Primis Financial Corp. ($FRST)

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. [Operator Instructions] 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 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 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. How a non-GAAP measure relates to the most comparable GAAP measure will be discussed when the non-GAAP measures used, if not 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. And as I'm reading that, excited to report earnings shrinking that much. 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, it's up 126% operating earnings, where we reported $0.14 in the same quarter of '25. And 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 ratios 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 and as well as operating expense control. On net interest margin. Our net interest margin, excuse me, 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 really distinguish us amongst our peer group. Loans ended at $3.4 billion, up 11.7% compared to the same quarter in '26 (sic) [ '25 ]. That excludes about $40 million or so, that math we moved into loans held for sale related to a flow agreement with Panacea. So really, our growth was probably stronger than this. 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 of '25. And lastly, it's very important to note that we grew deposits in this stronger fashion and never once felt pressured in our core bank 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 folks, focusing on commercial deposits and having real success. All of the energy and momentum on our balance sheet really starts at our core bank. There's 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. Personally, 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 we were -- that all we were doing here is working on our factory and stuff in the factory. But today, stuff is rolling off that assembly line faster and faster, and I'm very encouraged by what our people are accomplishing. Mortgage Warehouse has fully replaced Life Premium Finance at this point. It has been so well received in the marketplace. We finished the quarter with about $460 million outstanding. And for a few days in the quarter at near the end of March, we crested $0.5 billion outstanding. This is before any refi boom. It's before the busy spring and summer seasons for retail mortgage. Importantly, warehouse is still producing impressive yields and margins, efficiency ratios in the 20s. The amount of scale and impact on our overall operating ratios from this business is not really something that's been fully baked or recognized in our current numbers, as really they've been just scaling the business so quickly over the past year. But as we -- I believe we could probably double this business in the next 12 to 18 months, and I believe the incremental impact from that second double is going to be very meaningful. Retail mortgage had an absolute blowout quarter. They'll tell you that it was impacted by some Middle East activities and an impact on rates and fair value adjustments. And that's true. We might have reported $0.5 billion -- looking at Matt, $0.5 billion more, had that. But regardless, pretax income in the mortgage group grew to $2.1 million in the first quarter compared to $766,000 same quarter a year ago. In the quarter, our earnings crept up to 57 basis points on closed volume compared to 46 in the same period a year ago. So on a profitability basis, we're up maybe 20% -- a little better than 20% on closed volume. Our recruiting pipeline has never been this strong. And consistently, we double each month on apps, closed volume, new files. So we have real -- so we're very positive about what the second half of the year would look like. Right now, we believe Primis Mortgage is on track to be a top 50 mortgage company nationwide in 2026. And lastly, before I turn it over to Matt, I want to emphasize what's really present mind for us and our desire to build this into a top-performing bank. In our day-to-day here, we are laser-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 using steady to decreasing OpEx. And I know I've been saying this for several quarters. And so 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, first quarter '25 from -- first quarter of '25, all the way back to the first quarter of '24, we were reporting growth in core revenue of about $45 million -- excuse me, we were reporting core revenue of about $45.6 million, which is higher about 33.7%, call it, 34% over a year ago. Reported operating expenses straight off of Matt's 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, only a 4% growth in OpEx. I had in my comments that I'd like to promise that we could do that for a couple more years, but I was afraid Matt would grimace, so I took that out. But this is an extraordinary level of operating leverage and really the driver of our results. Nobody at Primis thinks we're done in this area and that revenue may not be outpacing OpEx going forward. We have several strategies, of course, to continue getting this result. And one of those is AI. And I don't want to steal Matt's comments or his hard work on this. I know he's going to comment further on this. But AI for us is the same kind of opportunity and catalyst that you would expect me to report if we were doing an M&A transaction. We already have all the tools we need for this. We expect hardly no additional investment except short -- except the deep training that we're going to give our staff to be effective with this. And we believe that in a year, we are going to be the undisputed leader amongst banks under $10 billion, using AI to drive operating results, sales efficiency, customer satisfaction and experience and importantly, fraud prevention. When you combine that with our work towards 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 community bank feel. With that, Matt, 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 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 3.28% last quarter and 3.15% in the year ago period. And we have expectations for margin expansion as we progress through 2026. We completed the redemption 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 core bank cost of 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 linked quarter. Our focus on growing NIB deposits is a key part of our strategy to continue to drive 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 was tied to activity 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 home buying 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 Panacea 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 will 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 as 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 these 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.

[Operator Instructions] And your first question comes from Woody Lay with KBW.

I 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.

