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Primis Financial Corp. (NASDAQ:FRST) - Solid Core Performance Amidst Noise
Published on September 24, 2024 | Ticker: FRST

Primis Financial Corp. (NASDAQ:FRST) reported solid core performance in the second quarter of 2024, with earnings available to common shareholders of $7.8 million, or $0.32 per diluted share. Adjusting for the impact of Panacea Financial Holdings (PFH) and certain one-time items, the company's core earnings were $9.3 million, or $0.38 per share, a significant improvement from $0.03 per share in the year-ago period.

The company's total assets stood at $4 billion as of June 30, 2024, up slightly from the previous quarter. Loans held for investment increased 2.5% from the end of the first quarter, driven primarily by growth in the Panacea and Life Premium Finance divisions. Deposits reached $3.3 billion, also up slightly from the prior quarter.

Core net interest income, excluding accounting adjustments related to a third-party managed portfolio, decreased slightly to $27.1 million in the second quarter, as growth in earning assets offset margin pressure. The reported net interest margin was 3.03%, while the core net interest margin, excluding the accounting adjustments, was 2.94%, compared to 3.03% in the previous quarter. The core yield on loans held for investment increased to 6.14%, and the core yield on earning assets rose to 5.92%. The cost of deposits increased to 2.98%, and the cost of funds rose to 3.16% during the quarter.

Excluding the impact of PFH and certain one-time items, noninterest income was $9.9 million in the second quarter, up from $8.3 million in the previous quarter, primarily due to increased mortgage banking activity. Noninterest expense, excluding the impact of PFH, was $27.8 million, with mortgage expenses increasing to $6.1 million from $5.1 million in the prior quarter due to higher volume. The company also incurred approximately $1.3 million in accounting and advisory costs related to its SEC restatement process.

The core provision for credit losses was a release of $600,000 in the second quarter, compared to a core provision of $1.6 million in the first quarter. Core net charge-offs were $600,000, down from $900,000 in the previous quarter. The net reserve release was largely due to a reduction in individually evaluated and purchased credit-deteriorated (PCD) reserves.

Primis' operating return on assets (ROA) improved to 90 basis points in the second quarter, up from 70 basis points in the prior quarter. The company's core profitability remains solid, and management is optimistic about continuing to improve core returns as it puts the noise related to the SEC restatement process behind it.

Business Overview

Primis Financial Corp. is a bank holding company that operates through its subsidiary, Primis Bank. The company provides a range of financial services to individuals and small-to-medium-sized businesses, with a focus on commercial lending and deposit-related services. Primis Bank has 32 full-service branches in Virginia and Maryland and also provides services through online and mobile applications.

In addition to its core community banking operations, Primis has several lines of business that have contributed to its recent performance. The Panacea and Life Premium Finance divisions, along with the company's digital platform, collectively accounted for approximately 25% of total loans and 29% of total deposits as of the end of the second quarter. These higher-yielding lending strategies have generated incremental loan yields in the high 7% and even 8% range, with funding costs around 4.84%.

The company's mortgage banking division also had a strong quarter, reporting pretax net income of just over $1 million, compared to essentially breakeven in the year-ago period. During the quarter, Primis took in $228 million in mortgage loan locks, up approximately 25% from the same quarter last year, with a gain-on-sale margin of 3.1%, up from 2.8% a year ago.

Liquidity and Capital

Primis maintains a strong liquidity position, with cash and cash equivalents of $93.9 million as of June 30, 2024. The company also has significant borrowing capacity, including $558.9 million from the Federal Home Loan Bank and $548.9 million from the Federal Reserve discount window program. As of the end of the second quarter, the company had $467.3 million in unfunded lines of credit and undisbursed construction loan funds, not all of which will ultimately be drawn.

Primis' capital ratios remain well above regulatory minimums, with a Tier 1 risk-based capital ratio of 12.27% and a total risk-based capital ratio of 13.42% as of June 30, 2024. The company expects to deconsolidate Panacea Financial Holdings in the near future, which would lift its tangible book value by approximately $0.65 per share and improve its tangible capital ratios by around 40 basis points.

Risks and Outlook

While Primis has demonstrated solid core performance, the company continues to navigate the challenges facing the banking industry, including rising interest rates, economic uncertainty, and competitive pressures. The company's lines of business, though promising, are still relatively young and may face integration and execution risks.

Looking ahead, management remains cautiously optimistic about the company's prospects. The core community bank is focused on deposit growth and commercial lending, leveraging its digital capabilities and other advantages. The company's lines of business are expected to continue improving quarter-over-quarter, and management is committed to maintaining discipline on operating expenses.

Primis believes that a falling or softer interest rate environment would be positive for the company, both in terms of net interest margins and mortgage volumes. The rapid success of the company's lines of business has also generated interest from potential partners, but management remains focused on its existing strategies and opportunities.

Overall, Primis Financial Corp. has delivered solid core performance in the second quarter of 2024, with strong contributions from its community banking operations and its higher-yielding lending strategies. While the company continues to navigate industry challenges, management's focus on disciplined growth, cost control, and leveraging its digital capabilities positions Primis for continued success.

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