Primis Financial Corp. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; financial statements are unaudited. Primis is a Virginia-based bank holding company with Primis Bank and Primis Mortgage, serving individuals and businesses through 32 branches in Virginia and Maryland and digital channels.
Financial performance and condition
| Metric | Q2 2023 / June 30, 2023 | Comparison |
|---|---|---|
| Net income (loss) | $(0.2) million; $(0.01) per diluted share | Q2 2022 net income was $4.9 million; $0.20 per diluted share |
| Net interest income | $26.2 million | Up from $24.6 million |
| Net interest margin | 2.65% | Down from 3.33% |
| Provision for credit losses | $4.3 million | Up from $0.4 million |
| Noninterest income / expense | $8.5 million / $30.6 million | Q2 2022: $2.6 million / $20.5 million |
| Total assets | $3.85 billion | Up 8% from $3.57 billion at year-end 2022 |
| Loans held for investment | $3.17 billion gross; $3.14 billion net of allowance | Gross loans up about 8% from year-end 2022 |
| Deposits | $3.32 billion | Up 22% from $2.72 billion at year-end 2022 |
| Cash and cash equivalents | $100.9 million | Up from $77.9 million at year-end 2022 |
| Allowance for credit losses | $38.4 million; 1.21% of loans | $34.5 million; 1.17% at year-end 2022 |
| Stockholders’ equity | $393.2 million | $392.4 million at year-end 2022; accumulated other comprehensive loss was $26.1 million |
For the six months, net income was $5.8 million ($0.23 per diluted share), versus $9.5 million ($0.38) in 2022. Net interest income increased to $54.5 million from $47.4 million, while net interest margin declined to 2.89% from 3.14%.
Six-month cash flows were $(34.5) million from operating activities, $(204.7) million from investing activities and $262.2 million from financing activities, resulting in a $23.0 million increase in cash. Financing included $594.6 million of net deposit growth and repayment of $325.0 million in short-term borrowings.
At June 30, the Bank reported regulatory capital ratios above well-capitalized thresholds: leverage 9.41%, common equity Tier 1 11.71%, Tier 1 risk-based 11.71% and total risk-based 12.92%. Long-term subordinated debt was approximately $95.5 million; no FHLB advances were outstanding.
Material changes and management commentary
- Rapid deposit repricing pressured earnings: Q2 average interest-bearing deposit cost rose to 3.10% from 0.45% a year earlier. Management attributed margin pressure partly to higher deposit rates and excess cash earning less than loans.
- Q2 expenses rose 49%, primarily from higher compensation and benefits, digital-platform data processing, and costs associated with the cost-saving initiative. Mortgage banking income and credit-enhancement income partly offset the expense and credit-provision increases.
- Non-time deposits increased 26% from year-end, led by savings accounts. Uninsured deposits were $1.2 billion, or 35% of deposits. Management stated that available liquidity sources exceeded uninsured deposits by $100 million.
- Nonperforming assets were $27.0 million, down from $38.8 million at year-end; nonaccrual loans were $25.3 million. Management noted a large property sale in Q2 and said three assisted-living facilities tied to another troubled relationship were under contract to close in Q3. It estimated nonperforming loans would be about $5 million after receipt of funds and removal of those loans.
- The company plans to consolidate eight branches, reducing the network from 32 to 24 by October 31, 2023. Management estimated annual cost savings of $9.4 million, with implementation expected to be complete by October.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management described future Federal Reserve rate decisions as uncertain and data-dependent, and noted recession risk, inflation, deposit competition and continued pressure on bank margins.
- In Q2, the company discovered employee loan fraud with approximately $2.5 million of exposure dating to loans originated in 2010. Management believes insurance may cover the losses and is pursuing claims, but recovery is not assured. It stated the losses are expected to be material to projected 2023 annual earnings. Prior periods were revised to allocate losses to the periods incurred; opening retained earnings at January 1, 2022 was reduced by $2.0 million, and reported 2022 net income was reduced by $61,000 for Q2 and $118,000 for the six-month period.
- The available-for-sale securities portfolio had $33.0 million of gross unrealized losses at June 30, attributed by management to interest-rate changes rather than credit impairment. Management said it intends to hold the securities until maturity or recovery and does not anticipate realizing losses.
- Credit risk includes commercial real estate and construction lending, rising interest rates, borrower repayment capacity and specific loan resolutions. Q2 and six-month provisions included amounts related to a third-party credit-enhanced consumer-loan portfolio; corresponding credit-enhancement income offset those amounts in earnings.
- Liquidity resources included approximately $580.8 million of FHLB borrowing capacity, $489.6 million of Federal Reserve discount-window capacity and $138.0 million of securities available for the Bank Term Funding Program; no BTFP borrowings were outstanding. These are available capacities, not cash already drawn.
- Management stated disclosure controls were effective and reported no material change in risk factors during the quarter. It also noted continuing integration of Primis Mortgage into internal control processes.
Investor verification priorities
- Track the insurance claim, recoverability and final financial impact of the employee loan fraud, including future restatements or revisions.
- Assess whether deposit growth is durable and economical, including deposit-rate costs, uninsured deposit levels and liquidity coverage.
- Verify delivery and timing of the projected $9.4 million annual cost savings and the planned branch consolidations.
- Monitor the assisted-living loan closings, other criticized and nonaccrual loans, charge-offs, and adequacy of the allowance for credit losses.
- Evaluate net interest margin sensitivity to further rate changes and the continuing gap between loan yields and funding costs.
- Review the securities portfolio’s unrealized losses and the assumptions behind management’s intent and ability to hold the securities.