Primis Financial Corp. Q2 FY2026 Earnings Call

Hello, everyone. Thank you for joining us and welcome to the Primus Financial Corp second quarter earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference call over to Matthew Switzer, Chief Financial Officer.

Matthew, please go ahead. good morning thank you for joining us for our second quarter webcast and conference call before we begin please note that many of our comments during this fall 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, permissbank.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 gap measure will be discussed when the non-gap measure is used if not readily apparent. I will now turn the call over to our president and chief executive officer Dennis Semberg.

Thank you Matt and thank you to all of you that have joined our second quarter 2026 conference call. We are very pleased with our second quarter results and pretty excited about how things are moving going into the last half of 26. When I compare our current results to last year I see strong growth in revenue, very contained operating expenses, increasing net interest margins, lower efficiency ratios, lower levels of non-performers, steady growth in earning assets, growing levels of non-interest bearing checking accounts, and importantly tangible book over 20 percent from last year. Lastly, it's really nice to see some stability may have returned to our operating results, which I believe is critical to making sure our work is appropriately valued. For the session quarter, we're reporting net earnings of $9.4 million or $0.38 per share compared to $2.4 million or $0.10 a year ago. During the current quarter, we did book a gain on the sale of an investment in an insurance agency of about $5.9 million and we fully offset that that was a legal settlement and a reserve bill on our largest office CRE. Because these items washed, I believe our stated ROA for the quarter of 90 basis points is really the recurring level that we're working with, and I'm very pleased to see this kind of improvement. These results include a net interest margin of about 345, up a couple of basis points over the last quarter, but up almost 60 basis points over the same quarter a year ago. That margin growth comes alongside steady earning asset growth, which has happened for several years now. For the quarter, we averaged about $3.9 billion of earning assets, which is up about 11% compared to the same time a year ago. The increase in margins and earning assets, combined with really strong performance from a mortgage company, allowed us to have our first quarter ever with more than $50 million of core revenue. That level is 40% higher than it was a year ago. Making sure that that revenue moves to the bottom line is critical. And the recurring pitch we've had with investors is that operating leverage will be our main strategy. Matt can give you a lot more context, but I'm showing that our core OPEX is up about 16% over the past year compared to the 40% growth in revenue I just talked about. Of that 16%, 7.3% is tied to the increase in mortgage revenue, and 4.7% is tied to the lease expense from the sale leaseback. So, actual growth in OPEX, the real controllable part, is reliably less than 5%. This is outstanding work by our executive team and our staff, and it has totally reset the operating performance you can expect from our bank. In the quarter, we had a nice improvement in credit quality with non-performers moving down by 36 percent thanks to a single CNI loan that was refinanced elsewhere. And then additionally, we were able to upgrade a mixed-use commercial project that finally reached stabilization, so collectively classified assets declined by about $53 million or 36 percent. As we stated earlier, we built additional reserves on our largest office loan by about $5.3 million in the quarter. Lastly, before I turn it over to Matt, we announced in the press release a series of earnings improvements that are coming out of our court consolidation project. Altogether, we believe the impact on next year's results is about $7 million pre-tax, which includes zeroing out the amortization expense from the original bill of the court. This set of improvements is about 13 or 14 basis points in the RLA, about $0.22 per diluted share. That's important. But from a strategic standpoint, what is so special or noteworthy about this is that I firmly believe that this announcement, all it guarantees another year and a half of outside operating leverage is similar to what we've put up this year. That's very exciting for our team and our board, and we believe should meaningfully improve the kind of results we put up in 2017.

