Primis Financial - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 GAAP diluted EPS was $0.11, down from $0.14 in Q4 2024 operating EPS; EPS missed Wall Street consensus of $0.25, while operating EPS of $0.14 also fell short of estimates. Values retrieved from S&P Global.
• Net interest margin expanded to 3.15% from 2.90% in Q4 2024 and 2.84% in Q1 2024, driven by lower deposit costs (2.52% vs. 2.80% in Q4) and loan repricing yields >7%.
• Management outlined a path to >1% ROA via rebuilding earning assets to ~$3.75B (+21 bps ROA), mortgage contribution (+15 bps), and technology core consolidation savings of $6–$7M annually (+~15 bps ROA), with expected 5–10 bps NIM expansion in Q2 2025.
• Mortgage and warehouse momentum accelerated: mortgage locks $257M (+27% q/q); March locks $110M (+53% y/y); warehouse outstandings $115M (+80% q/q) and commitments $487M.
• A $0.10 dividend was declared (54th consecutive), and consumer program risk continued to abate (promo loans down to $17.2M; reserves on consumer portfolio 16% of gross), reducing volatility.

What Went Well and What Went Wrong

What Went Well

• Net interest margin improved 25 bps q/q to 3.15% as deposit costs fell 28 bps to 2.52%, with new loan production at ~7.20% yields and additional repricing ahead.
• Mortgage business inflected: ~$0.8M pre-tax profit vs. a ~$0.4M loss in Q4; locks $257M (+27% q/q) with March locks $110M (+53% y/y); new teams in Nashville, Wilmington, Raleigh, Austin add ~$500M annual production potential.
• Warehouse lending scaled rapidly: balances $115M (+80% q/q); commitments $487M (vs. $349M in Q4); noninterest-bearing deposits tied to warehouse at $11M.
• Management expects technology core consolidation to save $6–$7M per year and add ~15 bps to ROA; normalized run-rate ROA was 0.56% in Q1.
• Nonperforming assets remained low at 0.28% of total assets and no OREO; noninterest-bearing deposits edged up to $446M.

Quotes:

• “We believe our normalized operations show material improvement... positioned well.” — CEO Dennis J. Zember, Jr.
• “Net interest margin in the first quarter was 3.15%... Core bank cost of deposits remained very attractive at 183 basis points.” — CFO Matthew Switzer

What Went Wrong

• Reported EPS $0.11 missed consensus; nonrecurring professional fees and a $1.9M CECL reserve related to consumer portfolio pressured results. Values retrieved from S&P Global.
• Consumer program drove elevated net charge-offs ($11.3M, with $10.8M from consumer) despite lower provision ($1.6M); charge-offs expected to remain high as portfolio runs off, albeit with adequate reserves.
• Core operating expense burden, while improved, remains elevated; core expenses were ~$20.3M (down $3.2M q/q), with management targeting ~$18–$18.5M post-tech consolidation but most savings likely impacting 2026.

Transcript

Operator (participant)

Good morning, my name is Aaron and I will be your conference operator for today. At this time I would like to welcome everyone to the Primis Financial first quarter earnings call. All lines have been placed on mute to prevent any background noise and after the speaker's remarks we will have a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If at any point you would like to withdraw your question, just press star followed by the number one again. With that, I am pleased to turn the call over to Matt Switzer, Chief Financial Officer. Matt, you may now begin.

Matt Switzer (CFO)

Thank you. Good morning. Thank you for joining us. 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 been posted, which is also 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.

Dennis Zember (President and CEO)

Thank you, Matt. Thank you to all of you that have joined our conference call this morning. For the quarter, we saw our performance continue to track. Excuse me.

For the quarter we saw our performance continuing to track to the levels that we have expected. We have three in place strategies that will drive much higher ROA that I'd like to discuss with you. Before I do that I want to highlight our core community bank which I believe is going to be a driver of our growth and results this year. We continued building pipelines of new customers in the current quarter, pushing today's pipeline to about three times what it was a year ago. For the first quarter loans were down a touch because of some delayed closings, but in April as of this morning, our core bank is up $25 million in loans over the quarter end with plenty of pipeline to keep the numbers moving for the rest of the second quarter.

