10-Q: Primis Financial Q2 2025: Profit Dip Amid Loan Loss Surge

Primis Financial Corp. reported a decline in Q2 2025 net income to $2.4 million, or $0.10 EPS, primarily due to a significant increase in provision for credit losses, despite a substantial gain from the deconsolidation and partial sale of Panacea Financial Holdings investment.

Summary

• Net income available to common shareholders for the three months ended June 30, 2025, totaled $2.4 million ($0.10 basic and diluted earnings per share), a decline from $3.4 million ($0.14 basic and diluted earnings per share) for the same period in 2024.
• Net income available to common shareholders for the six months ended June 30, 2025, totaled $25.1 million ($1.01 basic and diluted earnings per share), an increase from $5.9 million ($0.24 basic and diluted earnings per share) for the same period in 2024.
• The Q2 2025 decline was primarily driven by a $5.1 million higher provision for credit losses, $2.1 million higher noninterest expense, and a $1.9 million decrease in noncontrolling interest income.
• The H1 2025 increase was primarily driven by a $24.6 million gain on deconsolidation of Panacea Financial Holdings (PFH) and a $7.5 million gain on the sale and fair value adjustment of PFH common shares.
• Net interest margin increased to 2.86% for Q2 2025 (from 2.72% in Q2 2024) and to 3.00% for H1 2025 (from 2.78% in H1 2024), primarily due to declines in interest expenses.
• The core net interest margin (excluding Consumer Program portfolio impacts) was 3.12% for both Q2 and H1 2025.
• Provision for credit losses increased 166% to $8.3 million in Q2 2025 compared to $3.1 million in Q2 2024, and increased 3% to $9.9 million in H1 2025 compared to $9.6 million in H1 2024.
• Noninterest income increased 66% to $18.0 million in Q2 2025 and 138% to $50.4 million in H1 2025, largely due to the PFH-related gains.
• Noninterest expenses increased 7% to $31.9 million in Q2 2025 and 12% to $64.4 million in H1 2025, driven by salaries and benefits, data processing, and miscellaneous lending expenses.
• Total assets increased 5% to $3.87 billion at June 30, 2025, from $3.69 billion at December 31, 2024.
• Total loans held for investment increased 8% to $3.1 billion at June 30, 2025, from $2.9 billion at December 31, 2024, driven by Panacea Division and mortgage warehouse lending.
• Total deposits increased by $0.1 billion to $3.34 billion at June 30, 2025, from $3.17 billion at December 31, 2024, with noninterest-bearing demand deposits up 9% to $477.7 million.
• Nonperforming assets as a percentage of total assets (excluding SBA guarantees) significantly increased to 1.90% at June 30, 2025, from 0.29% at December 31, 2024, primarily due to two large loan relationships totaling $63.6 million.
• The allowance for credit losses to total loans decreased to 1.47% at June 30, 2025, from 1.86% at December 31, 2024.
• Book value per common share increased to $15.27 at June 30, 2025, from $14.23 at December 31, 2024, and tangible book value per common share increased to $11.48 from $10.42.
• Capital ratios continue to exceed requirements to be considered well capitalized.

Sentiment

Score: 4

Explanation: While the company achieved significant one-time gains from the Panacea Financial Holdings deconsolidation and sale, core operating performance in Q2 2025 showed a decline in net income driven by a substantial increase in provision for credit losses and rising noninterest expenses. The significant deterioration in asset quality, particularly the sharp rise in nonperforming assets due to two large loan relationships, is a major concern. Although the company maintains strong capital ratios and has growth in specialized lending segments, the unresolved material weaknesses in internal controls and ongoing high operational costs from dual core systems temper the positive aspects.

