Primis Financial Corp Stock

Hello, everyone. Thank you for joining us, and welcome to the Primis Financial Corp. Second Quarter Earnings Call. [Operator Instructions] I will now hand the conference call over to Matthew Switzer, Chief Financial Officer. Matthew, please go ahead.

Good morning, and thank you for joining us for our 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, 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 our non-GAAP measure relates to the most comparable GAAP measure will be discussed when the non-GAAP measures is used if not readily apparent. I will now turn the call over to our President and Chief Executive Officer, Dennis Zember.

Thanks, Matt, and thank you to all of you that have joined our second quarter 2026 conference call. We are very pleased with our second quarter results and pretty excited about how things are moving going into the last half of '26. When I compare our current results to last year, I see strong growth in revenue, very, very contained operating expenses, increasing net interest margins, lower efficiency ratios, lower levels of nonperformers, steady growth in earning assets, growing levels of noninterest-bearing checking accounts and importantly, tangible book up over 20% from last year. Lastly, really nice to see some stability, Matt, return to our operating results, which I believe is critical to making sure our work is appropriately valued.

For the second quarter, we're reporting net earnings of $9.4 million or $0.38 per share compared to $2.4 million or $0.10 a year ago. During the current quarter, we did book a gain on the sale of an investment in an insurance agency of about $5.9 million, and we fully offset that with a legal settlement and a reserve build on our largest office CRE. Because these items launched, I believe our stated ROA for the quarter of 90 basis points is really the recurring level that we're working with, and I'm very pleased to see this kind of improvement. These results include a net interest margin of about 3.45%, up a couple of basis points over last quarter, but up almost 60 basis points over the same quarter a year ago.

That margin growth comes alongside steady earning asset growth, which has happened for several years now. For the quarter, we averaged about $3.9 billion of earning assets, which is up about 11% compared to the same time a year ago. The increase in margins and earning assets, combined with really strong performance from our mortgage company allowed us to have our first quarter ever with more than $50 million of core revenue. That level is 40% higher than it was a year ago. Making sure that, that revenue moves to the bottom line is critical and the recurring pitch we've had with investors is that operating leverage will be our main strategy.

Matt can give you a lot more context, but I'm showing that our core OpEx is up about 16% over the past year compared to the 40% growth in revenue I just talked about. Of that 16%, 7.3% is tied to the increase in mortgage revenue and 4.7% is tied to the lease expense from the sale leaseback. So actual growth in OpEx, the real controllable part is reliably less than 5%. This is outstanding work by our executive team and our staff and has totally reset the operating performance you can expect from our bank.

In the quarter, we had a nice improvement in credit quality with nonperformers moving down by 36%, thanks to a single C&I loan that was refinanced elsewhere. And then additionally, we were able to upgrade a mixed-use commercial project that finally reached stabilization. So collectively, classified assets declined by about $53 million or 36% and as we stated earlier, we built additional reserves on our largest office loan by about $5.3 million in the quarter.

Lastly, before I turn it over to Matt, we announced in the press release a series of earnings improvements that are coming out of our core consolidation project. Altogether, we believe the impact on next year's results is about $7 million pretax, which includes zeroing out the amortization expense from the original bill of the court. This set of improvements is about 13 or 14 basis points in the ROA. It's about $0.22 per diluted share. That's important.

But from a strategic standpoint, what is so special or noteworthy about this is that I firmly believe that this announcement all but guarantees another 1.5 years of outsized operating leverage similar to what we've put up this year. That's very exciting for our team and our Board, and we believe should meaningfully improve the kind of results we put up in '27. Matt, with that, I will 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. As Dennis mentioned, Primis reported earnings of $9.4 million or diluted earnings per share of $0.38 in the second quarter compared to $7.3 million or $0.30 per share in the first quarter of '26 and $2.4 million or $0.10 per share a year ago.

Return on average assets was 90 basis points versus 76 basis points in the first quarter and 26 basis points a year ago. There are a few notable puts and takes in the quarter that I'll review in more detail later in my remarks, but on balance, it was a quarter of solid operating results with pretax pre-provision operating net income of $11.7 million, up 185% from $4.1 million a year ago.

Turning to the balance sheet. Gross loans held for investment increased approximately 8% annualized from March 31 to June 30 and were 11% year-over-year, led by continued growth in Panacea and mortgage warehouse. Average earning assets increased approximately 14% annualized in the second quarter and were up 11% compared to the year ago quarter.

