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) (“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 revised to Negative from Stable.

Key Credit Considerations

The Negative Outlook is driven by the below rated peer average regulatory risk-based capital ratios and the diminished and variable profitability performance in recent quarters. While the sale of Life Premium Finance loans (On October 31, 2024, the bank completed the sale of $370 million Life Premium Finance loans to EverBank, National Association for a premium of $6 million) increases capital levels meaningfully (about 1.25% on average), the risk-based capital ratios remain measurably below peers.

The uneven earnings performance is mostly connected to the third-party managed/serviced consumer loan book and is tied to i) a change in accounting policy (unearned interest income and loan loss reimbursements from the third party) and ii) provision expense in 4Q23 related to higher net loss rate associated with the portfolio. Although KBRA recognizes that the accounting adjustments are likely to be one-time in nature and could lead to some level of income recapture, the path to sustained profitability metrics commensurate with the peer group will take time to demonstrate.

The bank's NIM trails modestly below peer since the 2H22. Considering that the bank's digital deposits (30% of total deposits) have a cost generally in line with short-term interest rates (4.99% for 3Q24), it appears that the NIM should expand in the near- to intermediate-term as these deposits reprice.

Excluding third-party managed consumer loans, the bank’s asset quality metrics remain adequate with de minis amount of net charge-offs associated with the bank's core community banking loan portfolio. In addition, the loan portfolio is considered diversified by subsegment and appears granular with relatively strong LTVs generally in the 60% range.

Following the recent loan sale, the bank increased on-balance sheet liquidity to around 10% of total assets. The bank has limited reliance on wholesale funding. On-balance sheet liquidity sources, combined with available borrowing capacity with FHLB and FRB, coverage of uninsured deposits (23% of total deposits) is considered adequate.

Rating Sensitivities

A demonstrated path to stabilized earnings performance consistent with rated peer levels, in conjunction with continued improvement in bank and consolidated capital ratios would be key factors to returning the Outlook to Stable. Conversely, lower ratings would mostly likely emanate during the next 12 – 18 months if bottom line profitability remains volatile or if consolidated and bank regulatory risk-based capital ratios remain well below rated peers.

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