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

Announces Cost Saving Initiative

Declares Quarterly Cash Dividend of $0.10 Per Share

MCLEAN, Va., July 27, 2023 /PRNewswire/ -- Primis Financial Corp. (NASDAQ: FRST) ("Primis" or the "Company"), and its wholly-owned subsidiary, Primis Bank (the "Bank"), today reported a net loss of $0.2 million for the quarter ended June 30, 2023, compared to net income of $6.0 million for the quarter ended March 31, 2023 and $5.0 million for the quarter ended June 30, 2022.  Earnings per share ("EPS") for the three months ended June 30, 2023 was a loss of $0.01 on a basic and diluted basis, compared to earnings of $0.24 on a basic and diluted basis for the three months March 31, 2023 and $0.20 on a basic and diluted basis for the three months ended June 30, 2022.  Net income for the six months ended June 30, 2023 was $5.8 million compared to $9.5 million for the six months ended June 30, 2022. Earnings per share for the six months ended June 30, 2023 were $0.23 on a basic and diluted basis, compared to $0.39 on a basic and $0.38 on a diluted basis for the six months ended June 30, 2022. Notable impacts to the quarter include one-time costs tied to cost saving initiatives and impairments and other costs related to the disposal of nonperforming assets, all discussed further below, with a combined impact of $4 million pre-tax.

Commenting on the quarterly results, Dennis J. Zember Jr., President and CEO stated, "We are finishing the second quarter with pro forma capital, liquidity and credit quality levels that are at the top of our peer group.  While the cost to the quarterly results are noticeable to achieve this, I believe operating in this current environment with substantial balance sheet strength is very important.   We have the best funding strategies in our peer group and even further in our very competitive region and our 23% beta on our core bank's interest bearing deposits evidences that strength.  Additionally, our efforts over the past several years to focus away from long-maturity CRE into shorter and higher quality asset classes also brings strength to our balance sheet and confidence in our future growth."

Mr. Zember continued, "The inverted yield curve is a reality, but it's not normal and it will not persist forever.  In this environment, our funding and investment decisions have less incremental profitability, by around 100bps, than normal.  Instead of abandoning our higher quality asset strategies that will produce the margins we want in normal cycles, we have pivoted hard towards much lower costs and a gain on sale model for that production.  Our V1BE delivery service for branch functions will allow us to consolidate branches reduce associated costs and retain virtually all of the low cost deposits.  We went further and have reduced administrative staff and recalibrated other strategies and functions that bring the total cost reductions to approximately 12% of non-mortgage operating expense.    Lastly, we believe our move to the gain on sale model should offset most of the decrease in net interest income and when fully in place, allow us to supercharge our lending efforts and customer acquisition."

Cost Saving Initiative

The Company has put in place a material cost saving project to reduce administrative and branch expenses given the challenging operating environment.  As part of this initiative, the Bank will initially consolidate 8 branch locations, reducing total branches from 32 to 24, with an expected effective date of October 31, 2023.  Branch consolidations are expected to save approximately $2.9 million annually.  In addition to consolidating branches, the Company is reducing administrative expenses by eliminating certain positions and not filling others lost to recent attrition.  Administrative reductions are expected to save approximately $6.5 million annually and is expected to be fully implemented early in the third quarter of 2023.  Combined savings are expected to be approximately $9.4 million annually.  Second quarter 2023 results include approximately $1.5 million of severance and related charges for these activities.

Material Improvement in Asset Quality

During the period or subsequent to the second quarter of 2023, the Company sold or took near term contracts on 80% of its non-performing assets outstanding last quarter and experienced new non-accrual loans of only $0.6 million in the second quarter of 2023.  Upon the expected closing of the contracts, pro-forma non-performing assets to total assets would have been only 0.13% as of June 30, 2023.  Charges associated with impairing the non-performing assets to prepare for the sale totaled $2.3 million in the quarter.

Additionally, the Company ended the quarter with only 4.7% of loans in office CRE.  The Company ended the quarter with 10.9% of loans secured by cash (mostly in life premium finance), 9.1% of loans to medical professionals and 18.1% in first mortgage loans with a weighted average LTV of approximately 51.4%.   Lastly, concentrations in hospitality continued to decline in the second quarter of 2023, and are currently 6.6% of total loans with a current weighted average debt service coverage of over 1.50x as of the end of the second quarter of 2023.