Average deposits were up approximately 12% annualized in the quarter and average noninterest-bearing deposits were up approximately 24% annualized, with average noninterest-bearing deposits representing 16.3% of average total deposits in the second quarter versus 14.3% a year ago. Net interest income was approximately $33.8 million, up from $32.1 million last quarter and $25.2 million a year ago. Our net interest margin in the second quarter was 3.45%, up from 3.43% last quarter and 2.86% in the year ago period.

The improvement reflected robust earning asset growth funded at attractive incremental margins with 3 basis points of linked quarter expansion in the yield on earning assets. Core bank cost of deposits remains very attractive at 1.6% for the quarter compared to 1.79% in the same quarter last year. Cost of total deposits was 2.25% in the second quarter, up 1 basis point linked quarter and down 28 basis points year-over-year.

Cost of interest-bearing deposits was 2.69%, down 25 basis points from the same quarter last year, and total cost of funds was 2.46%, flat with the first quarter and down 21 basis points year-over-year. Our focus on growing noninterest-bearing deposits remains a key part of our strategy to continue controlling funding costs as we grow the balance sheet.

Our provision this quarter was $5.5 million compared to $1.5 million in the first quarter and $8.3 million a year ago. Approximately $5.3 million of the second quarter provision was related to specific reserve additions for one nonaccrual credit. Absent this item, improvements in specific reserve amounts largely offset provision amounts related to portfolio growth and the consumer loan program.

Nonperforming assets, excluding portions guaranteed by the SBA, improved to 1.45% of total assets at quarter end from 2.35% at March 31 and 1.9% a year ago. Core net charge-offs were 53 basis points in the second quarter, up from 6 basis points in the first quarter and 15 basis points a year ago, driven by one nonaccrual loan that was resolved in the quarter. Noninterest income was $22 million in the quarter versus $13.6 million in the first quarter and $18 million a year ago.

Second quarter included a $5.9 million pretax gain from the liquidation of an insurance agency investment, while the year ago quarter included a $7.5 million gain on the company's investment in Panacea Financial Holdings. Mortgage-related noninterest income grew 44% year-over-year to $11.4 million in the second quarter and Primis mortgage closed volume was $421 million, up 30% compared to the second quarter of '25. We also reported $1.6 million of gain on sale income related to the sale of Panacea loans and guaranteed portion of SBA loans, including approximately $237,000 attributable to the core bank.

On the expense side, when you exclude mortgage and the Panacea division volatility and nonrecurring items, our core operating expense burden was approximately $25 million versus $22 million in both the first quarter of this year and the second quarter of last year. As previously disclosed, the first and second quarters of '26 include a full quarter of lease expense net of reduced depreciation of approximately $1.4 million from the sale-leaseback transaction executed in the fourth quarter of '25.

The second quarter also included several discrete expenses, including $1.1 million related to the settlement of a previously disclosed mortgage lawsuit, $0.4 million increase in loan-related expenses and $0.2 million of higher marketing costs. There was also approximately $900,000 cumulatively of small expenses related to the company's recent shelf filing, by exchange fees and the core conversion project. We expect the noninterest expense burn, excluding mortgage and Panacea to return to the $22 million to $22.5 million range in the third quarter of this year.

I would also like to briefly add to Dennis' comments on how we are thinking about operating leverage from our core consolidation initiatives and artificial intelligence. During the last 6 months of planning for the core conversion, we have identified $6.1 million of expected earnings improvements from fully converting the core bank in all divisions onto our real-time fully digital core.

These improvements are equally centered on revenue and expense opportunities with $3 million of revenue improvements as we rationalize products and fees and $3.1 million from contracts and vendor consolidation and will largely be in place in early 2027. These amounts are real, and we believe highly achievable in the time frame highlighted. This also does not include the amortization expense related to capitalized platform development costs of $0.8 million per quarter that will end in the third quarter of '27.

Lastly, we are also in the beginning stages of deploying AI tools and agents to drive ongoing productivity improvements that we believe will allow us to limit expense growth and maintain strong operating leverage for the foreseeable future. In summary, we are excited to report another solid quarter with continued year-over-year improvement in profitability, net interest income, margin, asset quality and tangible book value per share. We believe the balance sheet momentum, core consolidation work and ongoing productivity initiatives keep us on track to hit our profitability goals and put us on a path to superior returns. With that, operator, we can now open the line for Q&A.

[Operator Instructions] Your first question is from Woody Lay with KBW.

I wanted to start on the net interest margin. Now it feels like we're in a higher for longer and it feels like a general theme this earnings period has just been the magnitude of competition, both on the loan and deposit side and what that's meaning for pricing. So I'd love to just get your thoughts on how you see the NIM outlook from here.

