Primis Financial Corp. (FRST) Earnings

Management highlights

- Overall Financial Performance * Reported Q2 2026 net earnings of $9.4 million ($0.38 per diluted share), up from $2.4 million ($0.10 per share) year-over-year; return on average assets (ROA) was 90 basis points, up from 26 basis points year-over-year. * Core revenue topped $50 million for the first time, growing 40% year-over-year, while controllable core operating expense growth was held below 5% year-over-year, demonstrating strong operating leverage. * Net interest margin (NIM) was 3.45%, up 2 basis points linked-quarter and 59 basis points year-over-year. Average earning assets were $3.9 billion, up 11% year-over-year. * Average non-interest-bearing deposits grew 24% annualized in the quarter, and now represent 16.3% of total average deposits, up from 14.3% year-over-year, helping keep funding costs low. - Credit Quality Improvements * Non-performing assets (excluding SBA-guaranteed portions) fell to 1.45% of total assets from 2.35% at the end of Q1 2026 and 1.9% year-over-year, a 36% overall reduction in classified assets. * A $5.3 million specific reserve addition was made for the firm's largest office commercial real estate (CRE) loan in Q2, bringing the total specific reserve against this asset to just over $11 million. * Net charge-offs were 53 basis points in the quarter, driven by the resolution of one large non-accrual loan. - Strategic and Operational Initiatives * The ongoing core bank consolidation (conversion to a real-time fully digital core platform) is expected to deliver $6.1 million of pre-tax annual earnings improvements starting in early 2027: $3 million from revenue optimizations via product and fee rationalization, and $3.1 million from vendor consolidation and contract cost savings. These improvements will add ~13-14 basis points to annual ROA, or ~$0.22 per diluted share. * An additional $0.8 million per quarter of amortization expense for capitalized platform development will end in Q3 2027. * The firm is in the early stages of deploying AI tools to drive ongoing productivity improvements, to support long-term operating leverage.

Guidance

- Net interest margin is expected to stay around the current 3.45% level, plus or minus 1-2 basis points for the foreseeable future. An upcoming refinancing of outstanding subordinated debt is expected to reduce the cost of that debt by 200-250 basis points, which will fully offset any incremental NIM pressure from loan pricing competition. - Core operating expenses (excluding mortgage and Panacea) are expected to return to the $22-$22.5 million run rate in Q3 2026, and remain in this $22-$23 million range for the next several quarters. The $6.1 million in annual cost savings from the core consolidation will incrementally reduce expenses starting in early 2027. - Management expects overall loan growth in the second half of 2026 to be similar to the first half of 2026, with growth across core bank, Panacea, and mortgage warehouse segments. New loan growth is not expected to be dilutive to the current NIM. - The core conversion project has no material remaining one-time costs, with only minor implementation fees (a few hundred thousand dollars) expected over the next couple of quarters. - Management expects ~10 basis points of incremental NIM upside over the next 12 months from repricing of the existing commercial loan portfolio.

Segment performance

Primus Financial Corp reported overall Q2 2026 net earnings of $9.4 million, or $0.38 diluted earnings per share, compared to $2.4 million, or $0.10 per share, in the year-ago quarter. Core revenue exceeded $50 million for the first time ever, representing 40% year-over-year growth. - **Mortgage Segment**: Mortgage-related non-interest income grew 44% year-over-year to $11.4 million. Permanent Mortgage closed volume hit $421 million, up 30% year-over-year. The mortgage warehouse business achieved an after-tax ROA of over 2% in Q2 2026, with an efficiency ratio of ~21-22% that is expected to fall to 15% if the portfolio doubles in size. All-in margins for the business are comparable to the firm's overall company margin. - **Core Bank Segment**: Core bank (excluding mortgage and Panacea divisions) core operating expenses were $25 million in Q2 2026, including non-recurring discrete items. Excluding non-recurring items, the expected core operating expense run rate is $22-$22.5 million. The core bank has a 5-6% annual growth rate, with low cost of deposits and strong incremental margins on new originations. - **Panacea Segment**: Panacea loan gain on sale income contributed $1.6 million of non-interest income in Q2 2026, with $237,000 attributable to the core bank. Management expects higher Panacea balance sheet growth in the second half of 2026.

Risks & headwinds

- Ongoing competitive pressure on loan pricing in the current high-for-longer interest rate environment creates incremental downward pressure on net interest margins. - The large office CRE non-accrual loan has been slower to lease up than expected over the past 12 months, requiring incremental reserve builds. While the borrower is active in leasing efforts and has signed a letter of intent for a large new lease, full lease-up and resolution of the asset remains uncertain. - Sustained high mortgage rates continue to dampen overall mortgage market volume, limiting the full upside of the firm's mortgage segment, even as the segment remains profitable.

Analyst Q&A

• Q: What is the outlook for net interest margin, given widespread competitive pressure on loan and deposit pricing in the current high-for-longer rate environment? /

  A: Management expects NIM to stay near the current 3.45% level, plus or minus 1-2 basis points. While there is some mild pricing pressure on earning assets, an upcoming refinance of existing subordinated debt will cut the cost of that debt by 200-250 basis points, which will fully offset any incremental margin pressure. New loan growth expected in the second half of 2026 will not be dilutive to current margin levels, and 10 basis points of additional upside is expected from commercial loan repricing over the next year.

• Q: Can you provide an update on the large office CRE loan still on the books, including the current total reserve level and drivers of the Q2 additional provision? /

  A: As of Q2 end, total specific reserves against the loan total just over $11 million. The borrower is still making payments, is actively investing to lease up the property, and signed a letter of intent for a large new lease in Q2. The additional reserve build was driven by slower than expected leasing progress over the 12 months since the loan went on non-accrual; management chose to build reserves further to reduce future earnings volatility from the asset. The loan is accounted for via a discounted cash flow model rather than appraisal-based marks given the borrower is still active and making payments.

• Q: What is the outlook for loan growth in the second half of 2026, by asset class, and how is the firm defending against rising industry deposit cost pressures? /

  A: Management expects second half 2026 loan growth will be similar to the first half's pace: higher Panacea growth is expected, mortgage warehouse balances are expected to hold near current levels or increase modestly, and the core bank has a strong pipeline of new originations. On deposits, much recent growth has been in mortgage warehouse, which funds 10% of its growth from near non-interest-bearing deposits, and the firm's national digital banking platform continues to deliver strong competitive deposit growth, putting the firm in a better position than many peers to absorb industry-wide deposit cost pressure.

• Q: What are current spreads for the mortgage warehouse business, and what is the return profile of the segment? /

  A: All-in spreads, including fees, range from ~200 basis points for large customers to over 300 basis points for smaller non-delegated customers. The segment achieved an after-tax ROA of over 2% in Q2, and currently has an efficiency ratio of ~21-22%. Management expects the efficiency ratio could fall to 15% if the portfolio doubles, with very little incremental operating expense needed to support growth, making the segment a strong driver of ROA for the firm.