Primis Financial Corp (FRST) 2025 Q4 法說會逐字稿

Thank you for standing by, and welcome to the Primis Financial Corp. fourth quarter earnings conference call. (Operator Instructions)

I'd now like to turn the call over to Matt Switzer, Chief Financial Officer. You may begin.

Good morning, and thank you for joining us for Primis Financial Corp.'s 2025 fourth quarter webcast and conference call. Before we begin, please note that many of our comments during this call will be forward-looking statements, which involve risk and uncertainty.

There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Further discussion of the company's risk factors and other important information regarding our forward-looking statements are part of our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has also been posted to the Investor Relations section of our corporate site, primisbank.com.

We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. How a non-GAAP measure relates to the most comparable GAAP measure will be discussed when the non-GAAP measure is used, if not readily apparent.

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

Thank you, Matt, and thank you to all of you that have joined our fourth quarter 2025 conference call. We're very pleased to be reporting our '25 results today and really excited about what '26 is going to look like. For the quarter, we're reporting earnings of $29.5 million or $1.20 per share, which works out to almost a 3% ROA.

I tell people all the time that your best result ever isn't good enough tomorrow and that you have to strive to keep reaching higher, which may have tapped me. But obviously, in the quarter, we had the substantial gain from the sale leaseback and quite a bit of related noise from the restructuring and some other items that we were affording because of the outsized gain.

The most important thing you can take away from this call is this in the fourth quarter of '25, Matt and I are showing our run rate earnings at about $8 million, which works out to about an 80 basis point ROA on about $4 billion of average assets. That reflects virtually no improvement from the restructure that we announced and it includes a seasonally slow quarter of mortgage.

So taken together, going into '26, we see substantial momentum and a lot of opportunity to hit our goals. I wanted to talk about some of the real notable improvements this year. When you look at fourth quarter or you look at December 31 of any year versus the prior year, what do you notice?

For us, we noticed that our margin increased from 2.90% in the fourth quarter of last year to 3.28% in the fourth quarter of this year. The restructure includes -- the restructure had virtually no impact on fourth quarter margins. And our press release showed that, that when it's fully implemented, would add about 28 basis points.

Pushing this kind of margin in our company to a place where 3.5% margins are in range is very impressive against our peer group and our region, and our core bank has led the drive. Next, we grew checking accounts, which has been a very -- which has been a big focus of our bank.

Next, we grew checking accounts by over 23% during the year. I'll talk a little more about this. But from a percentage basis, we have to be in the top 10 banks nationwide on checking account growth. We achieved this by leveraging our proprietary delivery app in our market and abroad. We grew our C&I portfolio substantially and saw the normal deposit balances you would expect from this effort show up.

We benefited from our warehouse division's effort selling our treasury services to their clients. We improved our noninterest-bearing deposits to total deposits from 12%, 13% in mid-'24 to 16.3% at December 31, '25. We've been even higher than that early this year. Most importantly, we continue to fund nearly every dollar of earning asset growth with transaction accounts, not retail or brokered CDs or wholesale borrowings.

Lastly, we rebuilt our earning assets just like we said we would after the Life Premium sale with balances from the core bank and our lending divisions, and we did it with much more yield and scale than we had in Life Premium. For the year, we grew earning assets by $325 million with a larger growth in the loan side.

We held our yield steady compared to '24 with loans only dropping 10 basis points despite the fall in short-term rates during the year. Where are all these successes coming from? And why are we confident that there's more to come here? Our core bank has led the way this year in almost all of the areas, particularly on deposit growth and driving success with cost of funds.

For the year, I'm showing that we grew checking accounts by about $116 million, which is about 23%, as I stated earlier. On the loan side, our focus has been on C&I and owner-occupied for as long as we can remember. And we finished -- and as we finished the year, we saw a real flurry of loan closings and sales success that are going to carry over into '26.

In December alone, the core bank closed about $75 million of new commercial loans with about $90 million of related deposits. Importantly, the incremental margins on this business are almost 4% with no incremental operating resources or new staff. So we achieved the operating leverage that Matt and I have been talking about and that has been the driver of our '25 improvement.

In the fourth quarter, we rolled the digital platform up under the core bank's reporting arm. So now everything facing the bank customer reports to Rick. We finished '25 with $993 million in digital deposits, which is down maybe less than 10% from where we were a year ago despite the fact that the rate is down 115 basis points. We have over 20,000 customers on this platform, about 15% of those in our core footprint.

