Primis Financial (NASDAQ:FRST) Q3 2026 Earnings Call

0:00 Press star 1 again. I will now hand the conference over to Matthew Switzer, Chief Financial Officer. Matthew, please go ahead.

0:10 Good morning. 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 Security Exchange Commission, including our recently filed earnings release, which has also been posted to the investor relations section of our corporate site, premisebank.com. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. How a non-GAAP measure relates to the most comparable GAAP measure will be discussed when the non-GAAP measure is used, if not readily apparent.

1:06 I will now turn the call over to our President and Chief Executive Officer, Dennis Zember.

1:11 Thank you, Matt. Thank you for everyone that's joined our third quarter earnings call. For the quarter, we're reporting 8.7 million of net earnings, or about 35 cents per share. which is a healthy increase of 28% over the same quarter a year ago. A couple notable items had a real outsized impact on the quarter's results. First was our net interest margin coming out of the community bank which increased to about 366 in the current quarter compared to the same quarter a year ago. That's about a 15% improvement when we reported 3.18%. We continue to benefit from a very valuable deposit portfolio with long-term loyal customers, and we pair that with loan production levels, loan production and loan repricing opportunities that have delivered real results.

2:06 Putting that steady quarter-over-quarter improvement in perspective, we've grown annual net interest income by about $28 million over the last 12 months. The balance sheet restructuring we did at the end of 25 definitely helped. but staying disciplined on both sides of the balance sheet and with loan repricing has been the real driver. Our core bank and our digital platform combine quarter after quarter, growing deposits at a healthy and profitable level and our bank's loan engines focus on higher quality customers with yields and rates that I know are at a win-win level. There's real competition out there right now on the loan side and customers are shopping very hard. So having a valuable deposit side of the balance sheet is critical to being competitive and profitable.

2:56 On the negative side, we had a fall off in revenue in the mortgage company that corresponded to a pretty steep rise in rates. The 10-year treasury increased almost 100 basis points in the third quarter, and it moved Freddie Mac's average 30-year mortgage from 643 at the end of June to 728 at the end of September. Our mortgage CEO calibrates volume based on these rates and if these higher rates were to persist, we think annual volume would decrease from about $1.6 billion a year to about $1.1 billion a year. Knowing this might be a new normal, we have been right-sizing costs mostly in support and vendor categories since mid-September and have reduced fixed costs by about $4 million a year. These fixed cost reductions are augmented by the fact that virtually none of our commission-based sales team have regular salaries, and so we know that a notable reduction in compensation will occur as volumes fall.

4:02 In the third quarter, the mortgage company lost about $200,000, which included the $2.5 million reset in the open pipeline values. and about $300,000 of provision for growth in portfolio and construction loans. This performance with these headwinds, I'm sorry, this performance with those headwinds combined with the restructuring work that our mortgage team has undertaken give us confidence in this division as we adjust to what might be a new norm in rates. On the balance sheet, we ended the quarter with about $3.5 billion in loans, up 9.3% from a year ago, but only up about $30 million from the end of the second quarter.

4:47 Production in our core bank was very good, with very good rates, and we supported that with mostly steady balances in warehouse and higher balances in panacea. I'd expect balances to come in a little in the fourth quarter, just given the mortgage backdrop and how that's going to affect warehouse. I expect that we probably finish the year with total growth in the balance sheet of about eight to eight and a half percent on year-end balances. Deposits have grown slower over the past year as we've been unsure about where rates were heading. I know that our loan pricing and our sensitivity allow us to be would allow us to be more aggressive on rates for deposits but we did want to outrun the Fed and so we stood still waiting to waiting to know which direction rates will be going and rely more heavily on federal home loan banks.

5:41 Still today, we don't have any wholesale or broker deposits and we have a pipeline of large deposit opportunities that should move our year-end balances materially at very attractive rates. Lastly, capital levels are creeping up like we believe they would. For the quarter, tangible book value and tangible common equity to total assets improved. Tangible book value ended at 1381, which is 18% higher than a year ago. And our TCE ratio improved to 8.14, which is materially higher than a year ago when we were in the mid-sevenths. Matt and I really would like for TCE to be north of 8.5, and we expect that a continued improvement in earnings and cautious balance sheet growth will get us there in a few quarters. With that, Matt, I'll turn it to you.