Matt, with that, I will turn it over to you. Thank you, Dennis. As a reminder, a discussion of our financial results can be found in our press release investor presentation located on our website and in our 8K thought of the SEC. As Dennis mentioned, premise reported earnings of $9.4 million or diluted earnings per share of $0.38 in the second quarter compared to $7.3 million or $0.30 per share in the first quarter of 26 and $2.4 million or $0.10 per share a year ago. Return on average assets was 90 basis points versus 76 basis points in the first quarter and 26 basis points a year ago. There were a few notable puts and takes in the quarter that we'll review in more detail later in my remarks but on balance it was a quarter of solid operating results with pre-tax pre-provisioned operating net income of 11.7 million of 185 percent from 4.1 million a year ago. Turning to the balance sheet, gross loans held for investment increased approximately 8 percent annualized from March 31st to June 30th and were up 11 percent year-over-year, led by continued growth in panacea and mortgage warehouse. Average earning assets increased approximately 14 percent annualized in the second quarter and were up 11% compared to the year ago quarter. Average deposits were up approximately 12% annualized in the quarter, and average non-interest-free deposits were up approximately 24% annualized, with average non-interest-free deposits representing 16.3% of average total deposits in the second quarter versus 14.3% a year ago. That interest income was approximately $33.8 million, up from $32.1 million last quarter and $25.2 million a year ago. Our net interest margin in the second quarter was 3.45% up from 3.43% last quarter and 2.86% in the year-ago period. The improvement reflected robust earning asset growth funded at attractive incremental margins with three basis points of linked quarter expansion and yield on earning assets. Core bank cost of deposits remains very attractive at 1.6 percent for the quarter compared to 1.79 percent in the same quarter last year cost of total deposits was 2.25 percent in the second quarter up one basis points link quarter and down 28 basis points year over year cost of interest bearing deposits was 2.69 percent down 25 basic points from the same quarter last year and total cost of funds was 2.46 percent flat with the first quarter and down 21 basis points year over year our focus on growing non-instagram deposits remains a key part of our strategy to continue controlling funding costs as we grow the balance our provision this quarter was five and a half million compared to 1.5 million in the first quarter and 8.3 million a year ago approximately 5.3 million of the second quarter provision was related to specific reserve additions for one non-accrual credit Absent this item, improvements in specific reserve amounts largely offset provision amounts related to portfolio growth and the consumer loan program. Non-performing assets excluding portions guaranteed by the SBA improved to 1.45% of total assets at quarter end from 2.35% in March 31 and 1.9% a year ago. Poor net charge-offs were 53 basis points in the second quarter, up from six basis points in the first quarter and 15 basis points a year ago, driven by one non-accrual loan that was resolved in the quarter. Non-interest income was $22 million in the quarter versus $13.6 million in the first quarter and $18 million a year ago. The second quarter included a $5.9 million pre-tax gain from the liquidation of an insurance agency investment, while the year-ago quarter included the seven and a half million dollar gain on the company's investment in panacea financial holdings mortgage related non-entered income grew 44 percent year over year to 11.4 million in the second quarter and permits mortgage close volume was 421 million up 30 percent compared to the second quarter of 25. we also reported 1.6 million of gain on sale income related to the sales panacea loans and guaranteed portion of sba loans including approximately 237 000 attributable to the core bank. On the expense side, when you exclude mortgage and the panacea division volatility and non-recurring items, our core operating expense burden was approximately $25 million versus $22 million in both the first quarter of this year and the second quarter of last year. As previously disclosed, the first and second quarters of 26 include a full quarter lease expense net of reduced depreciation of approximately $1.4 million from the sale-leaf back transaction executed in the fourth quarter of 25. The second quarter also included several discrete expenses, including $1.1 million related to the settlement of a previously disclosed mortgage lawsuit, $0.4 million increase in loan-related expenses, and $0.2 million of higher marketing costs. There was also approximately $900,000 cumulatively of smaller expenses related to the company's recent shell filing fully exchange fees and the core conversion project which split expect the non-interest expense burden excluding mortgage and panacea to return to the 22 to 22 and a half million dollar range in the third quarter of this year i would also like to briefly add des's comments on how we are thinking about operating leverage from our core consolidation initiative, and artificial intelligence. During the last six months of planning further core conversion, we have identified 6.1 million of expected earnings improvements from fully converting the core bank in all divisions onto our real-time, fully digital core. These improvements are equally centered on revenue and expense opportunities, with 3 million of revenue improvements as we rationalize products and fees, and 3.1 million from contracts and vendor consolidation and will largely be in place in early 2027 these amounts are real and we believe highly achievable in the time frame highlighted this also does not include the amortization expense related to capitalized platform development costs of 0.8 million per quarter that will end in the third quarter of 27. lastly we are also in the beginning stages of deploying ai tools and agents to strive ongoing productivity improvements that we believe will allow us to limit expense growth and maintain strong operating leverage for the foreseeable future in summary we're excited to report another solid quarter with continued year-over-year improvement and profitability that interest income margin asset quality and tangible book value per share we believe the balance sheet momentum core consolidation work and ongoing progress productivity initiatives keep us on track to hit our profitability goals and put us on a path to superior returns With that operator, we can now open the lawn for Q&A.