Positives

• Achieved significant one-time gains from the deconsolidation of Panacea Financial Holdings (PFH) of $24.6 million and a subsequent $7.5 million gain from the sale and fair value adjustment of retained PFH common shares.
• Net interest margin increased to 2.86% in Q2 2025 and 3.00% in H1 2025, driven by a meaningful decrease in the cost of funds.
• The core Bank's cost of deposits was 1.79% in Q2 2025, up to 100 basis points lower than similar sized peers in its footprint.
• Total assets increased 5% to $3.87 billion at June 30, 2025.
• Total loans held for investment grew 8% to $3.1 billion, primarily driven by growth in the Panacea Division and mortgage warehouse lending.
• Mortgage Warehouse outstanding loan balances surged 189% to $184.5 million, with committed facilities up 130% to $804 million.
• Panacea Financial Division outstanding loan balances grew 16% ($71.5 million) and deposits increased 21% to $111.7 million.
• Primis Mortgage locked loan volume increased 57% to $323.5 million in Q2 2025.
• Total deposits increased by $0.1 billion, with noninterest-bearing demand deposits growing 9% to $477.7 million.
• The company is 100% funded with customer deposits, indicating a strong and stable funding base.
• Book value and tangible book value per common share increased by 104 and 106 basis points, respectively.
• Capital ratios (Common Equity Tier 1, Tier 1, Total Risk-Based, and Leverage) continued to exceed 'well capitalized' requirements, demonstrating strong financial health and regulatory compliance.
• Interest income reversals on Consumer Program promotional loans are expected to be substantially lower going forward as most promotional periods have ended.
• Implemented loss mitigation efforts for Consumer Program loans, contributing to lower provisioning for this portfolio in H1 2025.

Negatives

• Net income available to common shareholders declined by $1.0 million in Q2 2025 compared to Q2 2024.
• Provision for credit losses increased significantly by 166% in Q2 2025 to $8.3 million, primarily due to a $7.1 million provision for one commercial real estate loan.
• Asset quality declined substantially, with nonperforming assets as a percentage of total assets (excluding SBA guarantees) rising to 1.90% at June 30, 2025, from 0.29% at December 31, 2024.
• The increase in nonperforming assets was driven by a $40.1 million commercial real estate loan downgraded to substandard and placed on nonaccrual, and two commercial loans totaling $23.5 million becoming 90 days past due.
• Noninterest expenses increased by $2.1 million in Q2 2025 and $7.1 million in H1 2025, driven by higher salaries and benefits (due to new PMC teams and PFH growth), increased data processing costs, and higher miscellaneous lending expenses.
• Consumer Program derivative income decreased significantly (53% in Q2 and 91% in H1) due to promotional loans exiting their period and less origination income.
• Continued high cost of operating two core operational systems, which management is actively working to consolidate.
• FDIC insurance expense increased by $0.4 million in Q2 2025 and $0.6 million in H1 2025 due to an increase in the assessment base from 2024 financial restatements.
• Unrealized losses on available-for-sale securities totaled $20.88 million at June 30, 2025, although management intends to hold these until maturity or recovery.
• Material weaknesses in internal controls over financial reporting have not been fully remediated.

