8-K/A: Primis Financial Revises Q2 Earnings Down on Loan Downgrades

Primis Financial Corp. amended its second-quarter 2025 financial results, reporting a $6.0 million decrease in net income due to loan downgrades and increased provisions for credit losses.

Summary

• Primis Financial Corp. filed an amended 8-K/A report to correct its second-quarter 2025 financial results, reducing net income by $6.0 million.
• Net income available to common shareholders for Q2 2025 was revised to $2.4 million, or $0.10 per diluted share, down from an implied $8.4 million previously.
• The revision was primarily driven by the downgrade of three performing loans: a $6.4 million commercial loan to special mention, a $30.7 million office property loan to substandard accruing, and a $40.1 million office property loan to substandard nonaccrual.
• The $40.1 million nonaccrual loan, which was 57 days past due, required a specific reserve of $7.7 million.
• Additional adjustments included a $0.3 million reversal of accrued interest on the nonaccrual loan and a $0.6 million reversal of pooled reserves on both substandard loans.
• The provision for loan losses increased significantly to $8.3 million for Q2 2025, compared to $1.6 million in Q1 2025 and $3.1 million in Q2 2024, with approximately $7.1 million attributed to the commercial real estate loan downgrades.
• Nonaccrual loans (excluding SBA guarantees) rose to 1.54% of total loans at June 30, 2025, from 0.24% a year prior.
• Despite the revisions, the company reported strong growth in its mortgage warehouse lending, with outstandings reaching $185 million, up 189% from December 31, 2024.
• Panacea Financial's loans grew 34% to $505 million, and its customer deposits increased 58% to $107 million compared to Q2 2024.
• Primis Mortgage closed $323 million in loans, a 52% increase from Q2 2024.
• The core bank's cost of deposits improved to 1.79% in Q2 2025 from 2.20% in Q2 2024, and noninterest bearing demand deposits grew 18% annualized since December 31, 2024.
• Management expects future expense reductions of $0.9 million in Q3 2025 and $1.5 million quarterly thereafter due to core contract renegotiations and vendor consolidation.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the significant downward revision of Q2 net income and the increase in nonaccrual loans and loan loss provisions, indicating unexpected credit quality deterioration. While there are strong strategic growth areas and cost management initiatives, the core reason for this amended filing is a negative financial correction that overshadows some of the operational positives.

Positives

• Net income for the six months ended June 30, 2025, was $25.1 million, significantly up from $5.9 million for the same period in 2024.
• Completed the sale of a portion of Panacea Financial Holdings (PFH) ownership, generating $22.1 million in proceeds and a $7.5 million pre-tax gain in Q2 2025.
• Promotional loans driving volatility decreased significantly to $9.6 million at June 30, 2025, from $77.2 million a year prior, with no additional provision for loan losses on this portfolio in Q2 2025.
• Primis Mortgage closed $323 million in loans in Q2 2025, a 52% increase compared to Q2 2024.
• Mortgage warehouse outstandings grew to $185 million at June 30, 2025, up 189% from December 31, 2024, with committed facilities increasing to $804 million.
• Panacea Financial's loans grew 34% to $505 million, and customer deposits increased 58% to $107 million compared to Q2 2024, with a weighted average cost below 0.25%.
• The core bank's cost of deposits improved to 1.79% in Q2 2025, up to 100 basis points lower than similar-sized peers in the greater DC region.
• The company has zero brokered deposits and no reliance on FHLB borrowings, being 100% funded with customer deposits.
• Noninterest bearing demand deposits grew at an annualized rate of 18% since December 31, 2024, reaching $478 million at June 30, 2025.
• Management anticipates expense reductions of $0.9 million in Q3 2025 and $1.5 million in Q4 2025 and beyond due to core contract renegotiation and vendor consolidation.
• New and renewed loan production in Q2 2025 had a weighted average yield of 7.57%, favorably comparing to 7.25% in Q2 2024.
• Book value per common share increased to $15.27 at June 30, 2025, up $0.05 from June 30, 2024.
• Tangible book value per common share increased to $11.48 at June 30, 2025, up $0.10 from June 30, 2024.
• The Board of Directors declared a quarterly cash dividend of $0.10 per share, marking the 55th consecutive quarterly dividend.

