Primis Financial Corp Aktie

Ladies and gentlemen, thank you for standing by. My name is Colby, and I'll be your conference operator today. At this time, I would like to welcome you to the Primis Financial Corp. First Quarter Earnings Call. [Operator Instructions]

I will now turn the call over to Matthew Switzer. You may begin.

Good morning, and thank you for joining us for Primis Financial Corp.'s 2026 First Quarter Webcast and Conference Call.

Before we begin, please note that many of our comments during the 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 changes in 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. Our non-GAAP measure, relates to the most comparable GAAP measure, will be discussed when the non-GAAP measure is used [indiscernible] readily apparent.

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

Thank you, Matt. Thank you for all of you that have joined our first quarter conference call. We're excited to report that in the first quarter, we earned $7.3 million or $0.30 per share which compares to $22.6 million and $0.92 per share in the same quarter of '25. And as I'm reading that, excited to report earnings shrinking that much. The fact of the matter is, on an operating basis, we earned $0.33 per share in the first quarter, which excluded a small tax adjustment related to 2025 results. And when you compare that to second quarter a year ago, it's up 126% operating earnings, where we reported $0.14 in the same quarter of '25. And Matt may mention this, but the first quarter of '25 included a substantial gain on the deconsolidation of Panacea, which is what I'm excluding.

Our key operating ratio has obviously improved alongside that earnings number I just gave you. On an operating basis, our ROA improved to 84 basis points compared to 40 basis points in the same quarter of '25. Driving that were a couple of items: margin, mostly; and as well as operating expense control.

On net interest margin, our net interest margin benefited from the securities restructure as well as the mix of earning assets and climbed to 3.43% in the first quarter compared to $3.15 in the same quarter of '25. We continue to put up nice growth numbers that are manageable, but really distinguish us amongst our peer group. Loans ended at $3.4 billion, up 11.7% compared to the same quarter in '25. That excludes about $40 million or so that [indiscernible] that we moved into loans held for sale, related to a flow agreement with Panacea. So really, our growth was probably stronger than this.

Deposit growth over the same period is really what you should look at. That came in at just better than 8% with very little of that from the digital platform, which is pretty steady state, at about $1 billion. The growth in checking accounts in our company was even more notable, with noninterest-bearing checking accounts growing to $541 million, which is almost 19% higher than where we were in '25.

Checking accounts continue to be a more meaningful element of our deposit mix and were 15.9% of total deposits compared to just [ 14.2% ] in the first quarter '25. It's very important to note that weaker deposits in this strong fashion and never once felt pressured in our 4 bank or on our digital platform, to be more aggressive on rate. We're doing it with technology, with service, with people, with getting in front of us, focusing on commercial deposits and had real success.

All of the energy and momentum on our fund sheet really starts at our core banking. There has never been a time since I came to Primis that our core bank has had this opportunity on both sides of the balance sheet. Honestly, we're winning business that several years ago, we just wouldn't have been in the running for or maybe even had a conversation about. Virtually nothing that we're doing to win this business has to do with rates or fees. We're leaning hard into our technology, our service, our people, our existing customers who are turning out to be amazing centers of influence for us. For so long, it felt like all we were doing here is working on our factory and stuff in the factory. But today's stuff is rolling off, that [indiscernible] line faster and faster. I'm very encouraged by what our people are accomplishing.

Primis' warehouse has fully replaced life premium finance at this point , has been some well received in the marketplace. We finished the quarter with about $460 million outstanding. For a few days in the quarter, at the near the end of March, we credited $0.5 billion outstanding. This is before any [indiscernible], is before the busy [indiscernible] for retail mortgage. Importantly, warehouse is still producing important impressive yields and margins, efficiency ratios in the [ 20s ], the amount of scale and impact on our overall operating ratio in this business, it's not really something that's been fully banked or recognized in our current numbers. That's really -- they've been just scaling the business so quickly over the past year.

But as we -- I believe we could probably double this business in the next 12 to 18 months. And I believe the incremental impact from that [indiscernible] is going to be very meaningful.

Retail Mortgage had an absolute blowout for. [indiscernible] it was impacted by some Middle East activities and an impact on rates and fair value adjustments. And that's true. We might have reported $0.5 billion, looking at $0.5 billion more at that. But [indiscernible] pretax income in the Mortgage grew to $2.1 million in the first quarter compared to $766,000 same quarter a year ago.

In the quarter, our earnings [indiscernible] up to 57 basis points on closed volume compared 46 in the same period a year ago. So on a profitability basis, we're up maybe 19%, 20% -- a little better than 20% on closed volume.

Our recruiting pipeline has never been as strong, and we're consistently we double each month [indiscernible] flow volume, new files. So we have real [indiscernible] very positive about what the second half of the year would look like. Right now, we believe Primis Mortgage is on track to be a top 50 mortgage company nationwide in '26.

And lastly, before I turn it over to Matt, I want to emphasize what's really proven [indiscernible] for us and our desire to build this into a top-performing bank. In our day-to-day here, we are [indiscernible] on growing checking accounts, like I mentioned earlier, to about 20% of total deposits. Secondly, we're determined to drive massive amounts of operating leverage from our consistent, reliable balance sheet growth [indiscernible] to decreasing OpEx. And I know I've been saying this for several quarters. And so as the quarter ended, I was pretty delighted, start playing with the numbers and see what I'm about to tell you here.

If you look at the last year, first quarter of '25 from -- first quarter '25, all the way back to the first quarter of '24, we were reporting growth in core revenue of about $45 million -- excuse me, we were reporting core revenue of about $45.6 million, which is higher by 33.7%, call it, 34% over a year ago. Reported operating expenses straight off of [indiscernible] income statement, no adjustments, came in at $33.8 million, which is only 4% higher than the same time a year ago. That's 34% growth in revenue, only a 4% growth in OpEx.

I had in my comments that [indiscernible] that we could do that for a couple of more years. But I refrain with Primis, so I tick that out. But this is an extraordinary level of operating leverage and really the driver of our results. Nobody approve things we've done in this area and that revenue may not be outpacing OpEx going forward.

We had several strategy, of course, to continue getting this result. And one of those is AI. And I don't want to steal Matt's comment or his hard work on this. I know he's going to comment further on this. But any [indiscernible] is the same kind of opportunity and catalyst that you would expect me to report if we were doing M&A transactions. We already have all the tools we need for this. We expect hardly no additional investments except short, but -- except the deep training that we're going to give our staff to be effective with this. And we believe that in the year, we are going to be the undisputed leader amongst banks under $10 billion, using AI to drive operating results [indiscernible] sales efficiency, customer satisfaction experience and, importantly, fraud prevention.

When you combine that with our work towards converting our core bank to a fully digital core, we are on the edge of being a uniquely positioned bank with technology that has figured out how to keep our [indiscernible].

With that, Matt, I'll turn it over 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 14% annualized from December 31 to March 31, led by growth in Panacea and Mortgage Warehouse. Average earning assets increased 6% annualized in the first quarter, with a slower growth rate versus period end growth due to the ramp in mortgage route later in the period.

Average deposits were up 4% annualized in the quarter, while average noninterest-bearing deposits were up 7% from year-end.

Net interest income was approximately $32 million, a substantial improvement from $26 million a year ago. Our net interest margin in the first quarter was 3.43%, up from [ 3.2% ] last quarter and 3.15% in the year ago period. And we have expectations for further margin expansion as we progress through 2026. We completed a reduction of $27 million of subordinated debt at the end of January, so that was only partially reflected in the quarter. We also have approximately $400 million of loans repricing in the second half of 2026 and early '27 with a weighted average yield of 4.81% that will add to loan yields.

