FRST Primis Financial Corporation

MCLEAN, Va., Nov. 9, 2023 /PRNewswire/ -- Primis Financial Corp. (NASDAQ: FRST) ("Primis" or the "Company"), and its wholly-owned subsidiary, Primis Bank (the "Bank"), today amended its previously announced financial results for the three and nine months ended September 30, 2023.

Revised results reflect a non-cash after-tax goodwill impairment charge of $11.2 million. As required under generally accepted accounting principles, the Company tests goodwill for impairment at least annually and more frequently if there are indications that goodwill could be impaired. Accordingly, the Company engaged an independent valuation firm to evaluate the Company's goodwill for impairment as of September 30, 2023. While the significant decline in the Company's stock price in the third quarter to a level substantially below book value indicated the possible existence of impairment at September 30, 2023, preliminary valuation results at the time of the Company's October 26, 2023 earnings release, using consistent techniques from impairment testing in previous periods, supported a fair value of the reporting unit in excess of book value, indicating that no goodwill impairment was necessary.

Because of the significant difference between the preliminary fair value as modeled and the Company's market capitalization at September 30, 2023, the Company has continued to analyze the goodwill valuation results, including stressing certain assumptions and inputs to the modeling, subsequent to its previously announced financial results for the third quarter of 2023. After further analysis of lower fair values produced under more conservative assumptions and inputs, including lower assumed cash flows and a higher discount rate, have caused the Company to conclude that an $11.2 million partial impairment of goodwill is warranted. This impairment is a non-cash accounting charge to earnings and has no impact on the Company's core net income, profitability, cash flows or liquidity, nor does it impact tangible or regulatory capital ratios which already exclude goodwill.

The Company is amending its previously announced third quarter financial results as provided below, which replaces the earnings release of October 26, 2023 in its entirety.

Third Quarter Results

The Company reported a net loss of $3.6 million for the quarter ended September 30, 2023, compared to net income of $5.0 million for the quarter ended September 30, 2022. Diluted earnings per share ("EPS") for the three months ended September 30, 2023 was a loss of $0.14 versus earnings of $0.20 per diluted share reported in the third quarter of 2022. For the year-to-date period in 2023, the Company reported earnings and diluted earnings per share of $2.2 million and $0.09, respectively, compared to $14.5 million and $0.59, respectively, in the same period in 2022.

Excluding nonrecurring items, including the goodwill impairment charge in the third quarter of 2023, adjusted net income was $7.7 million for the quarter ended September 30, 2023, compared to adjusted net income of $5.3 million for the quarter ended September 30, 2022. Operating earnings per diluted share was $0.32 for the three months ended September 30, 2023, an increase of 52% from $0.21 in the year-ago period. For the year-to-date period in 2023, the Company reported adjusted earnings and operating earnings per diluted share of $14.7 million and $0.60, respectively, compared to $15.3 million and $0.62, respectively, in the same period in 2022.

The results of the third quarter of 2023 reflected material improvement in operating results across several fronts. Notably, the Company:

• Operating return on average assets⁽¹⁾ was 81 basis points, up from 9 basis points in the second quarter and 64 basis points a year ago.
• Generated a margin of 3.02%, up from 2.65% linked quarter due to sweeping off excess funds and tightly managing the balance sheet to maximize incremental spreads.
• Sold approximately $15 million of loans for a gain of approximately $400 thousand and participated out another $10 million to manage balance sheet capacity.
• Reduced noninterest expense, excluding goodwill impairment, to $25.9 million for the third quarter of 2023, compared to $30.6 million for the second quarter of 2023. Excluding other nonrecurring, mortgage and unfunded reserve expenses, noninterest expense was $20.9 million in the third quarter, down from $24.0 million in the second quarter of 2023 on a comparable basis.
• Maintained peer-group leading liquidity with no FHLB borrowings, only $75 million of brokered CDs and $228.7 million of off-balance sheet funds swept off at September 30, 2023.
• 21% reduction in nonperforming assets, excluding SBA guarantees, linked-quarter to $19.6 million.  Subsequent to quarter end, additional resolution occurred that results in the following pro forma credit metrics:
  • Nonperforming assets to total assets of 0.17%
  • Loan loss reserve as a percentage of nonperforming assets of 550%.
• Grew all capital ratios including TCE/TA.  Leverage ratio increased to 8.80%.
• Opened 2,404 new deposit account relationships totaling $72.7 million with a weighted average cost of only 1.80%.