We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press star 1 again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question is from Woody Lay with KBW. Your line is now open. Please go ahead.

Hey, good morning, guys. Morning. Wanted to start on the net interest margin.

Now it feels like we're hired for longer and feels like a general theme this earnings period. it's just been the magnitude of competition both on the loan and deposit side and what that's meaning for pricing um so i'd love to just get your thoughts on on how you see the nim outlook for here from here similar to what we discussed on previous quarters where we think where we are right now plus or minus a basic point or two is probably where we'll be for the foreseeable future We are seeing some pressure on the earning asset side, you know, maybe a little less on the funding side, but certainly some pressures in the loan pricing. But we have some levers there. A notable one is we have some subordinated debt that's available to refinance that we think we're going to be able to do at some point in the next quarter or two and will save us. probably between 200 and 250 basis points on the cost of that debt um so that'll should more than offset any incremental pressures on the margin from the balance sheet got it that's that's helpful color and then maybe shifting over to credit it was great to see um the quarter of quarter mpa improvement um which is hoping to get an update on on that larger office CRE credit that's still on the books and and can you just remind us what the total reserve total specific reserve you have against that credit is now yeah it's a little over 11 million in reserve the credit that borrowers still working with us and investing in TNI and commissions to lease it up we did have a relatively large lease at least the LOI for it signed in the second quarter so it's there's activity and the borrowers working hard to get it leased up we're working with them as best

we can so but we do have a pretty healthy reserve on it at this point we have a couple million dollars of cash reserves almost two million dollars cash reserves the borrower is making payments so it's in non-accrual but um not 90 days past due borrower does and mike matt said invest um you know but just we just want to keep adding reserves there um whenever we can for to reduce whatever kind of earnings volatility might come out of that witty yeah that makes That makes total sense.

And then last for me, in regards to the core conversion, those additional impacts you're planning that could begin in the run rate in 27, are there any larger one-time costs remaining with the core conversion that we should expect?

I'm overly significant. I mean, we may have smaller implementation fees here and there in the next couple of quarters, but we're talking like a few hundred grand, nothing.

Yeah, I think that's all for me. Thanks for taking my questions.

Your next question comes from the line of Russell Gunter with Stefan.

Please go ahead. hey good morning guys uh wanted to start on the loan growth outlook um really strong first half of the year good 2q i think matt you mentioned even a larger cni payoff in the quarter um and growing through that would be helpful to get a sense for how you're thinking about loan growth in the back half of the year uh both from an order of magnitude and asset class perspective I mean, I'll start back and, you know, we've not had a lot of panacea growth this year.

