Business Overview and History

Primis Financial Corp (FRST) is a Virginia-based bank holding company that provides a range of financial services to individuals and small-to-medium sized businesses through its subsidiary, Primis Bank. While the company has navigated through regulatory challenges in recent years, its diversification strategy and focus on core banking operations have positioned it for potential growth.

Primis Financial Corp was founded in 2005 as Primis Bank, a Virginia state-chartered bank. The company initially focused on providing financing services to businesses in various industries, as well as deposit-related services to businesses, consumers, and other customers. Over the years, Primis has expanded its presence, growing to 24 full-service branches across Virginia and Maryland as of March 31, 2024.

The company operates through its subsidiary, Primis Bank, offering a range of financial products and services including commercial lending, consumer banking, mortgage banking, and specialized financial services. In 2022, Primis Financial Corp acquired Primis Mortgage Company, a residential mortgage lender headquartered in Wilmington, North Carolina. This acquisition allowed Primis to expand into the mortgage banking business, with Primis Mortgage Company becoming a consolidated subsidiary.

In late 2023, Primis Financial Corp consolidated Panacea Financial Holdings, Inc. (PFH), a company that owns the rights to the Panacea Financial brand and its intellectual property. PFH partners with Primis Bank to offer financial products and services tailored for the healthcare industry. This new division has been a focus for the company as it looks to diversify its revenue streams.

Primis has faced some challenges in recent years. In 2023, the company had to restate its financial statements due to accounting issues related to a consumer loan portfolio originated through a third-party. This led to delays in Primis’ SEC filings, causing the company to receive a notice of non-compliance from Nasdaq. Primis has been working to resolve these issues and regain compliance. Despite these headwinds, the core bank and mortgage operations have continued to show momentum, with the company reporting improved financial results in the third quarter of 2024.

Financials and Key Ratios

As of the latest 10-Q filing in Q3 2024, Primis Financial reported total assets of $3.89 billion, up slightly from $3.86 billion at the end of 2023. The company’s loan portfolio stood at $3.23 billion, relatively flat compared to the previous year. Deposits grew 1% to $3.31 billion during the same period.

Primis’ net interest margin was 2.97% in Q3 2024, up from 2.72% in the prior quarter, due in part to the company’s efforts to optimize its deposit costs. The core bank’s cost of deposits improved to 2.21% in Q3 2024, compared to 1.97% a year earlier. The company’s pre-tax pre-provision earnings reached $10 million in Q3 2024, up from $9.4 million in the previous quarter.

The company’s asset quality remained relatively stable, with nonperforming assets at 25 basis points of total assets as of Q3 2024, down from 40 basis points a year earlier. The allowance for credit losses to total loans ratio stood at 1.66% at the end of the third quarter.

Primis’ capital position remains strong, with a Tier 1 risk-based capital ratio of 11.09% and a total risk-based capital ratio of 12.35% as of Q3 2024, well above regulatory minimums.

For the full year 2023, Primis Financial Corp reported revenue of $143.96 million and a net loss of $7.83 million. The company generated operating cash flow of $28.82 million and free cash flow of $26.89 million. In the most recent quarter (Q3 2024), revenue increased by 7% year-over-year to $66.04 million, with net income of $1.21 million. However, operating cash flow and free cash flow were negative at $965,000 for the quarter, impacted by changes in the accounting for Consumer Program loans.

Liquidity

Primis Financial Corp maintains a solid liquidity position. As of Q3 2024, the company reported cash and cash equivalents of $88.72 million. The debt-to-equity ratio stood at 0.40, indicating a relatively low level of leverage. Primis also had access to $478.5 million in unused FHLB lines of credit, providing additional liquidity if needed. The company’s current ratio and quick ratio both stood at 1.12, suggesting adequate short-term liquidity to meet its obligations.

Segment Performance

Primis Financial Corp operates two reportable segments: Primis Bank and Primis Mortgage.

The Primis Bank segment, which includes the company’s core banking operations, generated $24.36 million in net interest income during the first quarter of 2024. This represented the majority of the company’s consolidated net interest income of $25.27 million. The segment’s income before income taxes was $171,000 for the quarter.

