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Primis Financial Corp. - Quarter Report: 2023 June (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2023

Commission File No. 001-33037

PRIMIS FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Virginia

20-1417448

(State or other jurisdiction

(I.R.S. Employer Identification No.)

of incorporation or organization)

1676 International Drive, Suite 900

McLean, Virginia 22102

(Address of principal executive offices) (zip code)

(703) 893-7400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

Trading symbol

Name of each exchange on which registered:

Common Stock, par value $0.01 per share

FRST

NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes        No 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes        No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b–2 of the Exchange Act:

Large accelerated filer 

Accelerated filer 

Smaller reporting company 

Non-accelerated filer 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  No 

As of August 2, 2023, there were 24,686,764 shares of common stock, $0.01 par value, outstanding.

Table of Contents

PRIMIS FINANCIAL CORP.

FORM 10-Q

June 30, 2023

TABLE OF CONTENTS

    

PAGE

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022

2

Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the three and six months ended June 30, 2023 and 2022

3

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2023 and 2022

4

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022

6

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

35

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

51

Item 4 – Controls and Procedures

53

PART II - OTHER INFORMATION

Item 1 – Legal Proceedings

54

Item 1A – Risk Factors

54

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

54

Item 3 – Defaults Upon Senior Securities

54

Item 4 – Mine Safety Disclosures

54

Item 5 – Other Information

54

Item 6 - Exhibits

55

Signatures

57

Table of Contents

PRIMIS FINANCIAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share amounts)

    

June 30, 

    

December 31, 

2023

2022

ASSETS

(unaudited)

Cash and cash equivalents:

 

  

 

  

Cash and due from financial institutions

$

6,720

 

$

6,868

Interest-bearing deposits in other financial institutions

 

94,148

 

 

70,991

Total cash and cash equivalents

 

100,868

 

 

77,859

Securities available-for-sale, at fair value (amortized cost of $256,101 and $269,036, respectively)

 

223,087

 

 

236,315

Securities held-to-maturity, at amortized cost (fair value of $11,369 and $12,449, respectively)

 

12,378

 

 

13,520

Loans held for sale, at fair value

57,704

27,626

Loans held for investment

 

3,173,638

 

 

2,946,637

Less: allowance for credit losses

 

(38,414)

 

 

(34,544)

Net loans

 

3,135,224

 

 

2,912,093

Stock in Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB)

 

12,083

 

 

25,815

Bank premises and equipment, net

 

25,298

 

 

25,257

Assets held for sale

3,115

3,115

Operating lease right-of-use assets

10,707

5,335

Goodwill

 

104,609

 

 

104,609

Intangible assets, net

 

2,606

 

 

3,254

Bank-owned life insurance

 

67,985

 

 

67,201

Deferred tax assets, net

 

20,391

 

 

18,289

Other assets

 

72,438

 

 

49,211

Total assets

$

3,848,493

 

$

3,569,499

LIABILITIES AND STOCKHOLDERS' EQUITY

 

  

 

 

  

Noninterest-bearing demand deposits

$

480,832

 

$

582,556

Interest-bearing deposits:

 

 

 

NOW accounts

 

817,725

 

 

617,687

Money market accounts

 

850,359

 

 

811,365

Savings accounts

 

696,750

 

 

245,713

Time deposits

 

471,330

 

 

465,057

Total interest-bearing deposits

 

2,836,164

 

 

2,139,822

Total deposits

 

3,316,996

 

 

2,722,378

Securities sold under agreements to repurchase - short term

 

3,921

 

 

6,445

FHLB advances

 

 

 

325,000

Junior subordinated debt - long term

 

9,806

 

 

9,781

Senior subordinated notes - long term

 

85,647

 

 

85,531

Operating lease liabilities

11,546

5,767

Other liabilities

 

27,361

 

 

22,232

Total liabilities

 

3,455,277

 

 

3,177,134

Commitments and contingencies (See Note 8)

 

 

 

Stockholders' equity:

 

  

 

 

  

Preferred stock, $0.01 par value. Authorized 5,000,000 shares; no shares issued and outstanding

 

 

 

Common stock, $0.01 par value. Authorized 45,000,000 shares; 24,690,064 and 24,680,097 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively

 

246

 

 

246

Additional paid in capital

 

312,976

 

 

312,722

Retained earnings

 

106,075

 

 

105,247

Accumulated other comprehensive loss

 

(26,081)

 

 

(25,850)

Total stockholders' equity

 

393,216

 

 

392,365

Total liabilities and stockholders' equity

$

3,848,493

 

$

3,569,499

See accompanying notes to unaudited condensed consolidated financial statements.

2

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PRIMIS FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands, except per share amounts) (Unaudited)

For the Three Months Ended June 30, 

For the Six Months Ended June 30, 

    

2023

    

2022

    

2023

    

2022

    

Interest and dividend income:

 

  

 

  

 

  

 

  

 

Interest and fees on loans

$

43,970

$

26,337

$

85,276

$

51,060

Interest and dividends on taxable securities

 

1,449

 

1,340

 

2,932

 

2,665

Interest and dividends on tax exempt securities

 

102

 

105

 

203

 

210

Interest and dividends on other earning assets

 

7,158

 

448

 

11,382

 

854

Total interest and dividend income

 

52,679

 

28,230

 

99,793

 

54,789

Interest expense:

 

  

 

 

  

 

Interest on deposits

 

24,783

 

2,311

 

39,827

 

4,684

Interest on other borrowings

 

1,739

 

1,341

 

5,444

 

2,699

Total interest expense

 

26,522

 

3,652

 

45,271

 

7,383

Net interest income

 

26,157

 

24,578

 

54,522

 

47,406

Provision for credit losses

 

