Primis Financial Corp. — Q3 2021 Form 10-Q
Business context and period. This unaudited filing covers the three and nine months ended September 30, 2021, with balance-sheet comparisons to December 31, 2020. Primis is a Virginia-based bank holding company serving individuals and small and midsized businesses through Primis Bank, with branches in Virginia and Maryland and digital channels. The company changed its name from Southern National Bancorp of Virginia, Inc. on March 31, 2021.
Financial results and condition
- Q3 earnings: Continuing-operations net income was $6.2 million ($0.25 diluted EPS), versus $6.5 million ($0.27) a year earlier. Consolidated net income was $3.9 million, compared with $9.6 million, reflecting a $2.3 million discontinued-operations loss versus $3.1 million of income in Q3 2020.
- Nine-month earnings: Continuing-operations net income was $23.4 million ($0.95 diluted EPS), versus $7.8 million ($0.32) in 2020. Consolidated net income was $23.6 million, versus $14.3 million. The improvement in continuing results was principally due to a $4.5 million credit-loss recovery, compared with a $16.3 million provision in 2020.
- Net interest income and margin: Q3 net interest income was $23.2 million, up from $23.0 million; net interest margin was 2.87%, down from 3.18%. Excluding PPP effects, the margin was 2.66% versus 3.28%. For nine months, net interest income was $70.0 million versus $66.0 million, while margin was 3.02% versus 3.27%. Management cited elevated cash balances and lower PPP fee recognition as margin pressures; lower deposit costs supported net interest income.
- Other income and expenses: Q3 noninterest income was $2.7 million versus $2.4 million, and noninterest expense was $16.9 million versus $15.3 million. Nine-month noninterest income declined to $7.8 million from $9.3 million, largely because 2020 included a substantial acquired-loan recovery; noninterest expense rose to $52.5 million from $49.2 million. Higher Q3 compensation included management restructuring costs.
- Assets, loans and deposits: Total assets were $3.45 billion, up 12% from year-end 2020. Gross loans were $2.31 billion, down 5%; excluding PPP loans, loans increased $48.6 million, or 2%, from year-end and grew at a 24% annualized rate in Q3. Deposits increased $374.5 million to $2.81 billion despite a $115.1 million decline in time deposits. Non-time deposits were 87% of deposits, versus 80% at year-end.
- Liquidity and cash flows: Cash and cash equivalents were $650.7 million, compared with $196.2 million at year-end. For the nine months, operating cash flow was $22.4 million, investing cash flow was positive $86.2 million, and financing cash flow was positive $345.9 million; cash increased $454.6 million. Management said normal funding sources were expected to meet commitments, while noting possible reliance on costlier funding if deposits leave.
- Credit quality: The allowance for credit losses was $30.4 million, or 1.31% of total loans; management reported 1.40% excluding PPP loans. Nonperforming assets were $19.7 million versus $17.5 million at year-end; nonaccrual loans were $18.4 million versus $14.5 million. OREO declined to $1.3 million from $3.1 million. COVID-related deferrals fell to $7.0 million from $122.0 million; four deferred loans were current at quarter-end. There were nine TDR loans totaling $3.7 million, with no defaults among TDRs modified in the prior 12 months.
- Debt and capital: At September 30, debt included $100.0 million of FHLB advances, $13.3 million of repurchase agreements, $9.7 million of junior subordinated debt and $85.7 million of senior subordinated notes. The company redeemed $20.0 million of senior subordinated notes in February 2021. Primis Bank was categorized as well capitalized; 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.
- Other obligations: Unfunded lines of credit and undisbursed construction loan funds were $420.6 million; letters of credit were $14.4 million. The filing states commitments may expire undrawn and are not necessarily equivalent to future funding needs.
Material changes, outlook and risks
- Southern Trust Mortgage transaction: Primis Bank agreed to sell all its common membership interests and part of its preferred interests in Southern Trust Mortgage (STM) for $1.6 million in cash and an $8.5 million promissory note. Closing was expected in Q4 2021. Primis recorded an approximately $2.9 million pretax charge in Q3, classified the relevant investments as held for sale, and presented STM-related results as discontinued operations. The bank expected to remain an STM borrower after closing but cease being a minority owner.
- Management outlook: Management described economic activity as improving but still uncertain, with COVID-19 and variants continuing to affect customers, particularly in hotels, restaurants, retail and commercial real estate. It anticipated minimal additional loan deferrals during the rest of 2021 and expected additional PPP forgiveness. The filing provides no specific earnings or revenue guidance.
- Interest-rate exposure: The modeled 100-basis-point rate decline reduced estimated economic value of equity by 17.81% as of September 30, 2021; modeled net interest income declined $2.6 million, or 3.17%, from the base case. Management cautioned that model assumptions limit the precision of these estimates.
- Key risks and contingencies: Risks include borrower repayment and collateral values, real-estate and construction loan concentrations, COVID-19 effects, deposit competition and funding costs, interest-rate and LIBOR transition exposure, securities valuation, credit-loss estimates, cybersecurity, regulatory changes and potential litigation. Management reported no pending or threatened proceedings presenting a significant risk and no known material liquidity trend as of quarter-end. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- Whether the STM sale closed as expected, its final consideration and any resulting gain, loss or continuing credit exposure.
- Whether loan growth excluding PPP is sustained and whether unusually high cash balances continue to pressure net interest margin.
- Trends in nonaccrual loans, past-due credits, TDRs and allowance coverage, especially in real-estate and construction lending.
- Deposit stability, the cost and availability of alternative funding, and the eventual use of the large cash balance.
- Actual PPP forgiveness, remaining customer deferrals and any material changes in COVID-19-related credit conditions.
- Changes in capital ratios, interest-rate sensitivity and the timing and terms of subordinated debt repricing.