Commenting on the quarterly results, Dennis J. Zember Jr., President and CEO stated, "We are excited about the improvement in our results and believe we are positioned very well for the current environment. The Bank experienced a great quarter with an improved margin, substantial new deposit account openings at low rates and downward trends on operating expenses ahead of the planned consolidation of eight retail banking offices in late October 2023. There is building momentum at the community bank with our technology and convenience factors, resulting in us seeing material deposit opportunities that otherwise would not be available to the Bank.

As far as our positioning in the current environment, we have existing liquidity levels that are substantial with deposit growth strategies that are very incremental. As of this press release, we have only 0.17% of non-performing assets with no concentrations of credit in areas of concern to investors. Lastly, we have strong capital levels that we expect to build further during the upcoming periods and believe position us to have all the strategic options we need."

Net Interest Income

Net interest income increased approximately $1.0 million to $27.1 million during the quarter compared to the second quarter of 2023 as higher earning asset yields offset increased funding costs. For the third quarter of 2023, the Company reported a net interest margin of 3.02% versus 2.65% for the second quarter of 2023. The second quarter included substantial excess cash which lowered margin prior to the sweep program implementation on June 30, 2023. Adjusting for excess cash, net interest margin in the second quarter would have been 3.00%.

Commenting on net interest margin trends, Mr. Zember said, "On a comparable basis, when you exclude the excess liquidity and deposits, our margin improved linked-quarter. Further, it was higher in the month of September at 3.05%. To be recording increasing margins in this environment is notable, but to do this alongside the substantial growth in deposit levels our bank is experiencing is remarkable. Our deposit growth engine, with unique technology and convenience factors combined with the sales intensity at our community bank is fueling this success. For the third quarter, we opened new deposit accounts totaling $73 million with a weighted average cost of 1.80%. We funded new loans in the Bank totaling $104 million with a weighted average yield of 7.95%, producing incremental spreads of 5.18% on new business in the quarter. This kind of incremental momentum is critical right now as the industry grapples with rising deposit costs and clearly gives us an advantage over our peers."

Interest income on earning assets decreased during the third quarter of 2023 to $50.5 million compared to $52.7 million during the second quarter of 2023 due to lower interest on excess cash balances. Yield on earning assets and loans held for investment were 5.63% and 5.86%, respectively, up 29 basis points and 26 basis points, respectively, from the second quarter of 2023.

Interest expense declined $3.2 million in the third quarter of 2023 from the second quarter of 2023 as a result of excess deposits swept off of the balance sheet beginning June 30, 2023. Cost of deposits declined 10 basis points to 2.60% in the third quarter from 2.70% in the second quarter of 2023 as higher cost deposits entered the sweep program. Management continues to leverage the strong liquidity generated by the Bank's digital platform to conservatively manage the cost of deposits in the core bank. As highlighted by the table below, core bank deposit costs increased 11 basis points in the third quarter while the cost of wholesale funding options, using three month FHLB advance rates as a proxy, increased 23 basis points in the quarter.

Noninterest Income

Noninterest income increased during the third quarter to $9.9 million when compared to $8.5 million in the second quarter of 2023. Excluding credit enhancement income from a third-party managed portfolio, noninterest income increased $0.6 million to $7.9 million in the third quarter of 2023, largely due to increased gain on sale income and increased BOLI income.