Our loan repricings in the first quarter at the core bank were in the mid 7% range and our new deposit account opened came in under 2%. All that and our core bank ended with essentially the same operating expense that they had a year ago. Managing tight and letting our improvements have an outsized impact on the bottom line. The momentum at the core bank is encouraging and important when you consider the three in place strategies we have to materially change our results. I'll give you a quick recap of these and some first quarter results. Realizing them first is growth in earning assets back to the level that we experienced before we sold the Life Premium Finance Portfolio. In the second quarter of 2024 we had about $3.75 billion of earning assets, about $350 million higher than where we finished 1Q25.

Growing earning assets haven't been a problem for our bank and as I look through the rest of this year we expect about $100 million of growth from the core bank, about $150 million more in warehouse and about $125 million more from Panacea. None of these strategies need more operating expense to drive this growth. Over the next few quarters as we reach our target, I expect the spread on this growth to drop straight to pre-tax and lift the ROA by 20 basis points-25 basis points over our first quarter numbers.

Second is our mortgage division. We need mortgage to add about 20 basis points to our return on assets compared to last year's contribution of about five basis points. We've been slowly and reliably building our mortgage division since we acquired it in 2022 and I know that that growth sounds insurmountable, but we closed $800 million of loans in 2024 but had about $1.2 billion of momentum as we exited the year. Our pre tax income divided by closed volume in first quarter 2025 was 50% higher than all of 2024 and so we already have the higher volumes and higher profitability to carry us very close to that goal. To further support that and to highlight the opportunity here, we continue to recruit and brought on some of the best teams in the country. We added the top producing team in Nashville, Tennessee.

That likely will close somewhere between $150 million and $175 million per year. We added a family team in Wilmington, North Carolina. All are military veterans and expect that they will close $175 million-$200 million per year of mostly FHA Virginia business. We also added teams in Austin, Texas and some other markets and collectively the first quarter's recurring yielded increased production capacity of about $500 million. Lastly, we are working and probably most importantly we're working to simplify and consolidate our core processing contract into one. We've built all the proprietary integrations and customer experiences and we did so last year so that it would be core agnostic and allow for the kind of move that we need to make.

Our customer experience, which is unquestionably leading the market, will not change, nor will our unique and reliable method for banking the entire country with proprietary concepts that weed out bad actors and fraudsters. What will change is the bottom line impact, and we think materially. We expect to have this announced in 2Q 2025 with a clear path to what we think are, confident will be, a 15 basis point-18 basis point pickup in our ROA. Before I leave this, I want to make a comment about the importance of the digital platform and why that core consolidation is so important. Had a question from an investor last night, and it sort of jogged me, sort of made me think about this and put this together. Right now, we fund everything that is not the core bank with our digital platform.

Meaning I'm not stressing my very profitable core community bank with having to stretch to fund national ideas. The digital platform funds all of Panacea's excess lending which I believe will be around $500 million by the end of the year. With that funding and at our digital cost of funds, Panacea will earn the bank around a 1.5% after tax ROA. The digital platform funds mortgage warehouse which will bring in a lot of low cost funds itself, but with its production I suppose it will need about $200 million-$250 million throughout the rest of 2025. At the digital cost of funds, warehouse will earn the bank over a 2% return on assets. Collectively this is an exceptional idea for growth and profitability.

It augments and supports the community bank and severely tamps down the idea that we have to win every single loan and every single deposit in the marketplace in our core bank. Over time that pressure in a community bank leads to poor credit decisions and higher cost of deposits. The only problem with realizing this dream scenario on almost $1 billion of balance sheet is the cost to run the digital core is pretty high. Our trailblazing idea was supported by something back then that the cores could not do. Over time the cores have modernized and now accept outside APIs and integrations. Once we have resolved the higher cost of these two cores, this safe and balanced strategy is going to be exceptionally profitable for the bank. My last general comment about all this is about Panacea and our efforts to deconsolidate.