Yes. I think what -- I think we probably -- I think maybe we came into the year thinking we might have -- we closed $1.2 billion last year, but had a lot of momentum in the fourth quarter. Thought we probably had like a $1.6 billion, $1.7 billion Mortgage company. And then through the first quarter, felt like it was a little higher, maybe $1.8 billion, maybe even $2 billion. But we -- I feel like we're probably still maybe around [ 100 ]. I mean we're going to be -- April is very strong, sort of reflecting what we thought. I think for the -- I'd say we're probably still somewhere in the $1.8 billion range on closed volume. And I think, Woody, what's important is -- as we've been growing, what's important is like we were at 46 basis points a year ago, we're at 57 basis points now on closed volume. What's impacting that is obviously a lot more scale on the fixed expenses as we get closer to $2 billion, a lot more focus on -- Matt mentioned construction perm. We have a big construction perm focus here that's honestly very centered on government for getting higher yields there. And really, we've been building that for the last year. These are probably 6- to 9-month deals. So that's starting to flow. So what's important, I think, is that we think we're going to do $1.8 billion or so this year as things look right now and maybe trend somewhere closer to probably 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. So we might have been over 60 had we not had the fair value adjustment. That's going to happen in Mortgage, that's in -- you can't really exclude it.

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 -- are we looking more at a flat margin with the incremental growth?

I think we'll see a little bit more margin expansion because of the debt payoff I mentioned. And we also had a little bit of a drag in the margin in the quarter from moving those loans to held for sale. We reversed some deferred costs that ran through the margin. It was only like 1 basis point. So we'll see some margin expansion next quarter and a little and then probably inch up from there. I mean I would not expect margin to hit 3.6%, but would we hit high 3.4s to 3.5% 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 the paydowns of those 90-day past due loans 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?

Matt? It's funny you asked that. Matt looks straight at me, like, "You answer that one." I mean the -- there's two real estate -- commercial real estate deals, office, and both had pretty good quarters on new leases. So I mean, it's -- I think it's trending positive there. I think the -- two things are trending positive. One, there is more leasing activity. Sales cycle on new leases in an office park like this is longer than we want it to be, but still the fact that they're talking to a lot of folks and that there's a pathway is positive. The second is cap rates are improving. They're not falling like we like them to, but they are improving. And so I think every day that goes by, we're a little safer on value. They're current. So they're not -- these are not -- I mean, it could change any time. But right now, there -- things are trending more positive there. Does that answer your question?

Yes. No, that's perfect.

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 last piece. I think on the deposit side, it's probably flat. Up or down a couple of basis points, but not -- I don't expect any substantial moves in the cost of deposits in the near term. On the production side, we're -- in the core bank, probably [ mid-6s ].

Yes. We're probably regularly 5-year. And we're still probably -- all in, we're probably close to 5-year 2.75%.

Warehouse is probably better than that.

Mortgage Warehouse is probably -- with fees is probably 1-month SOFR plus 3.15%, 3.20%. Panacea is outstanding. I mean, they are -- I mean, they've really -- I mean, the niche that they've established for themselves, their marketing, their profile, the opportunity to do business with them is reflected in the rates. And I think the rates they're getting on their production is exceptional, too. They're probably 5-year treasury plus 2.50%, 2.60% on that kind of credit. On funding -- and Matt and I regularly debate this. I mean, we could -- I mean across the bank right now, I feel like we could probably take digital down 25 or 30 basis points, probably not lose that much. We can probably take the core bank down 5 or 10. It's already very low. But there's some savings that we could get on the deposit side. The problem is it puts us in a place where we're not very strong on the growth side. And again, we're not leaning into rate on digital or anything else, but we also don't want to not be competitive. And right now, when we're looking at Panacea, Panacea can do $200 million for us this year. Warehouse could grow $300 million, $400 million. The core bank is the best it's ever been. That could be a couple of hundred million. We just don't want to get in a position -- I mean, we don't want to go harvest 30 basis points of deposit cost and then just rely on home loan bank advances. That's -- we don't want to be that bank.

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

Inclusive of Mortgage? That was kind of hard to spit out, unfortunately, because it's so tied to volume. I mean, as you know, it's going to be almost direct percentage of whatever their volume is going to be in the next quarter. I mean I like to think of Mortgage as kind of net noninterest income and noninterest expense for the year. Now that doesn't include, like, spread income, which we also include in our profitability. I mean it's probably going to net us $5 million or $6 million for the year. So you can kind of back into -- take whatever your revenue assumption is in noninterest income for Mortgage and kind of back into expense from there. Otherwise, when we kind of -- and then Panacea has some volatility to it as well. So we really focused on that core expense number, which is around $22 million. I think we'll stay in that kind of $22 million to $23 million range for the year.

Okay. No, understood. I appreciate it, Matt. And then just last one for me, guys, would be an update on your kind of ROA glide path. You mentioned in your remarks, 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 time line to achieve?

You want to answer that before I box you into doing something?

No, please. Move the goal once again. I can take you.

Matt sometimes doesn't like how aspirational I am, Russell.

I understand. Yes, I get that.

