Primis Financial Corp. — Q1 2023 Form 10-Q
Business context and reporting period. Primis Financial Corp. is a Virginia-based bank holding company operating Primis Bank and Primis Mortgage. The unaudited quarter ended March 31, 2023 is compared with Q1 2022 for income and cash flow, and with December 31, 2022 for balance-sheet changes. Primis operated 32 branches in Virginia and Maryland, alongside digital banking channels. The mortgage business acquired in May 2022 contributed to the year-over-year comparison.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $28.4 million | $22.9 million in Q1 2022 |
| Net interest margin | 3.15% | 2.96% in Q1 2022 |
| Net income; diluted EPS | $5.8 million; $0.23 | $4.6 million; $0.19 in Q1 2022 |
| Noninterest income / expense | $11.5 million / $27.4 million | $2.1 million / $19.0 million in Q1 2022 |
| Total assets | $4.21 billion | $3.57 billion at December 31, 2022 |
| Loans held for investment | $3.04 billion | $2.95 billion at December 31, 2022 |
| Total deposits | $3.67 billion | $2.72 billion at December 31, 2022 |
| Cash and cash equivalents | $607.1 million | $77.9 million at December 31, 2022 |
| Allowance for credit losses | $35.7 million; 1.17% of loans | $34.5 million; 1.17% at December 31, 2022 |
| Stockholders’ equity | $400.3 million | $394.4 million at December 31, 2022 |
Combined net interest and noninterest income was approximately $39.9 million, versus $24.9 million in Q1 2022. Operating cash flow was negative $11.2 million; investing cash flow was negative $75.7 million and financing cash flow was positive $616.1 million. Cash increased $529.3 million during the quarter.
Primis repaid $325.0 million of short-term FHLB advances that matured in Q1; no FHLB advances remained at quarter-end. It reported $9.8 million of junior subordinated debt and $85.6 million of senior subordinated notes. The Bank reported regulatory capital ratios above minimums and was categorized as well capitalized; its March 31 total risk-based capital ratio was 13.58% and leverage ratio was 10.21%.
Material changes and management commentary
- Net income increased 26% year over year, with higher loan and cash yields and mortgage banking income contributing to growth. Average earning-asset yield rose to 5.24% from 3.44%; the cost of interest-bearing deposits rose to 2.32% from 0.44%, reflecting rate competition.
- Deposit growth was principally associated with the digital deposit platform. Savings balances rose to $971.4 million from $245.7 million at year-end, and NOW balances increased to $835.3 million from $617.7 million. Gross loans to deposits declined to 83% from 108%.
- Noninterest income included $4.3 million of mortgage banking income and $4.9 million of credit enhancement income. The mortgage contribution reflects the 2022 acquisition; credit enhancement income was associated with a covered consumer-loan portfolio.
- Noninterest expense rose 44%, including higher compensation, data-processing costs, and credit-enhancement servicing costs. Management cited increased staffing, digital-platform activity, FDIC insurance costs, fraud losses, and mortgage-related expenses.
- The $5.2 million provision for credit losses included approximately $4.8 million related to loans with a third-party credit enhancement; management said this was fully offset by related credit-enhancement income and had no net-income effect. Excluding that portion, provision was approximately $0.5 million.
Liquidity, credit quality, risks and outlook
- Management reported substantial on-balance-sheet liquidity and approximately $541.6 million of FHLB borrowing capacity. It also had $165.0 million of securities available for the Federal Reserve Bank Term Funding Program, with no BTFP borrowing outstanding. Available liquidity sources plus cash were approximately 180% of uninsured and uncollateralized deposits.
- Uninsured deposits were $1.1 billion, or 31% of deposits, including affiliate and collateralized public deposits. After excluding those categories, uninsured and uncollateralized deposits were approximately $946 million, or 26% of deposits.
- Nonperforming assets were $35.0 million, down from $38.8 million at year-end; nonaccrual loans were $33.4 million. Two borrower relationships accounted for approximately $27 million of nonperforming assets. Management described overall asset quality as strong, while noting economic uncertainty.
- Real-estate-secured loans represented 65.8% of loans held for investment. Management highlighted exposure to interest rates, inflation, recession risk, real-estate values, and borrower repayment capacity. Available-for-sale securities had $29.8 million of gross unrealized losses; management attributed these to interest-rate changes rather than credit impairment and stated it intended to hold the securities until maturity or recovery. Held-to-maturity securities had a $13.1 million carrying value and $12.2 million fair value.
- Management cited recent banking-industry disruption as a risk to customer confidence, deposit retention, funding costs, liquidity, and regulatory scrutiny. Other stated risks include competition for deposits, credit deterioration, securities values, CRE concentration, technology and fraud, and execution of growth initiatives.
- No numerical earnings or operating guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results. Its interest-rate model estimated a $10.3 million decrease in adjusted net interest income under an immediate, sustained 400-basis-point rate increase; the filing cautions that model assumptions limit predictive value.
- One residential loan of $0.9 million was modified to defer principal and interest for six months, with payments expected to resume in August 2023. The filing reported no significant pending or threatened legal proceeding and no material adverse effect expected from ordinary-course claims.
Important facts for investors to verify
- Whether the large digital-platform deposit inflows are durable, their rate and retention profile, and the resulting effect on funding costs and margins.
- Uninsured and uncollateralized deposit exposure, collateral coverage, and the availability and operational terms of contingent liquidity sources.
- Performance, collateral values, and recovery prospects for the two borrower relationships comprising approximately $27 million of nonperforming assets.
- Credit trends, charge-offs, and the adequacy of the allowance, particularly in real-estate, commercial, and consumer lending.
- How mortgage banking and credit-enhancement income and related expenses evolve, including the economics of the covered loan portfolio.
- Potential effects of unrealized securities losses and interest-rate changes on liquidity, capital, and earnings; verify the assumptions underlying management’s sensitivity models.