[indiscernible] core bank hosted posits remains very active at 159 basis points for the quarter, flat from the fourth quarter. Cost of total deposits was 223 basis points in Q1, down 3 basis points each quarter. Our focus on growing NIB deposits is a key part of our strategy to continue driving funding costs lower.

Our provision this quarter was $1.5 million, partially driven by growth in the loan portfolio described above. Approximately $0.7 million of the provision was due to specific reserving on impaired loans, while another $0.4 million on the activities in the consumer portfolio.

Core net charge-offs remained low at 6 basis points in the first quarter of 2026. Noninterest income was $13.6 million in the quarter versus $12.8 million in the fourth quarter after adjusting for the sale-leaseback gain, investment portfolio restructuring and Panacea loan pool sale in the fourth quarter. Mortgage revenue was solid in Q1 at $10.8 million versus $10 million in the fourth quarter and would have been even better in the first quarter, if not for the impact of market volatility late in the quarter.

Year-over-year, Retail Mortgage production was 122% higher in the first quarter of '26 versus the first quarter of '25, showing strong momentum as we head into the busy homebuying season. Also included in that production was $26 million of attractive construction to permanent loans in the first quarter, up from $4 million in the first quarter last year.

On the expense side, when you exclude Mortgage and Primis division volatility and nonrecurring items, our core expenses were $22 million in the first quarter versus $20.8 million a year ago. Absent the increased occupancy expense from our recent sale leaseback transaction, core expenses on this basis would have actually been down year-over-year. We've been focused on controlling expenses to maximize operating leverage and feel like we are in a good spot on that front so far in 2026.

I would also like to take a moment to briefly touch on how we are thinking about AI. As mentioned in the earnings release, we have canvassed the bank looking for opportunities to deploy AI tools to reduce repetitive and time-consuming tasks and generate efficiencies. Our first pass has identified hundreds of hours of opportunity and there is almost certainly more that can be found as we start tackling these projects. We view this as a key part of our strategy to keep expense growth to a minimum, while maximizing operating leverage.

Equally as excited from where I sit, our in-house talent in this area, combined with the robust tools built into our existing products such as Microsoft CoPilot should allow us to get the vast majority of efficiencies without expensive consultants.

In summary, we are excited to report a solid first quarter in line with our expectations and believe we are still on track to hit our profitability goal in '26.

With that, operator, we can now open the line for Q&A.

[Operator Instructions] And your first question comes from Woody Lay with KBW.

Wanted to start on Mortgage. And as you mentioned, it was a blowout quarter in what's typically a seasonally weaker quarter. We're now entering the stronger quarters ahead. What are your expectations for production in the near term? And then also in the Mortgage expenses, was there additional hiring that was done in 1Q '26 or elevated legal expenses, anything that sort of prop that up?

Nothing unusual on the expense side.

I think what -- I think we probably -- I think maybe when you came into the year thinking we might have -- we closed $1.2 billion last year. but had a lot of momentum in the fourth quarter. I thought we'd probably have like a $1.6 billion, $1.7 billion mortgage company. And then through the first quarter, felt like it was a little higher, maybe $1.8 billion, maybe even $2 billion. But we -- I feel like we're probably still maybe around [ 100 ]. I mean we're going to -- April is very strong sort of reflecting what we thought.

I think for the -- I said we're probably still somewhere in the $1.8 billion range on close volume. And I think what was important is as we've been growing, what's important is like we were at 46 basis points a year ago. We're at 57 basis points now on closed volume. What's impacting that is obviously a lot more scale on the fixed expenses as we get closer to $2 billion. A lot more focus on Matt mentioned construction [indiscernible]. We have a base construction term focus here that's honestly very centered on government for getting higher yields there. And really, we've been building that for the last year. These are probably 6 to 9 months.deals, and so that's starting to flow.

So what's important, I think, is that we think we're going to do [ $1.8 ] billion or so this year as things look right now and maybe trend somewhere closer to probably a touch over 60 basis points. We -- the Middle East event probably hit us for a few basis points, 5 or 6 basis points, on profitability. So we might have been overseas had we not had a fair value [indiscernible]. That's going to happen in Mortgage, [indiscernible]

Yes. That's helpful color. And then maybe shifting over to the net interest margin outlook, Matt, you noted some of the loan repricing tailwinds through the remainder of the year, growth is expected to remain strong. You're going to have to fund that growth. Do you think you can continue to post strong growth and see margin expansion? Or will it be -- are we looking more at flat margin with the incremental growth?

I think we'll see a little bit more margin expansion because of the debt payoff, I mentioned, and we also had a little bit of a drag in the margin quarter from moving those loans to held for sale. We reversed some deferred costs that ran through the margin. It was only like 1 basis point.

So we'll see some march expansion next quarter and a little -- and then probably inch up from there. I mean I would not expect margin to hit 3.6%. But would we hit high 3.4s to 3.5% as we go through the year, most likely.

Got it. And then maybe just last for me on the credit. I appreciate the comments on pay downs of those 90-day past due on past -- subsequent to quarter end. But just on some of those larger relationships that are still on NPA, any update on those and when we could see possible resolution?

[indiscernible], you asked that, Matt, looks trade like you answer that one. I mean there's 2 bills real estate -- commercial real estate deals office. And both had pretty good quarters on new leases. So I mean -- I think it's trending positive there. I think the -- 2 things are trending positive. One, there is more leasing activity. Sales cycle on new leases in an office part like this is longer than we want it to be, but still, the fact that they're talking to a lot of folks and that there's pathway is positive.

The second is cap rates are improving, and they're not falling like we'd like them to, but they are improving. And so I think [indiscernible] goes by, we're a little safer on their current. So they're not -- these are not -- I mean it could change any time. But right now, they're things are trending more positive there.

Does that answer your question?

Your next question comes from the line of Russell Gunther with Stephens. Inc.

I wanted to start -- maybe just a quick follow-up on the margin commentary. I appreciate the directional guide, but maybe some of the underpinning assumptions. It would be helpful to get a sense for kind of where new commercial loan origination yields are today? And then, Matt, within the guide, how are you thinking about deposit costs for years? Is there room to move those lower? Or is there kind of a flat to upward bias within your margin expectations? .

I'll start with the last piece. I think on the deposit side, it's probably flat, up or down a couple of basis points, but not -- I don't expect any substantial moves in the cost deposits in the near term. On the production side, we're -- in the core bank, probably [indiscernible]

Yes, we're probably regularly 5 years. And we're still probably all in, we're probably close to 5-year [ 275]. [indiscernible] Mortgage warehouses probably with phase is probably 1 month so for plus [ 315 ], [ 320]. Panacea is outstanding. I mean they are -- I mean they really -- I mean, the niche that they've established for themselves, their marketing, their profile, the opportunity to do business with them is reflected in the pricing, I think the rates they're getting on their production is exceptional to. They're probably 5-year treasury plus [indiscernible] on that kind of credit.

On funding, Matt and I regularly debate this. I mean we could -- across the bank right now, I feel like we could probably take digital down 25 or 30 basis points, probably not lose that much. We can probably take the core bank down 5 or 10, it's already very low. But there some savings that we could get on the deposit side. The problem is it puts us in a place where we're not very strong on the on the growth side. And again, we're not leaning into rate on digital or anything else, but we also don't want to not be competitive. And right now, when we're looking at Panacea, Panacea could do $200 million for us this year. Warehouse could grow $300 million, $400 million. The core bank is the best [indiscernible]. That could be a couple of hundred million. We just don't want to get in a position -- I mean we don't want to go hardest 30 basis points of deposit cost and then just rely on home loan bank advances. That's -- we don't want to be that bank.

I appreciate the color there. And Dennis, kind of took my next question in terms of how that loan growth shake out from a vertical perspective. So I appreciate that. Maybe I would then switch gears to the expense front. How are you guys thinking about directionally the overall expense base inclusive if we could, of the kind of mortgage banking vertical as well?