Risks

• Future economic, business, and market conditions, and disruptions in credit and financial markets.
• Potential increases in the provision for credit losses and other general competitive, economic, political, and market factors.
• Uncertainties surrounding geopolitical events, trade policy, taxation policy, and monetary policy impacting future economic growth, including recession.
• Fraudulent and negligent acts by loan applicants, mortgage brokers, and employees.
• Ability to recover certain losses related to fraudulent loans under insurance policies.
• Adverse results from current or future litigation, regulatory examinations, or other legal and/or regulatory actions.
• Changes in local economies in market areas adversely affecting customers and their ability to repay loans or the value of collateral.
• Changes in interest rates, inflation, stagflation, loan demand, real estate values, or competition, as well as labor shortages and supply chain disruptions.
• Changes in the availability of funds resulting in increased costs or reduced liquidity.
• Deterioration or downgrade in the credit quality and credit agency ratings of the investment securities portfolio.
• Impairment concerns and risks related to the investment securities portfolio of collateralized mortgage obligations, agency mortgage-backed securities, and obligations of states and political subdivisions.
• Incurrence and impairment of goodwill associated with current or future acquisitions.
• Increased credit risk in assets and increased operating risk caused by a material change in commercial, consumer, and/or real estate loans as a percentage of the total loan portfolio.
• Concentration of the loan portfolio in loans collateralized by real estate.
• Level of construction and land development and commercial real estate loans.
• Risk related to a third-party's ability to satisfy its contractual obligation to reimburse for waived interest on promotional loans.
• Cybersecurity risks on systems and/or third-party vendors, including data security breaches, malware, and hacking.
• Changes in the levels of loan prepayments and the resulting effects on the value of the loan portfolio.
• Failure of assumptions and estimates underlying the establishment of and provisions made for credit losses.
• Ability to expand and grow business and operations, including acquisitions, and realize expected cost savings and revenue enhancements.
• Government intervention in the U.S. financial system, including legislative, tax, accounting, and regulatory actions and reforms.
• Potential implementation of a regulatory reform agenda under the new presidential administration that is significantly different.
• Increased competition for deposits and loans adversely affecting rates and terms.
• The continued service of key management personnel.
• Potential environmental liability risk associated with properties assumed upon foreclosure.
• Increased asset levels and changes in the composition of assets and the resulting impact on capital levels and regulatory capital ratios.
• Risks of current or future mergers and acquisitions, including implementation time and cost, and potential failure to achieve expected gains.
• Increases in regulatory capital requirements for banking organizations generally.
• Acts of God or of war or other conflicts, civil unrest, acts of terrorism, pandemics, or other catastrophic events.
• Changes in accounting policies, rules, and practices and applications or determinations made thereunder.
• Any inability or failure to implement and maintain effective internal control over financial reporting and/or disclosure control or inability to expediently remediate existing material weaknesses.
• Risk that deferred tax assets could be reduced if future taxable income is less than currently estimated, if corporate tax rates are less than current rates, or if stock sales trigger NOL carryforward limitations.
• Ability to attract and retain qualified employees, including as a result of heightened labor shortages.
• Risks related to Diversity, Equity, and Inclusion (DEI) and Environmental, Social, and Governance (ESG) strategies and initiatives.
• Negative publicity and the impact on reputation.
• Ability to realize the value of derivative assets that are recorded at fair value due to changes in fair value driven by actual results being materially different than assumptions.
• Ability to grow the mortgage warehouse business and achievement of certain margin results.

Future Outlook

Management expects income from new Primis Mortgage Company (PMC) production teams to exceed the upfront costs incurred as they rebuild their pipeline. The company anticipates a resolution with its core processing vendor in the second half of 2025, which is expected to lead to significant reductions in data processing expense. Funding requirements for commitments are expected to be met in the normal course of business. The company does not anticipate the recently signed One Big Beautiful Bill Act (OBBBA) will have a material impact on its consolidated financial position or results of operations, absent any further changes in law.

Management Comments

• "The second quarter of 2025 demonstrated progress in key areas that are expected to continue and build through the rest of the year and into 2026."
• "Our strategy centers on growing earning assets back to previous levels after the sale of our Life Premium Finance division and achieving higher production and profitability in our retail mortgage business."
• "We expect income from their production [new PMC teams] to exceed the upfront costs incurred."
• "We are in negotiations with our current core provider to consolidate into one core and are reevaluating other vendor relationships. We expect to have resolution with our core processing vendor of our path forward to a consolidated core environment in the second half of 2025 that will begin to provide significant reductions in data processing expense in the future."
• "We believe that the allowance for credit losses as of June 30, 2025 is sufficient to absorb future expected credit losses in our loan portfolio based on our assessment of all known factors affecting the collectability of our loan portfolio."
• "Our assessment involves uncertainty and judgment; therefore, the adequacy of the allowance for credit losses cannot be determined with precision and may be subject to change in future periods."
• "We intend to hold these securities [available-for-sale] until maturity or recovery of the value and do not anticipate realizing any losses on the investments."

Industry Context

The filing indicates Primis Financial Corp.'s strategic focus on specialized lending segments, particularly the growth in mortgage warehouse lending and the Panacea Financial Division (targeting the healthcare industry). This aligns with a broader industry trend of banks seeking niche markets for growth. The discussion of declining interest expenses due to lower fed funds borrowing rates reflects the impact of broader monetary policy on the banking sector's cost of funds. The significant increase in nonperforming assets, especially in commercial real estate, suggests potential vulnerabilities in specific asset classes or regional real estate markets, which could be a broader industry concern. The company's efforts to consolidate core operating systems are a common efficiency drive across the banking industry to reduce operational costs and improve scalability.

