Primis Financial Corp. Reports Basic and Diluted Earnings per Share for the First Quarter of 2023

Successfully Deployed New Digital Platform at Scale

Declares Quarterly Cash Dividend of $0.10 Per Share

MCLEAN, Va., April 27, 2023 /PRNewswire/ -- Primis Financial Corp. (NASDAQ: FRST) ("Primis" or the "Company"), and its wholly-owned subsidiary, Primis Bank (the "Bank"), today reported net income of $5.8 million for the quarter ended March 31, 2023, compared to $3.1 million for the quarter ended December 31, 2022 and $4.6 million for the quarter ended March 31, 2022.  Earnings per share ("EPS") for the three months ended March 31, 2023 were $0.23 on a basic and diluted basis, compared to $0.13 on a basic and $0.12 on a diluted basis for the three months ended December 31, 2022 and $0.19 on both a basic and diluted basis for the three months ended March 31, 2022.  

Updates on Digital Platform and Resulting Strength in Liquidity and Capital

As of December 31, 2022, the Company's ratio of gross loans to deposits was approximately 108% due to increasing liquidity constraints in the industry beginning late last year.  As a result, management accelerated the roll out of the new digital banking platform that had begun in the fall of 2022 to a more aggressive pursuit of new customers beginning February 1, 2023.  The results of that effort exceeded management's expectations and generated the following results for the digital platform as of or for the three months ended March 31, 2023:

• $980 million of deposits from approximately 11,500 customers at quarter-end
• Vast majority of funds (approx. 94%) were raised prior to the bank failures in mid-March with little attrition and continued customer growth since that time
• Customers are in all 50 states with approximately 88% of balances outside of Virginia, D.C. and Maryland
• Cost of deposits of 4.88%, approximately equal to Fed Funds, approximately 25 basis points below short-term borrowing costs and 30 to 40 basis points below earnings rate on one-way sweep arrangements
• Approximately 73% of funds from other banks and credit unions, versus online-focused banks or fintechs, with a little over 50% from banks with over $25 billion in assets
• No additional staffing added
• No fraud losses
• Less than $90 thousand in incremental marketing expense

Dennis J. Zember, Jr., President and CEO commented, "Two and a half years ago, we began a project to build modern infrastructure with the stated goal of being able to open accounts quickly and easily nationwide.  Through this period, the industry's liquidity levels were near all-time highs and the effort regularly seemed redundant.  Still, we believed that being able to self-fund our lines of business with a low-cost national deposit platform as necessary.  It is very exciting to see our hard work strengthen our Company in such a meaningful way with thousands of new customers and leading technology."

As a result of the successful expansion of the digital customer base, Primis substantially improved its liquidity profile in the first quarter.  As of March 31, 2023:

• The ratio of gross loans to deposits has declined to 83% from 108% at year-end
• Grew total cash and equivalents to $607 million, up from $78 million at December 31, 2022
• Repaid $340 million of short-term borrowings and listing agent CDs that matured in the first quarter
• Uninsured/non-collateralized deposits now represent only 26% of total deposits
• Liquidity sources (FHLB borrowings, Brokered CDs, etc.) plus cash-on-hand represent over 180% of uninsured/non-collateralized deposit balances

The Company's securities portfolio was $244.6 million at March 31, 2023.  Of the total, only $13.1 million is categorized as held-to-maturity with the rest designated as available-for-sale.  The unrealized after-tax loss on our available-for-sale portfolio was $23.5 million, down from $25.9 million at year-end, and is included in the Company's equity.  The unrealized loss on our held-to-maturity portfolio is $0.7 million after-tax at March 31, 2023.  If the Bank sold its portfolio for liquidity purposes, Primis would continue to have solid capital ratios as highlighted by the table below:

Financial Highlights for the Period Ended March 31, 2023

• Total deposits grew 34.7% un-annualized linked-quarter to $3.67 billion.
• Loans held for investment grew at an annualized rate of 13.1% in the first quarter compared to the linked-quarter, net of a decline in Paycheck Protection Program ("PPP") balances.
• Successfully completed first Panacea loan sale – approximately $15 million of loans with $427 thousand pre-tax gain.
• Return on average assets of 0.60% for the three months ended March 31, 2023 versus 0.36% for the three months ended December 31, 2022 and 0.55% for the three months ended March 31, 2022.  Operating return on average assets ⁽¹⁾ of 0.60%, 0.09% and 0.57% for the three months ended March 31, 2023, December 31, 2022 and March 31, 2022, respectively.
• Pre-tax pre-provision return on average assets ⁽¹⁾ was 1.31% for the three months ended March 31, 2023, versus 1.33% for the three months ended December 31, 2022 and 0.75% for the three months ended March 31, 2022. 
• Pre-tax pre-provision operating return on average assets ⁽¹⁾ was 1.31% for the three months ended March 31, 2023, versus 0.99% for the three months ended December 31, 2022 and 0.77% for the three months ended March 31, 2022.
• Mortgage banking almost broke even for the quarter with a $0.2 million after-tax loss versus $2.2 million after-tax loss in the prior quarter, with substantially all of the loss occurring in the seasonally slow month of January.
• Net interest margin of 3.15% in the first quarter of 2023 was up from 2.96% in the same period last year and down 52 basis points from 3.67% in the fourth quarter of 2022. Core net interest margin⁽¹⁾, which excludes the effects of PPP loans, was 3.16% in the first quarter of 2023, down from 3.68% in the fourth quarter of 2022 and up from 2.96% in the first quarter of 2022. 
• Core bank net interest margin (excluding excess digital deposit balances) of 3.38% for the first quarter of 2023.
• Allowance for credit losses to total loans was 1.17% at March 31, 2023 and at December 31, 2022, compared to 1.23% at March 31, 2022.  Allowance for credit losses to total loans (excluding PPP balances and loans held for sale) was 1.17% at March 31, 2023 and at December 31, 2022, compared to 1.24% at March 31, 2022. 
• Equity to assets was 9.52% at March 31, 2023 and tangible common equity to tangible assets was 7.14%.  Excluding $500 million of excess cash that the Company will begin sweeping, these ratios would have been 10.80% and 7.90%, respectively, at March 31, 2023 compared to 11.04% and 8.27%, respectively, at December 31, 2022.

Speaking about the items in the Company's quarterly performance, Mr. Zember said, "Our results in the first quarter were only mildly impacted by the challenges our industry is facing with liquidity levels.  To drive the nearly $1 billion of deposit growth, we incurred about $0.49 million of negative spread that fully abated with the Federal Reserve's last rate hike.  Additionally, we incurred approximately $0.42 million of one-time data processing costs related to over 30,000 applications for the new accounts.  Loan volumes and demand softened, particularly in the core bank, but pipelines in Panacea and Life Premium Finance are still strong and building with weighted average yields above 7.50%.  Additionally, Panacea completed its first loan sale transaction with a $0.47 million gain and is building a pipeline of other potential buyers.  Lastly, we expect to have sweep capabilities late in the second quarter that will allow us to resume aggressively growing the digital platform with positive spreads but no impact on our asset or capital levels."

Net Interest Income

Adjusted net interest income (excluding the excess revenue from credit enhancements) increased in the first quarter of 2023 to $27.5 million compared to $22.8 million for the same quarter in 2022 and was down slightly when compared to $28.2 million for the fourth quarter of 2022.  Higher yields on earning assets offset most of the accelerating cost of funding experienced by the industry in the quarter.  The Company did experience approximately $0.4 million of negative spread on the digital platform initiative that had fully abated by the end of the quarter.

The Company's net interest margin in the first quarter of 2023 was greatly affected by the success of the digital deposit platform.  Excluding the impact of the excess digital deposits and cash balances, the core bank's net interest margin declined by 0.29% to 3.38% compared to 3.67% in the fourth quarter of 2022.  Increased competition in the Company's core banking markets moved the cost of deposits higher to 1.67% in the current quarter of 2023 compared to 0.78% in the fourth quarter of 2022.  At the core bank level, yields on earning assets increased to 5.31% in the first quarter of 2023 compared to 4.80% in the fourth quarter of 2022, buoyed by higher rates on cash and loans.