Because of the success of this platform, there is not a single ounce of pressure on our core bank's deposit goals, production efforts or pricing, which is reflected in their remarkably low cost of deposits. Through the year and the changes in rates, we've maintained 90% of the balances, which is unquestionably a testament to our style of surprising the customer with a personal banker, 24/7 access to the bank, rapid turnaround on any question or concern and near zero fraud.

In short, we engineered a community-style banking approach for these customers. And when rates started following -- excuse me, falling, they rewarded us with their loyalty. I think, a key success or something that's -- all those are important items, but the thing that's really driving the bottom line improvement or the ROA improvement is operating leverage.

For maybe two years, we have controlled and reworked our operating expense base. We've invested only in production and revenue personnel, and we've leveraged our back office -- or we've leveraged our back-office resources on the growth. Every moment of turnover or attrition on our administrative functions has been an opportunity to improve talent and drive more leverage, and we've not really missed any opportunity. Matt provides a table in the press release that shows our operating expense burden. And it obviously includes some of the noise from the restructuring and some other items.

But on a go-forward basis, we reconcile right back to around $22 million or so. So we believe we can hold this. I think maybe we've been saying this for four or five quarters, but we think we can hold this line for several more quarters and allow a reliable trend on revenue to keep improving results.

Another success -- another area where we believe the success is going to continue is in -- on the mortgage side or where we face the mortgage industry with warehouse and retail. They're obviously separate lines of business, but in our company, they both work together and drive results in a markedly different fashion than what you see in most community banks.

We talked quite a bit about warehouse this year and about how those results are impacting our results. But the fact is warehouse only averaged $175 million of outstandings for the year. That's not even half of the assets we sold with Life Premium Finance and only about 35% of what we think '26 could average.

Our margins in the business are accretive to our overall levels and our run rate efficiency ratio here is in the mid-20s, which is going to be noticeable on our consolidated ratios when we reach scale. At Primis Mortgage, we saw closed loans increase to approximately $1.2 billion, 50% increase over '24.

But more importantly, we closed $143 million in December of '25, arguably the slowest month of the year in this business, but a good indicator for why we are modeling '26 production in the $1.6 billion to $2 billion range. Also, it's important to note that growth did improve profitability. And on a pretax basis, Primis Mortgage earned $1.4 million in the fourth quarter, which is about $1.8 million higher than '24.

Before I give it back to Matt, let me say what is special about Primis, about what we're managing. And obviously, I could soak up a lot on this call on this topic. But I think the important thing for our investors to know is that we've rebuilt a core bank into one that is leading on deposit successes and growing. We're not just milking a branch infrastructure from two decades ago, we're growing the core bank with good deposits, good core deposits and improving our mix.

We've built integrated lines of businesses that have substantial scale. Every single one of our lines of business feel us pumping the brakes every month to not outrun our resources or our capital or become our whole story. The growth part of our story is bank. It's fully built, requires very limited resources to continue growing. When you combine that with a strong and leading community bank, we have strategic options that many banks in our region do not have.

We've had a lot of noise in our past. I'm not going to pretend that we did. But there's no doubt in my mind that every quarter of reliable ROA and growth in tangible book value that we can post, that noise subsides and our multiples, I believe, will return and reward the shareholders for our hard work.

All Right, Matt, with that, I'll turn it back 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 10% annualized from September 30 to December 31.

Including the Panacea loans sold in the fourth quarter, gross loans would have increased approximately 17% annualized, led by growth in Panacea and mortgage warehouse. Importantly, average earning assets increased 13% annualized in the fourth quarter with a slightly slower growth rate versus period-end growth adjusted for the loan sale due to substantial loan closing activity that took place at the end of the quarter.

Deposits were up 10% annualized in the quarter, also due to strong production late in the fourth quarter. Even more impressive, as Dennis mentioned, noninterest-bearing deposits ended the year at $554 million or 16% of total deposits versus $439 million or 14% at the end of 2024.

Net interest income was approximately $31 million, a substantial improvement from $26 million in the year-ago period. Our net interest margin in the fourth quarter was 328 basis points, up from a reported 3.18% last quarter and 2.90% in the year-ago period. And we have expectations for further margin expansion as we progress through 2026.

Our previously announced investment portfolio restructuring only benefited half of December, and we will complete the redemption of $27 million of subordinated debt at the end of this month. If both those transactions had been in place for all of the fourth quarter, the net interest margin would have been approximately 11 basis points higher.