Inclusive of -- that was kind of hard to split out unfortunately because it's so tied to volume. I mean -- as you know, it's going to be an almost direct percentage of whatever their bill volumes going to be in the next quarter. I mean, I like to think of Mortgages net noninterest income and noninterest expense for the year. Now that doesn't include like spread income, which we also included our profitability. I mean, it's probably going to net us $5 million or $6 million for the year, so you can kind of back in to take your whatever -- your assumption is in noninterest [indiscernible] number mortgage and kind of back into expense from there? .

Otherwise, when we kind of and then past volatility to it as well. So we're really focused on that more expense number, which is around $22 million. I think I think we'll stay in that kind of $22 million to $23 million range for the year.

Okay. Understood. I appreciate it, Matt. And then just last one for me guys, would be an update on your kind of ROA glide path, like you mentioned in your remarks, I would expect to hit your targets, which I think are 1% ROA by the end of the year. What aspirations do you guys have from there and sort of a time line to achieve?

[indiscernible] do something.

No, please. move the gold again. I can take . [indiscernible].

I understand. Yes, I get that.

Yes. I mean -- I mean 1% is a good [indiscernible] we've not consistently been there, but 1% is not going to I mean, given our growth rate, that problem -- our growth rates and our dividends, that will probably keep the bank capital levels flat. But I mean we want to build book, we want to build capital ratios. We want to position ourselves to be strategic. And so we've got to be higher than that.

I think mortgage at scale, I've said it's 57 basis points. Mortgage at scale probably is another 20% higher than that. That's going to be a big deal in the ROA. That's probably another 10 basis points for the ROA. Warehouse is probably going to add another 10 basis points once it gets to scale. The AI thing that Matt is working on and our rest of our bank, I mean, over time, I mean we're not looking at that if [indiscernible] is something that's going to reduce headcount. What it's going to do is take the experts we have and just make them be able to manage twice as much. And that's we can magnify that when we have growth rates like we have. We know -- I know I'm going to need these staff is, these staff return.

I mean admirationally, we are be given these lines of business, on top of our core bank, we ought to be [ 125 ] or better and probably looking at more ROTCE to be something that we get there 15%. I think your 15% ROTCE, you kind of can control your feature. People don't like your stock and you can just buy it back. If they do like your stock, then you can do other strategic things. But really, until you get to that point, you're -- all you do is working to get to that point. [indiscernible].

That's good.

[Operator Instructions] Christopher Marinac with Brean Capital Research.

Dennis, the last couple of days, banks have talked about the competitiveness of digital deposits being more expensive than the brokered funds. And I'm curious what you think about that. It seems that you're in a much better place. You've been doing the digital banking much longer. And I'm just curious kind of how you look at that? And is that digital area going to grow less as a result of the rate environment?

[indiscernible] you asked that question. I remember speaking on a panel somewhere, and I was talking about how we had these 25,000 or 30,000 digital customers all across the country. That have never been in the branch, probably never seen one of our bankers do. And I was talking about how that we sometimes produce their social media or we -- we communicated with them, we find out that they have a dog of [indiscernible]. And we will do things that are very community bankers. We will send up some slag a dog collar band, or we'll reach out to when we're in -- I've gone to see customers when I'm in [indiscernible]. I found additional customers was out there and went and had breakfast with them.

The reason that -- I'm not going to sit here and say that these deposits are more expensive. Honestly, they should be. We have 25,000 or more digital customers that were banking with 6 people. So they should be more comfortable -- I mean more expensive. There are very little cost associated with it. But we have separated them from being just straight rate driven by being community bankers. The same thing that we do in bank to make our customers not be solidly right focused. We're doing that on the digital platform. I'm not going to sit here and say that we're the only people that are doing that, but I will tell you that we're probably more effective at that than our competition.

And we've been doing that for now for 3 years since we've got the real big slug of deposits in here. Our average digital customer has -- average digital customer is probably down 150 basis points from where their peak was. The average digital customer has been here probably more than 30 months, closer to 36. Their average age is over 50. Average deposits probably appreciate $30,000, $40,000. They have the cell phone numbers of the fingers that work them. Everybody has talked to a banker. I mean it's just things like that, that have separated these customers from being solely rate-focused.

Now I would tell you, in the core, the core base cost of deposits is probably $180 million $175 million -- $159 million. I mean, the digital is sitting there at like $375 million or so. Like I said, we could probably push that down 25% or 30%. So let's just say we could get them to [ 3.5 ]. So yes, it's obviously more expensive. But it's growing at that level. And yes, I don't know, I don't want to ramble about it. But I'm very proud. I'm very proud of how our bankers pushed a community bank attitude and approach on to these 25,000 customers, and that's paid off.

Chris outside very long and ratable answer.

That is okay. My other question just goes back to the mortgage business. As you continue to thrive in mortgage, both in terms of production and gains plus the mortgage warehouse, -- is there a natural cap that will happen to how much of that business you want for the whole company? Will the bank just grow or route and kind of naturally cap how much mortgage will be down the road?

See, that's the kind of thing you don't worry about when you're starting. Matt and I check all the time that we are claim to fame is that we find problems and we face some set they create new problems. I mean mortgage really should not be.

We don't want to be a mortgage company here. We want to run an amazing mortgage company, but we don't want to be a mortgage company. It really probably should be more than 20% of our bottom line. No question about it. I mean, some of it is we have a dynamic team in mortgage and autonomy leader. And we have that for the core bank as well, too, in [indiscernible], but I mean the core bank, we're a little we don't -- we're still not fascinating with CRE. We're doing it, but that's not our hallmark. We're in some nongrowth, really fast growth areas in the core bank. So over time, where we've got to find a way probably to grow the core bank faster so that Mortgage, Warehouse, Panacea, all of those stay as tape to the bank and not the whole story.

I mean we're not -- we don't want to change the growth profile or the growth dynamics. I mean our core bank is -- what our core bank right now is doing is amazing. And I don't want to step on the gas any harder and get a different kind of business. Some strategy will open up to us. We've not been in an M&A strategy or a position to do that, maybe that will open up one day. And that's probably the catalyst we need to build on the core bank and let these other items that we do are so good and just run so well a complement to that.

Thank you. And there are no further questions at this time. I'd like to turn the conference back over to Dennis Zember for any closing remarks.

Thank you all for joining our first quarter conference call. If you have any questions, Matt and I are a happy to get on phone with you. Otherwise, have a good weekend, and we'll talk to you soon.

This concludes today's conference call. You may now disconnect.

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 12/31/25. 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 0 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 2 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 4 or 5 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 2 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 1 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] Your first question comes from the line of Russell Gunther from 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 in 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 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 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.

Your next question comes from the line of Christopher Marinac from 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 2 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-3, 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 whatnot. 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 3 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 3 years. But I can tell you, if you go back 2 or 3 years, 4 years, 5 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.

Ladies and gentlemen, thank you for standing by. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Primis Financial Corp. Third Quarter Earnings Call. [Operator Instructions]

And I would now like to turn the conference over to Matt Switzer, Chief Financial Officer. You may begin.

Good morning and thank you for joining us for Primis Financial Corp.'s 2025 Third 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 on anticipated 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 with 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 for that introduction, and thank you to everybody that's joined our conference call this morning. We believe our third quarter results reflect much of what we've been talking about in recent quarters, and we're excited to see the improvement and the lack of noise honestly in the current quarter.

For the current quarter, we are reporting $6.8 million in net earnings and about $0.28 per share, which compares to core income of $2 million and $0.08 per share in the same quarter in '24. Our ROA and ROTCE in the current quarter improved to 70 basis points and 9.45%, respectively. We mentioned this in the press release, and I know Matt's going to give more current -- or more color. But our current profitability levels are higher than what we're reporting. When we adjust for some certain items that we know aren't permanent, we see a core ROA that's closer to 90 basis points and puts us right in line to be successful reaching the 1% ROA that we've been targeting.