During the third quarter of 2023, the Bank realized $0.4 million of gains associated with the sale of $15 million of Panacea commercial and consumer loans. Another $9 million of Panacea loans was classified as held for sale at September 30, 2023 and is expected to be sold early in the fourth quarter. Management sees continued interest in the division's consumer and commercial loans and believes fourth quarter loan sales will exceed third quarter amounts.

Noninterest Expense

Noninterest expense was $37.1 million for the third quarter of 2023, compared to $30.6 million for the second quarter of 2023. As noted above, noninterest expense for the third quarter of 2023 included a $11.2 million goodwill impairment charge. Noninterest expense for the third quarter of 2023 and the second quarter of 2023 included $337 thousand and $515 thousand, respectively, of servicing and other expenses for a third-party managed loan portfolio. The third quarter of 2023 also included $0.2 million of nonrecurring expenses while the second quarter included $1.5 million of branch consolidation costs. Noninterest expense adjusted for goodwill impairment, third-party portfolio expenses, branch consolidation costs, other nonrecurring costs and unfunded commitment reserve impacts was $25.6 million and $28.8 million for the third and second quarter of 2023, respectively. Included in noninterest expense was $5.1 million in expenses related to Primis Mortgage in the third quarter of 2023 versus $5.3 million in the second quarter of 2023 with decreased mortgage-related expenses driven by slightly lower activity.

Excluding goodwill impairment, mortgage, nonrecurring expenses, unfunded reserve expenses and the third party expenses described above, noninterest expense for the third quarter of 2023 was $20.5 million versus $23.5 million in the second quarter. Compensation and benefits excluding mortgage was $9.7 million in the third quarter of 2023, down from $10.8 million during the second quarter of 2023, primarily due to administrative cost saves announced last quarter and attrition. FDIC insurance costs decreased $0.25 million in the third quarter of 2023 due to lower balances as excess deposits were swept to other banks. Data processing costs were lower by $0.6 million due to low account opening activity in the third quarter of 2023. Other operating expenses declined $2.0 million from the second quarter due to generally tighter expense controls and lower customer fraud losses.

The Company continues to pursue efficiencies to enhance operating leverage. As previously disclosed, eight branch locations will be consolidated in the fourth quarter of 2023 which will positively impact noninterest expense going forward.

Loan Portfolio and Asset Quality

Loans held for investment decreased to $3.15 billion at September 30, 2023, compared to $3.17 billion at June 30, 2023. The Company sold or participated out approximately $25 million of loans in the third quarter and moved another $9 million to loans held for sale at September 30, 2023. Adjusting for these activities, loans would have increased slightly in the third quarter of 2023 versus the second quarter of 2023.

Nonperforming assets, excluding portions guaranteed by the SBA, were $19.6 million at September 30, 2023, compared to $24.7 million at June 30, 2023, while loans rated substandard or doubtful decreased to $28.8 million in the third quarter of 2023 from $33.7 million in the second quarter of 2023. Included in those balances is one remaining assisted living problem credit outstanding at September 30, 2023 related to the relationship discussed in previous quarters and with a book balance of $13.1 million. This credit was resolved in early October 2023 bringing pro forma nonperforming assets to $6.5 million as of September 30, 2023. The Bank had no other real estate owned at the end of the third quarter of 2023.

The Company recorded a provision for loan losses of $1.6 million for the third quarter of 2023 versus $4.3 million for the second quarter of 2023. Of this provision, $2.1 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 recovery for loan losses would have been $0.5 million for the third quarter of 2023 due to lower loan balances and lowered modeled losses on certain portfolios, particularly Panacea and Life Premium Finance. As a percentage of loans, excluding PPP balances, the allowance for credit losses was 1.14% and 1.21% at the end of the third and second quarter of 2023, respectively.

