Operator: Hello, everyone. Thank you for joining us and welcome to Primis Financial Corp. Q3 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 over to Matthew Switzer, Chief Financial Officer. Matthew, please go ahead.
Matthew Switzer: 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 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.
Matthew Switzer: 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.
Dennis Zember: Thank you, Matt. Thank you for everyone that has joined our Q3 earnings call. For the quarter, we are reporting $8.7 million of net earnings or about $0.35 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 is 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. Putting that steady quarter-over-quarter improvement in perspective, we have grown annual net interest income by about $28 million over the last 12 ones.
Dennis Zember: The balance sheet restructuring we did at the end of 2025 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 combined quarter after quarter, growing deposits at a healthy and profitable level, and our bank loan engines focus on higher quality customers with yields and rates that I know are at a win-win level. There is 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. On the negative side, we had a fall off in revenue in the mortgage company that corresponded to a pretty steep rise in rates.
Dennis Zember: The 10-year Treasury increased almost 100 basis points in the Q3, 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 rightsizing 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. So we know that a notable reduction in compensation will occur as volumes fall.
Dennis Zember: In the Q3, 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 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 Q2. Production in our core bank was very good with very good rates, and we supported that with mostly steady balances in Mortgage Warehouse and higher balances in Panacea.
Dennis Zember: I'd expect balances to come in a little in Q4, just given the mortgage backdrop and how that's going to affect Mortgage Warehouse. I expect that we'd probably finish the year with total growth in the balance sheet of about 8% to 8.5% 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 would allow us to be more aggressive on rates for deposits, but we didn't want to outrun the Fed, so we stood still waiting to know which direction rates will be going and relied more heavily on Federal Home Loan Bank. 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.
Dennis Zember: 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 $13.81, 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 sevens. 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 will turn it to you.
Matthew Switzer: 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. As Dennis mentioned, Primis reported earnings of $8.7 million, or diluted earnings per share of $0.35 in Q3, compared to $9.4 million or $0.38 per share in Q2, and $6.8 million or $0.28 per share a year ago. Operating earnings were $0.35 per share this quarter, up substantially from $0.23 in Q2 and $0.28 a year ago. Operating return on average assets was 80 basis points versus 53 basis points in Q2 and 70 basis points a year ago. Pre-tax, pre-provision operating net income was $12 million in Q3, up 38% from $8.7 million in the year ago period.
Matthew Switzer: Turning to the balance sheet, gross loans held for investment increased approximately 4% annualized from 30 June to 30 September, and were up 9% year over year. Core 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 a $43 million decline in period-end Mortgage Warehouse balances to $501 million. Average earning assets were approximately $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. Net interest income was approximately $36.3 million, up from $33.8 million last quarter and $29 million a year ago. Q3 included approximately $700,000 of interest recoveries from a previously charged-off loan.
Matthew Switzer: Excluding that recovery, net interest income was $35.6 million, up 5.5% linked quarter. Our reported net interest margin was 3.66%, up 21 basis points linked quarter and 48 basis points year over year. Excluding this interest recovery, core net interest margin was 3.59%, up a healthy 14 basis points from the second quarter. While earning asset yields continued to increase, we have benefited from a stable funding base, with cost of total deposits of 228 basis points in the third quarter, up 3 basis points linked quarter and down 18 basis points year over year, while total cost of funds was 247 basis points, up 1 basis point linked quarter and down 15 basis points year over year. 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.
Matthew Switzer: The majority of the provision this quarter was driven by loan growth, as described above. Asset quality remained stable, with non-performing assets excluding portions guaranteed by the SBA, improving to 1.43% of total assets at quarter end from 1.45% at 30 June 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 3 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. 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.
Matthew Switzer: Primis 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. 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.
Matthew Switzer: 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 leaseback in the Q4 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. Break even on net overhead for mortgage, which would still be lower than normal for a typical third quarter, would have had us at a 1% ROA for the third quarter, as we've been targeting.
Matthew Switzer: 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 like 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.
Operator: We will now begin the question and answer session. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *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. Please stand by while we compile the Q&A roster. Your first question comes from the line of Russell Gunther from Stephens. Your line is now open. Please go ahead.