I know Matt is going to give more details on that. But from a high level, I want to recap some of the impactful things that happened this quarter and that give us the confidence that a 1% ROA is within reach. First, we're reporting our core margin in the quarter at 3.15%, which is up from 3.12% in the second quarter of this year, but up about 35 basis points compared to a year ago. At this point, we've replaced about half of the loans that we sold with the life premium business a year ago at yields that are at least 200 basis points higher. Importantly, we have -- importantly, we have the pipeline and the momentum to get the remaining portfolio replaced. And with current levels and margins that we see across our business, we expect that to add another 6 to 8 basis points of ROA and about -- excuse me, of margin and improved pretax earnings by about $1.6 million per quarter.

We've also driven results on the deposit side. Compared to a year ago, we've grown noninterest-bearing checking accounts by about 16%, which has materially improved our deposit mix and taken our cost of deposits down by almost 20%. We at the end of the quarter alongside the rate cut by the FOMC, we were able to move lower again on the deposit side across our footprint -- across our business, both digital and in our core business. And thanks to our focus on core relationships, we've experienced very strong retention across the bank. Very little of this last move is reflected in our results due to the timing at the end of the quarter, but we expect this to be meaningfully positive to our margin and our results in the fourth quarter.

When I look through the improvement in margin, I see new asset yields holding in strong, being funded incrementally at very attractive levels. But I know it has more details on this. But in the current quarter, our new and renewed loans came in at about 7.16% compared to 7.57% in the second quarter of this year. New deposit mix -- new deposit business is a mix of us competing hard on new businesses, commercial businesses and driving down the overall cost with new checking accounts. New deposit business came in at around 2.51%. And so taken together, our new activity across the entire bank, all of our divisions spreads of about 4.65%. We these kind of incremental margins on balance sheet growth is important because we're still relying on operating leverage to drive our results to where we know they should be.

Our table in the press release reflects how steady we have been on operating expenses, showing that we came in at just $100,000 or so from our 5-quarter average. Looking ahead, we are confident that we can continue to hold growth in OpEx to a very minimal level, managing very tight in this environment and letting the investment that we've made in past quarters paid dividends with growth at the attractive levels we talked about. On our operating divisions, real quickly, I'm getting pretty excited about the investments we've made that are tied to residential mortgage. We've built our mortgage division from about $20 million a month of production to about $100 million to $120 million a month over the past few years. We've done this profitably too, slowly reinvesting enough of our earnings to build our production staff to what it is today. We've focused on culture and service as well as just products and pricing, and all of this work continues to pay dividends.

In the third quarter, we had continued recruiting success that built annual production by about another $120 million or 10% of where we stood at the beginning of the quarter. Core results for the quarter showed pretax earnings of about $1.9 million, which is 58 basis points on closed volume and our strongest quarter yet. For core results in mortgage, we are excluding some legal fees associated with some recent hires that totaled about $900,000, and we expect this to moderate back to normal levels very rapidly.

Mortgage warehouse continued to grow nicely and continued and shows real pace for the bank and for our earnings. To illustrate this, we had average balances in the quarter of about $210 million, but ending balances of about $327 million. Today, we have over $1 billion of uncommitted lines approved and in place and a pipeline of new opportunities working through the system of about $300 million. For the quarter, the warehouse group showed pretax earnings of about $1.6 million and moved their efficiency ratio down to about 27%. Long term and at scale, this business can be 2 to 3x its current size on our balance sheet with operating ratios that are accretive across the board and taken together with our mortgage company we have the ideal -- we have ideal and sustainable exposure to residential mortgage that produces fee income and balance sheet growth that nicely augment what our core bank is doing.

Panacea continues to gain steam and momentum. Loan balances moved higher in the current quarter to $530 million on average compared to [ 385 ] in the same quarter a year ago. Deposits what's really impressive, growing at a faster rate ending at about $132 million in the current quarter, which is about 50% higher than they were a year ago. Importantly, Panacea cost of deposits reflect a blend of technology, customer service and deep brand endorsement. For the current quarter, their cost of deposits came in at 1.37%, lower than our core banks and compares very nicely to 2.28% in the same quarter a year ago. I have -- obviously, I have a lot of conviction about the kind of value that we're creating here because the industry deeply values traditional community and commercial banking and honestly, rightfully so. And while Panacea and what we're doing here does have somewhat of a fintech flare to it, operating nationwide with deep embedded technology versus physical branches. It's producing dynamite credit results focused on C&I and owner-occupied CRE with excellent yields to one of the most, if not the most coveted customers out there. and it's funding the balance sheet at extremely attractive levels lower than most established community banks. Strategies like this in the past didn't garner meaningful value because they focus on real easy credit and funded with flimsy or expensive solutions like CDs or institutional borrowings. But Tyler and his team is focused on relationships and technology and a customer experience that's proven to be more meaningful.

And lastly, before I turn it to Matt for some more details, a few comments on credit. We noted in the last quarter that we've had a few downgrades that were centered on loans that weren't delinquent but did have weaker prospects and weaker guarantor support. Our negative exposure to 2 office real estate properties in the Northern Virginia market are reflected in our quality numbers. with both being in substandard and one being in nonaccrual. Both properties have improving NOI and strong leasing activity, but tenant improvements -- tenant improvements, leasing commissions and rent abatement have stressed the borrowers' cash levels and their ability to support the property. These properties are ideally situated outside of the district in very desirable locations. And it's important to note that the market here is stable to slightly improving compared to areas inside the District of Columbia.

The remainder of our nonaccruals are centered in 2 loans. One is a $7.5 million loan to a private equity-backed company with proven value. Recent capital raises for the company indicate a strong enterprise value that puts us at about 35% loan-to-value. Matt's impairment testing on the company using pretty deeply discounted cash flows, continue to show no impairment on this loan. The other loan is a nationwide operating business with positive debt coverage, working several strategic opportunities to either be recapitalized or sold. On both of these loans, the banks working with the borrowers to exit the relationships through sales or refinance. And at this point, we don't believe there's additional losses or costs to be incurred. Outside of these properties, we really have virtually no exposure to office in any of our markets, but especially the D.C. metro area that is still not operating ideally. I don't want to minimize our gloss over any credit issue, but I don't believe we have exposures that should be causing problems or costs going forward.

Okay. With that, Matt, I'll turn it 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 almost 9% annualized from June 30 to September 30. Including the Panacea loans reclassified up for sale gross loans would have increased approximately 15% annualized led by growth in Panacea and mortgage warehouse.

Importantly, average earning assets increased 10% annualized in the third quarter, positioning us to fully replace earning assets sold a year ago with the Life premium finance sale. Deposits were flat in Q3 due to limited runoff at the end of the quarter after the Fed rate cut, but we're still up 7% annualized using average balances for the quarter. Even more impressive noninterest-bearing deposits increased 10% annualized in the quarter, with a strong contribution from the core bank and mortgage warehouse. As Dennis discussed, our focus has been making sure we execute on the strategies that drive the ROA higher from here, which we've done.

Our net interest margin in the third quarter was 3.18%, up from a reported 2.86% last quarter and 2.97% in the year ago period. We had limited impacts on net interest margin and margin -- this quarter from the consumer program and expect that to be the norm from here. The margin was impacted by interest reversals on loans moved to nonaccrual in the quarter and would have been 3.23% on an adjusted basis without those reversals. We're still booking new loans but yields near 7%, and we have a substantial amount of loans repricing later this year and next that will continue to move yields higher and help the margin.