We've been selling most of that. Tyler's got a good flow agreement. I think we'll see more growth on that side of the balance sheet in the second half of the year. In mortgage warehouse, we keep, you know, rates up as tremendously as they are. I thought that that might slow down, but actually, you know, new customer acquisition and, you know, sales efforts there have, you know, countered that trend. And so, you know, I still think there's a little bit of risk on growing mortgage warehouse. I think we can probably hold something close to the levels that we're at. I think maybe even go up. If you asked Dre, I think he'd say we could go up from here just given the pipeline. But I don't think it will be as tremendous as what you've seen for the first half of the year. And the core bank's got, you know, a great pipeline. So I think all three together, I think the back half of the year probably will look a little bit like the first half of the year. Yield-wise, I think they're definitely incremental to where you see where our loan book is right And I don't see really, just back to Woody's question about margin, I don't see anything incrementally with growth that would be diluted to the current margin and you see where we're growing deposit you know core bank warehouse digital versus earning asset growth i still think it's uh positive and incremental to the margin yeah i agree with all that that's helpful that's helpful dennis thank you and yeah look the death calls out with some nice uh fixed repricing over

the next few quarters as well so uh good to see um you know matt you mentioned with regard to the margin, more pressure on the average earning asset side incrementally relative to deposits. I think as we're wrapping up the end of earnings season here, a lot of focus has been on just incremental deposit costs as a headwind to margin. So how are you guys kind of defending against that?

Well, the nice thing is a lot of the growth in the first half of the year has been mortgage warehouse, and they fund about 10% of their growth themselves with section pretty close to non-interest bearing they have a little bit of interest expense but it's by large all non-interest bearing so it's been very additive from a mixed standpoint digital bank has shown some nice growth at similar rates to where they've been the last quarter or two and some of that's actually been small business driven which has been nice to see and the core bank has done a really good job growing in footprint. I'm not saying we're immune to pressures on cost-to-cost, but arguably we have a few more levers that we can pull than a lot of other banks that are helping us stay pretty consistent to where we've been.

I think, you know, adding to that, I think our digital advantage, our national advantage, just continues to pay dividend. I think even with rates being up a little, I guess on the short-term side, maybe not, but with the attitude of higher rates, it's really not affected what we're doing on digital. I think we're still at a competitive level. and there are a lot of banks I've seen that Russell reporting you know a little more a little more pressure on the deposit side and maybe the margin bill that the industry's seen has kind of reached an end because a lot of it has been sort of funding driven but for us I don't think we we probably never harvested all of the deposit opportunity anyhow because we had so much earning asset growth. And so I think we're probably in a better position on the deposit side to stay competitive.

Understood.

Okay, that's helpful context, guys. And then just last one for me on the expense side of things. Matt, thanks for level setting us in terms of where that kind of core expense run rate should head for 3Q. I just wanted to clarify in terms of the incremental expense initiatives that that $3.1 million is really incremental to anything you've called out in the past? And if so, you know, it looks like it's an early 27 event. How you would expect that kind of core expense run rate to maybe exit 4Q or trend over the course of next year?

I think that our expectation is that 22 to 20, 22 and a half, 23, whatever we want, somewhere in that range. It's kind of our baseline for the next few quarters, and then the savings from the consolidation will be incremental to that down.

Okay. That's nothing we've called out. Got it, Barb. We've never talked about these savings on the revenue or the expense side.

All right. I appreciate it, guys. Thanks for all the help. Thanks, Russell.

Your next question will be from the line of Steve Moss with Raymond James. Please go ahead.

Good morning, guys. Most of my questions have been asked and answered here. How's it going? Maybe just want to follow up on the office non-performer here. Just curious in terms of just thinking about the drivers of the additional provision. I hear you in terms of the gain. But with the borrower leasing up, or having LOI at least, I guess I should say, you know, how are you thinking about the potential timing of resolution and, you know, did you get a new appraisal to drive some of this provision?