We have made some of the change. We made what we think are most of the changes near the end of the first quarter to lessen our control over the parent company and believe we may be close to being able to illustrate a real case for deconsolidation given that the gain is large and the accounting is complex. We are working closely with our consultants and with Crowe to note for sure if the changes are adequate. Consolidating Panacea in the first quarter reduced our operating ROA by 10 basis points simply from reporting our share of the non tax affected operating loss in our results. Consolidating this would have an additional impact improvement in our results.

Last comment quickly about the consumer book that's driven all of the volatility in our results and really covered up a lot of the progress and improvements we've made in the company. We moved the portfolio back to our held for investment portfolio as the prospects to sell the portfolio faded. Virtually all of the volatility and risk in this portfolio centered around the loans with promotional features that have declined from $90 million at June 30th, 2024 to only $17 million at the end of the most recent quarter. The standard portfolio has good consumer performance and the remaining portfolio of promotional loans are reserved at 75% of the principal balance that we expect to roll to amortization.

We evaluated this book aggressively in the quarter as we moved it to held for investment in our CECL model and we booked an additional provision related to that analysis. Going forward we believe we've neutralized the noise and volatility here and are focused on earning back the hits we took on this as fast as possible. With that Matt, I will turn it over to you.

Matt Switzer (CFO)

Thank you Dennis. As a reminder, detailed discussion of our financial results can be found in our press release on our website and in our 8-K file with the SEC. As Dennis mentioned, as in prior periods, the financial results for Panacea Holdings are included in our consolidated earnings. When you exclude the consolidated pre-tax loss from Panacea Holdings, we reported pre-tax net income of $4.5 million in the first quarter. We also had a little over $1 million of one-time items largely related to accounting expense and $1.9 million of additional credit expense.

As we move the consumer portfolio back to held for investment, adjusting for these items pre-tax net income was $7.5 million or $5.9 million after tax, which equates to a 66 basis point ROA in the first quarter. As we previously discussed, we expected ROA in Q1 to be lower due to the balance sheet shrinkage from the sale of the Life Premium Finance portfolio in the fall, which caused earning assets to be 10% lower than the third quarter of last year prior to the sale. The first quarter also exhibits seasonal slowness in mortgage and mortgage warehouse. As Dennis discussed, our focus has been making sure we execute on the strategies that drive ROA higher from here, which we are doing. Net interest margin in the first quarter was 3.15% up from the reported 290 basis points last quarter.

We ratcheted down deposit costs exiting last year, particularly on the digital platform, benefiting the margin. Core bank cost of deposits remain very attractive at 183 basis points. We are still booking new loans with yields well over 7% and we have a substantial amount of loans repricing later this year well below that level. That will continue to help the margin. Non interest income was $7.8 million in the quarter versus $8.5 million in the fourth quarter when excluding the Life Premium Finance gain. Increased mortgage revenue was offset by a negative swing linked quarter of $1.2 million in fee income related to the consumer program that we are running off as a substantial driver of that swing was the continued write down of the derivative asset related to loans exiting promotional periods.

The derivative value was down to $1.6 million at March 31 and will amortize off at a much slower rate over the next five quarters. On the expense side, when you exclude mortgage volatility and non-recurring items, our core expenses were $20.3 million, down $3.2 million from the fourth quarter and more in line with prior periods. We have continued to prioritize holding the line on expenses to position ourselves for substantial operating leverage going forward. The technology saves Dennis discussed have the potential to reduce that run rate an additional 9%, not including the efficiencies in other areas that come with simplifying our infrastructure. Looking forward, our focus is on executing the plan we have laid out. Growing earning assets back to $3.75 billion would add 24 basis points to the ROA.

Achieving the growth in mortgage volumes and profitability expansion that's right in front of us would add 15 basis points and reducing our technology spend would add another 15 basis points. Collectively that puts us on track to exceed the 1% ROA goal we've set out for ourselves. With that, operator, we can now open the line for questions.

Operator (participant)

Thank you very much. Ladies and gentlemen, if you would like to ask a question for today, remember to hit star plus the number one on your telephone keypad. Our first question for today comes from the line of Christopher Marinac with Janney Montgomery Scott, your line is live.