4,301

 

422

 

9,488

 

521

Net interest income after provision for credit losses

 

21,856

 

24,156

 

45,034

 

46,885

Noninterest income:

 

  

 

 

  

 

Account maintenance and deposit service fees

 

1,430

 

1,442

 

2,646

 

2,793

Income from bank-owned life insurance

 

394

 

378

 

814

 

753

Mortgage banking income

 

5,198

 

593

 

9,513

 

593

Gain on sale of loans

182

660

Credit enhancement income

1,152

6,038

Other noninterest income

 

130

 

217

 

347

 

581

Total noninterest income

 

8,486

 

2,630

 

20,018

 

4,720

Noninterest expenses:

 

  

 

 

  

 

Salaries and benefits

 

15,283

 

10,573

 

30,311

 

20,198

Occupancy expenses

 

1,593

 

1,418

 

3,038

 

2,875

Furniture and equipment expenses

 

1,852

 

1,128

 

3,429

 

2,228

Amortization of intangible assets

 

318

 

341

 

635

 

682

Virginia franchise tax expense

 

848

 

814

1,697

 

1,627

Data processing expense

 

2,828

 

1,293

 

5,079

 

2,783

Marketing expense

521

731

1,090

1,196

Telephone and communication expense

 

416

 

366

 

793

 

748

Net gain on other real estate owned

 

 

 

 

(59)

Loss on bank premises and equipment and assets held for sale

620

620

Professional fees

 

1,075

 

827

 

1,937

 

1,921

Credit enhancement costs

515

1,388

Other operating expenses

 

5,303

 

2,366

 

8,559

 

4,690

Total noninterest expenses

 

30,552

 

20,477

 

57,956

 

39,509

Income (loss) before income taxes

 

(210)

 

6,309

 

7,096

 

12,096

Income tax expense (benefit)

 

(22)

 

1,361

 

1,331

 

2,612

Net income (loss)

$

(188)

$

4,948

$

5,765

$

9,484

Other comprehensive loss:

 

  

 

 

  

 

Unrealized loss on available-for-sale securities

$

(3,299)

$

(10,723)

 

(293)

(24,099)

Tax benefit

 

(693)

(2,252)

 

(62)

(5,061)

Other comprehensive loss

 

(2,606)

(8,471)

 

(231)

 

(19,038)

Comprehensive income (loss)

$

(2,794)

$

(3,462)

$

5,534

$

(9,436)

Earnings (loss) per share, basic

$

(0.01)

$

0.20

$

0.23

$

0.39

Earnings (loss) per share, diluted

$

(0.01)

$

0.20

$

0.23

$

0.38

   

See accompanying notes to unaudited condensed consolidated financial statements.

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PRIMIS FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 2023 AND 2022

(dollars in thousands, except per share amounts) (Unaudited)

For the Three Months Ended June 30, 2023

Accumulated

Additional

Other

Common Stock

Paid in

Retained

Comprehensive

    

Shares

    

Amount

    

Capital

    

Earnings

    

Loss

    

Total

Balance March 31, 2023

24,685,064

$

246

$

312,903

$

108,732

$

(23,475)

$

398,406

Net loss

 

 

 

 

(188)

 

 

(188)

Changes in other comprehensive loss on investment securities (net of tax benefit, $693)

(2,606)

(2,606)

Dividends on common stock ($0.10 per share)

 

 

 

 

(2,469)

 

 

(2,469)

Restricted stock granted

5,000

Stock-based compensation expense

 

 

 

73

 

 

 

73

Balance - June 30, 2023

24,690,064

$

246

$

312,976

$

106,075

$

(26,081)

$

393,216

For the Three Months Ended June 30, 2022

Accumulated

Additional

Other

Common Stock

Paid in

Retained

Comprehensive

    

Shares

    

Amount

    

Capital

    

Earnings

    

Loss

    

Total

Balance March 31, 2022

24,622,739

$

245

$

311,872

$

99,710

$

(9,455)

$

402,372

Net income

 

 

 

 

4,948

 

 

4,948

Changes in other comprehensive loss on investment securities (net of tax benefit, $2,252)

(8,471)

(8,471)

Dividends on common stock ($0.10 per share)

 

 

 

 

(2,465)

 

 

(2,465)

Stock option exercises

 

27,500

1

278

279

Repurchase of restricted stock

(2)

(2)

Stock-based compensation expense

 

 

92

 

 

 

92

Balance - June 30, 2022

24,650,239

$

246

$

312,240

$

102,193

$

(17,926)

$

396,753

See accompanying notes to unaudited condensed consolidated financial statements.

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PRIMIS FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022

(dollars in thousands, except per share amounts) (Unaudited)

For the Six Months Ended June 30, 2023

Accumulated

Additional

Other

Common Stock

Paid in

Retained

Comprehensive

    

Shares

    

Amount

    

Capital

    

Earnings

    

Loss

    

Total

Balance - December 31, 2022

24,680,097

$

246

$

312,722

$

105,247

$

(25,850)

$

392,365

Net income

 

 

 

5,765

 

 

5,765

Changes in other comprehensive loss on investment securities (net of tax benefit, $62)

(231)

(231)

Dividends on common stock ($0.20 per share)

 

 

 

(4,937)

 

 

(4,937)

Shares retired to unallocated

(1,033)

Stock option exercises

8,000

 

 

85

 

 

 

85

Restricted stock granted

5,000

Restricted stock forfeited

(2,000)

Repurchase of restricted stock

(12)

(12)

Stock-based compensation expense

 

 

181

 

 

 

181

Balance - June 30, 2023

24,690,064

$

246

$

312,976

$

106,075

$

(26,081)