Yes. I mean 1% is a good line for us because we've not consistently been there. But 1% is not going to -- I mean, given our growth rate, that -- our growth rates and our dividend, that will probably keep the bank's capital levels flat. But I mean, we want to build book. We want to build capital ratios. We want to position ourselves to be strategic. And so we've got to be higher than that. I think Mortgage at scale, I've said it's 57 basis points. Mortgage at scale probably is another 20% higher than that. That's going to be a big deal in the ROA. That's probably another 10 basis points for the ROA. Warehouse is probably going to add another 10 basis points once it gets to scale. The AI thing that Matt is working on and our rest of our bank, I mean, over time, and we're not looking at that at, Russell, as something that's going to reduce headcount. What it's going to do is take the experts we have and just make them be able to manage twice as much. And that's -- we can manage like that when we have growth rates like we have. We know -- I know I'm going to need these staff over time. I mean, aspirationally, we ought to be -- given these lines of business, on top of our core bank, we ought to be 1.25% or better and probably are looking more ROTCE to be something that would get near 15%. I think at 15% ROTCE kind of can control your future. If people don't like your stock, you can just buy it back. If they do like your stock, then you can do other strategic things. But really until you get to that point, your -- all you're doing is working to get to that point. [indiscernible]

That was good.

[Operator Instructions] Your next question comes from the line of 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. And 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 kind of how you look at that? And is that digital area going to grow less as a result of the rate environment?

I'm so glad you asked that question. I remember speaking on a panel somewhere, and I was talking about how we had these 25,000 or 30,000 digital customers all across the country that have never been in a branch, probably never seen one of our bankers. And I was talking about how that we sometimes peruse their social media or we -- in communications with them, we find out that they have a dog, a Cavapoo. And we will do things that are very community bankers. We will send them some slag, a dog collar band, or we'll reach out to them when we're in -- I've gone to see customers when I'm in Telluride, I found that digital customers was out there, and went and had breakfast with them. The reason that -- I'm not going to sit here and say that these deposits aren't more expensive. Honestly, they should be. We have 25,000 or more digital customers that we we're banking with 6 people. So they should be more comfortable -- I mean, more expensive. There's very little cost associated with it. But we have separated them from being just straight rate driven by being community bankers. The same thing that we do in the bank, to make our customers not be solely rate focused, we're doing that on the digital platform. I'm not going to sit here and say that we're the only people that are doing that, but I will tell you that we're probably more effective at that than our competition. And we've been doing that for now for 3 years since we've got the real big slug of deposits in here. Our average digital customer has -- average digital customer is probably down 150 basis points from where their peak was. The average digital customer has been here probably more than 30 months, closer to 36. The average age is over 50. Average deposits is probably approaching $30,000 or $40,000. They have the cell phone numbers of the bankers that work them. Everybody has talked to a banker. I mean, it's just things like that, that have separated these customers from being solely rate focused. Now I would tell you, in the core bank, the core bank's cost of deposits is probably 180, 175...

159.

159. I mean the digital is sitting there at like 3.75% or so. Like I said, we could probably push that down 25 or 30. So let's just say we could get them to 3.5%. So yes, obviously more expensive, but it's growing at that level. And -- yes, I don't know. I don't want to ramble about it. But I'm very proud of how our bankers pushed a community bank attitude and approach on to these 25,000 customers, and that's paid off. Chris, that was a very long and rambling answer to your question.

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 around it and kind of naturally cap how much Mortgage will be down the road?

I think that's the kind of thing you don't worry about when you're starting up. Matt and I joke all the time that we -- our claim to fame is that we find problems and we fix them so well that they create new problems. I mean mortgage really should not be -- we don't want to be a mortgage company here. We want to run an amazing mortgage company, but we don't want to be -- just to be a mortgage company. It really probably should be more than 20% of our bottom line. No question about it. I mean -- and some of it is we have a dynamite team in Mortgage and a dynamite leader. And we have that for the core bank as well, too and Rick. But I mean, the core bank, we're a little -- we don't -- we're still not fascinated with CRE. We're doing it, but that's not our hallmark. We're in some non-growth -- not really fast growth areas in the core bank. So over time, we've got to find a way probably to grow the core bank faster so that Mortgage Warehouse, Panacea, all of those stay as complement to the bank and not the whole story. I mean we're not -- we don't want to change the growth profiles or the growth dynamics. I mean our core bank is -- what our core bank right now is doing is amazing. And I don't want to step on the gas any harder and get a different kind of business. Some strategy will open up to us. We've not been in an M&A strategy or a position to do that. Maybe that will open up one day. And that's probably the catalyst we need to build on the core bank and let these other items that we do, that are so good and just run so well, be a complement to that.

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 around and happy to get on the phone with you. Otherwise, have a good weekend. We'll talk to you soon.

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