The earning asset growth late in the fourth quarter was accretive to margin as is our current loan pipeline. We also have approximately $331 million of loans repricing predominantly in the second half of 2026 with a weighted average yield just under 5% that will add to loan yields.

Lastly, we have $40 million of deposits with a contractual rate leaving at the end of January with a cost almost 80 basis points higher than wholesale funding. The core bank cost of deposits remains very attractive at 159 basis points for the quarter, down 14 basis points from the third quarter.

Cost of total deposits was 226 basis points in the fourth quarter, down 20 basis points linked quarter. Our focus on growing NIB deposits is a key part of our strategy to continue driving funding costs lower from here. Our provision this quarter was $2.4 million, partially driven by growth in the loan portfolio described above. Approximately $1 million of the provision was due to specific reserving at year-end for impaired loans, while another $600,000 was tied to activity in the consumer portfolio.

Noninterest income, excluding the gains and losses from the sale-leaseback transaction and investment portfolio restructuring was $14.2 million in the quarter versus $12 million in the third quarter. Mortgage revenue was solid in Q4 at $10 million versus $8.9 million in Q3 with Q4 seasonal slowness offset by production from new hires.

Year-over-year retail mortgage production was 84% higher in the fourth quarter of '25 versus the fourth quarter of '24, showing momentum for a strong '26. Included in that production was $32 million of attractive construction to permanent loan production in the quarter, up from $26 million last quarter and an immaterial amount in the fourth quarter of '24.

On the expense side, when you exclude mortgage and Panacea division volatility and nonrecurring items, our core expenses were $28 million versus $22 million in the third quarter. The strong performance in the year resulted in higher compensation accruals, particularly restricted stock expense, which totaled $4.5 million in the fourth quarter.

There are a handful of other items described in the earnings release that are onetime in nature, but don't rise to the definition of nonrecurring for reporting purposes and totaled another approximately $1.8 million, including one month of lease expense. Not highlighted in the press release because of the small nature, there's roughly another $300,000 to $400,000 of cleanup expenses in the quarter that will moderate next quarter.

Normalizing for all of these items, core noninterest expense on a comparable basis was approximately $21 million, putting us only slightly higher than our run rate for the past year. Our conservative estimate for our quarterly core expense range next year adjusted for mortgage and Panacea is $23 million to $24 million in 2026, inclusive of the $1.5 million of quarterly lease expense that we've incurred with the sale-leaseback transaction, and we're pushing hard to be at the bottom of or below that range.

In summary, the sale-leaseback transaction in the fourth quarter was timely and allowed us to reposition a number of areas to enter 2026 with a lot of momentum. We have the capital to achieve our goals and fundamentals in place to hit our 1% ROA goal this year, and we are confident we will do so. With that, operator, we can open the line for Q&A.

(Operator Instructions)

Russell Gunther, Stephens.

This is Nick stepping in for Russell. So starting on the loan side, you saw average warehouse balances showing a nice growth of 812% year-over-year. And given that $1.23 billion in existing commitments plus the seasonality of the business, where do you see those balances ending in 2026?

Ending in 2026, I think we're anticipating mortgage warehouse to average $500 million across the year. Now it's seasonal. So that might be an average of $400 million and so in the first quarter, but will probably peak well over $600 million over the summer and then come back down in the fourth quarter. So the fourth quarter may be, call it, $100 million higher or so than the fourth quarter of this year, maybe a little bit more. But for the whole year, it will be, call it, $200 million to $250 million higher than the fourth quarter because of the seasonality.

Does that make sense?

Yes.

I think what's important is, I mean, that business for us is doing comfortably over a 2% ROA. Let's just say that number. I mean, for this year, it was $175 million average business, so call it, $3.5 million net income. I mean, I don't think scaling -- getting to $500 million is only going to improve that number. And so you sort of can see the pickup bottom line-wise from scaling this from $175 million average for the year to $500 million next year -- or excuse me, this year.

Okay. That makes sense. And related to all of that, how should we think about overall loan growth in '26?

We're shooting for --

I mean the core bank is probably somewhere in the $100 million -- if we're on nominal numbers, about $100 million or so. I think, call it, 5%, 6%, 7%. Again, we don't -- we're not going to be doing investor CRE. That's just not our focus. So we're looking for C&I and owner-occupied, Panacea.

Again, Panacea warehouse, I mean, if we let them out of the ring-fence, we -- it would get away from us. But I think Panacea, I think Matt's modeling about $150 million for them. And if you look at -- again, really more on an average basis, I think warehouse is probably, call it, $250 million more, maybe $200 million more from where we finished the year.

