Primis Financial: Strategic Pivot Towards Profitability Unlocked (FRST) - FRST Stock Research Report

## Executive Summary / Key Takeaways * Primis Financial is executing a strategic pivot focused on shedding legacy issues and leveraging specialized business lines and digital capabilities to drive significant Return on Assets (ROA) expansion. * First quarter 2025 results showed a substantial increase in reported net income, primarily boosted by a $24.6 million gain from the deconsolidation of Panacea Financial Holdings (PFH), highlighting underlying value. * Management has outlined clear, quantifiable targets for ROA improvement through earning asset growth (adding 24 bps), enhanced mortgage profitability (adding 15 bps), and core processing consolidation (adding 15-18 bps), aiming to exceed a 1% ROA. * The company is actively addressing past challenges, including the cleanup and run-off of the volatile Consumer Program loan portfolio and the remediation of internal control weaknesses, positioning for cleaner future earnings. * Competitive advantages stem from a relationship-focused core bank, a low-cost deposit base relative to peers, and differentiated digital/technology platforms supporting both community banking and national lending strategies. ## Unlocking Value: A Strategic Transformation Underway Primis Financial Corp. (FRST) operates as the bank holding company for Primis Bank, a Virginia state-chartered bank with roots tracing back to 2005. While historically focused on traditional community banking in Virginia and Maryland through its branch network, Primis has strategically evolved, embracing specialized lending verticals and digital platforms to expand its reach and enhance efficiency. This evolution has positioned the company as a niche player in the regional banking landscape, seeking to differentiate itself against larger, more diversified competitors like Atlantic Union Bankshares Corporation (TICKER:ABCB) and C&F Financial Corporation (TICKER:CFFI), as well as fintech challengers. The competitive environment for deposits remains intense, yet Primis' core bank has demonstrated a notable advantage, maintaining a cost of deposits consistently 40 to 50 basis points lower than community bank peers in the Mid-Atlantic and easily 100 basis points lower or more than comparably sized competition. This is attributed to cultivating lifetime customer relationships, leveraging technology like the V1BE fulfillment service for commercial clients, and the strategic interplay with its digital platform. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, Primis' focused approach in commercial real estate and specialized lending segments suggests a targeted market positioning. Central to Primis' modern strategy is its differentiated technology. The company has invested in a digital banking platform offering a fully digital full-service checking account, attracting approximately 18,000 customers. This platform is not merely a customer-facing tool; it serves a critical strategic function by funding national lending initiatives like the Panacea Financial Division and the Mortgage Warehouse business. This allows the core community bank to maintain its attractive, lower-cost deposit base without the pressure to fund higher-growth, national ventures, a key competitive dynamic that sets Primis apart from more traditional regional banks. Management highlights that the operating expense burden on these digital deposits is significantly lower, estimated at about 15% of the cost in the community bank, supporting the thesis that digital customers, being more adept with technology, are less costly to serve. The company's strategic journey has included significant operational shifts, such as consolidating its branch footprint from 42 to 24 locations while remarkably retaining 95% of those customers. This move, supported by digital capabilities, underscores the company's commitment to efficiency. However, this period of expansion and technological adoption has not been without challenges, notably the introduction of the third-party originated Consumer Program loans, which later became a source of significant accounting complexity and volatility. ## Performance Amidst Transformation Primis' recent financial performance reflects a company in the midst of a significant strategic transformation, working to resolve past issues while building momentum in key growth areas. The first quarter of 2025 saw reported net income available to common shareholders surge to $22.6 million, or $0.92 per diluted share, a dramatic improvement from $2.5 million, or $0.10 per diluted share, in the same period of 2024. This increase was substantially driven by a $24.6 million gain recognized from the deconsolidation of Panacea Financial Holdings (PFH) as of March 31, 2025.

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Adjusting for the consolidated pre-tax loss from PFH and certain one-time items, the core pre-tax net income in Q1 2025 was approximately $7.5 million, translating to an adjusted ROA of 66 basis points. While this ROA is below management's ultimate target, it provides a baseline from which planned improvements are expected to build. Net interest income saw a modest increase of $1.1 million year-over-year in Q1 2025, primarily due to a $3.7 million reduction in interest expense. This was achieved despite a $2.6 million decline in interest income resulting from a $184 million decrease in average earning assets, largely attributable to the sale of the Life Premium Finance (LPF) portfolio in the fourth quarter of 2024. The net interest margin (NIM) expanded notably, reaching 3.15% in Q1 2025, up 31 basis points from 2.84% in Q1 2024. This margin expansion was predominantly fueled by a 34 basis point decline in the rate paid on average interest-bearing liabilities, reflecting successful deposit cost management, particularly on the digital platform, which benefited from a 100 basis point drop in the fed funds borrowing rate over the prior year. Yields on average interest-earning assets saw a slight increase of 4 basis points, with loans held for investment yields rising 15 basis points as new loans originated at higher market rates replaced maturing lower-rate loans. Noninterest income experienced a significant increase of $22 million in Q1 2025, dominated by the PFH deconsolidation gain. Excluding this gain, noninterest income was impacted by volatility in the Consumer Program derivative, which saw fair value loss adjustments of $2.9 million in Q1 2025, driven by loans exiting their no-interest promotional periods. Noninterest expense rose by $5.0 million, or 18%, in Q1 2025. This increase was primarily due to higher salaries and benefits (reflecting growth in the mortgage business and PFH expenses prior to deconsolidation), increased professional fees (related to audit work with new auditors), and elevated data processing costs associated with operating two core systems.