On a consolidated basis, the Company's net interest margin includes approximately $346 million of excess deposits with a cost that is slightly higher than the quarter's earnings rate on cash, costing the Company about $0.4 million during the first quarter.  At quarter end, the cost of these deposits was slightly below the earnings rate on excess cash and approximately 30 to 40 basis points below the earnings rate for non-reciprocal sweeps.  Management intends to continue growing deposits on the digital platform and use non-reciprocal sweeps to manage total funding and asset levels.  The Company expects some amount of incremental net revenue from the platform in the short-term that could positively impact the net interest margin by 5 to 10 basis points. 

Noninterest Income

Noninterest income increased during the quarter to $11.5 million, up $9.4 million when compared to the first quarter of 2022 and up $0.6 million compared to the fourth quarter of 2022.  The Company began accounting for certain third party credit enhancements on consumer lending during the third quarter of 2022 and purchased the mortgage platform in the second quarter of 2022.

Gains associated with credit enhancements on consumer lending amounted to $4.9 million in the current quarter of 2023 and $1.8 million in the fourth quarter of 2022.  These amounts offset similar amounts of the Company's provision for loan losses in the respective quarters.

Mortgage revenue, and profitability, increased substantially in the first quarter of 2023.  Production teams hired in the fourth quarter built pipelines during the quarter and the Company saw attractive build in revenue.  Total mortgage revenue for the quarter was $4.3 million against interest rate lock volume during the quarter of $142 million. 

During the quarter, Panacea realized $0.43 million of gains associated with a small sale of commercial loans totaling $15 million.  Management continues efforts to secure additional buyers for the division's consumer and commercial loans and believes sales of $50 - $100 million are likely in 2023.

Noninterest Expense

Noninterest expense was $27.4 million for the first quarter of 2023, compared to $29.1 million for the fourth quarter of 2022. Noninterest expense for the first quarter of 2023 and fourth quarter of 2022 included $873 thousand and $1.37 million, respectively, of servicing and other expenses for a third-party managed loan portfolio.  Noninterest expense adjusted for these expenses, branch consolidation costs, other restructuring costs and unfunded commitment reserve impacts was $26.5 million for the first quarter of 2023 unchanged from levels in the fourth quarter of 2022. Included in noninterest expense was $5.0 million in expenses related to Primis Mortgage in the first quarter of 2023 versus $5.4 million in the fourth quarter of 2022. The expiration of elevated draws at year end was offset by higher commission expense due to increased mortgage activity. 

Excluding mortgage, nonrecurring expenses and the third party expenses described above, noninterest expense for the first quarter of 2023 was $21.5 million versus $21.2 million linked-quarter.  Compensation and benefits declined $757 thousand linked-quarter largely due to reduced incentive compensation accruals.  Marketing expense declined $364 thousand as the Bank prioritized digital advertising over more expensive local media.  Other professional fees declined $743 thousand from the fourth quarter due to expenses associated with bringing certain V1BE activities in-house in the fall.  Offsetting these reductions was an increase in FDIC insurance costs of $132 thousand and increased fraud losses of $371 thousand, primarily around increased check fraud activity.  Data processing costs were also higher by $549 thousand due to substantially higher application volume on the digital platform in the first quarter.

The Company's efficiency ratio was 68.6% in the first quarter of 2023 versus 71.7% in the fourth quarter of 2022.  The operating efficiency ratio ⁽¹⁾ in the first quarter of 2023 was 68.6% compared to 76.7% in the fourth quarter of 2022.  As noted above, the efficiency ratio was heavily impacted by Primis Mortgage in the first quarter.  Excluding mortgage, the operating efficiency ratio was 63.3% for the first quarter of 2023 versus 66.7% for the fourth quarter of 2022.