$

393,216

For the Six Months Ended June 30, 2022

Accumulated

Additional

Other

Common Stock

Paid in

Retained

Comprehensive

    

Shares

    

Amount

    

Capital

    

Earnings

    

Income (Loss)

    

Total

Balance - December 31, 2021

24,574,619

$

245

$

311,127

$

97,631

$

1,112

$

410,115

Net income

 

 

 

 

9,484

 

 

9,484

Changes in other comprehensive loss on investment securities (net of tax benefit, $5,061)

(19,038)

(19,038)

Dividends on common stock ($0.20 per share)

 

 

 

 

(4,922)

 

 

(4,922)

Shares retired to unallocated

(538)

Stock option exercises

 

27,500

1

278

279

Restricted stock granted

1,500

Repurchase of restricted stock

(8)

(8)

Stock-based compensation expense

 

 

843

 

 

 

843

Shares issued in lieu of bonus

47,158

Balance - June 30, 2022

24,650,239

$

246

$

312,240

$

102,193

$

(17,926)

$

396,753

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PRIMIS FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022

(dollars in thousands, except per share amounts) (Unaudited)

For the Six Months Ended June 30, 

    

2023

    

2022

Operating activities:

 

  

 

  

Net income

$

5,765

$

9,484

Adjustments to reconcile net income to net cash and cash equivalents (used in) provided by operating activities:

 

  

 

  

Depreciation and amortization

 

4,547

 

3,515

Net amortization (accretion) of premiums and discounts

 

(635)

 

312

Provision for credit losses

 

9,488

 

521

Origination of loans held for sale

(301,161)

(26,998)

Proceeds from sale of loans held for sale

270,852

31,273

Net gains on mortgage banking

(9,513)

(593)

Net gains on sale of loans

(660)

Loss on bank premises and equipment and assets held for sale

620

Earnings on bank-owned life insurance

 

(784)

 

(753)

Gain on bank-owned life insurance death benefit

(30)

Stock-based compensation expense

 

181

 

843

Gain on other real estate owned

 

 

(59)

Credit enhancement income

(6,038)

Benefit for deferred income taxes

 

(2,040)

 

Net increase in other assets

 

(8,830)

 

(3,008)

Net increase (decrease) in other liabilities

 

4,345

 

(2,631)

Net cash and cash equivalents (used in) provided by operating activities

(34,513)

 

12,526

Investing activities:

 

  

 

  

Purchases of securities available-for-sale

 

(5,000)

 

(27,573)

Proceeds from paydowns, maturities and calls of securities available-for-sale

 

17,373

 

16,896

Proceeds from paydowns, maturities and calls of securities held-to-maturity

 

1,124

 

7,907

Net decrease of FRB and FHLB stock

13,732

2,581

Net increase in loans

 

(231,405)

 

(287,754)

Proceeds from bank-owned life insurance death benefit

873

138

Proceeds from sales of other real estate owned, net of improvements

181

Purchases of bank premises and equipment

 

(1,405)

 

(536)

Business acquisition, net of cash acquired

 

 

(4,554)

Net cash and cash equivalents used in investing activities

 

(204,708)

 

(292,714)

Financing activities:

 

  

 

Net (decrease) increase in deposits

 

594,618

 

(80,411)

Cash dividends paid on common stock

 

(4,937)

 

(4,922)

Proceeds from exercised stock options

 

85

 

279

Repurchase of restricted stock

(12)

(8)

Repayment of short-term FHLB advances, net of proceeds

(75,000)

Repayment of short-term borrowings

(325,000)

(19,254)

Increase (decrease) in securities sold under agreements to repurchase

 

(2,524)

 

58

Net cash and cash equivalents provided by (used in) financing activities

 

262,230

 

(179,258)

Net change in cash and cash equivalents

 

23,009

 

(459,446)

Cash and cash equivalents at beginning of period

 

77,859

 

530,167

Cash and cash equivalents at end of period

$

100,868

$

70,721

Supplemental disclosure of cash flow information

 

  

 

Cash payments for:

 

  

 

Interest

$

41,182

$

7,698

Income taxes

$

3,908

$

1,556

Non-cash investing and financing activities:

Initial recognition of operating lease right-of-use assets

$

5,372

$

See accompanying notes to unaudited condensed consolidated financial statements.

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PRIMIS FINANCIAL CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

1.      ACCOUNTING POLICIES

Primis Financial Corp. (“Primis,” “we,” “us,” “our” or the “Company”) is the bank holding company for Primis Bank (“Primis Bank” or the “Bank”), a Virginia state-chartered bank which commenced operations on April 14, 2005. Primis Bank provides a range of financial services to individuals and small and medium-sized businesses.

At June 30, 2023, Primis Bank had thirty-two full-service branches in Virginia and Maryland and also provided services to customers through certain online and mobile applications. Thirty full-service retail branches are in Virginia and two full-service retail branches are in Maryland. The Company is headquartered in McLean, Virginia and has an administrative office in Glen Allen, Virginia and an operations center in Atlee, Virginia. Primis Mortgage Company, a residential mortgage lender headquartered in Wilmington, North Carolina, is also a consolidated subsidiary of Primis Bank.

The accounting policies and practices of Primis and its subsidiaries conform to U.S. generally accepted accounting principles (“U.S. GAAP”) and to general practice within the banking industry. Major policies and practices are described below.

Principles of Consolidation

The consolidated financial statements include the accounts of Primis and its subsidiaries Primis Bank, Primis Mortgage Company and EVB Statutory Trust I (the “Trust”). Significant inter-company accounts and transactions have been eliminated in consolidation. Primis consolidates subsidiaries in which it holds, directly or indirectly, more than 50 percent of the voting rights or where it exercises control. Entities where Primis holds 20 to 50 percent of the voting rights, or has the ability to exercise significant influence, or both, are accounted for under the equity method. Primis owns the Trust which is an unconsolidated subsidiary and the junior subordinated debt owed to the Trust is reported as a liability of Primis.