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The company's balance sheet remained relatively stable, with total assets at $3.70 billion as of March 31, 2025, similar to year-end 2024. Total deposits were flat at $3.17 billion, although the mix improved slightly with an increase in lower-cost demand deposits. The ratio of gross loans (excluding held for sale) to deposits increased to 96% from 90%, indicating increased loan utilization relative to the deposit base. Liquidity is supported by substantial borrowing capacity from the FHLB ($541.3 million) and the Federal Reserve Bank discount window ($550.5 million), none of which was utilized as of March 31, 2025. Capital ratios improved in Q1 2025, with CET1, Tier 1, and Total risk-based capital ratios increasing by 61 bps, 61 bps, and 43 bps, respectively, maintaining the bank's "well capitalized" status. ## Strategic Momentum and Future Outlook Management is clear that the Q1 2025 results, while showing a significant reported gain, represent a stepping stone towards materially higher profitability. The strategic focus is squarely on executing initiatives designed to drive ROA above the 1% threshold. The plan centers on three key pillars: growing earning assets, enhancing mortgage division profitability, and consolidating core processing systems. Earning asset growth is targeted to return to approximately $3.75 billion. Management expects this growth to be fueled by the core bank ($100 million), Mortgage Warehouse ($150 million), and Panacea ($125 million) throughout 2025. This growth is anticipated to add 24 basis points to ROA without a proportional increase in operating expenses. The Mortgage division is tasked with adding 15 basis points to ROA, building on its momentum (locked volume up 27% in Q1 2025, recruiting adding $500 million annualized capacity) and higher profitability per volume achieved in Q1 2025 compared to the prior year. A significant future catalyst is the planned consolidation of the company's core processing systems. Operating two systems is a known expense drag, and consolidating to one is expected to yield substantial annual savings, estimated at $6 million to $8 million, which management projects could add 15 to 18 basis points to ROA. This initiative is expected to begin impacting noninterest expense in early to mid-2026. The deconsolidation of PFH, effective March 31, 2025, is expected to improve reported ROA by removing PFH's operating losses from consolidated results. Furthermore, the retained common stock investment in PFH, valued at $21.2 million at deconsolidation, is expected to contribute to tangible book value. A subsequent announcement in June 2025 of a signed term sheet to sell a portion of these PFH shares for approximately $22 million is anticipated to generate an additional pre-tax gain of $6.5 million to $7.0 million, further enhancing capital and providing flexibility for strategies like share repurchases. While the strategic path is clear, risks remain. The Consumer Program loan portfolio, despite being moved back to held for investment with intent to run off, continues to pose credit risk. Although management is confident in existing reserves and discounts (128% coverage of non-current balances by allowance/discount as of March 31, 2025), charge-offs are expected to continue as the portfolio amortizes. Operational risks are present in the ongoing remediation of internal control weaknesses and the complexity of consolidating core systems. Interest rate risk persists, although management modeling suggests manageable impacts on EVE and NII within policy guidelines. The competitive landscape, particularly the efficiency advantages of larger peers and the disruptive potential of fintech, necessitates continued focus on leveraging technology and maintaining competitive pricing. ## Conclusion Primis Financial Corp. is at a pivotal juncture, actively shedding the complexities of the past while aggressively pursuing a strategy designed to unlock significant shareholder value through enhanced profitability. The first quarter of 2025 results, boosted by the PFH deconsolidation gain, provide a glimpse of the underlying value and strategic potential. With clear, quantifiable targets for ROA expansion driven by focused earning asset growth, optimized mortgage operations, and substantial cost savings from technology consolidation, Primis is laying the groundwork to exceed its 1% ROA goal. While challenges remain, particularly with the legacy consumer portfolio and operational improvements, management's decisive actions and the inherent competitive advantages derived from its relationship-focused core bank and differentiated digital platforms position FRST for a compelling narrative of strategic execution and value realization in the periods ahead.