Loan Portfolio and Asset Quality

Loans held for investment increased to $3.04 billion at March 31, 2023, compared to $2.95 billion at December 31, 2022.  Loans held for investment grew at an annualized rate of 13%, net of a decline in PPP balances, in the first quarter.  Loan growth was particularly strong in the Life Premium Finance division in the first quarter, as discussed below.  Growth in the portfolio was also offset by the sale of approximately $15 million of Panacea loans in the first quarter.

Nonperforming assets, excluding portions guaranteed by the SBA, were $32.8 million at March 31, 2023, compared to $34.9 million at December 31, 2022, while loans rated substandard or doubtful decreased to $39.5 million in the first quarter of 2023 from $41.0 million in the fourth quarter of 2022.  As discussed in previous periods, a substantial portion of the Bank's nonperforming assets are comprised of two relationships with a combined balance of approximately $27 million.  A large residential property with a balance of approximately $8 million included in that total, continues to make sporadic payments and is current as of March 31, 2023.  The other relationship, primarily consisting of assisted living facilities, is currently in the middle of a receiver-managed marketing process.  The Bank currently holds no other real estate owned at the end of the first quarter.     

The Company recorded a provision for loan losses of $5.2 million for the first quarter of 2023 versus $7.9 million for the fourth quarter of 2022.  Of this provision, $4.7 million was due to charge-offs and reserve build for the loan portfolio with a third-party credit enhancement described previously.  This portion of the provision is fully offset by a gain recorded in noninterest income and has no effect on net income.  Excluding this provision amount, the provision for loan losses would have been $469 thousand.  As a percentage of loans, excluding PPP balances, the allowance for credit losses was 1.17% at the end of the first quarter of 2023 and fourth quarter of 2022.

Net charge-offs were $4.0 million for the first quarter of 2023, down from $5.3 million in the fourth quarter of 2022.  Excluding the losses tied to the impaired relationship described in the fourth quarter and charge-offs that are covered by a third-party, the first quarter would have experienced $2.1 million of net charge-offs versus $1.3 million of net recoveries in the fourth quarter of 2022.  First quarter net charge-offs were primarily related to existing nonperforming assets with specific reserve amounts established in prior quarters.

Deposits and Funding

Total deposits increased to $3.67 billion at March 31, 2023 from $2.72 billion at December 31, 2022, or 34.7% un-annualized.  The Bank's new digital banking offering drove substantial growth in the quarter with balances on the new platform reaching $980 million, up from $30 million at year-end.  The majority of the growth was in savings accounts with the remainder largely in NOW accounts.  The Company was able to use the substantial growth in deposits to pay off $325 million of FHLB advances and $15 million of listing agent CDs that matured in the first quarter.  Currently, the Bank's only wholesale funding is comprised of $100 million of brokered CDs that mature in 2023.

Mr. Zember commented on additional growth in the bank, saying "Our core bank's success in the quarter on deposit levels and costs is notable but somewhat hidden by the digital platform success.  The Core bank experienced a 0.2% decline in total deposits which is remarkable in the current environment.  More notable is that during the quarter a single non-interest bearing relationship totaling approximately $52 million at year end moved out of the bank accounting for 61% of the decline in non-interest bearing balances in the first quarter of 2023.  Excluding this relationship, the core bank would have experienced deposit growth during the quarter of 1.7%, while keeping its costs and resulting margins mostly intact.

As we move forward in the year, we expect to continue growing deposits on the digital platform, developing the sweep arrangements that allow us to manage our capital and liquidity on a just-in-time basis and still earn some amount of spread on the balances.  We will convert as many of these new customers as possible into core customers over the next 12 months, continue tweaking and improving the functionality of our technology, and finish building and rolling out the lower cost deposit strategies including small business.  I am determined to put real space between us and our competition using functional, intuitive technology delivered by traditional community bank service and personal attention."                                                                                                                             

Digital Lines of Business

The Company operates two national lines of business that are focused primarily on lending to higher quality segments of the economy and a national digital platform for funding purposes.  While each of the divisions are relatively new, management believes that the combined strategy can have margins in the 3.00%-3.25% range, efficiency ratios in the 30%-40% range and 50% less net charge-offs than traditional community bank commercial real estate.