Negatives

• Net income for Q2 2025 decreased by $6.0 million to $2.4 million as a result of loan downgrades and related adjustments.
• A commercial loan with an unpaid principal balance of $6.4 million was downgraded to special mention.
• An office property loan with an unpaid principal balance of $30.7 million was downgraded to substandard accruing.
• An office property loan with an unpaid principal balance of $40.1 million was downgraded to substandard nonaccrual, requiring a specific reserve of $7.7 million.
• Net interest income decreased to $25.2 million in Q2 2025 from $26.4 million in Q1 2025, partly due to a $0.3 million interest reversal on the nonaccrual commercial real estate loan.
• Write-offs of accrued interest on promotional loans that defaulted totaled $2 million in Q2 2025.
• Mortgage profitability was lower due to increasing construction-to-permanent lending, which has a lag until revenue materializes, and $1.2 million in pricing and draw support for new production teams.
• Nonaccrual loans (excluding SBA guarantees) significantly increased to 1.54% of total loans at June 30, 2025, compared to 0.24% at June 30, 2024.
• The provision for loan losses increased to $8.3 million for Q2 2025, up from $1.6 million in Q1 2025 and $3.1 million in Q2 2024, largely driven by the commercial real estate loan downgrades.

Risks

• Instability in global economic conditions and geopolitical matters.
• Impact of current and future economic and market conditions, including seasonality, and conditions in the financial services industry.
• Changes in interest rates, inflation, loan demand, real estate values, or competition, as well as labor shortages and supply chain disruptions.
• The company's ability to successfully implement its strategic and growth initiatives, including Panacea Financial Division, digital banking platform, V1BE fulfillment service, Mortgage Warehouse division, 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.
• Credit risk associated with lending activities, including potential increases in the provision for credit losses.
• Adverse results from current or future litigation, regulatory examinations, or other legal and/or regulatory actions.
• Potential impacts of adverse developments in the banking industry, such as high-profile bank failures, affecting customer confidence, deposit outflows, liquidity, and regulatory responses.
• Ability to identify and address increased cybersecurity risks, including those impacting vendors and other third parties.
• Fraud or misconduct by internal or external actors that may not be prevented, detected, or mitigated.
• Acts of God or of war or other conflicts (e.g., Ukraine/Russia, Israel/Hamas), acts of terrorism, pandemics, or other catastrophic events affecting general economic conditions.

Future Outlook

Management is focused on rebuilding earning assets with quality and yield, expecting moderate growth by year-end 2025 and managing earning assets in the $3.75 billion to $3.85 billion range for coming quarters. This growth is anticipated to carry the net interest margin to the 3.20% range, with further improvements from shifts in deposit mix and costs. Loan and deposit scheduled maturities/repricing are expected to add 10-12 basis points to the margin by year-end 2025 and approximately 35 basis points by year-end 2026. The company aims for slower growth rates in 2026 and beyond, driving profitability from improved deposit mix and operating expense levels, targeting a tangible common equity to tangible assets ratio of 8.50% and a consolidated CET1 of 10.0%.

Management Comments

• "We are pleased with the progress we have made in rebuilding our balance sheet for higher sustained earnings as we enter the second half of 2025."
• "The core bank is maximizing profitability with its enviable core deposit base while pursuing moderate growth."
• "At the same time, mortgage warehouse and Panacea are executing on their tremendous growth potential while non-core portfolios run off."
• "Adjusting for those items and the PFH gain, our run-rate pre-tax pre-provision earnings were approximately $8.1 million in the second quarter."
• "Mortgage profitability was lower due to increasing construction to perm lending that is highly profitable but has a lag until revenue materializes."
• "In the second quarter, the value of that production was approximately $0.9 million pre-tax assuming conservative gain on sale margins."
• "Lastly, we are close to executing on our plan to reduce technology costs and anticipate the savings to begin late in the third quarter of 2025."
• "Along with the end of our core deposit amortization in June, our expected reduction in quarterly expenses is approximately $1.5 million."
• "In total, we believe we have visibility to pre-tax pre-provision earnings of $10.5 to $11 million before the benefits of the profitable growth and balance sheet repricing we have in front of us."