Similar to what we discussed on previous quarters, we're -- we think where we are right now, plus or minus a basis point or 2 is probably where we'll be for the foreseeable future. We are seeing some pressure on the earning asset side, maybe a little less so on the funding side, but certainly some pressures in the loan pricing.

But we have some levers there. A notable one is we have some subordinated debt that's available to refinance that we think we're going to be able to do at some point in the next quarter or 2 and will save us probably between 200 and 250 basis points on the cost of that debt. So that will -- should more than offset any incremental pressures on the margin from the balance sheet.

Got it. That's helpful color. And then maybe shifting over to credit. It was great to see the quarter-over-quarter NPA improvement. I was just hoping to get an update on that larger office CRE credit that's still on the books. And could you just remind us what the total reserve -- total specific reserve you have against that credit is now?

Yes. It's a little over $11 million of reserve the credit, that borrower is still working with us and investing in T&I and commissions to lease it up. We did have relatively large lease, at least the LOI for it signed in the second quarter. So it's -- there is activity and the borrowers working hard to get it leased up.

We're working with them as best we can. But we do have a pretty healthy reserve on it at this point. a couple of million dollars of cash reserves, almost $2 million of cash reserves. The borrower is making payments. So it's in nonaccrual, but not 90 days past due. The borrower does, like Matt said, invest. But just -- we just want to keep adding reserves there whenever we can to reduce whatever kind of earnings volatility might come out of that.

Yes, that makes total sense. And then last for me, in regards to the core conversion, those additional impacts you're planning that could begin in the run rate in '27. Are there any larger onetime costs remaining with the core conversion that we should expect?

Not overly significant. I mean we may have smaller implementation fees here and there in the next couple of quarters, but we're talking like a few hundred000, nothing really not.

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

I wanted to start on the loan growth outlook. Really strong first half of the year, good 2Q. I think, Matt, you mentioned even a larger C&I payoff in the quarter and growing through that. Would be helpful to get a sense for how you're thinking about loan growth in the back half of the year, both from an order of magnitude and asset class perspective.

I mean I'll start back and we've not had a lot of Panacea growth this year. We've been selling most of that. Tyler has got a good flow agreement. I think we'll see more growth on that side of the balance sheet in the second half of the year mortgage warehouse, we keep rates up as tremendously as they are, thought that, that might slow down. But actually, new customer acquisition and sales efforts there have countered that trend. And so I still think there's a little bit of risk on growing mortgage warehouse.

I think we can probably hold something close to the levels that we're at. I think maybe even go up if you ask our yay, I think he'd say we could go up from here just given the pipeline. But I don't think it will be as tremendous as what you've seen for the first half of the year. And the core bank has got a great pipeline. So I think all 3 together, I think the back half of the year probably will look a little bit like the first half of the year.

Yield-wise, I think they're definitely incremental to where you see where our loan book is right now. And I don't see really -- just back to Woody's question about margin. I don't see anything incrementally with growth that would be dilutive to the current margin and you see where we're growing deposits in core bank, warehouse, digital versus earning asset growth, I still think it's positive and incremental to the margin.

Yes, I agree with all that.

That's helpful, guys. And yes, look, the debt calls out with some nice fixed repricing over the next few quarters as well. So good to see. Matt, you mentioned with regard to the margin, more pressure on the average earning asset side incrementally relative to deposits. I think as we're wrapping up the end of earnings season here, a lot of focus has been on just incremental deposit costs as a headwind to margin. So how are you guys kind of defending against that?

Well, the nice thing is a lot of the growth in the first half of the year has been mortgage warehouse, and they fund about 10% of their growth themselves with essentially pretty close to noninterest-bearing. They have a little bit of interest expense, but it's by and large, all noninterest-bearing. So it's been very additive from a mix standpoint. Digital bank has shown some nice growth at similar rates to where they've been in the last quarter or 2. And some of that's actually been small business driven, which has been nice to see. And the core bank has done a really good job growing in footprint.

So I mean we're not -- I'm not saying we're immune to pressures on deposit costs, but arguably, we have a few more levers that we can pull than a lot of other banks that are helping us stay pretty consistent to where we've been.

I think adding to that, I think our digital advantage, our national advantage just continues to pay dividends. I think even with rates being up a little, I guess, on the short-term side, maybe not.

But with the attitude of higher rates, it's really not affected what we're doing on digital. I think we're still at a competitive level. And there are a lot of banks. I've seen that Russell reporting a little more pressure on the deposit side and maybe the margin build that the industry has seen has kind of reached an end because a lot of it has been sort of funding driven. But for us, I don't think we probably never harvested all of the deposit opportunity anyhow because we have so much earning asset growth. And so I think we're probably in a better position on the deposit side.

