Primis Financial Corp. Q3 FY2026 earnings call

• Core Banking Strength: The core bank benefited from a stable, loyal deposit portfolio and disciplined loan production, resulting in an annualized net interest income growth of approximately $28 million over the last 12 months.
• Mortgage Sector Adjustment: Facing headwinds from rising mortgage rates (10-year Treasury up ~100 bps), the mortgage division reduced fixed costs by approximately $4 million annually and adjusted compensation structures to align with lower volumes.
• Balance Sheet Growth: Total loans grew 9.3% year-over-year to $3.5 billion. The company expects total balance sheet growth of 8-8.5% for the full year, driven by core bank and Panacea lending.
• Deposit Strategy: Deposits grew modestly as the bank waited for rate clarity, avoiding wholesale/brokered deposits. Management anticipates significant deposit inflows in Q4 from large pipeline opportunities at attractive rates.
• Capital Position: Tangible Book Value increased 18% year-over-year to $13.81, and the Tangible Common Equity (TCE) ratio improved to 8.14%, with a target to exceed 8.5% in coming quarters.

The company reported consolidated net earnings of $8.7 million (approx. $0.35 per share), a 28% increase year-over-year. The core banking franchise demonstrated strong performance, with Net Interest Income reaching approximately $36.3 million and Net Interest Margin expanding significantly to 3.66%. Non-interest income was $12.9 million, heavily impacted by the Mortgage Banking segment, which generated $8 million in revenue, down from $11.4 million in the previous quarter due to rising interest rates. Other income included gains from Panacea loans and SBA loan servicing releases.

• Full Year Loan Growth: Management expects total loan growth to settle around 8% for the full year, down slightly from earlier trends but consistent with strategic goals to preserve capital ratios.
• Expense Savings: Annualized savings of approximately $3 million from vendor consolidation and statement services are expected to begin impacting results in early 2027, with initial impacts seen in Q1 2027.
• Mortgage Volume Outlook: If current high interest rates persist, annual mortgage volume is projected to decrease from $1.6 billion to approximately $1.1 billion; management is right-sizing costs based on this 'new normal.'
• Operating Leverage: Core operating expenses are expected to remain flat in Q4 before declining in Q1 2027 as efficiency initiatives take effect, supporting a long-term goal of Return on Average Assets (ROA) north of 1%.

• Interest Rate Sensitivity: Rising rates have negatively impacted mortgage production volume and profitability, requiring ongoing cost adjustments.
• Credit Quality: While asset quality remains stable, there is exposure to specific classified assets that may require charge-offs or increased reserves, potentially affecting net charge-off ratios.
• Market Volatility: Unpredictable movements in mortgage rates create uncertainty in pipeline values and future revenue streams for the mortgage division.
• Operational Execution: Success depends on the effective implementation of cost-saving measures and the ability to attract low-cost deposits without relying on volatile brokered funds.

Q: Russell Gunther asked about the trajectory of the net interest margin into Q4 and next year, and whether core expenses would step down in 2027.

A: CFO Matthew Switzer indicated incremental margin expansion is likely due to loan repricing from five years ago, though less dramatic than the current quarter. He noted low beta on deposits because the bank avoids aggressive rate hikes on digital platforms. Regarding expenses, Switzer confirmed core quarterly run-rate will stay near $22-22.5 million in Q4, with $3 million in savings from vendor/statement contracts beginning in Q1 2027, offsetting potential salary increases.

Q: Chase (on behalf of Steve Moss) inquired about loan growth drivers for Q4/2027 and new loan pricing levels.

A: CEO Dennis Zember stated core bank loan growth may be flat in Q4 due to a large payoff, but full-year growth will be ~8%. This level allows for TCE improvement without pressure. Pricing is described as Prime+ for core bank, 5Y+225/250 for Panacea, and SOFR+275/300 for warehouse. Zember emphasized a 'luxury' of not needing to push hard on core deposits, allowing focus on credit quality.

Q: Christopher Maranac asked about the 'Banking Valet' app's role in deposit growth and expense timing.

A: Zember explained Banking Valet is a proprietary app enhancing branch reach (up to 25 miles) rather than replacing it, crucial for retaining commercial deposits in a rising rate environment. He noted its success is visible in deposit stability despite mix shifts. Switzer confirmed operating expenses will be flat in Q4 with reductions starting in Q1 2027 as system changes kick in.

Q: An analyst asked about the upside to mortgage volume if rates drop 50-100 bps.

A: Zember stated that at current 'low seven' rates, volume is ~$1.1B yielding ~30-35 bps pre-tax ($3.5-4M). If rates fall to mid-sixes (volume $1.6-1.7B), profitability could rise to >50 bps ($8M pre-tax). However, management is structuring costs assuming persistent high rates ('new norm') to remain efficient regardless of market direction.

Q: Questions were raised regarding credit quality and potential charge-offs.

A: Management stated net charge-offs are currently stable at 17 basis points. Zember noted they are debating whether to charge off specific classified assets to avoid inflating the NPA ratio, but no other significant migration or losses are expected in the near term.