6:32 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 file with the SEC. As Dennis mentioned, premise reported earnings of $8.7 million or diluted earnings per share of $0.35 in the third quarter compared to $9.4 million or $0.38 per share in the second quarter and $6.8 million or $0.28 per share a year ago. Operating earnings were 35% 35 cents per share this quarter, up substantially from 23 cents in the second quarter and 28 cents a year ago. Operating return on average assets was 80 basis points versus 53 basis points in the second quarter and 70 basis points in a year ago.

7:18 Pre-tax pre-provision operating net income was 12 million in the third quarter, up 38% from 8.7 million in the year-ago period. Turning to the balance sheet, Gross Loans held for investment increased approximately 4% annualized from June 30th to September 30th and were up 9% year over year. For bank loan growth was approximately 11% annualized in the quarter and Panacea Loans held for investment increased 20 million to 603 million, partially offset by $43 million decline in period and mortgage warehouse balances to 501 million. Average earning assets were approximately 3.9.4. 3.94 billion, up slightly linked quarter, but up 9% compared to the year-ago quarter. Total deposits ended the quarter at 3.47 billion, up 26 million linked quarter and 4% year-over-year, while FHLB advances declined 80 million to 220 million.

8:17 Net interest income was approximately 36.3 million, up from 33.8 million last quarter and 29 million a year ago. The third quarter included approximately $700,000 of interest recoveries from a previously charged off loan. Excluding that recovery, net interest income was $35.6 million, a 5.5% linked quarter. Our reported net interest margin was 3.66% of 21 basis points linked quarter and 48 basis points year over year. Excluding this interest recovery, core net interest margin was 3.59%. of the healthy 14 basis points from the second quarter. While earning asset yields continue to increase, we have benefited from a stable funding base with cost of total deposits of 228 basis points in the third quarter, up three basis points linked to order, and down 18 basis points year over year, while total cost of funds was 247 basis points, up one basis point linked to order, and down 15 basis points year over year.

9:20 Our provision this quarter was $1.1 million compared to $5.5 million in the second quarter and a recovery of $49,000 a year ago. The majority of the provision this quarter was driven by loan growth as described above. Asset quality remains stable with non-performing assets excluding portions guaranteed by the SBA, improving to 1.43% of total assets at quarter end from 1.45% in June 30th. and 2.07% a year ago. Core net charge-offs were 17 basis points in the third quarter, down 53 basis points in the second quarter, and up from three basis points a year ago, with the year-over-year increase largely driven by one credit that had previously been reserved for. Non-interest income was $12.9 million in the third quarter versus $22 million last quarter, which also included a $5.9 million investment gain.

10:14 Mortgage Banking Revenue was $8 million, down from $11.4 million last quarter and $8.9 million a year ago, reflecting the significant market disruption during the quarter. Premise Mortgage still closed $347 million of volume, which was a 12.5% increase year-over-year. We also reported $1.5 million of gain-on-sale income related to Panacea loans and the guaranteed portion of SBA loans this quarter. Other income included approximately $900,000 of recoveries on a previously charged-off loan reflected in the third quarter. On the expense side, reported non-interest expense was $37.2 million down from $38.2 million in the second quarter and up from $32.3 million a year ago. Excluding mortgage and panacea division volatility and non-recurring items, our core operating expense burden was approximately $24.2 million versus $24.9 million in the second quarter and $21.6 million a year ago.

11:15 Included in the third quarter numbers, approximately $1.4 million of loan-related expenses and $0.4 million of professional fees and other third-party expenses incurred in the quarter. Excluding these items, the core operating expense burden was essentially flat with the run rate we discussed last quarter and down slightly from the year ago period when adjusting for the lease expense associated with our sale lease back in the fourth quarter of 2025. We continue to expect approximately 3 million of annualized savings from vendor consolidation and statement services beginning early in 2027. These savings are an important part of our effort to drive continued operating leverage through 2027. In summary, the third quarter demonstrated continued strength in the core banking franchise, further margin expansion, stable credit costs, and meaningful year-over-year improvement in operating earnings.

12:08 Breakeven on net overhead for mortgage, which would still be lower than normal for a typical third quarter, would have had us at a 1% R-way for the third quarter as we've been targeting. We can't control the environment, but we are taking steps to align costs with current volumes while preserving our ability to benefit when the market recovers. We liked how we are positioned right now, and we couldn't be more confident that profitability is going to continue to improve as planned. With that, operator, we can now open the line for Q&A. We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device.