We determine whether we have a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (“VIE”) under U.S. GAAP. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. We consolidate voting interest entities in which we have all, or at least a majority of, the voting interest. As defined in applicable accounting standards, VIEs are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when an enterprise has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. The Company has investments in VIE’s for which we are not the primary beneficiary and, as such, are not included in our consolidated financial statements.

Operating Segments

The Company, through its Bank subsidiary, provides a broad range of financial services. While the Company’s chief operating decision makers monitor the revenue streams of the various financial products and services, operations are managed and financial performance is evaluated on an organization-wide basis. Management has determined that the Company has two reportable operating segments: Primis Mortgage and Primis Bank, as discussed in Note 10 – Segment Information.

Basis of Presentation

The unaudited consolidated financial statements and notes thereto have been prepared in accordance with U.S. GAAP for interim financial information and instructions for Form 10-Q and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required

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by U.S. GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in Primis’ Annual Report on Form 10-K for the year ended December 31, 2022.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Estimates that are particularly susceptible to change in the near term include: the determination of the allowance for credit losses, the fair value of investment securities, credit impairment of investment securities, the valuation of goodwill and deferred tax assets. Management monitors and continually reassess these at each reporting period.

Interest Rate Swaps

The Company is subject to interest rate risk exposure in the normal course of business through its core lending operations. Primarily to help mitigate interest rate risk associated with its loan portfolio, the Company entered into interest rate swaps in May 2023 with a large U.S. financial institution as the counterparty. Interest rate swaps are contractual agreements whereby one party pays a floating interest rate on a notional principal amount and receives a fixed-rate payment on the same notional principal, or vice versa, for a fixed period of time. Interest rate swaps change in value with movements in benchmark interest rates, such as Prime or SOFR. Interest rate swaps subject the Company to market risk associated with changes in interest rates, changes in interest rate volatility, as well as the credit risk that the counterparty will fail to perform. The Company’s interest rate swaps are pay-fixed and receive-floating whereby the Company receives a variable rate of interest based on SOFR.

The Company’s interest rate swaps meets the definition of a derivative instrument under ASC 815, Derivatives and Hedging, and is accounted for both initially and subsequently at its fair value. The Company assessed the derivative instrument at inception and determined it met the requirements under ASC 815 to be accounted for as a fair value hedge.  Fair value hedge relationships mitigate exposure to the change in fair value of the hedged risk in an asset, liability or firm commitment. The Company’s interest rate swaps are a fair value hedge that is accounted for using the portfolio layer method, which allows the Company to hedge the interest rate risk of prepayable loans by designating as the hedged item a stated amount of a closed portfolio of consumer loans that is expected to be outstanding for the designated hedge periods. Under the fair value hedging model, gains or losses attributable to the change in fair value of the derivative instrument, as well as the gains and losses attributable to the change in fair value of the hedged item, are recognized in interest income in the same income statement line item with the hedged item in the period in which the change in fair value occurs. The corresponding adjustment to the hedged asset or liability is included in the basis of the hedged item, while the corresponding change in the fair value of the derivative instrument is recorded as an adjustment to other assets or other liabilities, as applicable.

The following table represents the carrying value of the portfolio layer method hedged assets and the cumulative fair value hedging adjustments included in the carrying value of the hedged assets as of June 30, 2023 and December 31, 2022:

June 30, 2023

December 31, 2022

(dollars in thousands)

Amortized Cost Basis

Hedged Asset

Basis Adjustment

Amortized Cost Basis

Hedged Asset

Basis Adjustment

Fixed rate assets

$

440,935

$

195,739

$

(4,261)

$

$

$

Revisions

During the second quarter of 2023, the Company discovered an employee loan fraud with total exposure of approximately $2.5 million. The fraud dated back to origination of several loans to an actual customer in 2010.

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Management believes, on the advice of its counsel, its insurance broker and a third party forensic auditor, that the losses are recoverable under the Company’s insurance policies and is working through the claims process. The Company has evaluated the effect of the error, both qualitatively and quantitatively, and believes the impact to prior years is immaterial to each respective period assessed. However, the Company’s quantitative and qualitative assessments of the fraud losses on the projected 2023 annual earnings is expected to be material. Accordingly, the Company made the decision to revise the losses to the respective periods in which they were incurred in its future Form 10-Q and Form 10-K filings by revising those periods. For all of its future filings, the Company will revise opening retained earnings of the earliest period presented for losses incurred in periods prior to that and revise all prior periods presented in the filing for losses incurred related to the period. Accordingly, the Company has revised prior periods presented in this Form 10-Q to reflect the fraud losses in the respective period incurred, with any losses incurred prior to January 1, 2022 adjusted in the January 1, 2022 opening retained earnings balance. The revisions resulted in retained earnings as of January 1, 2022 being $2.0 million lower than previously reported in prior periods. Additionally, the revisions resulted in a decrease in loans held for investment of $2.0 million and a decrease in net income for the three and six months ended June 30, 2022, of $61 thousand and $118 thousand, respectively.

The table below discloses the net change (increase or (decrease)) included in all the consolidated statements of net income (loss) line items in this Form 10-Q, as a result of the revisions discussed above.

