Primis Financial Corp. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; filed August 9, 2022. Primis is a Virginia-based bank holding company serving individuals and small and medium-sized businesses, principally in Virginia and Maryland. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and condition
- Q2 earnings: Continuing-operations net income was $5.0 million ($0.20 diluted EPS), versus $8.8 million ($0.36) in Q2 2021. Net income was also $5.0 million, compared with $10.3 million a year earlier; the prior period included $1.5 million from discontinued operations. First-half continuing net income was $9.6 million ($0.39 diluted EPS), versus $17.2 million ($0.70) in 2021.
- Interest income and margins: Q2 net interest income rose to $24.6 million from $21.8 million, and net interest margin increased to 3.33% from 2.80%. First-half net interest income was $47.5 million versus $46.8 million; margin was 3.14% versus 3.10%. Lower PPP fee income affected comparisons: $0 in Q2 and $0.3 million for the first half of 2022, versus $1.8 million and $6.8 million, respectively, in 2021.
- Expenses and credit costs: Q2 noninterest expense increased 19% to $20.4 million; first-half expense rose 12% to $39.4 million. The company recorded credit-loss provisions of $0.4 million for Q2 and $0.5 million for the first half, versus respective recoveries of $4.2 million and $5.6 million in 2021. The filing does not provide a clear consolidated revenue figure labeled “revenue” in its income statement.
- Assets and lending: Total assets were $3.24 billion, down about 5% from year-end 2021. Loans held for investment were $2.63 billion, up 12%; excluding PPP loans, management reported growth of $348.6 million, or 15%. Real-estate loans were 75.2% of total loans. The allowance for loan losses was $30.2 million, or 1.15% of loans, versus 1.24% at year-end.
- Deposits and liquidity: Deposits were $2.68 billion, down 3% from year-end. Noninterest-bearing demand deposits rose to $653.2 million, 24% of deposits; time deposits declined to 12%. Cash and cash equivalents fell to $70.7 million from $530.2 million. First-half operating cash flow was $12.5 million; investing and financing activities used $292.7 million and $179.3 million, respectively. Management cited available FHLB lines and other customary funding sources for commitments and maturities.
- Debt and capital: FHLB advances were $25.0 million, down from $100.0 million at year-end. Senior subordinated notes were $85.4 million and junior subordinated debt $9.8 million; short-term repurchase borrowings were $10.0 million. Primis Bank was categorized as well-capitalized; its June 30 total risk-based capital ratio was 15.71%, against a 10.00% well-capitalized threshold.
- Equity and securities: Stockholders’ equity declined to $398.6 million from $411.9 million, including a $19.0 million after-tax unrealized loss on available-for-sale securities recorded in other comprehensive income. Available-for-sale securities had $22.7 million of gross unrealized losses at quarter-end, which management attributed to interest-rate changes rather than credit impairment. Book value per share was $16.17.
- Asset quality: Nonaccrual loans were $19.6 million, up from $15.0 million at year-end; total nonperforming assets were $22.2 million, or 0.61% of assets excluding SBA-guaranteed amounts. There were 11 troubled debt restructurings totaling $2.7 million and no reported defaults among TDRs modified in the prior 12 months.
Material changes and notable events
- Primis acquired SeaTrust Mortgage Company on May 31, 2022, renamed Primis Mortgage Company. It paid $7.0 million cash and assumed $19.3 million of warehouse-facility debt. Since acquisition, the mortgage business contributed $0.7 million of revenue and a $0.1 million net loss.
- Management attributed lower earnings principally to higher compensation and benefits, including costs related to branch closures and consolidations, and to provisioning for credit losses instead of the prior-year recovery. Q2 also included a $0.6 million loss on bank premises and equipment and $0.4 million in merger expenses.
- Primis consolidated six branches during Q2 and planned to consolidate two more in Q3. The filing reports higher technology and data-processing costs during the period.
- Six-month cash use reflected substantial loan growth, deposit outflows, and repayments of FHLB and acquired short-term borrowings. Deposits declined by $80.4 million during the first half.
Outlook, commentary, and risks
- No quantified earnings, margin, growth, or expense guidance is provided. Management said loan growth and an improved asset mix supported net interest income and margin, and stated it did not anticipate realizing losses on securities, which it had the ability and intent to hold until recovery or maturity.
- Management described economic uncertainty from inflation, supply-chain constraints, labor shortages, recession risk, and rapid Federal Reserve rate increases. It noted U.S. GDP contracted 0.9% in Q2 and unemployment was 3.6% in June.
- Interest-rate simulations showed modeled net interest income below the base case under both a +400 bp shock (down $2.3 million) and a -100 bp shock (down $3.2 million). Management cautioned that these models rely on assumptions and are not precise forecasts.
- Key disclosed risks include real-estate and commercial loan concentrations, credit deterioration, interest-rate and deposit competition, liquidity and funding costs, securities valuation, goodwill impairment, acquisition integration and execution, cybersecurity, and economic and regulatory changes. The company reported disclosure controls effective; it was continuing to evaluate and augment internal controls following the mortgage acquisition.
- Management reported no pending or threatened legal proceeding it considered a significant risk, and believed ordinary-course matters would not materially affect financial condition or results.
Important facts for investors to verify
- Whether loan growth, particularly in commercial, consumer, and real-estate lending, is matched by stable credit quality and adequate allowance coverage.
- Deposit trends, funding mix, cash levels, and available borrowing capacity relative to $448.8 million of unfunded lines and construction commitments and $262.2 million of certificates maturing within one year.
- The realized and unrealized effects of higher rates on securities, tangible book value, net interest margin, and modeled rate sensitivity.
- Whether Primis Mortgage’s integration, earnings contribution, and assumed warehouse funding develop as expected; also verify the planned Q3 branch consolidations and related costs.
- How recurring compensation, technology, and other operating costs evolve after the branch actions, and whether earnings comparisons normalize as prior-year PPP fees and discontinued-operation income roll off.