Christopher Marinac (Director of Research)

Hey, thanks. Good morning. Dennis and Matt, wanted to ask about, you know, any wrenches that you see in the second quarter for, you know, for not being able to get back to this higher profitability. I know there's some progress and it's going to be several quarters in the making. We're just looking specifically at kind of transition to better numbers in Q2. Is there anything that you see that could throw you off another quarter?

Dennis Zember (President and CEO)

I mean, we are up over average balances over the first quarter to where we are right now. We're up about $60 million in earning assets. I think the track towards having upside down, you know, on the margin, I think we're tracking well there. We're about to come into the season where I expect Mortgage Warehouse to be up a little just seasonally. The core bank's closing loans that have been in the pipeline and doing well there. I see that we were taking on average, I mean in March we took about $160 million of applications in the mortgage group. We closed about 65% of those.

That is, that's up 45% over January and February. Up pretty tremendously this month. I mean, we've got today left to go, but it looks like this month we're going to beat that number. I think the mortgage number is going to come in strong on track with what we're looking for. On operating expense, there really is nothing on the, there's really nothing around here that's pressuring operating expense to move higher. We're not going to have the professional fees on a go forward basis. I mean a lot of the professional fees we had in the first quarter were just to, you know, our auditor didn't get the job and start working until.

Matt Switzer (CFO)

October.

Dennis Zember (President and CEO)

October. I mean that's probably, you know, easy three months, four months. They had to do a couple queues to get through the year and just accelerating that. That's not going to continue. I know those costs are coming out. I do believe we're going to be able to deconsolidate Panacea. We may have to make a couple more tweaks, you know, working with our auditors and with the consultants. I feel like we've done the vast majority of that. That savings is going to come as well as hopefully the pretty material pickup in book value.

Matt Switzer (CFO)

Yeah, I mean I agree with everything Dennis said. I mean Chris, our key, I mean mortgage just kind of baked in the cake at this point. We're going into the busy season. They've recruited a tremendous couple of teams here recently in addition to the recruiting from late last year. I mean we're very confident in mortgage volumes even in this rate environment. Mortgage warehouse was up 80% in the Quarter, but a lot of that growth in balances came at the end of the quarter.

You did not really see it in the average balance and net interest income in the first quarter because of seasonality. They are going to be up substantially on an average basis in the second quarter by a healthy bit. They are getting good yields with fees on their business and the core bank is showing good momentum again. They were kind of flattish in the first quarter, that is just because January and February are always so slow. They had healthy closings in March and that is even with some of that being pushed into April. As Dennis said, we are already up for the month of April relative to March. All the momentum is there.

Our whole story is getting to the back half of 2025 and holding the line on expenses, which we feel confident in, and rebuilding earning assets. You know, those earning assets compound. You know, we've got to get stuff booked and on the balance sheet here to replace what we sold late last year. We're in progress on that.

Christopher Marinac (Director of Research)

That's super. Thank you both for the background on all those fronts. I just want to ask about the consumer loans is the sort of resolution on those and payoff is a chunk of that going to happen this next three quarters or four quarters. Just, we do this, remind us some kind of time frame. Those will get worked out.

Dennis Zember (President and CEO)

The payoff rate in the first quarter on the standard book, which is, you know, the promo loans definitely will. More than half of those are scheduled to pay off before the promo period ends, given what's remaining. The rest are sort of resolved with the pretty substantial reserves we have. I think the promo book is, you know, by the end of the year I think we have the promo book being down to $4.5 million. The remaining book is about $100 million. It's standard consumer paper. It's low interest rate, low payment. The payoff rate on that, Chris, is about 7% per quarter. At least it was in the first quarter. If you look at that, you probably could realistically believe that 20%-30% of that would pay off this year, maybe a little more.

Matt Switzer (CFO)

I think it's amortizing [crosstalk] paper. It's just we're not booking anymore and it's now just running it down over time.

Dennis Zember (President and CEO)

Middle of last year we had $200 million in this book.

