Primis Financial Corp. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; balance-sheet comparisons are to December 31, 2021. Unaudited. Primis is a Virginia-based bank holding company serving individuals and small and medium-sized businesses, principally in Virginia and Maryland. It operated 32 branches and also served customers digitally.
Financial performance and condition
| Metric | Q3 2022 / September 30, 2022 | Comparable period / prior year-end |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $33.1 million | $25.6 million in Q3 2021; up 29.4% |
| Net interest income | $27.5 million; net interest margin 3.57% | $23.2 million; 2.87% in Q3 2021 |
| Continuing-operations net income | $5.1 million; diluted EPS $0.20 | $6.2 million; diluted EPS $0.25 in Q3 2021 |
| Nine-month continuing-operations net income | $14.7 million; diluted EPS $0.59 | $23.4 million; diluted EPS $0.95 in 2021 |
| Total assets | $3.36 billion | $3.41 billion at December 31, 2021 |
| Loans held for investment | $2.74 billion | $2.34 billion at December 31, 2021 |
| Total deposits | $2.71 billion | $2.76 billion at December 31, 2021 |
| Cash and cash equivalents | $97.7 million | $530.2 million at December 31, 2021 |
| Stockholders’ equity | $391.8 million | $411.9 million at December 31, 2021 |
- For the first nine months, net cash from continuing operating activities was $23.1 million; investing activities used $399.2 million, largely reflecting $397.0 million of net loan growth; financing activities used $56.3 million. Cash fell by $432.4 million.
- Allowance for loan losses was $32.0 million, or 1.17% of loans, versus $29.1 million, or 1.24%, at year-end. Total nonperforming assets rose to $39.7 million from $16.5 million; nonaccrual loans were $36.9 million versus $15.0 million.
- Available-for-sale securities were $238.9 million at fair value, with $34.8 million of gross unrealized losses. The filing attributes these losses to interest-rate changes, not credit impairment, and says the company can hold the securities until recovery or maturity.
- Interest-bearing debt included $125.0 million of FHLB advances, $85.5 million of senior subordinated notes, and $9.8 million of junior subordinated debt. The bank was reported as well capitalized; its September 30 total risk-based capital ratio was 15.28% and capital conservation buffer was 7.28%.
Material changes and drivers
- Q3 net interest income increased as loan growth and asset mix improved, and interest-earning-asset yield rose. The margin increase also reflects the prior-year comparison: Q3 2021 included $2.7 million of PPP fee income, versus none in Q3 2022. Excluding PPP effects, reported margin was 3.58% versus 2.66%.
- Q3 noninterest expense rose 44% to $23.8 million, including higher compensation, technology, Primis Mortgage costs, marketing, legal and fraud-related expenses. Continuing-operations income consequently declined 19% year over year despite higher revenue.
- Nine-month provision for credit losses was $3.4 million, versus a $4.5 million recovery in 2021. Nine-month noninterest expense rose 22% to $63.2 million; continuing-operations income fell 37%.
- Loans excluding PPP balances increased $466.4 million, or 21%, from year-end. Deposits declined 2%; noninterest-bearing demand deposits were $687.3 million, or 25.4% of deposits.
- Accumulated other comprehensive loss reached $27.5 million, principally from unrealized securities marks, contributing to the decline in equity.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management described an uncertain environment involving elevated inflation, rapid Federal Reserve rate increases, labor and supply-chain constraints, geopolitical risks, and possible recession. Results for interim periods are not necessarily indicative of full-year results.
- Management identified real-estate and commercial-loan concentrations, credit deterioration, deposit competition and funding costs, interest-rate exposure, securities valuation, acquisition execution, cybersecurity, and the economic outlook as risks. One assisted-living-facility relationship was downgraded and placed on nonaccrual; management reported recent appraisals showed no impairment was required at the time. The filing also noted increased classified balances, largely related to that relationship.
- Primis acquired SeaTrust Mortgage Company on May 31, 2022, paying $7.0 million in cash and assuming $19.3 million of warehouse-facility debt. It recorded $2.7 million of goodwill; Primis Mortgage contributed $2.2 million of Q3 mortgage banking income.
- After quarter-end, an October 3 sale of Infinex Financial Services was expected to produce an approximately $4.1 million pretax gain in Q4 2022.
- At September 30, unfunded lines of credit and undisbursed construction-loan funds totaled $495.5 million; loan commitments were $35.4 million and letters of credit $12.3 million. Management said available FHLB lines and other funding sources should meet anticipated commitment needs and reported no known material liquidity uncertainty.
- Interest-rate sensitivity models estimate that a parallel +400 basis-point shock would reduce economic value of equity by 6.71% and adjusted net interest income by $5.9 million from the modeled base. The filing cautions that these models rely on assumptions and are not precise forecasts.
- Management reported effective disclosure controls. Acquisition-related changes to internal financial-reporting controls were being evaluated and augmented. No significant pending or threatened legal proceeding was reported.
Most important facts for investors to verify
- Whether the rise in nonaccrual and nonperforming loans persists, especially the assisted-living relationship, and how collateral values and loss reserves develop.
- Whether loan growth can be funded while deposits decline, cash balances fall, and deposit pricing adjusts to higher rates.
- Whether securities unrealized losses remain recoverable and how they affect equity, capital and liquidity if securities must be sold.
- Whether higher operating costs, Primis Mortgage performance and acquisition integration support future earnings; verify the timing and realization of the expected Infinex gain.
- How rate changes affect actual net interest margin and funding costs compared with the filing’s model scenarios, and whether capital remains comfortably above regulatory requirements.