Primis Financial Corp. — Q1 2022 Form 10-Q
Business context and reporting period. Primis is a Virginia-based bank holding company serving individuals and small and medium-sized businesses, primarily in Virginia and Maryland through 40 branches and digital channels. This unaudited report covers the three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
- Earnings and revenue: Net income was $4.6 million, or $0.19 per basic and diluted share, versus $9.4 million, or $0.39 basic and $0.38 diluted, in Q1 2021. Continuing-operations income was $4.6 million versus $8.4 million. The prior-year quarter included $1.0 million of income from the discontinued Southern Trust Mortgage operation. Net interest income was $22.9 million, down from $25.0 million; noninterest income was $2.1 million, down from $2.3 million.
- Margins: Net interest margin was 2.96%, compared with 3.41% a year earlier. Management reported margin excluding PPP effects of 2.96% versus 2.99%. PPP fee income fell to $0.3 million from $5.0 million. Average earning-asset yield declined to 3.44% from 4.14%; average interest-bearing deposit cost improved to 0.44% from 0.74%.
- Expenses and credit costs: Noninterest expense rose 5.3% to $19.0 million, including higher technology/data-processing costs. Credit-loss provision was $0.1 million, compared with a $1.4 million recovery in Q1 2021. The allowance for loan losses was $29.4 million; management reported coverage of 1.24% of loans excluding PPP balances.
- Assets and lending: Total assets were $3.22 billion, down 5.5% from year-end. Loans were $2.39 billion, up 2.3%; excluding PPP loans, they increased $99.6 million, or 4.4%. PPP loans declined to $31.4 million from $77.3 million. Real-estate-secured loans represented 81.1% of the portfolio.
- Deposits, liquidity, and cash flow: Deposits were $2.69 billion, down 2.8%; noninterest-bearing demand deposits were $559.7 million, or 20.8% of deposits. Cash and cash equivalents were $298.2 million versus $530.2 million at year-end. Q1 operating cash flow was $3.0 million, investing cash flow was negative $56.8 million, and financing cash flow was negative $178.2 million, including $100.0 million repayment of FHLB advances and a $77.0 million net deposit decline. Management said expected commitment funding could be met from normal funding sources and reported no known liquidity trend expected to have a material impact.
- Debt and capital: The $100.0 million FHLB advance balance at year-end was repaid; quarter-end borrowings included $11.2 million in repurchase agreements, $9.7 million in junior subordinated debt, and $85.4 million in senior subordinated notes. The Bank was categorized as well capitalized: its March 31 leverage, CET1, Tier 1 risk-based, and total risk-based ratios were 11.65%, 15.70%, 15.70%, and 16.95%, respectively. Parent-company ratios were 9.77%, 12.64%, 13.06%, and 17.66%.
- Equity and securities: Stockholders’ equity was $404.2 million, down from $411.9 million. A $10.6 million after-tax unrealized securities loss reduced equity; AFS securities had $12.5 million of gross unrealized losses at quarter-end. Management said it could hold the securities until maturity or value recovery and did not anticipate realizing losses.
- Asset quality: Nonaccrual loans were $14.9 million; total nonperforming assets were $17.8 million, or 0.47% of assets excluding SBA-guaranteed loans, versus $16.5 million at year-end. Ten troubled debt restructurings totaled $3.1 million, with no defaults among TDRs modified in the prior 12 months. No loans were on COVID-related deferral at quarter-end.
Changes, outlook, and risks
- Year-over-year changes: Lower PPP fees and loan yields weighed on reported interest income and margin; management said net interest income excluding PPP fees increased $2.5 million year over year. Lower deposit costs partly offset reduced asset yields. Earnings also reflected a shift from the prior-year credit-loss recovery to a small provision, higher operating expenses, and the absence of prior-year discontinued-operation income.
- Quarter-end changes: Core loan growth was accompanied by lower deposits and cash, while the company repaid its FHLB advance. Rising market rates drove the securities valuation loss recorded in other comprehensive income.
- Management outlook: Management expected planned Federal Reserve rate increases to support net interest margin and income and said it did not expect them to significantly affect core loan-growth guidance. The filing provides no numeric earnings, margin, or loan-growth guidance. Management cautioned that inflation, supply-chain and labor pressures, geopolitical uncertainty, and continuing pandemic effects make future impacts difficult to predict.
- Strategic and unusual items: On April 28, 2022, Primis Bank agreed to acquire SeaTrust Mortgage Company, with closing anticipated in Q2 2022 subject to conditions. The company also identified Panacea Financial, Life Premium Finance, its digital bank, and V1BE fulfillment service as strategic initiatives. The filing describes risks involving interest rates, inflation, credit quality, real-estate concentrations, liquidity, cybersecurity, regulatory matters, acquisitions, and LIBOR transition. Management reported no pending or threatened legal proceeding presenting a significant risk and no material change in internal controls.
Important facts for investors to verify
- Whether core loan growth and deposit trends persist, and how deposit competition affects funding costs.
- How rapidly higher rates change asset yields, deposit costs, net interest income, and securities valuations; review the rate-sensitivity assumptions as well as the reported scenarios.
- Credit performance in the real-estate-heavy loan portfolio, including past-due, nonaccrual, substandard, and TDR balances and the adequacy of the allowance.
- Whether the SeaTrust acquisition closes as anticipated and its eventual effect on earnings, capital, and integration costs.
- The sustainability of reported earnings given declining PPP fees, higher operating costs, and the prior-year discontinued-operation comparison.
- Regulatory capital and liquidity headroom, including the effect of loan growth, deposit outflows, and unfunded commitments.