13:00 Please stand by while we compile the Q&A roster. Your first question comes from the line of Russell Gunther from Stevens. Your line is now open. Please go ahead.

13:18 Hey, good morning, guys. Hey, Russell. Russell, good morning. Hey, Dennis. Hey, Matt. You guys wanted to start out on the margin. So great score result this quarter. You know, you're well through kind of where you thought you might end the year, I think, in that 350,355 range. So it would be helpful to get a sense for where you see the margin trajectory from here into the fourth quarter and next year. Would you guys expect to see continued expansion or has the right environment or competitive landscape kind of shifted your view on where that margin ultimately shakes out?

14:01 Yeah, I think we'll continue to see some incremental margin expansion, Russell. It's probably not going to be quite as dramatic as it was this quarter, but we've got loan repricing still in front of us from loans we put on five years ago. And that's going to still play out over the next, call it two to three quarters. So we do, I mean, we have We've strongly benefited from our core deposit base and I don't have the beta for me, but our beta on this last rate move was very low. We have been selectively adjusting rates. You know, customers have raised their hand, but we have not been aggressively moving rates up across the board or going after hot money, which is including on the digital platform.

14:56 We did not adjust rates on the digital platform after the last rate move. So we're going to continue to see, you know, after the Fed move, we're going to continue to see, you know, people raise their hand or ask for concessions and we'll manage through that. But we don't expect a big move in cost of funds. It'll be more incremental. And then, you know, loan yields will continue to tick up. So I think that when you put all that together, we'll have some incremental margin expansion, you know,

15:33 Well, it's still an excellent result and sounds like some forward progress still to come. So I appreciate the color, very helpful. Maybe switching gears onto the expense side of things, I hear you on how the mortgage revenue will impact comp and the step down there. maybe outside of that and how are you thinking about kind of core trends in the fourth quarter and then do we see more of a kind of step down in in 2027 as some of those efficiency initiatives pull through just be helpful to get I hear you on positive operating leverage but maybe just a finer point on kind of core expense trends.

16:19 Yeah I think last quarter we talked about a kind of run rate expense of call it 22 to 22 and a half million quarterly when you take out mortgage and panacea and non-recurring noise. We're basically in that same ballpark this quarter when you take out those couple of expenses that I highlighted in mortgage and panacea. And I still think that's around that 22 and a half number is still a good spot for the fourth quarter as we go into next year. Next year, it'll be kind of midway through the first quarter. We'll start to see those savings from the our contracts around the statements and other vendor consolidation, the $3 million number I highlighted. So in our mind, that's incrementally bringing down that 22 and a half number. Now we will see, you know, We adjust salaries and things like that late in the first quarter, so that'll put some pressure up. But we're looking for offsets to that to keep us in that low 22 range or less after those statement savings.

17:42 Okay. Thanks, Matt. And then, guys, just last one for me, if I could. The DEC had suggested that 27 estimates

17:50 are achievable.

17:51 I see consensus near two bucks. That puts you firmly in that sustainable ROA north of one. Do you have a goalpost in mind beyond that and a timing you'd hope to achieve it?

18:07 Oh, man, it wouldn't be normal for me to tell you the next goal before we get to this goal, Russell. But I mean, our peer group's better than that. and you know the some of the things that we've been doing over the years investing and building stuff around here we're done with that we're simply harvesting the good that all of our efforts have provided so I think we'd be higher than that and the mortgage investment sort of requires it so I think adjusting mortgage even in this at this level if These rates persist and we're really somewhere in the 1 billion to 1.2. I still think mortgage would add 10 basis points to the ROA over a year. I think if it was higher, if we were sort of in the 1.7, 1.8, probably be closer to 15. But at 10 basis points, given where the margin is and some of the objects, things that Matt was mentioning that are, I mean, we're a month away from some of these things happening.

19:15 1% is definitely in sight. We would have been there this quarter if just sort of steady on mortgage. Beyond that, we really just got to sort of get to and get above peer level, which is probably another 15 basis points.

19:38 Got it. Okay. Very good, guys. Thanks so much for taking my questions.

19:43 All right. Thanks, Russell. Your next question comes from the line of Steve Moss with Raymond James. Your line is now open. Please go ahead. Hey guys, good morning. This is Chase on for Steve.

20:00 Hey, good morning. So, you know, good core bank loan growth this quarter, and I saw the pipeline number in the release, so thank you for that. Can you just give a sense where you're seeing the best opportunities today and maybe how to think about growth in 4Q into 2027?