For the Three Months Ended June 30, 

For the Six Months Ended June 30, 

(dollars in thousands)

2022

2023

2022

Income Statement:

Effect to interest income

$

(28)

$

(45)

$

(54)

Effect to noninterest expenses

47

7

92

Effect on income tax expense (benefit)

(14)

(230)

(28)

Net effect to net income (loss)

$

(61)

$

179

$

(118)

Recent Accounting Pronouncements

In March 2022, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 2022-02, Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance on troubled debt restructurings (TDRs) for creditors in ASC 310-40 and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination. The ASU also updates the requirements related to accounting for credit losses under FASB ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancing and restructurings for borrowers experiencing financial difficulty. The Company adopted the guidance in the first quarter of 2023, which did not have a material impact on the Company’s consolidated financial statements and disclosures.

In March 2022, FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging-Portfolio Layer Method, to expand the current single-layer method of electing hedge accounting to allow multiple hedged layers of a single closed portfolio under the method. To reflect that expansion, the last-of-layer method was renamed the portfolio layer method. The amendments in this update were effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company adopted the update as it became applicable to us on May 11, 2023. The adoption of this standard did not have a material impact on the consolidated financial statements or disclosures.

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2.      INVESTMENT SECURITIES

The amortized cost and fair value of available-for-sale investment securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows (in thousands):

Amortized

Gross Unrealized

Fair

    

Cost

    

Gains

    

Losses

    

Value

June 30, 2023

Residential government-sponsored mortgage-backed securities

$

113,816

$

$

(15,802)

$

98,014

Obligations of states and political subdivisions

 

33,951

 

2

 

(4,280)

 

29,673

Corporate securities

 

16,000

 

 

(3,044)

 

12,956

Collateralized loan obligations

 

5,020

 

 

(119)

 

4,901

Residential government-sponsored collateralized mortgage obligations

 

30,813

 

 

(2,245)

 

28,568

Government-sponsored agency securities

 

16,243

 

 

(2,883)

 

13,360

Agency commercial mortgage-backed securities

 

35,374

(4,580)

 

30,794

SBA pool securities

 

4,884

 

10

 

(73)

 

4,821

Total

$

256,101

$

12

$

(33,026)

$

223,087

Amortized

Gross Unrealized

Fair

    

Cost

    

Gains

    

Losses

    

Value

December 31, 2022

Residential government-sponsored mortgage-backed securities

$

119,371

$

1

$

(16,491)

$

102,881

Obligations of states and political subdivisions

 

34,103

 

2

 

(4,927)

 

29,178

Corporate securities

 

16,000

 

 

(1,172)

 

14,828

Collateralized loan obligations

 

5,022

 

 

(146)

 

4,876

Residential government-sponsored collateralized mortgage obligations

 

28,643

 

 

(2,048)

 

26,595

Government-sponsored agency securities

 

17,719

 

 

(3,103)

 

14,616

Agency commercial mortgage-backed securities

 

42,180

(4,763)

 

37,417

SBA pool securities

 

5,998

 

13

 

(87)

 

5,924

Total

$

269,036

$

16

$

(32,737)

$

236,315

The amortized cost, gross unrecognized gains and losses, allowance for credit losses and fair value of investment securities held-to-maturity were as follows (in thousands):

Amortized

Gross Unrecognized

Allowance for

Fair

    

Cost

    

Gains

    

Losses

    

Credit Losses

    

Value

June 30, 2023

Residential government-sponsored mortgage-backed securities

$

9,753

$

$

(927)

$

$

8,826

Obligations of states and political subdivisions

 

2,388

 

1

 

(63)

 

 

2,326

Residential government-sponsored collateralized mortgage obligations

 

237

 

 

(20)

 

 

217

Total

$

12,378

$

1

$

(1,010)

$

$

11,369

Amortized

Gross Unrecognized

Allowance for

Fair

    

Cost

    

Gains

    

Losses

    

Credit Losses

    

Value

December 31, 2022

Residential government-sponsored mortgage-backed securities

$

10,522

$

$

(1,007)

$

$

9,515

Obligations of states and political subdivisions

 

 

2,721

 

3

 

(46)

 

 

2,678

Residential government-sponsored collateralized mortgage obligations

 

 

277

 

 

(21)

 

 

256

Total

$

13,520

$

3

$

(1,074)

$

$

12,449

Available-for-sale investment securities of $5.0 million were purchased during the three and six months ended June 30, 2023. During the three and six months ended June 30, 2022, $5.0 million and $27.6 million, respectively of available-

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for-sale investment securities were purchased. No held-to-maturity investments were purchased during the three and six months ended June 30, 2023 and 2022. No investment securities were sold during the three and six months ended June 30, 2023 and 2022.

The amortized cost and fair value of available-for-sale and held-to-maturity investment securities as of June 30, 2023, by contractual maturity were as follows (in thousands). Investment securities not due at a single maturity date are shown separately.

Available-for-Sale

Held-to-Maturity

    

Amortized

    

    

Amortized

    

Cost

Fair Value

Cost

Fair Value

Due within one year

$

$

$

325

$

324

Due in one to five years

10,024

9,121

1,124

1,121

Due in five to ten years

 

34,261

 

28,718

 

939

 

881

Due after ten years

 

26,929

 

23,051

 

 

Residential government-sponsored mortgage-backed securities

 

113,816

 

98,014

 

9,753

 

8,826

Residential government-sponsored collateralized mortgage obligations

 

30,813

 

28,568

 

237

 

217

Agency commercial mortgage-backed securities

 

35,374

 

30,794

 

 

SBA pool securities

 

4,884

 

4,821

 

 

Total

$

256,101

$

223,087

$

12,378

$

11,369

Investment securities with a carrying amount of approximately $193.3 million and $99.4 million at June 30, 2023 and December 31, 2022, respectively, were pledged to secure public deposits, certain other deposits, a line of credit for advances from the Federal Home Loan Bank (“FHLB”) of Atlanta, and repurchase agreements.

Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to U.S. Treasury and residential mortgage-backed securities issued by the U.S. government, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost basis of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued by States and political subdivisions and other held-to-maturity securities, management considers (i) issuer bond ratings, (ii) historical loss rates for given bond ratings, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities and (iv) internal forecasts. As of June 30, 2023, Primis had an immaterial allowance for credit losses on held-to-maturity securities.

The unrealized losses related to investment securities available-for-sale identified as of June 30, 2023 and December 31, 2022, relate to changes in interest rates relative to when the investment securities were purchased, and do not indicate credit-related impairment. Primis performs quantitative and qualitative analysis in this determination. As a result of the Company’s analysis, none of the securities were deemed to require an allowance for credit losses at June 30, 2023 and

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December 31, 2022. Primis has the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses.

The following tables present information regarding investment securities available-for-sale and held-to-maturity in a continuous unrealized loss position as of June 30, 2023 and December 31, 2022 by duration of time in a loss position (in thousands):

Less than 12 months

12 Months or More

Total

June 30, 2023

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

Available-for-Sale

value

Losses

value

Losses

value

Losses

Residential government-sponsored mortgage-backed securities

$

4,796

$

(281)

$

93,218

$

(15,521)

$

98,014

$

(15,802)

Obligations of states and political subdivisions

6,850

(84)

21,821

(4,196)

28,671

(4,280)

Corporate securities

5,591

(409)

7,365

(2,635)

12,956

(3,044)

Collateralized loan obligations

4,901

(119)

4,901

(119)

Residential government-sponsored collateralized mortgage obligations

13,910

(338)

14,658

(1,907)

28,568

(2,245)

Government-sponsored agency securities

 

 

 

13,360

 

(2,883)

 

13,360

 

(2,883)

Agency commercial mortgage-backed securities

 

 

 

30,794

 

(4,580)

 

30,794

 

(4,580)

SBA pool securities

 

 

 

3,009

 

(73)

 

3,009

 

(73)

Total

$

31,147

$

(1,112)

$

189,126

$

(31,914)

$

220,273

$

(33,026)

Less than 12 months

12 Months or More

Total

June 30, 2023

    

Fair

    

Unrecognized

    

Fair

    

Unrecognized

    

Fair

    

Unrecognized

Held-to-Maturity

value

Losses

value

Losses

value

Losses

Residential government-sponsored mortgage-backed securities

$

586

$

(35)

$

8,240

$

(892)

$

8,826

$

(927)

Obligations of states and political subdivisions

 

1,357

 

(17)

 

388

 

(46)

 

1,745

 

(63)

Residential government-sponsored collateralized mortgage obligations

 

58

 

(4)

 

159

 

(16)

 

217

 

(20)

Total

$

2,001

$

(56)

$

8,787

$

(954)

$

10,788

$

(1,010)

Less than 12 months

12 Months or More

Total

December 31, 2022

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

Available-for-Sale

value

Losses

value

Losses

value

Losses

Residential government-sponsored mortgage-backed securities

$

23,484

$

(2,268)

$

79,283

$

(14,223)

$

102,767

$

(16,491)

Obligations of states and political subdivisions

10,026

(388)

17,609

(4,539)

27,635

(4,927)

Corporate securities

14,828

(1,172)

14,828

(1,172)

Collateralized loan obligations

4,876

(146)

4,876

(146)

Residential government-sponsored collateralized mortgage obligations

22,343

(1,375)

4,252

(673)

26,595

(2,048)

Government-sponsored agency securities

 

1,484

 

(16)

 

13,132

 

(3,087)

 

14,616

 

(3,103)

Agency commercial mortgage-backed securities

 

13,031

 

(371)

 

24,386

 

(4,392)

 

37,417

 

(4,763)

SBA pool securities

 

529

 

(38)

 

3,243

 

(49)

 

3,772

 

(87)

Total

$

85,725

$

(5,628)

$

146,781

$

(27,109)

$

232,506

$

(32,737)

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Less than 12 months

12 Months or More

Total

December 31, 2022

    

Fair

    

Unrecognized

    

Fair

    

Unrecognized

    

Fair

    

Unrecognized

Held-to-Maturity

value

Losses

value

Losses

value

Losses

Residential government-sponsored mortgage-backed securities

$

9,457

$

(1,002)

$

58

$

(5)

$

9,515

$

(1,007)

Obligations of states and political subdivisions

 

1,255

 

(46)

 

 

 

1,255

 

(46)

Residential government-sponsored collateralized mortgage obligations

 

75

 

(4)

 

181

 

(17)

 

256

 

(21)

Total

$

10,787

$

(1,052)

$

239

$

(22)

$

11,026

$

(1,074)

Changes in accumulated other comprehensive income (loss) by component for the three and six months ended June 30, 2023 and 2022 are shown in the tables below. All amounts are net of tax (in thousands).

Unrealized Holding

Gains (Losses) on

For the three months ended June 30, 2023

    

Available-for-Sale

Beginning balance

$

(23,475)

Current period other comprehensive income (loss)

 

(2,606)

Ending balance

$

(26,081)

Unrealized Holding

Gains (Losses) on

For the three months ended June 30, 2022

Available-for-Sale

Beginning balance

$

(9,455)

Current period other comprehensive income (loss)

 

(8,471)

Ending balance

$

(17,926)

Unrealized Holding

Gains (Losses) on

For the six months ended June 30, 2023

Available-for-Sale

Beginning balance

$

(25,850)

Current period other comprehensive income (loss)

 

(231)

Ending balance

$

(26,081)

Unrealized Holding

Gains (Losses) on

For the six months ended June 30, 2022

Available-for-Sale

Beginning balance

$

1,112

Current period other comprehensive income (loss)