Russell Gunther: Hey, good morning, guys.
Dennis Zember: Hey, Russell.
Matthew Switzer: Russell, good morning.
Russell Gunther: Hey, Dennis. Hey, Matt. Guys, wanted to start out on the margin. So great core result this quarter. You are well through where you thought you might end the year, I think in that 353, 355 range. It would be helpful to get a sense for where you see the margin trajectory from here into Q4 and next year. Would you guys expect to see continued expansion, or has the rate environment or competitive landscape shifted your view on where that margin ultimately shakes out?
Matthew Switzer: Yeah, I think we will continue to see some incremental margin expansion, Russell. It is probably not going to be quite as dramatic as it was this quarter, but we have loan repricing still in front of us from loans we put on five years ago. That is going to still play out over the next, call it two to three quarters. We have strongly benefited from our core deposit base, and I do not have the beta in front of me, but our beta on this last rate move was very low. We have been selectively adjusting rates as customers have raised their hand, but we have not been aggressively moving rates up across the board or going after hot money, including on the digital platform. We did not adjust rates on the digital platform after the last rate move.
Matthew Switzer: After the Fed move, we are going to continue to see people raise their hand or ask for concessions, and we will manage through that. But we do not expect a big move in cost of funds. It will be more incremental. Then loan yields will continue to tick up. I think that when you put all that together, we will have some incremental margin expansion, four or five basis points over time, but not quite what we saw this quarter.
Russell Gunther: The big moves are kind of behind us here.
Matthew Switzer: Yes.
Russell Gunther: Well, still an excellent result, and sounds like some forward progress still to come. So appreciate the color. Very helpful. Maybe switching gears onto the expense side of things. I hear you on how the Mortgage Warehouse revenue will impact comp and the step down there. Maybe outside of that, how are you thinking about core trends in Q4? Do we see more of a step down 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 core expense trends.
Matthew Switzer: Yeah. I think last quarter, we talked about a run rate expense of, call it $22 million to $22.5 million quarterly when you take out Mortgage Warehouse and Panacea and non-recurring noise. We are basically in that same ballpark this quarter when you take out those couple of expenses that I highlighted in Mortgage Warehouse and Panacea. I still think around that $22.5 million number is still a good spot for Q4 as we go into next year. Next year, it will be kind of midway through Q1, we will start to see those savings from our contracts around the statement services and other vendor consolidations, that $3 million number I highlighted. So in our mind, that is incrementally bringing down that $22.5 million number. Now we adjust salaries and things like that late in Q1, so that will put some pressure up.
Matthew Switzer: But we are looking for offsets to that to keep us in that low $22 million range or less after those statement services savings.
Russell Gunther: Okay. Thanks, Matt. Guys, just last one for me, if I could. The deck had suggested that 2027 estimates are achievable. I see consensus near $2. That puts you firmly in that sustainable ROA north of one. Do you have a goalpost in mind beyond that and a timing you would hope to achieve it?
Dennis Zember: Oh, man, it would not be normal for me to tell you the next goal before we get to this goal, Russell. Our peer group is better than that. Some of the things that we have been doing over the years, investing and building stuff around here, we are done with that. We are simply harvesting the good that all of our efforts have provided. So I think we would be higher than that. The mortgage investment sort of requires it. So I think adjusting mortgage, even at this level, if these rates persist, and we are 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 into 1.7, 1.8, probably be closer to 15.
Dennis Zember: But at 10 basis points, given where the margin is and some of the OpEx things that Matt was mentioning that are, we are a month away from some of these things happening. 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.
Russell Gunther: Got it. Okay. Very good, guys. Thanks so much for taking my questions.
Matthew Switzer: All right. Thanks, Russell.
Operator: Your next question comes from the line of Steve Moss with Raymond James. Your line is now open. Please go ahead.
[Analyst] (Raymond James): Hey, guys. Good morning. This is Chase on for Steve.
Matthew Switzer: Hey, good morning.
[Analyst] (Raymond James): So good core bank loan growth this quarter, and I saw the pipeline number in the release. Thank you for that. Can you just give a sense where you are seeing the best opportunities today and maybe how to think about growth in Q4 into 2027?
