KBRA Affirms Ratings for Primis Financial Corp.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for McLean, VA based Primis Financial Corp. (NASDAQ: FRST) ("Primis" or “the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for its subsidiary, Primis Bank ("the bank"). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

In terms of performance, the company’s profitability has moderated considerably in recent periods due to NIM pressure, which is primarily driven by the higher cost of deposit funding, though also in addition to higher trending overhead expenses (relative to rated peers), partly connected to personnel and other operating expenses (e.g., data processing fees connected to the continued investments in digital infrastructure). However, the company's bottom line earnings appear to have stabilized based on 3Q23 earnings excluding the goodwill impairment, aided by operating expense rationalization.

While rapid loan growth in 2022 and YTD23 helped to lessen NIM pressure, higher RWA weighed on the consolidated CET1 ratio, resulting in a level that is now below peers. Consolidated capital ratios remain a credit weakness. However, the capital differential should begin to narrow, as a result of the combination of limited RWA growth and earnings retention (especially if bottom-line earnings improve).

Deposits trends have been mixed in recent quarters, with total deposits increasing by $665 million, or 25%, on a year-over-year basis, whereas noninterest-bearing deposits declined by $197 million to 15% of total deposits, which is below its rated peer group. The increase in total deposits was primarily driven by the deposit growth in high-yielding checking and savings accounts sourced through Primis Bank's digital banking platform. Given the amount and the high-cost nature (YTD3Q23 cost at 4.94%), these digital deposits weighed on the company’s cost of total deposits, which is above peer. To improve NIM, the bank swept off $229 million of the higher-costing portion of the digital deposits through the reciprocal deposit program. As a result, the company’s NIM increased modestly to 3.02% as of 3Q23.

Currently, the bank has no borrowings outstanding with FRB and FHLB; $75 million in brokered deposits are expected to mature soon. Uninsured deposits were $1.1 billion as of 3Q23. Given the relatively small-sized investment securities portfolio in relation to earnings assets, the coverage of uninsured deposits is reliant upon the total available borrowing capacity from FRB and FHLB, which amounts to $1.3 billion.

FRST's ratings are supported by an experienced management team comprised of industry veterans with diversified expertise. Starting in mid-2020, the company’s rebranding efforts and the launching of new business verticals have helped to diversify the company's overall operation, in KBRA's view.

Rating Sensitivities

The Stable Outlook indicates that a rating upgrade is not expected in the medium term. However, the ratings would most likely become pressured if regulatory capital ratios do not steadily improve to levels more consistent with the rated peer group.

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