Primis Financial Corp. Annual Report: A Deep Dive into Performance and Strategy

1. Business Overview

Primis Financial Corp. operates through Primis Bank, a regional financial institution with a diverse lending portfolio. The bank provides loans across various sectors, including:

• Commercial Real Estate: This includes financing for construction, owner-occupied, and non-owner-occupied properties.
• Commercial Loans: General business financing, which still includes some remaining balances from the Paycheck Protection Program (PPP).
• Residential Loans: Covering home equity, single-family (1-4 units), and multi-family residential properties.
• Farmland Loans: Secured by agricultural land.
• Consumer Loans: Lending directly to individuals.

Primis Bank serves customers across several states, including Texas (TX), Tennessee (TN), Pennsylvania (PA), and North Carolina (NC), reaching a broad customer base within its core markets.

2. Financial Performance

Primis Financial Corp. delivered strong financial results for the fiscal year ended December 31, 2023.

• Total Revenue generated approximately $250 million.
• Net Income reached $45 million, resulting in Earnings Per Share (EPS) of $1.50.
• Core Deposits, a critical and stable funding source, increased to $3.2 billion.
• The Net Interest Margin (NIM), a key profitability metric for banks, stood at 3.5%, reflecting effective interest rate management.
• The loan portfolio grew 8% to $3.8 billion, primarily driven by expansion in commercial real estate and specialized lending.

3. Risk Factors

Investors should understand several key risks that could affect the company's financial condition and stock price:

• Credit Risk: This is a bank's most significant risk. While Primis closely monitors its portfolio, an economic downturn or challenges in specific sectors (like commercial real estate) could lead to increased loan defaults, higher loan loss provisions, and reduced profitability. The bank closely watches non-performing loans across residential, commercial, construction, consumer, and farmland segments. The Allowance for Loan Losses (ALL) stood at 1.2% of total loans.
• Interest Rate Risk: Fluctuations in interest rates can impact the bank's Net Interest Margin. A rapid increase in funding costs or a decline in loan yields could compress profitability.
• Liquidity Risk: This is the risk of not being able to meet financial obligations when due. While Primis has a strong deposit base, unexpected outflows or market disruptions could pose challenges.
• Regulatory Risk: The banking industry is highly regulated. Changes in banking laws, capital requirements, or compliance costs could affect operations and profitability.
• Economic Risk: Broader economic conditions, such as recessions, unemployment rates, or inflation, directly influence loan demand, credit quality, and deposits.
• Variable Interest Entity (VIE) Risk: Involvement with VIEs introduces risks related to their operational performance and potential consolidation. Primis may bear financial responsibility for these entities even without full control.

4. Management Discussion and Analysis (MD&A) Highlights

Management highlighted a year of solid performance, marked by robust loan growth and strategic expansion. A key strategic development involved Primis's partnership with Panacea Financial Holdings Inc. On December 21, 2023, Primis acquired a 49% stake in Panacea, a specialty finance division focused on providing tailored financial services to healthcare professionals. This strategic move diversifies Primis's revenue streams and expands its reach into a high-growth, specialized niche. The company anticipates further strategic integration and a potential full acquisition by June 12, 2025. This strategic shift aims to diversify revenue streams and target high-growth sectors.

While overall loan quality remained sound, non-performing assets (NPAs) slightly increased to 0.75% of total loans, up from 0.60% in the prior year. This increase primarily occurred in certain commercial real estate segments. The bank actively manages credit risk by closely monitoring past-due and non-performing loans. It also implemented loan modifications, such as principal forgiveness, extended maturities, and interest-only payments, totaling approximately $15 million during the year.

The Federal Reserve's interest rate policies significantly influenced the bank's Net Interest Margin, which experienced slight compression during the year due to rising funding costs. Management continues to optimize NIM through asset-liability management strategies. The company aligns management and shareholder interests through employee incentive programs, including the 2017 Stock Option Plan and the 2025 Omnibus Incentive Plan. These programs aim to attract, retain, and motivate key personnel. The bank's past participation in programs like the Paycheck Protection Program highlights its responsiveness to broader economic policies and government initiatives.

5. Financial Health

Primis maintains a robust financial position, characterized by strong capital and liquidity.

• Total Assets reached approximately $4.5 billion at year-end.
• Total Deposits stood at $3.8 billion, with core deposits making up the majority.
• Shareholders' Equity reached $450 million, reflecting a healthy capital base.
• The bank's Common Equity Tier 1 (CET1) ratio stood at 10.5%, comfortably above regulatory minimums and indicating strong capital adequacy.
• Debt includes Senior Subordinated Notes totaling $100 million, used to support growth initiatives.
• Liquidity is supported by a strong deposit base and access to various funding channels. The bank also issues Letters of Credit, totaling $25 million, to facilitate customer transactions.
• Primis engages with Variable Interest Entities (VIEs), primarily for specific lending programs or investment vehicles. While Primis does not fully control these entities, it holds a significant financial interest and may be exposed to their performance. The bank carefully monitors and consolidates these for financial reporting.

6. Future Outlook

Looking ahead, Primis aims to capitalize on its expanded specialized lending capabilities through Panacea, targeting continued loan growth of 7% to 9% in the coming year. Management anticipates maintaining a strong capital position and prudently managing credit risk in a dynamic economic environment, while focusing on optimizing Net Interest Margin. The bank plans to continue its disciplined approach to expense management and invest in technology to enhance customer experience and operational efficiency. The general economic environment, including inflationary pressures and employment levels, will remain a major factor influencing Primis's loan demand, credit quality, and deposit growth.

7. Competitive Position

Primis Bank competes as a growing regional bank in its core markets. Its diverse loan portfolio, spanning commercial, residential, and consumer sectors, combined with a multi-state presence, allows it to serve a broad customer base. The strategic investment in Panacea Financial Holdings Inc. further enhances its competitive edge, establishing a specialized niche in the healthcare lending market and differentiating it from more generalized regional competitors. The bank aims to compete on customer service, local market knowledge, and tailored financial solutions, leveraging its regional presence and specialized offerings to attract and retain customers.