Dennis Zember: I think Q4 loan growth, I think the core bank will probably continue with. Well, actually, the core bank may be flat the Q4. We have one big loan payoff. Disappointing that it is paying off, but that is probably going to keep us flat on the core bank. Mortgage Warehouse had a strong Q3 despite where rates went. But it is the Q4. I would expect it to sag a little. I think for the year, we are going to end up with loan growth in probably the 8% category. We have several good drivers. We have the core bank. We have Panacea. We have Mortgage Warehouse. We can kind of lean on any of them in a quarter to sort of keep earning assets moving.
Dennis Zember: But I think we end the year somewhere around 8%, which I think is right in line with where Matt and I want it to go. It allows us to have earnings grow in TCE. It does not pressure that. Matt and I do not want to get back into 7s. We really want to be kind of closer to 8.5% or 9%. So I think 8% loan growth is good. 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 are going to have on the deposit side, I think we can fund the majority of that with core deposit growth, not using broker, not using wholesale.
Dennis Zember: I am pretty sure we are going to have a dynamite Q4 on deposits, just given some of what I know is going to close and show up here. So I think for the year we will probably be up, call it 3%, 4%, 5% on deposits, but next year I think we would be stronger than that. So yeah, I am saying we are probably going to settle back from 9% right now to probably around 8% for the whole year, and I would probably call for that same thing next year. Matthew?
Matthew Switzer: Yeah. The core bank had a really good Q3. But for the year won't be at 11%. And we think about the core bank more kind of a 5% to 7% year in and year out. And then we can manage the Panacea growth. We can manage mortgage portfolio. So something mid to high single digits is comfortable for next year.
Dennis Zember: Not having to push. It's a real luxury not having to push hard on the core bank. Keep it on sort of in the 5%, 6% growth rate. Because, one, we focus on better deposits that are less rate sensitive, that are less rate shoppers. 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 or Mortgage Warehouse or even digital to sort of get us to where we want to be. I think it's a real luxury.
[Analyst] (Raymond James): Appreciate all that color there. And just staying on loans here, where are new loans pricing at now today?
Dennis Zember: Mortgage Warehouse. Well, the core bank's probably comfortably, all blended comfortably either prime plus a little bit. Panacea is probably five-year plus 225, 250 maybe. But probably, with five-year moving up, it's probably tightened that spread a little. And Mortgage Warehouse is generally like SOFR with fees, generally like SOFR 275, maybe 300.
[Analyst] (Raymond James): Got that. Appreciate you. Just one more for me here. I believe I heard you say $1.1 billion, $1.6 billion in mortgage production at current rates. I know it is a bit tough to answer, but if mortgage rates came down another 50 to 100 basis points, I know we are down a lot in the 10 year this week, how much upside could there be to that range, do you think?
Dennis Zember: Yeah. I have found that I cannot accurately predict anything with mortgage outside of tomorrow. That is a good question, and I will tell you we have got a lot of, Matt has got a massive amount of algorithms and R-squareds on mortgage. I will tell you that at our current level, with rates sort of low 7%, 7%, 7.25%, we are about a $1.1 billion mortgage shop. At that level, we are probably about 30 to 35 basis points of pre-tax on volume. So maybe $3.5 million, $4 million at the high end pre-tax. At $1.6 billion, if rates were like in the mid-6s like we were at the end of Q2, we were on track to do $1.6 billion, $1.7 billion, maybe a little more. At that level, we are probably comfortably over 50 basis points of profitability.
Dennis Zember: At $1.6 billion, you are doing somewhere closer to $8 million of pre-tax. Again, our mortgage company does not have the luxury of nothing boosting our mortgage company's profitability with servicing or servicing revenues or recurring any of that. We do all service release type sales. We hedge a good bit. There is a lot of upside. I will tell you this, and I am reluctant to say this because I do not want anybody to hear us thinking that we are just hoping for higher rates. We are not. We are adjusting to today's rates with cost saves that will make us more efficient if rates sort of fall. We are sort of presuming that these rates will be persistent. The economy is a lot hotter and stronger than we want to believe it is, at least what the results say.