The driver of the provision was really while there's leasing activity and we did get a pretty substantial LOI signed in that order, we've gone 12 months since we put this thing non-accrual and vacancies only moved a little bit at the margin and so just with the passage of time we had as we do our evaluation work we had to add to that specific impairment to account for the fact that we have not made as much progress on vacancies we should have over the last 12 months We're accounting for this on a DCF versus the appraisal because the borrower is not

collateral dependent, yet making payments and still investing, and so we're accounting for it on a DCF, and Matt just got more aggressive with the DCF and with some assumptions, and we've sort of been telegraphing that we want to keep building reserves here, and so we were able to do that in a quarter. Okay. That's helpful.

And then just in terms of the mortgage warehouse business, I hear you guys in terms of, you know, obviously a tougher environment to grow, but good customer pipeline. Just kind of curious, where are the spreads these days for that business?

Spreads? Spreads. I mean, it depends. You know, if you're talking to a mortgage company that does, you know a couple billion a year you're probably somewhere so for 200 all in with fees uh if you're talking to a smaller um uh non-delegated customer you're probably maybe so for three plus with fees um it just depends um so the things first are note rate which mortgage rates are six and a half yeah and then we're 25 to 50 base points of fees on that so yeah there's some customers who are still probably paying seven yeah it just all depends I mean all all in for us you know we're booking margins there that are you know pretty comparable our all-in margin on that business is very close to where our um entire company's margin is The efficiency ratio in that group is right now probably just over 20%, 21%, 22%. We could probably double the portfolio, double the client base, double the throughput with very little um increase in opex other than maybe incentives and probably push efficiency ratio down to 15 so that's really the the roa play month in month out in the second quarter it was over two percent roa um after tax so i mean it's really good business for us great i appreciate all our call Eric.

Thank you very much, guys.

Your next question is from the line of Christopher Maranac with Breen Capital. Please go ahead.

Hey, thanks. Good morning. Dennis and Matt, wanted to go back to the core bank. And I guess I just want to get a little more background on sort of the margin change this quarter. Is that something that can go back? And then as you continue to work on the expense side, would that lead to even better returns in the core bank next year yeah the the when you say the core bank chris you're you're sort of excluding what warehouse panacea that or just the core bank sort of without the mortgage coming well i'm really looking at slide six and just kind of leveraging off of you know kind of the details there and the margin that you cited there and then i guess the strong uh pp and r roa Oh, I see what you're saying.

Yeah, I think, I mean, the core banks, you know, Panacea and Mortgage Warehouse and obviously mortgage are all big contributors to the ROA. The incremental business there is great. But it's interesting, the core bank's incremental ROA on new business is better than all of that because they drive a lot of their ROA and margin with checking accounts. The core bank's cost of deposits is remarkably low. Really when you look at our cost of deposits, our cost of funds is balanced by about a billion dollars of the national stuff that you know fuels the um funds the uh national stuff like panacea and warehouse but when you exclude that the core bank's incremental margins are are outstanding um the core bank's growth rate is not as tremendous as the rest of the bank i think the core bank's growth rate i would probably put it five or six percent um and it's nice to not have to push our folks hard there so we're able to focus on sort of non uh like the things as we're focused on um owner occupied cre cni residential builders strong residential builders really to support the mortgage company but we're really not focused at all on investor cre it's very rarely even gets in our um in our pipeline the margins on what we're bringing in we don't have to compete all way to the to the very bottom to the unprofitable level um i think if we were relying only on the core bank for all of our growth i think it would definitely impact the margins um if you look at where we are right now and matt i don't know if this includes the uh probably includes the sub debt and margin so i mean i think if you look at where we reported this quarter at 365 65 for the margin, you'd probably add 7-8 basis points on this balance sheet for the sub-debt refinance. And then I think when you look at where rates are right now, say with the 5- and the 10-year crisp, I think the upside on repricing for the existing commercial book is pretty strong. so I would say there's probably 10 basis points upside over the next year on this margin you know the efficiency when you look at the core bank here and you talk about the the earnings enhancements that were coming out of the core project you know the one area that our core bank has sort of been a laggard on it has been non-interest income we've sort of built the bank not really focusing on fee and so i think this this look in the core project of looking at products and services and right sizing those fees is is pretty important um there's no chance that there's any kind of um expense build in the forecast that would exhaust all the savings we came up with, not even close. I mean, we're definitely out looking for new lenders and new teams, but there's a 0% chance that that could exhaust these savings. So I would say between the margin build and revenue there and the savings, you're probably looking at taking another five or six points off the efficiency Great.