Okay. And just switching to expenses real quick. You guided 2026 quarterly to a range of $23 million to $24 million, it looks like. How should we think about expense sensitivity as mortgage banking and the fee income side improves? I mean, better said, what impact on expenses should we anticipate in relation to mortgage banking?

Yes. So the -- that $23 million to $24 million is excluding mortgage, right? Because the mortgage is going to be volatile and scale with the revenue side. So it's just easier to think of mortgage on a pretax contribution basis. Assume -- whatever your revenue assumption is for mortgage, assume that they're going to earn, call it, 50 basis points to 60 basis points pretax and then you get back into the expense from there.

This year, we did about $1.2 billion of loan closings. We probably -- I mean, fully loaded, we were probably high 30s basis points on pretax bottom line there on loan closings. We think next year, we're going to see 40%, 50% improvement in loan closings and even a better improvement in the bottom line.

I mean we're modeling somewhere between 50 basis points and 60 basis points of pretax on those loan closings. So to your point, Nick, it does scale tremendously as you get sort of above $1.5 billion because really, we're still recruiting, call it, $50 million, $60 million, $70 million a year producers.

But when you're bringing those on and it's a 10% growth in production, you can sort of feel it. When you're already at $2 billion, it's just not noticeable.

Okay. That's good to know. And last thing, talking about the ROA, what is your target sustainable ROA for the full year 2026?

I mean our bogey is still for the full year, a 1% ROA. We may be below that in the first quarter because first quarter is seasonally slower, particularly for mortgage and mortgage warehouse, but we'll be above that in the second half of the year, which would put us in that range for the full year.

Christopher Marinac, Janney Montgomery Scott.

Just want to go back to the noise that may be on top of the '23, '24 quarterly expense. Is some of that noise still going to be with us this first half of the year? Or do you think a lot of it is behind us?

I think the vast majority of it is behind us. We may have a little bit in the first quarter, but should not be anywhere near as significant as the fourth quarter.

Got it. And then part of getting back to the 1% ROA is going to be a higher margin, right? I mean expenses will make a big difference to get you from the core 80 to 100, but how big of a piece is the margin?

You go first.

I mean that's part of it. But I mean, there's -- we got margin expansion on the existing balance sheet plus healthy margins on the growth agenda Dennis just outlined that we're expecting for the year. And the incremental -- some significant portions of that growth come with much higher incremental ROAs for example, mortgage warehouse, which is going to be a big portion of the growth and has very wide ROAs relative to the consolidated.

On the existing balance sheet, we had a 3.28% margin in the fourth quarter, call it, high 3s if you adjust for paying off debt, which we'll have two quarters of that in the run rate, in the first quarter plus the full quarter of the securities portfolio restructuring. I mean we're -- we should be healthily in the mid-three, 4s in the first quarter, if not a little bit better than that and call it, pushing 3.5% as we get through the year.

So there's -- some of that is margin related, but a lot of it is just holding expenses.

And Chris, I'd say sort of adding to what Matt said, I mean, there's -- I'll start on the bottom side. There's virtually no pressure anywhere in our company for OpEx growth. And to the degree there is, it's a new producer or a new revenue or revenue-related opportunity. But outside of that, there's just -- there's no pressure for that. There's also virtually nothing that we're doing on the earning asset side or the growth side that's dilutive to our current margin.

So when you look at where we were a year ago at 2.90% versus where we're probably going to be somewhere closer to 3.5% midyear, that -- the math there is just very accretive to getting us to the 1% ROA. And over the 1% ROA. We're not trying to be conservative. We're just -- we definitely see a pathway to getting to 1% and it being sustainable. And a lot of it is a much more improved margin, absolutely sort of set in stone operating expense discipline. So --

The other thing I would add, Chris, mortgage will be a much -- for the full year, a much higher contributor in '26 than '25, partly because of the growth we're expecting in production, which does not assume like some big refi boom or what not.

That's driven by teams that we hired in '25. And recall, in the first half of the year, mortgage was not a contributor, particularly in the second quarter, because of expenses related to those hires, and that was about $1.5 million of impact at least that -- we don't have any of that in our expectations for 2026. So mortgage retail activity contributed maybe a couple of million dollars pretax in '25 because of expenses and build-out and whatnot. It's going to be multiples of that in '26, which is also accretive to ROA.