The core bank cost of deposits remains very attractive at 173 basis points in the quarter, down 6 basis points linked quarter. In addition, we used the Fed cut in late September as an opportunity to move digital rates down more aggressively by lowering rates of 35 basis points at that time, which should benefit us meaningfully in the fourth quarter. Our provision this quarter was a small release driven by growth in the loan portfolio hit categories with lower reserve requirements, low core charge-off activity and the release of reserves for moving a portion of the Panacea loans to held for sale.

Noninterest income was $12 million in the quarter versus $10.6 million in the second quarter when excluding PFH stock sale-related gains with increased mortgage revenue as the primary driver. Mortgage revenue and profitability bounced back in Q3 with pretax income of approximately $1.9 million versus $0.1 million in the second quarter and which had been impacted by cost tied to new teams onboarded at the end of March. To give you a sense of the scale we're building in mortgage, we funded 59% more loans in September of 2025 than we did in September of 2024. We also closed $26 million of construction of perm loans in the quarter where we won't see material profitability at closing, but generate attractive gain on sale revenue in a couple of quarters.

On the expense side, when you exclude mortgage and Panacea division volatility and nonrecurring items, our core expenses were $21.6 million versus $22.3 million in the second quarter. There are a handful of items described in the earnings release that are onetime in nature but don't rise to the definition of nonrecurring for reporting purposes in total of approximately $1.8 million, including one more month of technology contract savings. Normalizing for these items, core noninterest expense was approximately $19.8 million, putting us only slightly higher than the year ago quarter. We are laser-focused on driving that number down further even in the face of inflationary pressures that would otherwise move it higher.

In summary, as we detailed in the earnings release and investor presentation, our reported ROA was 70 basis points in the third quarter. Adjusting for the expense items we just highlighted, pretax earnings were close to $11 million and ROA would have been approximately 90 basis points in Q3, with growth and repricing of earning assets, pretax earnings will grow to over $13 million in the near term, which equates to our 1% ROA goal with upside still from there. We're pleased that the third quarter showed meaningful progress on profitability with much fewer -- many fewer onetime items that have masked our core earnings power before.

As I stated last quarter, we have substantial tailwinds from here that get us to strong profitability ratios without Herculean efforts just straightforward blocking and tackling. We recognize that one quarter is not considered a trend, but we firmly believe that we are seeing that trend play out and look forward to demonstrating our earnings power from here.

With that, operator, we can now open the line for Q&A.

[Operator Instructions] And our first question comes from the line of Russell Gunther with Stephens.

I wanted to begin on loan growth, please. And it would be helpful to get your guys' thoughts on how you're thinking about overall growth for the fourth quarter, given maybe some potential mortgage warehouse seasonality, continued consumer runoff and then thinking ahead into '26 as well in terms of order of magnitude and mix.

Russell, I'll start, and Matt can -- Matt can correct me, probably. I think on mortgage warehouse, we've got so much potential and so much still kind of maturing there that I think what's probably at scale, we would have more runoff in the fourth quarter. I don't know that we're going to have that same kind of runoff. I don't again, we only averaged $200 million or so, I think $210 million in the second quarter -- excuse me, third quarter. I think we can sustain those levels, maybe where we ended the quarter. We might not sustain that. Matt's probably got a little deeper understanding there.

I think for Panacea, honestly, we could probably take the Panacea loans to whatever level we want the I think an annual production capacity there is probably about what their balance sheet is. We've got some other parties that are going to take some of that production. And Matt and I don't really want Panacea to take over the whole balance sheet. But I think we're ending at [ 550 ], I think we may sell a little bit of those loans in the fourth quarter to sort of get into some of the flow agreements with the larger bank, the third party. But I think for next year, $150 million or so, I think is definitely possible there. And on the core bank, I think we probably could squeeze out 7%, 8% growth there. I think for all of next year, if you're asking me, I think this point in time next year, we could be comfortably up, call it, 10% to 12%. Matt, what you -- what's your thoughts?

Yes, I agree with all that. I mean a lot of our growth this quarter was more warehouse related. We would normally expect seasonality, but as Dennis mentioned, I mean, they're still on the growth path in terms of adding customers and loans. So even though utilization may drop some in the fourth quarter, the additional lines there they're bringing on is going to offset some of that growth. So they'll probably be up some on an average basis in the fourth quarter.

Okay. That's great color, guys. And then my next question was in regard to Slide 11 of the deck, kind of 2 parts. One, the timing of when you'd expect to get to that 3.30% margin that you said the average earning asset driven. I think maybe just expand upon what you are referring to when you talk about continued shifts in deposit mix will then become focused.

Go ahead, Matt. .

Yes. I mean we'll -- I think we'll be closer to 3.30% margin as we exit this year, probably first quarter next year. And then the deposit mix change is -- I mean, we've talked about this for a couple of quarters now. And I mean you can see it in the balance sheet results. We are 100% focused on increasing our proportion of noninterest-bearing deposits. we have, I would say, a long-term goal, more of a medium-term goal to have that number closer to 20% of total profits, it's about 20% in the core bank, but we wanted to be 20% for the entire institution. So '26, that is a focus of ours, just like it has been in '25, getting noninterest-bearing percentages up. So that's really the remixing we're talking about.

Russell, I would add that if you look at the bank as a whole, we probably -- we have -- there's no probably -- we have more technology and more strategies focused on driving low-cost deposits at a pretty fast clip than we do on the side. And we've got pretty notable loan strategies between warehouse and Panacea and the life business -- life premium business that we sold. But vibe in and around our markets is driving massive pipelines and massive success. I mean, we've looked -- our peer group is up 5% in checking accounts and we're up 16%. And I attribute some of that to what we're getting in the lines of business versus as well as in the core footprint. So we really believe that our long-term value here of sort of being unique is centered more on the deposit side than the loan side.

Right now, we're driving real success in the margin and with replacing the earning assets, as Matt showed you here in this graph. But I think as soon as we sort of tap out on replacing all those assets, the thing that will drive it is what Matt was saying, getting the deposit mix situated right, thanks to some of the technology that we got at play.

[Operator Instructions] And our next question comes from the line of Christopher Marinac with Janney Montgomery Scott.

I wanted to ask about deposits and Dennis, the point you made on deposit costs incrementally with interest rates going down, does that get harder to do? Or does it get more easier or flexible for you to drive more deposits in at kind of the appropriate rate to push up margins?

I guess it really could go either way. I think the -- you look at our universe or our competition, Chris, I mean, a lot of them are sort of looking at falling rates, the Fed cuts, they're looking at that to be -- I mean the whole industry honestly has been looking at that to be the sort of driver to get some of our margins back. So we suppose -- Matt and I both suppose that the competition is going to be using most of that to get the biggest beta possible. I think the fact that we're driving as many checking accounts into the bank lets us be sort of more aggressive on business money markets, business checking consumer even CDs and still sort of maintain a cost of deposits that's at or below our period. And I mean, we're more of a growth bank. So we have to sort of balance where we're bringing in where we have things priced versus just straight for profitability. So that checking account growth is absolutely key to us keeping deposit flows at the right level. Matt, and I don't want to fund the balance sheet with brokered CDs and institutional borrowings like Federal [indiscernible]. We want to be core funded. And we don't want that to eat into the margins or the operating leverage, we won't.

The only thing we can do to stay competitive and we're very competitive is are those check accounts. And as long as we're driving check counts in a sort of better than 10%, I think we can be very competitive on the rate oriented products, Chris and still punch out good growth and good profitability.

Got it. That's helpful, Dennis. And I guess, just kind of another point because you've now been doing the digital bank, process for several quarters, a couple of years now. Are you finding evidence that these are more sticky customers, which is really differentiating Primis in the rest of the pack?

