by the end of the year. What aspirations do you guys have from there and sort of a timeline to achieve?

1% ROA is a good target and given our current growth rate that will probably keep capital levels relatively flat given dividends and growth. But we want to build our capital ratios and position ourselves to be strategic, so we need to be higher than that over time. Mortgage at scale — we've said mortgage is around 57 basis points today; at scale mortgage could be roughly 20% higher than that, which translates into meaningful ROA impact, maybe another 10 basis points of ROA. Warehouse at scale could add another 10 basis points once it gets to scale. The AI work Matt is leading will not necessarily reduce headcount but will let our experts manage twice as much volume — it will magnify productivity as we grow. With our lines of business on top of the core bank, we think we can target ROA of 1.25% or better over time and aim for ROTCE on the order of 15% as a longer-term aspiration. Hitting those targets gives us flexibility on capital allocation, share buybacks, and strategic options.

Christopher Marinac with Brean Capital Research.

Dennis, the last couple of days, banks have talked about the competitiveness of digital deposits being more expensive than brokered funds. I'm curious what you think about that. It seems that you're in a much better place. You've been doing the digital banking much longer. And I'm just curious how you look at that? And is that digital area going to grow less as a result of the rate environment?

Great question. We've had 25,000 to 30,000 digital customers across the country, many of whom have never been in a branch or met one of our bankers in person. We've learned how to be community bankers on the digital platform: we communicate personally, find things about customers that matter, and we do small gestures that build relationships — everything from personalized outreach to other thoughtful touches. That has helped separate these digital customers from being purely rate-driven. Over the past three years since our digital deposit base grew materially, our average digital customer deposit levels and tenure indicate stickiness — average tenure is north of 30 months, average age is over 50, and average balances are meaningful. We could, if needed, reduce digital pricing by 25 to 30 basis points and likely not lose a large number of customers, and we could reduce core bank pricing by 5 to 10 basis points. So yes, digital deposits are generally more expensive than our lowest-cost core deposits, but they are still attractive relative to other alternatives and provide stable funding. We're proud of how our bankers have extended a community-bank attitude across our digital footprint, and that has paid off in retention and growth.

That is okay. My other question just goes back to the mortgage business. As you continue to thrive in mortgage, both in terms of production and gains plus the mortgage warehouse, is there a natural cap that will happen to how much of that business you want for the whole company? Will the bank just grow the warehouse and kind of naturally cap how much mortgage will be down the road?

That's the kind of thing you don't worry about when you're starting. Our approach has been to build each business responsibly. We don't want Primis to become a mortgage company — we want to run an excellent mortgage business that complements a strong core bank. Mortgage could be more than 20% of our bottom line over time; no question it can be a meaningful contributor. But we have to grow the core bank as well so that mortgage, warehouse and Panacea remain complementary to the overall franchise and not the whole story. We're focused on growing the core bank in a way that keeps the franchise balanced. In the future, if M&A or other strategic opportunities present themselves, that could help accelerate or balance these growth dynamics, but for now we're focused on executing across the core bank and our growing nonbank lines in a disciplined way.

Thank you. And there are no further questions at this time. I'd like to turn the conference back over to Dennis Zember for any closing remarks.

Thank you all for joining our first quarter conference call. If you have any questions, Matt and I are happy to get on the phone with you. Otherwise, have a good weekend, and we'll talk to you soon.

This concludes today's conference call. You may now disconnect.