Got it. And I guess just a follow-up on deposits is, Dennis, you talked about the deposit account growth that's been in place for a while. Do you see those same accounts funding more? Or do you see deposit growth coming because you continue to build accounts? Just that -- just curious kind of how you look at balances versus accounts?

We look at both. It's interesting, you'd ask that. We do measure -- one of the things we measure around here is new customers. So that's not new accounts. So new accounts to existing customers, we don't count.

We look only at new customers, new people to the bank, whether it's EINs or sub securities. And last year, it was almost 6,000 new customers to the bank. The first year I got here, we barely cracked 1,000. So the sales efforts are definitely attracting new customers. And interestingly, what you said, the balances three years after you acquired a customer are almost double what they were in the first year.

So I mean I can't scientifically guarantee that what we did this year on checking account growth is going to be double in three years. But I can tell you, if you go back two or three years, four years, five years and you look at what those customers have done here, unquestionably, the balances grew to about double. Now just like every bank, we have attrition. So you do have to grow 100 million of new customers to be able to come on the call, Chris, and tell you that we grew 50 million. Just that happens.

But new customer acquisition is key. What I will tell you is, I mean, every investor and analyst on the call knows this, when you're growing the bank -- when you're not focused on investor CRE, and you're growing the bank with C&I or owner-occupied or treasury-related sales, when you're focused only on deposits, those are absolutely relationship core customers.

And after you've got them on the books, they 100% turn into a center of influence. And most -- everything we did, and I was talking about the fourth quarter, December really and the growth, almost every one of those were a referral from an existing customer.

And so I mean, again, I wish I could -- I wish I had the foresight to say or -- I wish I was a prophet who could say all of this is going to turn into that. I can't. But I do know that what we did in the fourth quarter is, number one, a good sign that the sales culture is working. And number two, it gives us a big platform to springboard to drive more results in the coming year.

Got it. That's great. Just another question on the mortgage business. Do you think you'll still have more production hires there? Or do you have the team in place that you want in terms of head count?

We're definitely going to have more hires.

But it won't come with the large upfront expenses. It will be more incremental than the two large teams we had last year.

Yes. We hired two $200 million a year producers last year. There was some cost for onboarding them, no question about it. The folks we're recruiting now, Chris, back to what I said, they're probably -- they are probably $50 million to $70 million producers. We're recruiting them smart. We're not trying to do all of them in one quarter.

But recruiting those two big teams really just keeps paying dividends and people -- the more success we have here, honestly, the more our phone is ringing. I will tell you, we're a $4 billion bank. We probably need mortgage to be, call it, $2.5 billion to $3 billion. I think at $2 billion, we're not too concentrated in mortgage. And at that point, we probably sort of need to marry growth in mortgage along with growth in the core bank so that we're not a mortgage company. We're still a bank with a mortgage company.

Got it. Okay. And then last question on the one loan or loans that had an increase on special mention, do you see any of those graduating to substandard? Or would you see that those go back to pass at some point?

The specific impairment that you're referring to?

Yes. Just the $40 million that went up from September to December.

The special mention, I'm sorry. I think there's a list.

Probably, I think one of them is -- one of them is an office CRE deal that's got very strong cash flows, got very strong cash flows, an investor that's investing in the property. We downgraded it because we did a modification. So I think we're probably going to leave it to special mention. There's -- we've got good LTVs, very strong debt coverage. It's probably going to sit in special mention.

We've not had a payment problem. But because of that modification, we're probably going to leave it there. The other one's got extraordinarily strong guarantor with a lot of liquidity, a piece of collateral that we're not very delighted with maybe. It's probably going to be there for a little while, too. But given the strength of the borrower and his liquidity position, I don't think it's gone to substandard.

We have one piece of assisted living that -- they had an issue with their tenant, but they're working through that and the guarantor supporting it. So I'm assuming they get the tenant sorted out, I think we'll be fine there and probably be in a position to upgrade that back in the next couple of quarters. One of them is in the process of being recapped. And at that point, we would actually be paying off, which will be a nice chunk of that.

That also has a very strong borrower behind it. So we don't see substandard on these, and we definitely don't see big impairments or losses.

And that concludes our question-and-answer session. I will now turn the call back over to Dennis Zember for closing remarks.

Thank you again for joining our call. Thank you for your interest in our company and staying with us through 2025. We look forward to what '26 will bring, and Matt and I are available for any questions or comments after this if you want to give us a ring. Thanks, and have a safe weekend.

This concludes today's conference call. Thank you for your participation. You may now disconnect.