100% and Matt can give you more color here. But our average customer has over $50,000, average customer, I think we're right, maybe a month from having average customers' deposit relationship for 2 years. Over 90% of our customers have either more than one deposit account with us or more than one product or they refer to a customer. Questionably these are stickier than what the industry believes, Chris, I would still caution you that -- we -- these are not customers that are in the branch. These are countries using a digital experience that's by far better than what most banks are rolling out, still they're more rate sensitive than the traditional community bank, so community bank customers. So we're not going to get ahead of ourselves and push -- try to push these rates down to Fed funds minus [ 150 ]. That's not going to be these customers. But we've moved rates 3 or 4 times now, Matt, can correct me. And we've got retention rates over 90%. Matt, help me, make sure I'm right on most of that.

You're 100% right. And as I've mentioned in my remarks, Chris, we were aggressive after this last Fed cut because we were seeing still growth in balances without any advertising and based on our read of the deposit base, it looked like we were probably a little bit high relative to the rest of the market. So we actually had -- we cut rates a little bit more than the Fed cut in September, and we did see a little bit of runoff, but nowhere near the you would have expected from a deposit base that was truly hot money based or rate sensitive. I mean there were some rate-sensitive customers in there, but frankly, no more than we would have in the core franchise. So we're pleasantly surprised with how sticky these deposits have been as we've lowered rates with the Fed and it's been a very valuable funding source for us. And as we talked about in previous quarters, allowed us to protect the core bank deposit base, which is still very low cost and very sticky.

Chris, I'd add one more thing. Speaking on a panel a few weeks ago and people were asking about digital. And the industry -- I mean, I'll be honest, I had this too, the industry believes that kind of digital customers that you never see your touch have some sort of hotness to them in their hot money. Honestly, every customer -- we have 20,000 customers, maybe 25,000 when you include all the lines of business, every single one of those customers has a banker. And every single bankers cell phone is in the hands of every single customer. we're available to them 24/7 is what we pitch. Our bankers in our call center. We we offer premium banking products, we offer the full suite of banking products. I mean, yes, the digital products are deposit oriented. But if any of those customers needed anything, loans, deposits, loans, mortgages, he like anything. We are ready to do this. That's the reason, honestly, that they're sticky. I don't think that the industry is wrong about whether these customers are sticky or not or rate sensitive or not or how rate sensitive. I think we just sort of neutralize that by working hard to just to build relationships with these customers and sort of, I guess, I hate to say it, but sort of community bank style. And I think that's been successful. And really, we're proving it out with what Matt just said.

Understood. I had a asset quality question, which is the -- and thanks for the information you gave on a couple of loans. Do you see any of those things resolved in the next 2, 3, 4 quarters? And even though it's only a few basis points of margin difference, do you see any of that helping you in the next few quarters?

The larger C&I -- the C&I property that's sort of the operating business. I think there's a chance that could be resolved sold potentially the business sold or recapped in the fourth quarter, that would improve the margin, obviously, because that one is on nonaccrual in was for the whole quarter. The others are still sort of -- we're still sort of receiving payments and working with the borrowers. I think the real estate deals in Alexandria are not going to be resolved in the current quarter, although I think if you gave us probably a couple of quarters or maybe to the midpoint of next year, just given the leasing activity and Matt and I are personally involved in these loans and in the leasing activity and just to have very relevant right now data. I think by June of next year, given the leasing activity we're seeing, those properties could be strong enough to be and have strong enough debt coverage to at least not be on nonaccrual. Both of the properties right now are at 1x debt coverage on interest on P&I. One is above debt. One is above, one is that like [ 105 ] and the other is not. But the leasing activity on the one that's on nonaccrual, I think June of next year, we could have it above 1x debt coverage on a P&I basis. So I would tell you, really, we just got one that could be resolved in the current quarter and to others. I don't -- I mean I hate them being in nonaccrual and such and at all, but I believe we're in the best possible place we could be with those.

Great. That's good background. And then just last question, just to connect that what you said at the beginning of the call, but the expense number should continue to get better given the operating difference as you outlined and released, and we'll just see that quarter-to-quarter. I suspect it's not just the fourth quarter phenomenon, but it will go over the next few quarters.

Yes. Yes.

[Operator Instructions] And with no further questions, I will now turn the conference back over to Mr. Dennis Zember for closing remarks.

Okay. Thank you, everybody that's joined our call. Matt and I are available if you have any further comments or questions. And if you don't, I hope everyone has a safe and happy weekend, and we'll talk to you soon. .

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.

Good morning. My name is Audra, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Primis Financial Corp. Second Quarter Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Matt Switzer, Chief Financial Officer. Please go ahead.

Good morning, and thank you for joining us for Primis Financial Corp.'s 2025 Second 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 and investor presentation, which has also been posted to the Investor Relations section of our corporate site, premisebank.com.

We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. However non-GAAP measure relates to the most comparable GAAP measure will be discussed when the non-GAAP measures 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 who have joined our second quarter conference call. Today, I want to cover several items as succinctly as I can. First, our quarter results and where I see our recurring earnings, how our operating leverage is boosting our results, a recap on our operating divisions. And then lastly, a very subtle pitch on our stock. For the second quarter, we're showing about $8.4 million in net income or $0.34 per share.

This quarter, included an additional pretax gain of $7.5 million on a portion of our interest in PFH. We offset that gain with about $1.2 million of support on our new teams in Primis Mortgage. We had the last write-off of noticeable interest on the maturing promo loans of about $2 million and then some other expenses that Matt highlighted on the slide in our deck on Slide 6.

When you do all that, we get back to about $8.4 million of pretax pre-provision earnings. And then also on the slide, there are some items that we think are going to affect and improve future quarters, and outline our continued path higher. The #1 thing driving our results right now is very wide operating leverage. Quickly, the math is that we're getting incremental margins in the mid-4% range, and we're holding OpEx in a steady to declining state.

When we sold the Life premium portfolio, we moved off about $375 million of very safe earning assets but had no related decline in operating expenses. We concurrently added the warehouse lending team at that time and have been moving aggressively on the core bank's pipeline. The graph in data in our investor presentation on Slide 7, shows how high our incremental margins are and how that's fueling our spread income.

Importantly, I would point out, as I have in the past, the power of this digital platform alongside a strong community bank. The table shows that digital raised $36 million nationwide at 4.06%, which is right on top of the rate specials I'm seeing on regional bank and National Bank website. The difference is ours is targeted. It's barely marketed and it's massively scalable. That means any strategy we have on digital does not affect their very profitable relationship pricing in my core franchise.

Consequently, we priced about $120 million of deposits in the second quarter and our effective cost was only $2.89, which is 32% lower than it was the same quarter a year ago. We're beating the competition on incremental yields and cost of deposits, and we're doing it with a national deposit platform supporting a core bank. For the year, we've grown checking accounts by almost 18% annualized, and we had some real needle movers here pushed to the third quarter.

The point of all this is that while our incremental loan yields are really good, we're getting just as much of our margin results and NII growth from the deposit side. Slide 15 shows that our OpEx is contained, and my belief here is that we can hold this or hold this level or lower through the end of '26. That's supported by a few key items that I'll talk about here first. As we noted in the press release, we've negotiated with our core provider a solution that would save us about $300,000 a month starting in August.

There are some additional technology-oriented savings scattered through the next 8 quarters from other vendor consolidation and amortization runoff that will move this savings to about $600,000 per month in early 2017. Secondly, given that our company has grown exclusively from organic efforts, Matt's going to smile about this, given that our company has grown exclusively from organic efforts, and has done no M&A since 2018 or earlier 2017.

We have officially amortized off the last remaining portion of our deposit intangible. In the second quarter, that amounted to about $290,000 and I'll go off comments here and say this is the first time in my banking career that I have not had deposit intangibles. So a new stage of my career. Anyway, lastly, back on the note. The company continues to slowly and methodically restructure by leaning harder on our ambitious and technical experts and consolidating roles where we can for more than 2 years. Even through raises and team builds and all, we're essentially flat on base comp in the company -- base company outside of mortgage.