Understood. Okay. That's helpful context, guys. And then just last one for me on the expense side of things. Matt, thanks for level setting us in terms of where that kind of core expense run rate should end 3Q. I just wanted to clarify in terms of the incremental expense initiatives, that $3.1 million is really incremental to anything you've called out in the past? And if so, it looks like it's an early '27 event, how you would expect that kind of core expense run rate to maybe exit 4Q or trend over the course of next year?

I think that our expectation is that 22 to 23 -- to 22.5, whatever you want, somewhere in that range is kind of our baseline for the next few quarters. And then the savings from the consolidation will be incremental to that down.

That's nothing we've called out -- we've never talked about these savings on the revenue or the expense side.

Your next question will be from the line of Steve Moss with Raymond James.

Most of my questions have been asked -- answered here. Maybe just want to follow up on the office nonperformer here. Just curious in terms of just thinking about the drivers of the additional provision. I hear you in terms of the gain. But with the borrower leasing up or having an LOI at least, I guess I should say, how are you thinking about the potential timing of resolution? And did you get a new appraisal to drive some of this provision?

The driver of the provision was really while there's leasing activity and we did get a pretty substantial LOI signed in the quarter. We've gone 12 months since we put this thing on nonaccrual and vacancies only moved a little bit at the margin. And so just with the passage of time, we have -- as we do our valuation work, we had to add to that specific impairment to account for the fact that we have not made as much progress on vacancy as we should have over the last 12 months.

We're accounting for this on a DCF versus the appraisal because the borrower is not collateral dependent yet making payments and still investing. And so we're accounting for it on a DCF and Matt just got more aggressive with the DCF and with some assumptions. And we've sort of been telegraphing that we want to keep building reserves here. And so we were able to do that in the quarter.

Okay. That's helpful. And then just in terms of the mortgage warehouse business, I hear you guys in terms of obviously a tougher environment to grow, but good customer pipeline. Just kind of curious, where are the spreads these days for that business?

It depends. If you're talking to a mortgage company that does a couple of billion a year, you're probably somewhere SOFR $200 million all-in with fees. If you're talking to a smaller nondelegated customer, you're probably maybe SOFR 3 plus with fees. It just depends. I think it's considered not rate, which mortgage rates are 6.5%. And then 25 to 50 basis points fees on that. So there are some customers who are still probably paying 7%.

It just all depends. I mean all in for us, we're booking margins there that are pretty comparable. Our all-in margin on that business is very close to where our entire company's margin is. the efficiency ratio there is really the play. The efficiency ratio in that group is right now probably just over 20%, 21%, 22%. We could probably double the portfolio, double the client base, double the throughput with very little increase in OpEx other than maybe incentives and probably push efficiency ratio down to 15%. So that's really the ROA play. Month in, month out in the second quarter, it was over 2% ROA after tax. So I mean, it's a really good business for us.

Your next question is from the line of Christopher Marinac with Brean Capital.

Dennis and Matt, I wanted to go back to the core bank. And I guess I just want to get a little more background on sort of the margin change this quarter. Is that something that can go back? And then as you continue to work on the expense side, would that lead to even better returns in the core bank next year?

Yes. When you say the core bank, Chris, you're sort of excluding warehouse, PMC is that or just the core bank sort of without the mortgage company?

Well, I'm really looking at Slide 6 and just kind of leveraging off of kind of the details there and the margin that you cited there and then I guess, the strong PPNR ROA.

I see what you're saying. Yes. I think -- I mean the core banks, Panacea and mortgage warehouse and obviously, mortgage are all big contributors to the ROA. The incremental business there is great. It's interesting, the core bank's incremental ROA on new business is better than all of that because they drive a lot of their ROA and margin with checking accounts. The core bank's cost of deposits is remarkably low.

Really, when you look at our cost of deposits, our cost of funds is balanced by about $1 billion of the national stuff that fuels the funds the national stuff like PNC and warehouse. But when you exclude that, the core bank's incremental margins are outstanding. The core bank's growth rate is not as tremendous as the rest of the bank. I think the core bank's growth rate, I would probably put it 5% or 6%. And it's nice to not have to push our folks hard there.

So we're able to focus on sort of non -- like the things we're focused on owner-occupied CRE, C&I, residential builders, strong residential builders really to support the mortgage company. But we're really not focused at all on investor CRE. It very rarely even gets in our pipeline. The margins on what we're bringing in, we don't have to compete all the way to the very bottom to the unprofitable level.