Sweep Program Implementation

The Company implemented a traditional sweep program on the last day of the second quarter of 2023.  The sweep program initially swept $348 million on June 30, 2023 but management expects the amount to grow throughout the third quarter of 2023.  The effect of the program increases the Company's leverage ratio to approximately 8.6% (if in place for all of the second quarter of 2023), a level that the Company's management believes is in the top quartile of its peer group.  Additionally the program reduces uninvested cash on the balance sheet and would have increased the net interest margin by approximately 35 basis points in the second quarter.

With the sweep in place, the Company intends to resume account opening on the digital platform in a measured way with the goal to continue increasing accounts throughout the remainder of 2023.  Additional funds raised through new accounts will not affect the Company's capital or profitability ratios except that incremental spread between the earnings rate and the customer rate will improve the Company's non-interest income.  To achieve national name recognition and credibility, and the inertia and flexibility that comes alongside that image, management believes that the Company would need total accounts of approximately 50,000 or more and believes the sweep program provides the ability to scale to that level with minimal risk or impact to sensitivity or capital levels, while positively impacting the Company's operating results.  Lastly, the sweep program provides customers with enhanced FDIC insurance of up to $2 million per account holder.

Discussion of Employee Fraud

Late in the second quarter of 2023, the Company discovered an employee loan fraud with total exposure of approximately $2.5 million.  The employee, for a period of more than 10 years, would combine expertly crafted but fraudulent documentation and the willing participation of external parties to make or renew loans.   Management believes, on the advice of its counsel, its insurance broker and a third party forensic auditor, that the losses are recoverable under the Company's insurance policies and is working through the claims process.  Importantly, the lender's regular activities originating new loans or renewing existing loans ceased approximately 3 years ago when management changed reporting lines and instituted stricter controls on extensions of credit.  Since, the lender's activities since have centered on servicing the loans with proceeds from the past extensions.

Because of the size and timing of the fraudulent loans, a substantial portion of the loss is reflected in opening equity for the prior periods in the tables at the end of the press release.  Reported periods in the table have been adjusted for intra-period losses attributable to the fraud and is primarily comprised of interest reversals.  No potential recovery of losses from insurance has been recorded at this time while documentation is underway.

Mr. Zember commented, "While the accounting impact from the fraud this quarter is to capital instead of earnings, the situation is unfortunate and frustrating, though isolated and insurable.  Given that the fraud was uncovered late in the quarter, we are in the process of our forensic investigation to support the insurance claim to be filed, but expect future recoveries from the claim."

Financial Highlights for the Period Ended June 30, 2023

• Growth in average deposits of $494 million or 62% annualized versus the previous quarter.  New non-time deposit accounts for the quarter totaled 4,315 accounts with balances of $112 million at the end of the second quarter of 2023.  
• Cumulative beta on the core bank's interest bearing deposits of only 23%.
• Loan production for the quarter of $165 million and loan growth of $130 million, or 17% annualized, from the previous quarter.
• Pro forma non-performing assets to total assets of 0.13% adjusting for contracts in place.
• Strong liquidity and capital ratios.
• Limited exposure to investor CRE, particularly office or retail.
• 71% of loan growth in last 12 months has been either cash secured life premium or medical professional lending.
• Recently announced cost savings initiative and structural changes to branch and digital deposit gathering is expected to reduce costs by an estimated $9.4 million per year and is expected to be fully implemented by October 2023.  
• Reduction in branch count will push total deposits per branch to approximately $153 million (including swept deposits) compared to approximately $85 million per branch at the end of 2022.
• Total deposits fully serviced by V1BE increased to $144 million from the prior quarter with 746 customers to the invitation only service.
• Uninsured deposits make up approximately 16% of total deposits at June 30, 2023.
• Mortgage banking profitable in Q2 with a pre-tax contribution of $647 thousand. 

Net Interest Income

Continued upward pressure on deposit account rates and shifting from non-interest bearing to higher rate products are impacting interest expense and net interest income for the Company and the industry.  Net interest income of $26.2 million increased during the quarter compared to the same period in 2022, but declined when compared to levels recorded in the first quarter of 2023.  Net interest margin for the Company is further affected by excess cash balances that are 11% of average earning assets and investments in loans that have materially better credit quality metrics than the Bank's peer group.  For the second quarter of 2023, the Company reported a core net interest margin of 3.00% which excludes the effect of the excess cash balances now in the Bank's sweep program.