Industry Context

This amendment highlights the ongoing challenges within the commercial real estate sector, particularly office properties, which continues to be a point of vulnerability for many regional banks. While Primis Financial Corp. demonstrates strong performance and strategic growth in specialized lending areas like mortgage warehouse and healthcare (Panacea Financial), the unexpected loan downgrades and significant increase in nonaccrual loans underscore the broader credit quality pressures faced by the banking industry. The company's focus on reducing deposit costs and operating expenses aligns with industry trends to improve efficiency and profitability in a competitive and evolving interest rate environment.

Comparison to Industry Standards

• Primis Financial Corp.'s core bank cost of deposits at 1.79% in Q2 2025 is up to 100 basis points lower than similar-sized peers in the greater DC region, indicating a strong competitive advantage in funding costs.
• The company's tangible book value multiple of 1.04x at July 22, 2025, is below the peer group average of 1.33x, suggesting an attractive entry point compared to peers like BCBP (0.54x), MNSB (0.92x), CCNE (1.04x), MVBF (1.05x), SFST (1.07x), CARE (1.23x), MPB (1.32x), FRBA (1.45x), CFFI (1.53x), BWFG (1.78x), JMSB, SHBI, HTB, CBAN, PFIS, SMBK, ORRF, ACNB, CCBG, MCBS, FCBC, and CHCO.
• The increase in nonaccrual loans to 1.54% of total loans at June 30, 2025, is a notable rise compared to the company's own prior performance (0.24% a year ago) and may warrant closer scrutiny relative to industry averages, especially concerning commercial real estate exposure.
• The company's strategy of having zero brokered deposits and no FHLB borrowings, being 100% funded by customer deposits, positions it favorably against banks that rely on more volatile or expensive wholesale funding sources.
• The growth rates in mortgage warehouse outstandings (189% year-over-year) and Panacea Financial loans (34% year-over-year) demonstrate strong performance in these niche segments, potentially outpacing general industry growth in traditional lending areas.

Stakeholder Impact

• Shareholders: Experience a significant downward revision of Q2 2025 net income and diluted EPS, potentially impacting share price and investor confidence. However, the continued dividend declaration and focus on long-term profitability may provide some stability.
• Customers: Benefit from continued investment in proprietary technology like V1BE and specialized services through Panacea Financial, potentially leading to improved banking experiences and offerings.
• Employees: The company's focus on expense reduction through consolidation may imply ongoing operational streamlining, but specific impacts on employees are not detailed.
• Creditors: The increase in nonaccrual loans and provision for credit losses indicates higher credit risk, which creditors will monitor closely, though capital ratios remain strong.
• Regulators: The loan downgrades and earnings restatement may draw increased scrutiny from regulatory authorities regarding asset quality and risk management practices.

Next Steps

• Continue to implement enhancements to the V1BE proprietary banking app to make it easier to license to other banks, with the first customer expected onboard before the end of 2025.
• Panacea Financial aims to reach 10,000 customers by the end of 2025.
• Continue consolidation of cores and other vendor relationships to achieve further operating expense reductions of $0.9 million in Q3 2025 and $1.5 million in Q4 2025 and beyond.
• Focus on managing earning assets in the $3.75 billion to $3.85 billion range for the coming quarters.
• Continue to shift deposit mix and manage costs to improve net interest margin, with expected additions of 10-12 bps by EOY 2025 and ~35 bps by EOY 2026 from loan/deposit repricing and maturities.
• Pursue additional recoveries on previous charge-offs through the newly built collections and servicing team.

Key Dates

Recommendation

The company presents a mixed picture. On one hand, it demonstrates strong strategic execution in high-growth areas like mortgage warehouse and healthcare lending (Panacea), coupled with effective cost management and a robust core deposit base. These factors suggest long-term potential for improved profitability and operating leverage. On the other hand, the significant downward revision of Q2 earnings due to unexpected loan downgrades and a sharp increase in nonaccrual loans raises concerns about asset quality and credit risk management. While the stock trades at an attractive tangible book value multiple compared to peers, the recent credit issues warrant a cautious approach. A 'hold' recommendation allows investors to observe how the company manages these credit challenges and whether its strategic initiatives can consistently offset such setbacks, providing time for more clarity on the underlying asset quality trends.

Keywords

Financial Services, Banking, SEC Filing, Earnings Report, Loan Quality, Credit Risk, Commercial Real Estate, Mortgage Lending, Digital Banking, Panacea Financial, Financial Performance, Balance Sheet, Net Income, Provision for Loan Losses, Nonaccrual Loans, FRST