I think if we were relying only on the core bank for all of our growth, I think it would definitely impact the margins. If you look at where we are right now, and Matt, I don't know if this includes the -- it probably includes the sub debt and the margin. So I mean, I think if you look at where we reported this quarter at 3.65% for the margin, you'd probably add 7, 8 basis points at this -- on this balance sheet for the sub debt refinance. And then I think when you look at the -- where rates are right now, stay with the 5 and the 10-year, Chris, I think the upside on repricing for the existing commercial book is pretty strong.

So I would say there's probably 10 basis points upside over the next year on this margin. The efficiency, when you look at the core bank here and you talk about the earnings enhancements that were coming out of the core project, the one area that our core bank has sort of been a laggard on it has been noninterest income. We've sort of built the bank not really focusing on fees. And so I think this look in the core project of looking at products and services and rightsizing those fees is pretty important.

There's no chance that there's any kind of expense build in the forecast that would exhaust all the savings we came up with, not even close. I mean we're definitely out looking for new lenders and new teams, but there's 0% chance that, that could exhaust these savings. So I would say between the margin build and revenue there and the savings, you're probably looking at taking another 5 to 6 points off the efficiency ratio.

Okay. Great. That's all very helpful. And then I guess kind of a related question. As you execute the systems change and kind of realize those cost savings, it would seem to me that you have a competitive advantage at that point that might be correlated to other relationships with banks you look at or other opportunities down the road because you could get more out of it. And I was curious how you sort of think about that.

I mean -- I wish I had pixie dust and I can just make all of these savings and another year of earning asset growth happen because, I mean, I just see us reaching efficiencies in the 50s and the ROA, the margin is going to continue to inch up a little bit with repricings. And we are absolutely, I think, unquestionably the most balanced bank from an interest rate risk standpoint given our position. So I just -- I know what the next, call it, 6 quarters are, I really want to get to that point.

But on the competitive advantage, I mean, we're going to finish next year. We're going to have the entire bank on the most modern real-time core out there, unquestionably. We will be the most flexible bank in front of the customer, and that's a competitive advantage. That contract, you think with that advantage that we would be paying out the notes for that. Actually, our contract, given that we're an early adopter and are helping build it, our contract is going to be probably half of what a bank our size would be paying for that and it's fixed. So if we grow the bank to $8 billion or $10 billion, that doesn't scale. I mean it's fixed. And so it just accrues to the bottom line to our shareholders.

I think really the competitive advantage we need is just 6 more quarters of continued improvement, let all these results happen and just sort of over time, prove that our model is as valuable as we think it is. And there is a slide in there, Chris, that talks about where we are price to earnings and price to book and Matt and I understand that. I absolutely believe we're going to raise that count. And over the next, call it, 4 to 6 quarters as we prove this really present an opportunity for our investors. I'm sorry if I rambled there. I mean I did ramble. I'm sorry.

No problem at all. I appreciate that color. And I guess last question for me is if the mortgage market is still in the same kind of zone of sort of sluggish a year from now, do you just continue to tough it out knowing that at some point, it will shift back?

Definitely. I mean our mortgage companies just keep surprising us. I think we had the best quarter we've ever had in mortgage, close to most loans, had the highest level of profitability. I'm not going to sit here and act like rates are not dampening the profitability and the upside opportunity, absolutely is. I mean, we should probably be 20% or 30% better in this summer season.

But our folks are just dynamite on the sales side and on the OpEx side. I mean they just manage so tight. They're so profit oriented. So yes, I think -- and our folks are pretty offensive too. I mean when rates are like this right now, you can probably recruit really good mortgage loan officers. If -- when rates are -- you're selling a 5.5%, third year, it's hard to move a mortgage loan officer. So our folks are definitely on the street looking for -- to add to the rates.

Over time, we definitely believe rates will probably ease back a little once there's a little less volatility on the other side of the world. But yes, we're pleased with what the mortgage company has done. On top of it, probably 8% to 10% of their volume is portfolio product and a lot of that is construction of firm, which is only with us for a short period of time before it gets refi away.

But while it's with us, I mean, the spreads on that are very good. Most of their construction book is probably new originations probably in the mid-7s and comes with nice fees. So there's the retail piece of it, but there's also what they do for the portfolio.

This concludes the question-and-answer session. I will now turn the call back to Dennis Zember for closing remarks. Please go ahead.

All right. Thank you all for joining our call. I hope everybody has a good weekend and a good summer. And Matt and I are available for calls if you want to reach out to us. All right. Thanks. Have a great day.

This concludes today's call. Thank you for attending, and you may now disconnect.

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.