Net charge-offs were $4.3 million for the third quarter of 2023, up from $1.6 million for the second quarter of 2023. Excluding the losses that are covered by a third-party, the third quarter of 2023 would have experienced $2.2 million of net charge-offs versus $0.2 million of net charge-offs in the second quarter of 2023. Over half of the core charge-offs were related to the partial resolution of the assisted living relationship detailed previously that had been reserved for in prior quarters.

Deposits and Funding

Total deposits on the balance sheet at September 30, 2023 decreased to $3.29 billion from $3.32 billion at June 30, 2023 with excess deposits and associated cash balances swept off the balance sheet to optimize liquidity. Swept deposits receive full FDIC coverage, bringing the Bank's percentage of uninsured or unsecured deposits down to 20%. Liquidity sources represent almost 185% of uninsured or unsecured deposits, up substantially from December 31, 2022.

Deposit growth in the community bank continues to benefit from better technology and unique convenience factors. During the third quarter, the community bank attracted $50 million in new deposit relationships with a weighted average cost of 0.39%. V1BE, the Bank's proprietary delivery tool increased total users by 21% during the quarter, from 838 at the end of the second quarter of 2023 to 1,013 at the end of the third quarter of 2023.

During the third quarter, the Bank opened 1,369 new deposit account relationships on the digital platform with a weighted average cost of 4.9%. This new customer growth is a direct result of referrals made to us by existing customers with no marketing costs incurred. At quarter end, the Bank had 13,740 digital accounts with $998.4 million in total deposits, average balances of $72,600 per account and an average age of 49.

The Bank has $75 million of brokered CDs that mature later in 2023. The Bank has no other wholesale funding and has $228.7 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

Panacea continues to experience substantial growth alongside the development of its nationally-recognized brand. Panacea finished the third quarter of 2023 with approximately $299 million in outstanding loans, an increase of $8 million from June 30, 2023. As highlighted above, Panacea sold approximately $15 million of loans in the third quarter of 2023 for a pre-tax gain of $0.4 million. Panacea has $9 million of loans categorized as held for sale at September 30, 2023 in advance of a near-term loan sale and expects further loan sales throughout the fourth quarter.

Panacea-related deposits increased to $53.3 million at September 30, 2023, up 15% from June 30, 2023 and a substantially higher growth rate than the growth in loans for the third 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 third quarter of 2023 with outstanding balances, net of deferred fees, of $360.7 million, compared to $346.2 million at the end of the second quarter of 2023, or an increase of 4%. LPF also participated out approximately $10 million of loans in the third quarter.

Primis Mortgage was profitable for the third quarter of 2023 with pre-tax income of $697 thousand. The locked pipeline ended the third quarter of 2023 down 7% from June 30, 2023 while loans funded decreased to $169 million in the third quarter of 2023 from $184 million in the second quarter of 2023. Primis Mortgage continues to aggressively manage costs to preserve profitability in a lower volume environment.

Shareholders' Equity

Book value per share as of September 30, 2023 was $15.51, a decrease of $0.42 from June 30, 2023. Tangible book value per share⁽¹⁾ at the end of the third quarter of 2023 was $11.63, an increase of $0.05 from June 30, 2023. Shareholders' equity was $382.9 million, or 10.0% of total assets, at September 30, 2023. Tangible common equity⁽¹⁾ at September 30, 2023 was $287.1 million, or 7.72% of tangible assets⁽¹⁾. Unrealized losses on the Company's available-for-sale securities portfolio increased by $4.6 million to $30.5 million due to increases in market interest rates during the third quarter of 2023. The Company has the intent and ability to hold these securities until maturity or recovery of the value and does not anticipate realizing any losses on the investments.

The Board of Directors declared a dividend of $0.10 per share payable on November 24, 2023 to shareholders of record on November 10, 2023. This is Primis' forty-eighth consecutive quarterly dividend.

About Primis Financial Corp.

As of September 30, 2023, Primis had $3.8 billion in total assets, $3.1 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.

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.