Interest income on earning assets increased during the second quarter of 2023 to $52.7 million compared to $28.2 million for the same period in 2022 and $47.1 million during the first quarter of 2023.  The majority of loan production in the second quarter of 2023 (66%) was either one year loans on fully cash secured lending in the Company's life insurance premium division or lending to medical professionals in the Company's Panacea division.  Production yields across Panacea and Life Premium Finance averaged 7.61%, assuming benefit of an interest rate swap implemented in the second quarter of 2023, versus 7.26% in the first quarter of 2023.

While interest income continued to increase in the second quarter of 2023, incremental costs of interest bearing deposits has increased at a faster pace.  Management has used industry leading liquidity levels to intensely manage the core bank's interest expense in-line or below its direct competition while at the same time exploiting the opportunity to grow accounts on the national platform with acquisition rates that are initially 100 to 150 basis points higher than the long-term maintenance rates for these accounts.  Management expects that, with the sweep program in place, this acquisition strategy will have no impact on the Company's margin or capital ratios while positioning the Company to have a funding source that is profitable and has the growth potential of banks five to ten times the size of Primis Bank.

The core bank's relatively attractive deposit position is seen below:

During the second quarter of 2023, the core bank opened $49 million of new non-CD accounts with initial weighted average costs of 1.4%.  This level of sales activity first illustrates a potential slowdown in rising rates as well as success with the Company's proprietary banking delivery service, V1BE, which contributes heavily to new sales of commercial checking accounts.  During the quarter, customers using the service, which is by invitation only, increased to 746 with total deposits of $144 million.  This compares favorably to customers at December 31, 2022 when the Company had 495 customers with balances of $89 million on the platform.

National platform sales during the quarter centered on savings and interest checking and amounted to growth of $87 million.  The Company slowed new account openings during the quarter to train excess resources that were moved from the core bank platform to the national platform.  We expect these new resources will allow the Company to accelerate account opening and customer outreach throughout the remaining months of 2023.  At the end of the second quarter of 2023, there were approximately 13,000 accounts on the platform serviced by 7 bank professionals and with an average balance and customer age of $75 thousand and 48 years old, respectively.  

Noninterest Income

Noninterest income decreased during the second quarter to $8.5 million when compared to $11.5 million in the first quarter of 2023.  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.  Excluding credit enhancement income, noninterest income increased $0.7 million to $7.3 million in the second quarter of 2023, largely due to increased mortgage banking revenue.

During the second quarter of 2023, the Bank realized $0.2 million of gains associated with a small sale of Panacea commercial loans.  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 $30.6 million for the second quarter of 2023, compared to $27.4 million for the first quarter of 2023. Noninterest expense for the second quarter of 2023 and the first quarter of 2023 included $515 thousand and $873 thousand, respectively, of servicing and other expenses for a third-party managed loan portfolio.  The second quarter of 2023 also included $1.5 million of nonrecurring expenses discussed above versus none in the first quarter of 2023.  Noninterest expense adjusted for third-party portfolio expenses, branch consolidation costs, other restructuring costs and unfunded commitment reserve impacts was $28.8 million and $26.5 million for the second and first quarter of 2023, respectively. Included in noninterest expense was $5.3 million in expenses related to Primis Mortgage in the second quarter of 2023 versus $5.0 million in the first quarter of 2023 with increased mortgage-related expenses driven by increased activity. 

Excluding mortgage, nonrecurring expenses and the third party expenses described above, noninterest expense for the second quarter of 2023 was $23.5 million versus $21.5 million in the linked-quarter.  Compensation and benefits excluding mortgage was $9.6 million in the second quarter of 2023, down from $10.8 million during the first quarter of 2023, primarily due to attrition and reduction in cash bonus accruals.  Offsetting this reduction, FDIC insurance costs increased $0.7 million in the second quarter of 2023 due to the substantial increase in deposits this year.  FDIC insurance costs are expected to decline over the next two quarters as excess deposits are swept to other banks.  Data processing costs were higher by $0.9 million due to high account opening activity late in the first quarter and early in the second quarter of 2023 and which has now abated.  The second quarter of 2023 also included approximately $0.4 million of expense to rebuild and replace debit card stock.  Lastly, the second quarter of 2023 included $0.2 million of expenses for delinquent taxes for the nonperforming loans in the process of selling.

Loan Portfolio and Asset Quality

Loans held for investment increased to $3.17 billion at June 30, 2023, compared to $3.04 billion at March 31, 2023.  Loans held for investment grew at an annualized rate of 17.1%, net of a decline in PPP balances, in the second quarter of 2023.  Loan growth was particularly strong in the Life Premium Finance division in the second quarter of 2023, as discussed below. 

