Primis Financial Corp. quarterly report, Q2 FY2021

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Primis Financial Corp. — Q2 2021 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2021; financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise. The company changed its name from Southern National Bancorp of Virginia, Inc. to Primis Financial Corp. on March 31, 2021; its bank was renamed Primis Bank.

Business context and financial position

Primis is a Virginia-based bank holding company serving individuals and small and medium-sized businesses through 41 branches in Virginia and Maryland and digital channels. Lending is focused on commercial real estate, other commercial loans, and consumer lending; the bank is also an SBA lender.

  • Total assets were $3.395 billion at June 30, up 10% from year-end 2020. Gross loans were $2.286 billion, down 6%; excluding Paycheck Protection Program (PPP) loans, loans declined 4%.
  • Deposits rose $318.5 million to $2.751 billion, despite time deposits declining $101.1 million. Non-time deposits were 86% of deposits, compared with 80% at year-end.
  • Cash and cash equivalents increased to $620.8 million from $196.2 million at year-end. Stockholders’ equity was $406.9 million, versus $390.6 million.
  • Borrowings included $100.0 million of FHLB advances, $12.5 million of repurchase agreements, $9.7 million of junior subordinated debt, and $85.7 million of senior subordinated notes. The company redeemed $20 million of senior notes in February.

Results, cash flow, and margins

  • Q2: Net income was $10.3 million, or $0.42 per diluted share, versus $4.7 million, or $0.19, in Q2 2020. Net interest income was $21.8 million versus $22.5 million; total interest and dividend income was $26.6 million versus $28.7 million.
  • First half: Net income was $19.7 million, or $0.80 per diluted share, versus $4.7 million, or $0.19, in the first half of 2020. Net interest income was $46.8 million versus $43.0 million; interest and dividend income was $56.9 million versus $57.2 million.
  • Net interest margin was 2.80% in Q2 versus 3.33% a year earlier, and 3.10% for the first half versus 3.32%. Management attributed margin pressure to lower PPP fee recognition and higher cash balances. Q2 margin excluding PPP effects was 2.77%, versus 3.51% a year earlier.
  • Interest expense declined to $4.8 million in Q2 from $6.2 million; the reported cost of deposits declined to 0.50% from 0.95%. For the first half, interest expense was $10.2 million versus $14.2 million and deposit cost was 0.55% versus 1.10%.
  • Noninterest income fell 46% in Q2 to $4.5 million, mainly as mortgage affiliate earnings and recoveries on acquired charged-off loans and securities declined. Noninterest expense rose 24% to $17.4 million, including higher compensation and restructuring expenses. First-half noninterest income fell 26% to $8.3 million, while expenses rose 5% to $35.6 million.
  • Credit-loss provision was a recovery of $4.2 million in Q2 and $5.6 million for the first half, compared with provisions of $10.9 million and $14.3 million in the respective 2020 periods. Management linked the reversals to fewer deferrals and a reduced estimated pandemic impact.
  • First-half operating cash flow was $12.8 million; investing activities provided $120.6 million and financing activities provided $291.3 million. Cash increased $424.7 million to $620.8 million, principally alongside deposit growth and loan contraction.

Asset quality, liquidity, and capital

  • The allowance for credit losses was $31.3 million, down from $36.3 million at year-end. The allowance was 1.37% of total loans; management separately reported 1.52% excluding PPP loans.
  • Nonaccrual loans were $14.6 million, compared with $14.5 million at year-end; there were no loans 90 days past due and still accruing. Nonperforming assets were $15.9 million versus $17.5 million, and OREO declined to $1.3 million from $3.1 million.
  • COVID-related loan deferrals are described inconsistently: the notes report $26.0 million of loans in deferment or with modification requests, while MD&A also reports $30.0 million subject to deferrals. Hotels represented approximately 55% of deferrals. Nine TDR loans totaled $2.8 million; no recent TDR defaults were reported.
  • Liquidity sources include deposits, loan and investment repayments, FHLB facilities, correspondent-bank lines, and repurchase arrangements. Unfunded lines and undisbursed construction loans totaled $395.5 million; certificates of deposit maturing within one year totaled $275.6 million. Management said normal funding sources were expected to meet commitments.
  • The bank was categorized as well capitalized. At June 30, its leverage, common equity tier 1, Tier 1 risk-based, and total risk-based capital ratios were 11.03%, 17.13%, 17.13%, and 18.39%, respectively.

Outlook, commentary, and risks

Management anticipated minimal additional loan deferrals in the remainder of 2021 and expected further PPP loan forgiveness. It described economic activity as improving but noted that customer distress and uncertainty remained, particularly in hotels, restaurants, retail, and commercial real estate. COVID-19 variants, borrower repayment capacity, real-estate collateral values, credit-loss estimates, deposit outflows, funding costs, and interest-rate movements were highlighted as risks. Management also cautioned that volatile short-term funding costs could pressure net interest margin. No formal earnings or financial guidance was provided.

Interest-rate sensitivity analysis showed estimated economic value of equity down 20.16% under a 100-basis-point rate decline at June 30; management stated this scenario was outside its policy guidelines. The filing notes that model assumptions limit the predictive value of these sensitivity estimates. Management reported effective disclosure controls and no material change in internal control over financial reporting. It said ordinary-course legal matters were not expected to have a material adverse effect and identified no significant pending or threatened proceedings.

Important facts for investors to verify

  • Reconcile the $26.0 million and $30.0 million disclosures for COVID-related deferrals, including how much remained exposed in hotel lending.
  • Assess whether the large Q2 earnings increase is repeatable: it was materially supported by credit-loss recoveries, while mortgage affiliate earnings and acquired-loan recoveries declined.
  • Monitor loan contraction excluding PPP, PPP forgiveness and fee recognition, and the impact of elevated cash balances on net interest margin.
  • Review the allowance’s adequacy against criticized and nonaccrual exposures, real-estate concentrations, and the assumptions in the CECL forecast.
  • Evaluate liquidity and funding sensitivity, including deposit stability, near-term certificate maturities, unfunded commitments, and the modeled exposure to falling rates.