I think we'll end this year probably eighteen months later. I think we'll end this year probably somewhere, call it $70 million, $65-$75 million.

Christopher Marinac (Director of Research)

Great, that helps. Thank you very much. I'll step back.

Operator (participant)

Thank you for your questions. Ladies and gentlemen, once again, if you would like to ask a question today, it is star plus the number one on your telephone keypad. Our next question is from the line of Russell Gunther with Stephens Inc. Your line.

Russell Gunther (Managing Director and Equity Research Analyst)

Hey, good morning guys.

Matt Switzer (CFO)

Hey Russell.

Russell Gunther (Managing Director and Equity Research Analyst)

Appreciate all of the color on the average earning asset walk and where new yields and deposits came on this quarter. Could you just give us a sense for how that translates to the margin outlook in 2Q and across the remainder of the year?

Matt Switzer (CFO)

I mean I think we'll see, I don't know, 5 basis points-10 basis points of margin expansion in the second quarter and then by the end of the year we'll probably be up, call it 10 basis points-15 basis points, maybe 10 basis points-20 basis points depending on what happens with the broader rate environment.

Dennis Zember (President and CEO)

Where the loan repricing we're having in the core bank are easily 100 basis points higher than where the book is. Even now with rates sort of settling down on the 5 years-10 years and one month SOFR we're still picking up yield on loan repricing. Deposits, you know, I said they were in the just below 2%, probably 1.90%-1.95%. The core bank's cost of deposit is 1.83% or 1.84%. 1.83%. I mean really we're sort of growing the core bank with very, I mean almost no move in on deposit costs. Pretty strong there. Mortgage warehouse has a margin that's better than our overall margin. As that grows I'd expect you to see some of that sort of fade into the numbers and lift the margin. I like, you know, I like the numbers Matt telling you that's helpful.

Russell Gunther (Managing Director and Equity Research Analyst)

Guys, I appreciate it. A follow up to the expense conversation had earlier. If you could just kind of give us a walkthrough of where we stand at 1Q and folding in the additional savings, should they materialize? How should we think about an exit core non-interest expense base in 4Q assuming, you know, Panacea deconsolidation.

Matt Switzer (CFO)

Yeah, there's a table in the press release that walks through that, Russell, that kind of takes out all the different parts including Panacea's impact and mortgage impact to get to that core level. Take a look at that and then let me know if you have follow up questions. I would say, you know, that run rate should be pretty consistent for the rest of this year. The core consolidation savings is really probably, it's possible we would see some late this year depending on the final negotiations on that, but it's more likely something that will affect 2026.

Dennis Zember (President and CEO)

Russell, one thing too, that backs out the Panacea. When you look at the core banks, OpEx is right at $20 million and very consistent with where we were a year ago, like showing how hard we've been managing that around here. Matt backs out Panacea OpEx because when we calculate the impact of Panacea, we basically get paid for all of those operating expenses and you may see them sort of meander through non-interest income or non-interest expense, wherever we allocate that. What really matters, and mortgage as well, mortgage OpEx really just drives mortgage revenues. Really the number that matters is that $20 million. I think it's $20.25 million this quarter. That's really the number that matters.

I will tell you that we, you know, we're not having any massive moves around here, but we are trimming back and, you know, anything that's redundant, we're looking at that. We're, you know, consolidating other contracts that maybe are not core related and savings there. The whole goal again is to hold OpEx flat and let all of the growth, whether it's mortgage, Panacea, earning assets, whatever we do, skip OpEx and get 100% leverage and scale straight to the bottom line. I am very confident that we'll do all that. I think if we can finish the year somewhere right around $20 million, maybe a touch below that. I think the quarterly pickup on the negotiation, on negotiating this core contract consolidation is probably $1.5 million-$2 million a quarter. It's like Matt said, 9%.

It's a material, material move and that's really on today's number. If we could grow the bank back to where we were second quarter, hold the line on OpEx and then get these savings, I think the operating results impact is going to be very, very noticeable.