The Primis Mortgage segment, which specializes in originating mortgages in a majority of the U.S., contributed significantly to the company’s noninterest income. In the first quarter of 2024, this segment generated $5.57 million in mortgage banking income, a substantial portion of the total noninterest income of $10.31 million. The segment’s income before income taxes was $1.36 million for the quarter.

The mortgage division has shown strong growth, with a 67% increase in locked loan volume compared to the prior year quarter, driving the overall revenue growth for the company.

Regulatory Challenges and Diversification Efforts

Primis has faced regulatory scrutiny in recent years, primarily related to the accounting for a consumer loan portfolio originated through a third-party. In 2024, the company engaged in a consultation process with the Securities and Exchange Commission’s Office of the Chief Accountant to resolve the accounting issues, which led to delays in the company’s financial reporting.

To address these challenges, Primis has focused on diversifying its business mix and optimizing its operations. The divestiture of the Life Premium Finance division, announced in Q3 2024, is expected to improve the company’s net interest margin and tangible common equity ratio. Additionally, the expansion of the company’s mortgage warehouse lending business, which is replacing the Life Premium Finance portfolio, is anticipated to provide a boost to Primis’ profitability.

Primis has also made progress in its Panacea Financial division, which partners with the medical industry to provide specialized financial services. The division recently announced partnerships with the American Student Dental Association and the American Dental Association, highlighting the company’s efforts to develop tailored products and services for specific customer segments.

Risks and Outlook

While Primis has taken steps to diversify its business and address regulatory concerns, the company’s operations are still subject to various risks. These include interest rate risk, credit risk, and the potential for continued regulatory scrutiny. The company’s ability to successfully integrate new business lines and manage costs will be critical to its long-term success.

Despite these challenges, Primis’ management remains optimistic about the company’s prospects. The core bank’s cost of deposits and net interest margin improvements, along with the anticipated benefits from the mortgage warehouse lending business, suggest that Primis is well-positioned to deliver stronger financial performance in the coming years, provided it can navigate the regulatory landscape effectively.

Management expects the core bank’s contribution to continue improving, with the cost of deposits remaining 40-50 basis points lower than peers. The pipeline and pace of new commercial relationships is reported to be three times what it was a year ago, indicating strong momentum in the core bank.

The mortgage division is expected to see continued growth, with the production run rate reaching $1 billion in annual locked loans. The sale of the Life Premium Finance division is anticipated to improve the company’s tangible common equity ratio by about 75 basis points and the net interest margin by 6-7 basis points, with an additional 5 basis point margin lift expected over the next several quarters.

The new mortgage warehouse lending business is projected to replace the $375-$450 million in assets from the Life Premium Finance division, with a target average mortgage warehouse book of $400 million for 2025. Management has expressed confidence in reaching a sustainable 1% return on assets (ROA) by the second half of 2025, driven by the expected improvements in the core bank, mortgage division, and the impact of the Life Premium Finance sale.

Conclusion

Primis Financial Corp has faced its share of regulatory hurdles in recent years, but the company’s focus on diversification and optimization of its core banking operations appears to be bearing fruit. The divestiture of the Life Premium Finance division and the expansion of the mortgage warehouse lending business represent strategic moves aimed at improving the company’s profitability and risk profile.

The company’s two-segment structure, with the Primis Bank segment providing a stable base of net interest income and the Primis Mortgage segment contributing significantly to noninterest income, offers a balanced approach to revenue generation. The strong growth in the mortgage division and the anticipated improvements in the core bank’s performance provide a foundation for potential future growth.

As Primis continues to navigate the regulatory landscape and execute on its diversification strategy, investors will be closely watching to see if the company can deliver on its goal of reaching a 1% ROA by the second half of 2025. The company’s ability to successfully integrate its new business lines, manage costs, and capitalize on the expected benefits from its strategic initiatives will be crucial in determining its long-term success and ability to enhance shareholder value.

Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.