FRST

Primis Financial Corp. Q1 2025 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2025. Primis Financial Corp. is the bank holding company for Primis Bank, a Virginia state-chartered bank with 24 full-service branches in Virginia and Maryland. The Company operates two primary reportable segments: Primis Bank and Primis Mortgage. A significant corporate event during the period was the deconsolidation of Panacea Financial Holdings, Inc. (PFH) on March 31, 2025, following a change in the relationship that resulted in Primis no longer being the primary beneficiary of the variable interest entity.

Key Financial Metrics

Material Changes vs. Prior Period

• Deconsolidation of PFH: The most significant driver of results was the deconsolidation of PFH, which generated a one-time $24.6 million gain recorded in noninterest income. This gain arose from recognizing the fair value of Primis's retained 19% interest in PFH common stock ($21.2 million) and the removal of noncontrolling interests.
• Net Income Surge: Net income attributable to common stockholders increased 820% year-over-year, primarily due to the PFH gain, a $4.9 million decrease in the provision for credit losses, and a $1.1 million increase in net interest income.
• Loan Portfolio Shifts: Loans held for investment increased by $165.6 million from year-end 2024. This growth was driven by the transfer of $101.7 million of Consumer Program loans from "held for sale" back to "held for investment" and growth in the Panacea and mortgage warehouse portfolios.
• Interest Rate Environment: Net interest margin expanded to 3.15% from 2.84% in Q1 2024. This improvement was driven by a 29 basis point decline in the cost of funds, offsetting lower average interest-earning asset balances.
• Expense Growth: Noninterest expenses increased by $5.0 million year-over-year, driven by higher salaries and benefits (due to mortgage and PFH growth prior to deconsolidation), professional fees, and data processing costs.

Outlook, Risks, and Unusual Items

• Consumer Program Derivative: The Company recorded a loss of $0.3 million on the Consumer Program derivative in Q1 2025, compared to income of $2.0 million in Q1 2024. This reflects fair value adjustments related to loans exiting their no-interest promotional periods.
• Asset Quality: The allowance for credit losses to total loans ratio decreased to 1.45% from 1.86% at year-end 2024. This decline was driven by $11.3 million in net charge-offs, primarily within the Consumer Program portfolio, which exceeded the provision for expected losses.
• Operational Strategy: Management is actively working to consolidate two core operational systems, expecting annual savings of $6 million to $8 million, with impacts anticipated in early to mid-2026.
• Internal Controls: The Company disclosed that disclosure controls and procedures were not effective as of March 31, 2025, due to the continued remediation of previously identified material weaknesses in internal controls over financial reporting. Management asserts the financial statements fairly present the Company's condition.
• Market Risk: Economic Value of Equity (EVE) modeling indicates sensitivity to interest rate changes, with a potential decrease of 26.93% in EVE under a +400 basis point rate shock scenario.

Investor Verification Checklist

• PFH Deconsolidation Accounting: Verify the valuation methodology used for the $21.2 million retained interest in PFH and the sustainability of future earnings without PFH's consolidated results.
• Consumer Program Credit Quality: Review the specific performance metrics of the Consumer Program portfolio, which accounted for the majority of net charge-offs ($10.8 million) and remains a concentration of risk.
• Internal Control Remediation: Monitor the timeline and progress of remediation for the material weaknesses in internal controls over financial reporting.
• Core System Consolidation: Track the execution of the core system consolidation project to confirm the realization of projected cost savings.
• Deposit Mix Stability: Assess the stability of the deposit base, noting that while total deposits were flat, the mix shifted toward lower-cost demand deposits.