20:16 I mean, I think 4Q loan growth, I think the core bank will probably continue with growth. Well, actually, the core bank may be flat the fourth quarter. We have one big loan payoff. Disappointing that it's paying off, but that's probably going to keep us flat on the core bank. I mean, mortgage warehouse had a strong third quarter despite where race went. But I mean, it's the fourth quarter because I'd expect it to sag a little. I think for the year, we're going to end up with loan growth in probably the 8% category. You know, we've got several good drivers. We have the Corp Bank, we have Panacea, we've got Mortgage Warehouse. We can kind of lean on any of them in a quarter to sort of keep earning assets moving. But I think we end the year somewhere around 8%, which I think is right in line with where Matt and I wanted to go.

21:21 It allows us to have earnings grow in TCE. It doesn't pressure that. Matt and I don't want to get back into sevens. We really want to be kind of closer to eight and a half or nine. And so I think 8% loan growth is good. And I would tell you, I think 8%, given those loan drivers, those businesses, I think we could probably sustain that for a couple more years. I think we're going to have on the deposit side, I think we can fund the majority of that with core deposit growth, not using brokers, not using wholesale. We're going to have, I'm pretty sure we're going to have a dynamite fourth quarter on deposits, just given some of what I know is going to close and show up here.

22:13 So I think for the year, we'll probably be, call it 3, 4, 5% on deposits. But next year, I think we'd be stronger than that. So yeah, I'm saying we're probably going to settle back from 9% right now to probably around 8% for the whole year. And I'd probably call for that same thing next year.

22:35 Yeah, I mean, the core bank, had a really good third quarter, but for the year won't be at 11% rate. And we think about the core bank more about 5% to 7%, you know, year in and year out. And then, you know, we can manage the panacea growth. We can manage like mortgage portfolio. So something mid to high single digits is comfortable for next year.

23:03 And not having to push. It's a real... It's a real luxury not having to push hard on the core bank. You know, I mean, keep it on sort of in the 5, 6% growth rate. Because, I mean, one, we focus on better deposits. We focus that are less rate sensitive, that are less rate chompery. And we can really focus on the best loan opportunities, whether that's the loan rate or the yield or structure, credit quality. So we're able to be a little more picky and then lean harder on whether it's panacea, warehouse, or even digital to sort of get us to where we want to be. I think it's a real luxury.

23:51 I appreciate all that color there. And just staying on loans here, where are new loans pricing at now today?

24:00 Warehouse. Well, the core bank probably comfortably, I mean, all blended comfortably, you know, either, you know, prime plus a little bit. Panacea is probably, you know, five-year plus 225,250 maybe, but probably, I mean, it's with five-year moving up, it's probably tightened that spread a little. And warehouse is generally like SOFA with fees, generally like SOFA 275. might be 300. I appreciate you. Just one more for me here. I believe I heard you say 1.1, 1.6 billion in mortgage production at current rates. And I know it's a bit tough to answer, but if mortgage rates came down on their 50 to 100 basis points, and I know we're down a lot in the 10 year this week, how much upside could there be to that range, you think?

24:55 Yeah, I keep my eye I have found that I cannot accurately predict anything with mortgage outside of tomorrow. But that's a good question. And I will tell you, we've got a lot of, Matt has got a massive amount of algorithms and, you know, R-squareds on mortgage. I will tell you that if, you know, at our current level, if, you know, with rates sort of Low seven, seven to seven and a quarter. We're about a billion one mortgage shop. And at that level, we're probably about 30 to 35 basis points of pre-tax on volume. So maybe three and a half, four million at the high end pre-tax. At a billion six, if rates were like in the mid sixes, like we were at the end of the second quarter, I mean we were on track to do a billion six billion seven maybe a little more and at that level we're probably comfortably over 50 basis points of profitability so it's a billion six you know you're doing somewhere closer to eight eight million of pre-tax um you know we are again our mortgage company does not have the luxury of nothing's boosting our mortgage company's profitability with servicing or servicing revenues are recurring in that we do all

26:26 service release type sales. We hedge a good bit, but I mean, there's a lot of upside. I will tell you this, and I'm reluctant to say this because I don't want anybody to hear us thinking that we're just hoping for higher rates. We're not. We're like adjusting to today's rate with cost savings. That'll make us more efficient if rates sort of fall. but we're sort of presuming that these rates will be persistent. I mean, inflation is, I mean, the economy is a lot hotter and stronger than we want to believe it is, at least what the results say. And so we're sort of pretending that this is, not pretending, we're acting like this is our new norm.