That's all very helpful. Thank you for sharing all that. And then I guess kind of a related question. As you execute, the systems change and kind of realize those cost savings. It would seem to me that you have a competitive advantage at that point that might be porlayed into other relationships of banks you look at or other opportunities down the road because you could get more out of it. And I'm curious how you sort of think about that.

I mean, I wish I had pixie dust and I could just make all of these savings and another year of earning asset growth happen because, I mean, I just see us reaching, you know, efficiencies in the 50s and the ROA, you know, the margin is going to continue to inch up a little bit with repricings and, you know, we are absolutely, I think, unquestionably the most balanced bank from the interest rate risk standpoint, given our position. So I just, I know what the next call six quarters are. I just really want to get to that point, but on the competitive advantage, I mean, we're going to finish next year. We're going to have the entire bank on the most modern real-time core out there, unquestionably. We will be the most flexible bank in front of the customer, and that's a competitive advantage. That contract you think with that advantage that we would be paying out the nose for that actually our contract given that we're an early adopter and are helping build it our contract is going to be probably half of what a bank our size would be paying for that and it's fixed so if we grow the bank to eight or ten billion dollars that doesn't scale I mean it's fixed and so it just accrues to the bottom line to our shareholders um I think really the competitive advantage we need is just six more quarters of continued improvement um let all these results happen and um just sort of over time prove that our models as valuable as we think it is and you know there is a slide in there Chris that talks about where Here we are, price-to-earnings and price-to-book, and Matt and I understand that. Absolutely believe we're going to erase that discount. And over the next, call it four to six quarters, as we prove this, really present an opportunity for our investors. I'm sorry if I rambled there. I mean, I did ramble.

I'm sorry. Oh, no problem at all. I appreciate that, caller. And I guess last question for me is if the mortgage market is still in the same kind of, you know, zone of sort of sluggish a year from now, do you just continue to tough it out to knowing that at some point it will shift back?

Definitely. I mean, our mortgage companies just keep surprising us. I think we had the best quarter we've ever had in mortgage, closed the most loans, had the highest level of profitability. I'm not going to sit here and act like rates are not dampening the profitability and the upside opportunity. It absolutely is. I mean, we should probably be 20 or 30 percent better in this summer season. But our folks are just dynamite on the sales side and on the OpEx side. I mean, they just manage so tight. I mean, they're so profit-oriented. So, yeah, I think, you know, and our folks are pretty offensive, too. I mean, when rates are like this right now, you can probably recruit, you know, really good mortgage loan officers. If when rates are, you're selling a 5.5% 30-year, it's hard to move a mortgage loan officer.

So, our folks are definitely on the street looking for, you know, to add to the ranks. over time we definitely believe rates will probably ease back a little once there's a little less volatility on the other side of the world but we're pleased with what the mortgage company has done on top of it probably 8-10% of their volume is portfolio product and a lot of that is construction of perm which is only with us for a short period of time before it gets refied away but while it's with us i mean the spreads on that are very good on their most of their construction book is probably new originations probably in the mid-70s um and comes with nice fees so you know there's the retail piece of it but there's also what they do for the portfolio i will leave it there thank you all for your questions, if you're feedback to my questions, and thanks for hosting us.

This concludes the question and answer session. I will now turn the call back to Dennis Sember for closing remarks. Please go ahead.

All right. Thank you all for joining our call. I hope everybody has a good weekend and a good summer, and Matt and I are both calls if you want to reach out to us. All right. Thanks. Have a great day.

This concludes today's call. Thank you for attending, and you may now disconnect.