Comparison to Industry Standards

• The core Bank's cost of deposits at 1.79% in Q2 2025 is reported to be up to 100 basis points lower than similar sized peers in its core Bank's footprint, indicating a competitive advantage in funding costs.
• The company is 100% funded with customer deposits, with no wholesale funding, which is a strong liquidity position compared to many financial institutions that rely on more volatile wholesale funding sources.
• Capital ratios (Common Equity Tier 1, Tier 1, Total Risk-Based, and Leverage) consistently exceed Basel III 'well-capitalized' requirements, demonstrating a robust capital position relative to regulatory benchmarks for banking organizations.

Management Changes

Corporate Governance

Legal Proceedings

• Primis and Primis Bank are parties to various claims and proceedings arising in the ordinary course of business, including employment-related claims, lender liability, and breach of contract.
• Management believes that these matters, individually and in the aggregate, will not have a material adverse effect on the Bank's financial condition or results of operations.
• No proceedings are pending or, to management's knowledge, threatened that represent a significant risk against Primis or Primis Bank as of June 30, 2025.

Related Party Transactions

• Following the deconsolidation of Panacea Financial Holdings (PFH) on March 31, 2025, transactions between Primis and PFH are considered related party transactions.
• The primary transactions involve quarterly payments between the parties driven by the financial performance of loans PFH originates in the Panacea Division of the Bank.
• As of June 30, 2025, the Company had a receivable of $3.4 million included within other assets on the balance sheet related to a payment due from PFH.
• The Company does not have an obligation to provide any future monetary support to PFH.

Stakeholder Impact

• Shareholders: Experienced a decline in Q2 2025 net income and a significant increase in nonperforming assets, which could negatively impact investor sentiment. However, the substantial H1 2025 net income increase due to PFH gains and rising book/tangible book value per share are positive. The share repurchase program could also benefit shareholders.
• Employees: New lending teams were hired at Primis Mortgage Company (PMC), indicating growth and new opportunities in that segment. Three primary executives of Panacea Financial Holdings (PFH) resigned from their management-level positions within Primis's Panacea Financial Division.
• Customers: The continued growth in the Panacea Division and Mortgage Warehouse lending indicates expanded service offerings and access to credit. Consumer Program loan modifications are being offered to enhance collections and mitigate charge-offs.
• Creditors: The company's strong capital ratios and 100% funding from customer deposits indicate a stable financial position. However, the increase in nonperforming assets, particularly from two large loan relationships, could be a point of concern if asset quality trends worsen.

Next Steps

• New Primis Mortgage Company (PMC) production teams are expected to rebuild their pipeline and generate income exceeding upfront costs.
• Resolution with the core processing vendor is expected in the second half of 2025 to consolidate systems and reduce data processing expense.
• Continued efforts to maximize collectability of Consumer Program loans through loss mitigation strategies.
• Monitoring of the One Big Beautiful Bill Act (OBBBA) for potential impacts on consolidated financial position or results of operations.
• Continued remediation of material weaknesses in internal controls over financial reporting.

Key Dates

Recommendation

While Primis Financial Corp. reported a substantial increase in year-to-date net income driven by one-time gains from the Panacea Financial Holdings deconsolidation and sale, the core Q2 2025 results show a concerning trend. The significant increase in provision for credit losses and the sharp rise in nonperforming assets, particularly from two large commercial relationships, indicate deteriorating asset quality that warrants close monitoring. Although the company boasts strong capital ratios and a 100% customer deposit funding base, ongoing material weaknesses in internal controls and persistent high data processing costs present operational headwinds. The strategic growth in mortgage warehouse and Panacea divisions is positive, but the immediate asset quality concerns suggest a 'hold' position until there is clear evidence of stabilization in credit quality and successful remediation of operational inefficiencies.

Keywords

Financial Services, Banking, Commercial Real Estate, Mortgage Lending, Panacea Financial, Loan Portfolio, Deposits, Credit Quality, SEC Filing, 10-Q, Financial Results, Capital Ratios, Risk Management, Interest Rates, Loan Losses, Virginia, Maryland