Dennis Zember: We are sort of pretending that this is, not pretending, we are acting like this is our new norm. I say that. I do watch the 10-year every day, and I celebrate every time it is in the red. Anyway, go ahead.
[Analyst] (Raymond James): All right. I will just say I appreciate all the color, guys. I will step back here. Thank you.
Dennis Zember: Appreciate it.
Operator: Your next question comes from the line of Christopher Marinac from Brean Capital. Your line is now open. Please go ahead.
Christopher Marinac: Hey, good morning. Dennis, can you brag a little bit on the Banking Valet business that you have rebranded and maybe talk about the opportunities for more deposit growth from that channel?
Dennis Zember: The Banking Valet was what we used to call V1BE for those on the call, and that is 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 the branch, you can use our app and we will bring that service to you. 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 is very popular. Virtually none of these customers have closed their accounts. It is probably one of the leading things our commercial and treasury people lead with when they are in front of a new customer. Virtually every commercial deposit relationship we have that did not come because of a loan came because of this service. It is very valuable, very useful.
Dennis Zember: Probably half of our checking accounts are rooted with this app. I would tell you probably, and that is very important because especially in a rising rate environment where deposits, checking accounts seem to sag a little bit, I think this is something that is going to keep us pretty steady or potentially increasing. We have beta tested this in a faraway market to see how we could deliver services. We found COIs, salespeople, and had some success. I am not going to go out on a limb and say that that is the future here. Really what we do is we just use this to expand the power of our branch beyond 5 miles, and we are selling probably out to 20, 25 miles of each of our branches. It is not a branch replacement tool. It is sort of a branch enhancement tool.
Dennis Zember: We changed the name from V1BE to Banking Valet just to be a little more progressive and sort of fit with the rest of the bank as well. I do not know, Chris, if that answered your question, but
Christopher Marinac: Dennis, my impression is that you can lean more into this and as well as sort of with a weak mortgage environment, that you can lean more into banking. Certainly that may be a blessing in disguise. Just curious if you think that is going to 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.
Dennis Zember: Yeah. Chris, 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 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 deposit. I tell you, a lot of it is because of this. It's rooted in this plus long-term loyalty. So we are growing deposits aggressively with this. It's just not as visible because of shift mix. But I think if rates were to sort of stabilize, I know you would see stronger results in non-interest-bearing to deposit, non-interest-bearing to total.
Christopher Marinac: Got it. That's helpful. 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 Q1?
Matthew Switzer: I think we'll be flattish in the fourth quarter and then start to tick down in Q1.
Christopher Marinac: Okay. So the $3 million adjustment, we should see a lot of that in Q1?
Matthew Switzer: Yeah.
Christopher Marinac: Perfect. Okay. Anything on the credit side? You had success lowering charge-offs and criticized backed off a little bit. Anything in the pipeline in terms of where that could go further from here?
Matthew Switzer: No, I mean, not at the moment. We didn't have any migration in the quarter. It's really focused on working through the ones we already have.
Christopher Marinac: No, I was more curious if losses would be the same or if it's possible that they could grind lower.
Dennis Zember: Oh, net charge-offs?
Christopher Marinac: Correct.
Dennis Zember: We have some pretty substantial specific reserves on a few of the classified assets. We have debated or are debating, mostly from an accounting standpoint, if we should charge those off as opposed to just carrying them as the specifics, so the NPA ratio is not as inflated. We may do that before the end of the quarter, but I think that is it. Aside from that, I don't think we see anything that would move that number.
Matthew Switzer: Not right now that would generate incremental provisioning. You will be charging off existing reserves.
Christopher Marinac: Got it. Okay. That is great. Thank you both. I appreciate it.
Dennis Zember: Thank you, Chris.
Operator: This concludes the question and answer session. I will now turn the call back to Dennis Zember for closing remarks.
Dennis Zember: Thank you all again for joining us on our Q3 call. Hope everybody has a good weekend and a good Q4, and we will talk to you soon.
Operator: This concludes today's call. Thank you for attending. You may now disconnect.