And as we have turnover, we are very successful reallocating duties to our ambitious and technical champions in the company, and I believe that strategy is something we can sustain for about another 4 to 6 quarters before it's fully exhausted. A quick recap on our operating divisions and their results. First is the core bank. The core bank is still almost 70% of our total balance sheet and really our workhorse. On Slide 8, we're showing the core bank's ROA of about $138, which is supported by a very low cost of deposits in the 1.75% range.

The core bank sales efforts on the loan side are only minimally centered on investor CRE. And on the deposit side, are centered almost exclusively on low-cost deposits using our branch network and our proprietary delivery app called . Mortgage warehouse continues to build lines and relationships and volume. Slide 9 shows the amount of pretax contribution with key operating ratios, the fact that we're only 6 months into this strategy and realizing these kind of ratios and contribution is pretty exciting. And at scale, this strategy will materially move virtually every operating ratio we track and push out a monthly contribution that will move the needle for us.

Primis Mortgage closed about $323 million in the quarter, which is up about 52% from the same quarter in '24. We did support our new teams with about $1.2 million of draws and pricing concessions, which is only about 35 basis points of acquisition cost. A lot of our new volume is FHA oriented with higher yields, much higher yields and construction perm, which we believe is important to smooth out the earnings in this business is naturally slower fourth quarter. Without the support of the new teams, I have the mortgage company profitability at about 46 basis points on closed loans, which is about the same level we had last year.

Panacea lastly, is is just so impressive. Rated the #1 bank for doctors on Google. It's endorsed by about -- as the banking solution for by anybody that's important in this industry to doctors, their digital solutions are compelling and reliable, but they still thank doctors that's in dentists with real attention and humans. For the quarter, they grew to over $500 million of outstanding credit and really focused hard on the deposit side, closing some pretty big deposits at the end of the quarter. And to illustrate the momentum here, I looked this morning, Pease had cracked $150 million of total deposits and had moved to over 30% coverage ratio on their total loans.

Now as I close, I want to go back in the presentation to Slide 5, why should you own FRST right now. And I'll be honest and say it's been hard over the past year to be able to put out a slide like this because I knew the volatility in our results that the consumer book would cause. But with that behind us, I'm compelled again to have a slide like this. In our top peer group, we're the fourth cheapest stock. And it's hard to say that as an advantage. But we're the fourth cheapest stock barely over tangible book value. So the entry point here is attractive.

We are an organic growth story. So all of the work that we've done to build really scalable engines that can move earnings, move the balance sheet will benefit current shareholders. The operating leverage I noted that we outlined is absolutely unique and a real driver to earnings this quarter and beyond. Importantly, we have no negative influences on our company that would cause earnings pressure or risk issues. And that's a real critical element for a CEO that's trying to hurt his staff to build what shareholders really want.

And lastly, maybe most importantly, I think we're unique and not in a bad way. We -- in our region, we are 100% core funded. We have very little concentration in commercial real estate. And I really don't see the -- I don't see any -- again, the pressures, I don't see any pressures that would cause that to change. All right, Matt, with that succinct summary on our quarter, I'll turn it over to you.

I appreciate that, Dennis. As a reminder, a discussion of our financial results can be found in our press release and investor presentation found on our website and in our 8-K filed with the SEC. Dennis covered a lot of these points, so I will be brief and encourage you to review both of those documents for more information. As previously disclosed, we deconsolidated Panacea Financial Holdings, or PFH as of March 31, which means PFH's balance sheet is not included in our consolidated balance sheet at the end of the first quarter and thereafter. PFH's income was included for the first quarter of '25 and prior quarters but was not part of our consolidated financials beginning with the second quarter of 2025. We also disclosed we sold down some of our investment in PFH in the second quarter, yielding proceeds of approximately $22 million and an additional gain of $7.4 million in the quarter.

The second quarter included a number of items, both positive and negative, but on balance, we're on track to achieving the results in the second half of 2025 that we've been driving towards. Gross loans held for investment increased almost 12% annualized from March 31 to June 30. Excluding runoff of life premium finance and consumer program portfolios, gross loans would have increased approximately 15% annualized led by growth in Panacea and mortgage warehouse. This growth is moving us towards our target level of earning assets with strong yields.

Importantly, noninterest-bearing deposits increased $22 million or 19% annualized in the quarter with a strong contribution from the core bank and mortgage warehouse. Our strategies on that front are meaningful, and we believe are going to continue driving low-cost deposit growth. As Dennis discussed, our focus has been making sure we execute on the strategies that drive our ROA higher from here, which we've done. Core net interest margin, excluding the effects of the consumer program in the second quarter was 3.5% and up from a reported 3.13% last quarter and 280 basis points in the year ago period.

Because this quarter had significant interest reversals on the consumer program promo loans without offsetting interest recognition, reported net interest income declined in the quarter. However, excluding interest reversals on consumer program loans in the second quarter, net interest income would have been $27.5 million versus $26.4 million in the first quarter and $24.9 million a year ago. As described further in our earnings release, our level of promo activity is substantially lower from here, so we should not see the large reductions to interest income from this point forward.

We are still booking new loans with yields well over 7%, and we have a substantial amount of loans repricing later this year and next, below that level that will continue to help the margin. Core bank cost of deposits remains very attractive at 179 basis points in the quarter, and we recently lowered rates on the digital platform, 15 basis points and believe that we have an opportunity to lower further on that platform in the coming months.

Our provision expense this quarter was $1.2 million, driven by growth in the portfolio and moderate charge-off activity. We're pleased to report that we did not require a provision for the consumer program this quarter and are working hard with our own team to drive down delinquencies and losses in that portfolio.

Noninterest income was $10.6 million in the quarter versus $8.5 million last quarter when excluding PFH related gains with increased mortgage revenue as the primary driver. Mortgage revenue and profitability was impacted by the expansion in late Q1, driven by temporary pricing concessions and compensation report, as Dennis described, all of which is done at June 30. We also closed $26 million of construction to term loans in the quarter, where we won't see gain on sale revenue until later this year.

Lastly, we are in the early stages of ramping up our SBA lending activities and realized gains of $210,000 in the second quarter. While small, these are the first SBA gains we have recorded in roughly a year, and we expect that revenue to build the rest of this year and into 2026.

On the expense side, when you exclude mortgage volatility and nonrecurring items, our core expenses were approximately $22.7 million versus $20.4 million in the first quarter. There are a handful of 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 approximately $1.7 million. Normalizing for these core noninterest expense was approximately $21 million in the second quarter.

The technology saves we've discussed, combined with the ending of our CDI amortization are expected to lower our run rate by $1.5 million per quarter with approximately $900,000 of that expected in the third quarter. We have other opportunities, as Dennis alluded to, that we are chasing from an efficiency and vendor consolidation standpoint that we believe can get that run rate down to $18 million to $18.5 million per quarter in 2026.

In summary, as we have detailed in the earnings release and investor presentation, the second quarter is the last quarter to bear significant noise due to the consumer program and the associated catching up on filings. Normalizing for those items, our run rate pretax preprovision earnings were approximately $8.4 million in the second quarter with mortgage bouncing back, expense savings from technology contracts and growth and repricing of earning assets, that number is expected to grow to over $13 million heading into 2026, which equates to our 1% ROA goal.

We have consistently pointed to the end of 2025 as our target for getting to our profitability goals. We have substantial tailwinds from here that get us there without herculean efforts just straightforward blocking and tackling. We cannot be more optimistic about how we are positioned and our ability to generate attractive earnings in the coming quarters.

With that, operator, we can now open the line for Q&A.