27:17 I say that, I do watch the tenure every day and I celebrate every time and the red. You know, anyway, go ahead. All right. No, I'll say I appreciate all the color guys. I'll step back here. Thank you. Your next question comes from the line of Christopher Maranac from Breen Capital. Your line is now open. Please go ahead.

27:46 Hey, good morning. Dennis, can you brag a little bit on the Bank Valet business that you've rebranded and maybe talk about the opportunities and more deposit growth from that channel?

27:59 Yeah, Banking Valet was what we used to call Five for those on the call. And that's basically our proprietary app where we deliver banking services to mostly commercial customers, but commercial and consumer customers. basically any service you can get in a in the branch you can use our app and we will bring that service to you so we have thousands of customers using it of all the customers that have downloaded it and used it maybe one or two have quit using it or deleted it so it's very popular virtually none of these customers have closed their accounts if probably one of the leading things our commercial and treasury people lead with when they are in front of a new customer.

28:58 Virtually every commercial deposit relationship we have that didn't come because of a loan came because of this service. It's very, very valuable, very useful. probably half of our checking accounts are rooted with this app. So I would tell you, and that's very important because, you know, especially in a rising rate environment where deposits checking accounts seem to sag a little bit, I think this is something that's going to keep us pretty steady or potentially increasing. We have beta tested this in a far away market to see how we could deliver services. We found COI salespeople and had some success.

29:57 I'm not gonna go out on a limb and say that that's the future here. Really what we do is we just use this to expand the power of our branch beyond five miles. And we're selling probably out to 20, 25 miles of each of our branches. They just make our branches It's not a branch replacement tool. It's sort of a branch enhancement tool. You know, we changed the name from Five to Banking Ballet just to be a little more progressive and sort of fit with the rest of the bank as well. So I don't know, Chris, if that answers your question, but

30:40 So Dennis, my impression is that you can lean more into this as well as sort of with a weak mortgage environment that you can lean more into banking. And certainly that may be a blessing in disguise. So just curious if you think that's gonna help you get more core deposits, continue to have this low cost funding engine that can drive earnings while you manage expenses and hopefully get a turn in the mortgage business later.

31:04 Yeah, Chris, I mean, the numbers, you can't look at the balances in our numbers and sort of if you look at the balances you can't really see the success of this over the last three or four years because I mean really you've had so much shift mix going on as rates have moved up but what you can see is the stability in deposits as our betas have shrunk to rising rates and here we are with an extremely attractive cost of deposits and I tell you a lot of it is because of this. It's rooted in this plus long-term loyalty. So while we are growing deposits aggressively with this, it's just not as visible because of shift mix.

31:52 But I think if rates were to sort of stabilize, I think you would, I don't think, I know you would see stronger results in non-interest-bearing to deposit, non-interest-bearing to total.

32:09 Got it. That's helpful. And then, Matt, just a quick one for you. The operating expenses, should we see a small downtick in Q4 and then the more bigger change as the systems and other changes that you've already announced kick in in Q1?

32:23 I think we'll be flattish in the fourth quarter and then start to take down in Q1.

32:32 Okay. So the $3 million adjustment, we should see a lot of that in Q1. Yeah. Okay. And then anything on the credit side, you had success, low recharge offs and criticized, backed off a little bit. Anything in the pipeline in terms of where that could go further from here?

32:56 I mean, not at the moment. We didn't have any migration in the quarter. It's really focused on working through the months we already have.

33:09 Now, I was more curious if losses would be the same or if it's possible that they could grind lower.

33:16 Oh, net charge-offs? Correct. I mean, yeah, we have some pretty substantial specific reserves on a few of the classified assets. I mean, we've debated are debating, and mostly from an accounting standpoint, if we should charge those off as opposed to just carrying them into specifics so that the NPA ratio is not as inflated. We may do that before the end of the quarter, but I think that's it.

34:02 Aside from that, I don't think we see anything that would move that number.

34:07 This concludes the question and answer session. I will now turn the call back to Dennis Zember for closing remarks.

34:32 Thank you all again for joining us on our third quarter call. Hope everybody has a good weekend and a good fourth quarter, and we will talk to you soon. This concludes today's call. Thank you for attending. You may now disconnect.