 

(19,038)

Ending balance

$

(17,926)

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3.     LOANS AND ALLOWANCE FOR CREDIT LOSSES

The following table summarizes the composition of our loan portfolio as of June 30, 2023 and December 31, 2022 (in thousands):

    

June 30, 2023

    

December 31, 2022

Loans held for sale

$

57,704

$

27,626

Loans held for investment

Loans secured by real estate:

 

Commercial real estate - owner occupied

$

447,407

$

459,866

Commercial real estate - non-owner occupied

 

595,805

 

579,733

Secured by farmland

 

5,271

 

5,970

Construction and land development

 

175,073

 

148,690

Residential 1-4 family

 

591,938

 

609,694

Multi-family residential

 

133,754

 

140,321

Home equity lines of credit

 

62,808

 

65,152

Total real estate loans

 

2,012,056

 

2,009,426

Commercial loans

 

584,251

 

520,741

Paycheck Protection Program loans

2,143

4,564

Consumer loans

 

569,139

 

405,278

Total Non-PCD loans

 

3,167,589

 

2,940,009

PCD loans

6,049

6,628

Total loans held for investment

$

3,173,638

$

2,946,637

Accrued Interest Receivable

Accrued interest receivable on loans totaled $19.0 million and $13.7 million at June 30, 2023 and December 31, 2022, respectively, and is included in other assets in the consolidated balance sheets.

Nonaccrual and Past Due Loans

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, we consider the borrower’s debt service capacity through the analysis of current financial information, if available, and/or current information with regards to our collateral position. Regulatory provisions would typically require the placement of a loan on nonaccrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on nonaccrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.

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The following tables present the aging of the recorded investment in past due loans by class of loans held for investment as of June 30, 2023 and December 31, 2022 (in thousands):

    

30 - 59

    

60 - 89

    

90 

    

    

    

Days

Days

Days 

Total

Loans Not

Total

June 30, 2023

Past Due

Past Due

or More

Past Due

Past Due

Loans

Commercial real estate - owner occupied

$

83

$

53

$

$

136

$

447,271

$

447,407

Commercial real estate - non-owner occupied

 

 

19,187

 

19,187

 

576,618

 

595,805

Secured by farmland

2

503

505

4,766

5,271

Construction and land development

 

41

41

175,032

 

175,073

Residential 1-4 family

 

2,277

904

715

3,896

588,042

 

591,938

Multi- family residential

101

101

133,653

133,754

Home equity lines of credit

 

670

294

 

254

1,218

61,590

 

62,808

Commercial loans

10,437

184

1,371

11,992

572,259

584,251

Paycheck Protection Program loans

7

1,775

1,782

361

2,143

Consumer loans

 

2,628

1,872

129

 

4,629

 

564,510

 

569,139

Total Non-PCD loans

16,246

3,307

23,934

43,487

3,124,102

3,167,589

PCD loans

443

1,242

1,685

4,364

6,049

Total

$

16,689

$

3,307

$

25,176

$

45,172

$

3,128,466

$

3,173,638

    

30 - 59

    

60 - 89

    

90 

    

    

    

    

Days

Days

Days 

Total

Loans Not

Total

December 31, 2022

Past Due

Past Due

or More

Past Due

Past Due

Loans

Commercial real estate - owner occupied

$

55

$

$

$

55

$

459,811

$

459,866

Commercial real estate - non-owner occupied

 

290

 

169

19,641

 

20,100

 

559,633

 

579,733

Secured by farmland

5,970

5,970

Construction and land development

 

46

46

148,644

 

148,690

Residential 1-4 family

 

2,180

410

304

2,894

606,800

 

609,694

Multi- family residential

140,321

140,321

Home equity lines of credit

 

431

96

 

249

776

64,376

 

65,152

Commercial loans

39

2,956

2,995

517,746

520,741

Paycheck Protection Program loans

16

15

3,360

3,391

1,173

4,564

Consumer loans

 

2,079

1,421

200

 

3,700

 

401,578

 

405,278

Total Non-PCD loans

5,136

2,111

26,710

33,957

2,906,052

2,940,009

PCD loans

1,328

1,328

5,300

6,628

Total

$

5,136

$

2,111

$

28,038

$

35,285

$

2,911,352

$

2,946,637

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The amortized cost, by class, of loans and leases on nonaccrual status at June 30, 2023 and December 31, 2022, were as follows (in thousands):

    

90 

    

Less Than

    

Total

    

Nonaccrual With

Days 

90 Days

Nonaccrual

No Credit

June 30, 2023

or More

Past Due

Loans

Loss Allowance

Commercial real estate - owner occupied

$

$

491

$

491

$

491

Commercial real estate - non-owner occupied

 

19,187

 

 

19,187

 

1,323

Secured by farmland

503

2

505

505

Construction and land development

 

 

26

 

26

 

26

Residential 1-4 family

 

715

 

529

 

1,244

 

1,244

Home equity lines of credit

254

276

530

530

Commercial loans

 

1,371

 

60

 

1,431

 

61

Paycheck Protection Program loans

61

61

61

Consumer loans

 

129

 

444

 

573

 

573

Total Non-PCD loans

22,220

1,828

24,048

4,814

PCD loans

1,242

1,242

1,242

Total

$

23,462

$

1,828

$

25,290

$

6,056

    

90 

    

Less Than

    

Total

    

Nonaccrual With

Days 

90 Days

Nonaccrual

No Credit

December 31, 2022

or More

Past Due

Loans

Loss Allowance

Commercial real estate - owner occupied

$

$

509

$

509

$

509

Commercial real estate - non-owner occupied

 

19,641

 

 

19,641

 

19,641

Secured by farmland

713

713

713

Construction and land development

 

 

29

 

29

 

29

Residential 1-4 family

 

304

 

8,995

 

9,299

 

9,299

Home equity lines of credit

249

301

550

550

Commercial loans

 

2,956

 

121

 

3,077

 

121

Paycheck Protection Program loans

4

4

4

Consumer loans

 

200

 

134

 

334

 

299

Total Non-PCD loans

23,350

10,806

34,156

31,165

PCD loans

1,328

1,328

1,328

Total

$

24,678

$

10,806

$

35,484

$

32,493

There were $1.7 million and $3.4 million of Paycheck Protection Program (“PPP”) loans greater than 90 days past due and still accruing at June 30, 2023 and December 31, 2022, respectively.