Russell Gunther (Managing Director and Equity Research Analyst)

Okay, so I guess my follow up and just what I'm trying to get at is so that $20.2 million, when you're saying expect to finish the year around there, once we fold in the, you know, tech and data processing spend, we should expect that to reduce by the $1.5 million-$2 million. Or is that [crosstalk] kind of inclusive?

Dennis Zember (President and CEO)

Yeah, I'd say $18.5 million. I'd say $18 million-$18.5 million. With everything else that we're working on, we probably might get to $18 million but $18.5 million, I'm very confident we get to.

Russell Gunther (Managing Director and Equity Research Analyst)

Okay, that's super helpful guys. That's what I was trying to get to. Just switching gears on your outlook for charge offs going forward. Just given all the actions that have already been taking in consumer. That was the Volcker charge off this quarter. How would you expect that ratio to trend over the course of the year?

Matt Switzer (CFO)

I think we'll continue to see high charge offs. The key will be we're not expecting to see high provisions related to them. Right. Our core charge offs was I think five or six basis points. When you take out the consumer, the portfolio is in runoff. It's got a 16% total reserve with discounts against it. There's going to be charge offs against that reserve. The key is have we got enough allowance and discounts against that portfolio to absorb the charge offs as it runs off? We think we do at this point.

Pretty confident that we do. I mean the promo book like we. Said is 75% reserves on what we think will roll to AM. The delinquent book has comparable reserves. And the standard book has reserves that are probably four times, three or four times the rest of our consumer, our homegrown consumer book. We think we're appropriately marked. I mean, we, you know, we may have the charge offs. I think we, you know, rolling through those three quarters of promo loans, that's where the charge offs are coming. We had, in the first quarter, about $20 million of promo loans mature. About $10 million of it paid off and $10 million of it rolled. Of that $10 million, that $10 million is probably marked with $7.5 million of reserve, if we can, around numbers. That's what Matt's kind of saying. We don't think the charge offs will be greater than $7.5 million. That's where we're marked.

Russell Gunther (Managing Director and Equity Research Analyst)

Got it. Okay, super helpful. Last one for me, you guys mentioned, you know, a lot of the work has been done around the Panacea deconsolidation. Just, you know, best guesses in terms of when that should occur from a timing perspective and reminder on what the pickup in the gain could be.

Matt Switzer (CFO)

Dennis mentioned we made the changes operationally and whatnot, technically at the end of the first quarter. Then we have to evaluate whether going through the accounting and GAAP requirements, does that suggest that we no longer need to deconsolidate it? If we come to that conclusion, it would actually be effective March 31. Even though we haven't reflected it in our numbers here, we would reflect it. We would revise the first quarter to reflect that and it would show up in our, we would obviously make that public, but it would show up in our results when we file our 10Q which is scheduled for May 12th, I believe. Again, no guarantee that we're going to come to that conclusion. Still a lot of work to be done to sort through that.

It's a very complicated analysis but if we did make that determination it would be effective at the end of the first quarter. We would elect the fair value treatment for that investment, which means we would mark it to fair market value. We're carrying it at basically zero. We would book a substantial gain from writing it up. That is going to have to require, given the size of it, we need a third party to do that valuation, which we're getting in parallel in case we do get that determination or make that determination to deconsolidate so that we'll be prepared. I can't tell you what that valuation is going to be though. We have indicated publicly that the value of those shares at the time of the Panacea Holdings capital raise at the end of 2023 was just under $20 million pre tax.

Given all the progress they've made since then, we would like to think that it would be worth more than the valuation at that capital raise. That is all subject to a third party valuation.

Russell Gunther (Managing Director and Equity Research Analyst)

Understood. Okay guys, that's a lot of help. I appreciate it. That's it for me.

Operator (participant)

Thank you for your questions, ladies and gentlemen. That will conclude our Q and A session for today. Dennis, I'd like to hand it back over to you for any closing comments.

Dennis Zember (President and CEO)

Okay, thank you again for joining the call and your interest. If you have any questions or comments, Matt or I are available, give us a ring. Thank you. Have a great day.

Operator (participant)

Thank you.