Panacea continues to experience substantial growth alongside the development of its nationally-recognized brand.  The division increased its total client relationships to over 3,500 doctor households across all 50 states. Panacea finished the first quarter of 2023 with approximately $256.1 million in outstanding loans, an increase of $7.7 million, or 3.1%, from December 31, 2022. As highlighted above, Panacea sold approximately $15 million of loans in the first quarter for a pre-tax gain of $427 thousand.  Without the loan sale, growth would have been 9% for the quarter, or 36% annualized.  Panacea expects profitability to increase materially in 2023 due to higher gain on sale income in coming quarters.

Panacea-related deposits increased to $30.9 million at March 31, 2023, up 35% from December 31, 2022 and a substantially higher rate of growth than loan growth for the quarter.  Coupled with its loan sale strategy, Panacea expects to continue increasing the amount it self-funds its balance sheet.

The Life Premium Finance ("LPF") division, launched in late 2021, ended the first quarter of 2023 with outstanding balances, net of deferred fees, of $236.7 million, compared to $193.8 million at the end of the fourth quarter of 2022.  The LPF division increased profitability (including assumed cost of funds) at almost twice the rate it grew earnings assets as it continues to experience meaningful operating leverage.

As previously discussed, higher expenses related to team acquisitions at Primis Mortgage ended at the end of the last quarter.  Primis Mortgage was breakeven for February and March with an after-tax loss for the quarter of $212 thousand.  The locked pipeline ended the first quarter of 2023 at $53 million, up 110% from December 31, 2022 while loan fundings increased to $123 million in the first quarter, up 43% from the fourth quarter.  Primis still expects Primis Mortgage to contribute $4 to $5 million to net income and 10 to 15 basis points to return on assets in 2023.

Shareholders' Equity

Book value per share as of March 31, 2023 was $16.21, an increase of $0.23 from December 31, 2022.  Tangible book value per share⁽¹⁾ at the end of the first quarter of 2023 was $11.86, an increase of $0.25 from December 31, 2022.  Shareholders' equity was $400.3 million, or 9.52% of total assets, at March 31, 2023.  Tangible common equity⁽¹⁾ at March 31, 2023 was $292.7 million, or 7.14% of tangible assets⁽¹⁾.  Equity ratios are temporarily depressed by the excess cash and liquidity on the bank's balance sheet.  Management estimates that approximately $500 million of the Bank's current balance sheet will be included in the sweep program in the second quarter and that tangible common equity to tangible assets will move back to approximately 8.0%.  Unrealized losses on the Company's available-for-sale securities portfolio declined by $2.4 million to $23.5 million due to marginal increases in market interest rates during the quarter.  The Company has the wherewithal to hold these securities until maturity or recovery of the value and does not anticipate realizing any losses on the investments.

Additionally, the Board of Directors announced and declared a dividend of $0.10 per share payable on May 26, 2023 to shareholders of record on May 12, 2023.  This is Primis' forty-sixth consecutive quarterly dividend. 

About Primis Financial Corp.

As of March 31, 2023, Primis had $4.21 billion in total assets, $3.04 billion in total loans and $3.67 billion in total deposits. Primis Bank provides a range of financial services to individuals and small- and medium-sized businesses through thirty-two full-service branches in Virginia and Maryland and provides services to customers through certain online and mobile applications.

Conference Call

The Company's management will host a conference call to discuss its first quarter results on Friday, April 28, 2023 at 10:00 a.m. (ET). A live Webcast of the conference call is available at the following website: https://events.q4inc.com/attendee/659480176.  Participants may also call 1-888-330-3573 and ask for the Primis Financial Corp. call.  A replay of the teleconference will be available for 7 days by calling 1-800-770-2030 and providing Replay Access Code 4440924.