[Operator Instructions] We'll go first to Russell Gunther at Stephens.

This is Nick Lorenzoni on for Russell. So to start off, if you guys could provide some more color around your loan growth expectations just for the back half of this year and overall '26, but maybe particularly touch a little bit on growth expectations for Panacea and mortgage warehouse.

All right. The -- I think warehouse for the quarter, I think we ended at 180. I think the average for 184. I think for -- I mean, scale, you can see on the graph there, we're thinking that we sort of show what, $250 million, $350 million and $500 million. I don't think we're going to try to push that to $500 million next year, but I think being somewhere in the $250 million to $350 million range next year is very realistic. The team, I'm sure is listening and they want to reach for the moon or Mars, and -- but I think $250 million to $350 million is probably -- for the average for next year is pretty realistic, gets lower in the first quarter than the fourth.

Panacea could -- I mean, Panacea could, of course, below the top off. I mean, the pipelines are massive. The adoption is really good. Their salespeople are their bankers are really every day, increasingly recognized in the industry, telephone rings a good bit. But their growth is clearly more than our balance sheet can handle. And so Panacea has been reaching out finding some capital market solutions, some pretty big banks over $50 billion that are pretty interested in their paper.

And so I suppose we could probably meet a little bit of their growth or what a little bit of their pipeline. If I had to guess could we probably could have somewhere in the $100 million to $150 million range next year. And that whereas in the past, that's been 100% of their growth, it might only be 30% or 40% of their growth next year, hitting our balance sheet. I think the core bank is -- the core bank has some opportunities. They're focused a little more. I know we say that we're minimally focused on CRE, really all the CRE we're focused on is doing a little bit of residential construction to support the mortgage company.

And so I think the core bank probably is something that's in the 5% range overall. We're going to have some shrinkage in life premium. The consumer book is still going to shrink. So I think you boil all that together, I think we're probably maybe high single digits, would you say for next year for next year and probably for the rest of this year, maybe.

Low to mid-single digits because mortgage warehouse will moderate in the fourth quarter. We'll have shrinkage in those runoff books. And CMA have some opportunities to put some stuff off the balance sheet this year. So we won't -- I don't -- our expectation is not to have 12% to 15% growth for the back half of this year. It will be much slower Yes.

Okay. Awesome. That's great. Next. So with your core NIM, sitting around, what was it, 315 in this quarter, how much improvement or even compression do you guys anticipate over the next few quarters if you're assuming no rate cuts.

We're still assuming, call it, we've been seeing about 2 basis points a month in margin expansion. And with the reduction in digital platform and incremental growth and repricing, I mean, we're still expecting that to creep up for the rest of the year. probably into the mid-320s by the time we get to the end of the year.

We'll move next to Christopher Marinac at Janney Montgomery Scott.

I kind of want to continue along the same lines of questions. I want to go back, I guess, to the general bank or the core bank and compare kind of how that growth is going to be as a percentage of the overall earning asset growth, not just this next quarter but also thinking beyond Q3? And how much of that growth in the core bank is going to be local versus your digital changes?

On the deposit side, Chris?

It's fully deposits and loans. I mean for both sides would be helpful.

I think on the deposit side, I don't think -- I mean, I think digital probably for the rest of the year is flat, and then maybe next year could be up 10%, maybe $100 million. I think the core bank will outgrow the digital. I'm confident the core bank actually will outgrow digital on the deposit side, just given the pipeline for for that growth and some of the way they're using Vibe and other treasury services and how focused we are across the bank on the deposit strategy.

I mean our -- and I'm not trying to get off your question, but our whole strategy over here on improving core earnings is operating margins. And we see low-cost deposit growth or keeping incremental deposit yields sort of in the 2s, mid-2s, low 2s as key to that. So I think the core bank unquestionably will outgrow digital. And I just don't see any pressures on the company at all that would make us want to get more aggressive on the digital side. We lowered rates on the digital deposits this last week, and we've seen very minimal, not even 1% runoff in deposits. But that probably has caused a little bit of pressure on the upside growth. So there.

And on the loan side, again, we're -- I mean if we stepped pretty hard on local projects. I mean, when you do that, you have to focus a little more on investor CRE. And right now, we're just not willing to step out and do that office, multifamily just really the only investor CRE that we like right now is residential construction, and most of that's because we pair it up with our mortgage company. C&I growth, we've got I think, a decent pipeline on some C&I business. But when you look at the core bank's portfolio right now, the amortizations and the payoffs and so forth, I just I think 5% is growth on the core bank is just upside. I just don't think it can do more than that without us letting them loose in investor CRE world.

Okay. Super. And then launching 5 in other markets, that's still part of the core bank as you account for that. That's not included in all individual Okay. That's what I thought. The growth in the mortgage side that you mentioned in the slides before by year-end, does that predicate any drop in interest rates? Or can you do that without external help.

That's where we think we are right now. If you look at our team, especially with the new teams and new recruits that we've added in the first half of the year, that's where we are right now. I think if -- and so I would tell you, Chris, that's probably volume that we could expect with the 30-year mortgage probably approaching $675 million, I mean north of 6.5%, but probably closer to 7% than 6.5%. That's probably the volume you could expect. I think the volume would be up 30% to 40% if we got in the low 6s and probably 60% to 70% if we got in the 5s. Again, because just refi to impacts coming in there.

Got it. And then 2, I guess, other follow-up questions. Just 1 on sort of the the change in criticized and classified is improving. Does that portend lower charge-offs? Or is there kind of a base level of charge-offs we should just sort of think out loud about going forward?

I think I don't know that they can get much lower net charge-offs.

On a core basis, we really didn't have a high level of charge-offs anyway.

I mean I think our our net charge-offs are really, I think, in what the industry is. I think it's probably around 10% probably. So no. I mean, the answer is we'd like seeing that go down, but I don't think it's going to portend lower charge-offs. I mean if you -- there is really going to drive charge-offs here is the fact that we're pretty much through promo lines. We've had a year ago, Chris, we were in that consumer book, we had $90 million of promo loans, all types, and we're down -- we plow through 90% of that with immense noise in our results. and charge-offs. And I mean we're through all but $9 million of that right now. And I think that $9 million is probably even over the next 6 quarters yes.

And it's not like we're going to charge off all that.

Yes, exactly.

Okay. So I mean, so that mid-teens level we see on Slide 16, give or take, that's kind of where you're at.

Yes.

And then on core expenses, what would be kind of an appropriate growth rate in general? It's not necessarily looking at next quarter per se, but just thinking out loud the next 6 to 7 quarters as you continue to grow the whole enterprise.

Well, we're trying to get that negative in the short term. But if we get down to our kind of $18 million to $18.5 million level with the tech savings and some other initiatives. From there, we would expect kind of normal inflation, call it, 3% to 4%.

$18 million is probably about as low as we could go. I mean, $18 million, I show that $18 million -- if we got to $18 million with our sort of core banks if you get to that level, excluding mortgage, and you look at the core bank's noninterest income, it's not big, it's maybe $7 million a year. You really have us at about $100 million in -- $55 million or $100 million on net overhead. That's -- we're still a little tech-heavy and tech forward. That's probably about as low as we could go. So I think if we got to somewhere around there, $18 million, I think at that point, you would see us, like Matt's saying, moving a little higher.

And if you don't get that that far down, that will be because you've grown faster or done more and that just will take care of itself on the earnings side.

Yes, correct. And I think probably -- I mean, we want to get to somewhere in the $160 million range on net overhead $150 million to $160 million. And then that's probably the level we maintain sort of going forward.

And that concludes our Q&A session. I will now turn the conference back over to Dennis Zember for closing remarks.

All right. Thank you, everybody that's joined our call. I hope you have a good and safe weekend. If you have any questions or comments. Matt and I are available. All right. Talk to you soon.

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