Nonperforming assets, excluding portions guaranteed by the SBA, were $24.7 million at June 30, 2023, compared to $32.8 million at March 31, 2023, while loans rated substandard or doubtful decreased to $33.7 million in the second quarter of 2023 from $39.5 million in the first quarter of 2023.  As discussed above, a substantial portion of the Bank's nonperforming assets in previous periods were 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 was sold in the second quarter of 2023.  The other relationship, primarily consisting of assisted living facilities, is currently at the end of a receiver-managed marketing process with all three facilities under contract to close in the third quarter of 2023.  At that point, the Bank would have approximately $5 million of nonperforming loans.  The Bank had no other real estate owned at the end of the second quarter of 2023.     

The Company recorded a provision for loan losses of $4.3 million for the second quarter of 2023 versus $5.2 million for the first quarter of 2023.  Of this provision, $1.4 million was due to charge-offs 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 $2.96 million for the second quarter of 2023.  $2.3 million of this provision was to increase specific impairments for the pending nonperforming loan resolutions detailed above.  As a percentage of loans, excluding PPP balances, the allowance for credit losses was 1.21% and 1.18% at the end of the second and first quarter of 2023, respectively.

Net charge-offs were $1.6 million for the second quarter of 2023, down from $4.0 million for the first quarter of 2023.  Excluding the losses that are covered by a third-party, the second quarter of 2023 would have experienced $0.2 million of net charge-offs versus $2.1 million of net charge-offs in the first quarter of 2023. 

Deposits and Funding

Total deposits on balance sheet decreased to $3.32 billion from $3.67 billion at March 31, 2023 and were essentially flat at $3.66 billion including excess deposits swept off the balance sheet at June 30, 2023.  Swept deposits receive full FDIC coverage, bringing the Bank's percentage of uninsured or unsecured deposits down to 15.8%.  Liquidity sources represent almost 220% of uninsured or unsecured deposits, up substantially from December 31, 2022.

The Bank paid off $25 million of brokered CDs in the second quarter and has another $75 million of brokered CDs that mature later in 2023.  The Bank has no other wholesale funding and has $348 million of deposits currently sweeping to other banks.  The cost of the swept deposits is materially cheaper than wholesale funding and available to fund further balance sheet growth as needed.

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.  Management believes that over time 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.  Panacea finished the second quarter of 2023 with approximately $292 million in outstanding loans, an increase of $35 million, or 14%, from March 31, 2023.  As highlighted above, Panacea sold approximately $5 million of loans in the second quarter of 2023 for a pre-tax gain of $0.2 million.  Panacea expects profitability to increase materially in the second half of 2023 due to higher gain on sale income in coming quarters.

Panacea-related deposits increased to $46.3 million at June 30, 2023, up 50% from March 31, 2023 and a substantially higher rate of growth than loan growth for the second quarter of 2023.  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 second quarter of 2023 with outstanding balances, net of deferred fees, of $346 million, compared to $237 million at the end of the first quarter of 2023, or an increase of 46%.  The LPF division increased profitability (including assumed cost of funds) at a higher rate than it grew earnings assets as it continues to experience meaningful operating leverage.

Primis Mortgage was profitable for the second quarter of 2023 with pre-tax income of $647 thousand.  The locked pipeline ended the second quarter of 2023 at $61 million, up 15% from March 31, 2023 while loans funded increased to $184 million in the second quarter of 2023, up 50% from the first quarter of 2023.

Shareholders' Equity

Book value per share as of June 30, 2023 was $15.93, a decrease of $0.21 from March 31, 2023.  Tangible book value per share⁽¹⁾ at the end of the second quarter of 2023 was $11.58, a decrease of $0.21 from March 31, 2023.  Shareholders' equity was $393 million, or 10.21% of total assets, at June 30, 2023.  Tangible common equity⁽¹⁾ at June 30, 2023 was $286 million, or 7.64% of tangible assets⁽¹⁾.   Unrealized losses on the Company's available-for-sale securities portfolio increased by $2.6 million to $26.1 million due to marginal decreases in market interest rates during the second quarter of 2023.  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 August 25, 2023 to shareholders of record on August 11, 2023.  This is Primis' forty-seventh consecutive quarterly dividend. 

About Primis Financial Corp.

As of June 30, 2023, Primis had $3.8 billion in total assets, $3.2 billion in total loans and $3.3 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 second quarter results on Friday, July 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/322792474.  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; 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.

SOURCE Primis Financial Corp.