Non-GAAP Measures

Statements included in this press release include non-GAAP financial measures and should be read along with the accompanying tables. Primis uses non-GAAP financial measures to analyze its performance. The measures entitled net income adjusted for nonrecurring income and expenses; pre-tax pre-provision operating earnings; operating return on average assets; pre-tax pre-provision operating return on average assets; operating return on average equity; operating return on average tangible equity; operating efficiency ratio; operating earnings per share – basic; operating earnings per share – diluted; tangible book value per share; tangible common equity; tangible common equity to tangible assets; and core net interest margin are not measures recognized under GAAP and therefore are considered non-GAAP financial measures. We use the term "operating" to describe a financial measure that excludes income or expense considered to be non-recurring in nature.  Items identified as non-operating are those that, when excluded from a reported financial measure, provide management or the reader with a measure that may be more indicative of forward-looking trends in our business.  A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures is provided in the Reconciliation of Non-GAAP items table.

Management believes that these non-GAAP financial measures provide additional useful information about Primis that allows management and investors to evaluate the ongoing operating results, financial strength and performance of Primis and provide meaningful comparison to its peers. Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider Primis' performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of Primis.  Non-GAAP financial measures are not standardized and, therefore, it may not be possible to compare these measures with other companies that present measures having the same or similar names.

Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the results or financial condition as reported under GAAP.

Forward-Looking Statements

This press release and certain of our other filings with the Securities and Exchange Commission contain statements that constitute "forward-looking statements" within the meaning of, and subject to the protections of, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are forward-looking statements. Such statements can generally be identified by such words as "may," "plan," "contemplate," "anticipate," "believe," "intend," "continue," "expect," "project," "predict," "estimate," "could," "should," "would," "will," and other similar words or expressions of the future or otherwise regarding the outlook for the Company's future business and financial performance and/or the performance of the banking industry and economy in general. These forward-looking statements include, but are not limited to, our expectations regarding our future operating and financial performance, including our outlook and long-term goals for future growth and new offerings and services; our expectations regarding net interest margin; expectations on our growth strategy, expense management, capital management and future profitability; expectations on credit quality and performance; and the assumptions underlying our expectations.

Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve known and unknown risks and uncertainties which may cause the actual results, performance or achievements of the Company to be materially different from the future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements are based on the information known to, and current beliefs and expectations of, the Company's management and are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by such forward-looking statements. Factors that might cause such differences include, but are not limited to: the Company's ability to implement its various strategic and growth initiatives, including its recently established Panacea Financial and Life Premium Finance Divisions, new digital banking platform, V1BE fulfillment service and Primis Mortgage Company; competitive pressures among financial institutions increasing significantly; changes in applicable laws, rules, or regulations, including changes to statutes, regulations or regulatory policies or practices; changes in management's plans for the future; credit risk associated with our lending activities; changes in interest rates, inflation, loan demand, real estate values, or competition, as well as labor shortages and supply chain disruptions; changes in accounting principles, policies, or guidelines; adverse results from current or future litigation, regulatory examinations or other legal and/or regulatory actions, including as a result of the Company's participation in and execution of government programs related to the COVID-19 pandemic; potential impacts of the recent adverse developments in the banking industry highlighted by high-profile bank failures, including impacts on customer confidence, deposit outflows, liquidity and the regulatory response thereto; potential increases in the provision for credit losses; and other general competitive, economic, political, and market factors, including those affecting our business, operations, pricing, products, or services.

Forward-looking statements speak only as of the date on which such statements are made. These forward-looking statements are based upon information presently known to the Company's management and are inherently subjective, uncertain and subject to change due to any number of risks and uncertainties, including, without limitation, the risks and other factors set forth in the Company's filings with the Securities and Exchange Commission, the Company's Annual Report on Form 10-K for the year ended December 31, 2022, under the captions "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors," and in the Company's Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events. Readers are cautioned not to place undue reliance on these forward-looking statements.