16

Table of Contents

The following table presents nonaccrual loans as of June 30, 2023 by class and year of origination (in thousands):

Revolving

Loans

Revolving

Converted

2023

2022

2021

2020

 

2019

Prior

Loans

To Term

 

Total

Commercial real estate - owner occupied

$

$

$

$

$

$

491

$

$

$

491

Commercial real estate - non-owner occupied

 

 

 

 

 

 

19,187

 

 

 

19,187

Secured by farmland

2

503

505

Construction and land development

 

 

 

 

 

 

26

 

 

 

26

Residential 1-4 family

 

981

263

1,244

Home equity lines of credit

54

457

19

530

Commercial loans

 

 

 

 

3

 

 

1,428

 

 

 

1,431

Paycheck Protection Program loans

 

 

 

 

61

 

 

 

 

 

61

Consumer loans

 

379

194

573

Total non-PCD nonaccruals

379

194

64

2

22,670

457

282

24,048

PCD loans

1,242

1,242

Total nonaccrual loans

$

$

379

$

194

$

64

$

2

$

23,912

$

457

$

282

$

25,290

Interest received on nonaccrual loans was zero and $0.1 million for the three months ended June 30, 2023 and 2022, respectively and $0.01 million and $0.3 million for the six months ended June 30, 2023 and 2022, respectively.

Modifications Provided to Borrowers Experiencing Financial Difficulty

The Bank determines that a borrower may be experiencing financial difficulty if the borrower is currently delinquent on any of its debt, or if the Bank is concerned that the borrower may not be able to perform in accordance with the current terms of the loan agreement in the foreseeable future. Many aspects of the borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty, particularly as it relates to commercial borrowers due to the complex nature of the loan structure, business/industry risk and borrower/guarantor structures. Concessions may include the reduction of an interest rate at a rate lower than current market rates for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, or principal forgiveness. When evaluating whether a concession has been granted, the Bank also considers whether the borrower has provided additional collateral or guarantors and whether such additions adequately compensate the Bank for the restructured terms, or if the revised terms are consistent with those currently being offered to new loan customers.

The assessments of whether a borrower is experiencing financial difficulty at the time a concession has been granted is subjective in nature and management’s judgment is required when determining whether the concession results in a modification that is accounted for as a new loan or a continuation of the existing loan under U.S. GAAP.

Although each occurrence is unique to the borrower and is evaluated separately, for all portfolio segments, loans modified as a result of borrowers experiencing financial difficulty are typically modified through reduction in interest rates, reductions in payments, changing the payment terms from principal and interest to interest only, and/or extensions in term maturity.

For the quarter ended June 30, 2023, two loans from our owner occupied commercial real estate loan portfolio with an amortized cost basis of $0.4 million, were modified for a borrower experiencing financial difficulty. This modification resulted in reamortization of the balance of the notes over a 25 year period, while maintaining the original maturity dates of February and July 2027, respectively. Contractual payments for both notes, prior to modification, for the three month

17

Table of Contents

period would have totaled $0.03 million. The modified loans had no payment delinquencies in the second quarter of 2023 and represents 0.09% of our total owner occupied commercial real estate loans.

An existing modification performed in the first quarter of 2023, and was comprised of one loan with a $0.9 million amortized cost, which will resume contractual payments in August 2023. This existing modification has had no payment delinquencies since its modification and accounts for only 0.15% of our total 1-4 family residential loans.

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty.  Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies certain loans by providing principal forgiveness. When principal forgiveness is provided, the amortized cost basis of the loan is written off against the allowance. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

If it is determined that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. At that time, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

Credit Quality Indicators

Through its system of internal controls, Primis evaluates and segments loan portfolio credit quality using regulatory definitions for Special Mention, Substandard and Doubtful. Special Mention loans are considered to be criticized. Substandard and Doubtful loans are considered to be classified.

Special Mention loans are loans that have a potential weakness that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position.

Substandard loans may be inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Primis had no loans classified as Doubtful at June 30, 2023 or December 31, 2022.

In monitoring credit quality trends in the context of assessing the appropriate level of the allowance for credit losses on loans, we monitor portfolio credit quality by the weighted-average risk grade of each class of loan.

18

Table of Contents

The following table presents weighted-average risk grades for all loans, by class and year of origination/renewal as of June 30, 2023 (in thousands):

Revolving

Loans

Revolving

Converted

2023

2022

2021

2020

 

2019

Prior

Loans

To Term

 

Total

Commercial real estate - owner occupied

Pass

$

21,276

$

89,674

$

61,730

$

18,444

$

21,553

$

214,548

$

2,832

$

6,821

$

436,878

Special Mention

220

5,081

5,301

Substandard

97

5,131

5,228

Doubtful

$

21,276

$

89,674

$

61,950

$

18,444

$

21,650

$

224,760

$

2,832

$

6,821

$

447,407

Current period gross charge offs

$

$

$

$

$

$

$

$

$

Weighted average risk grade

3.49

3.31

3.44

3.39

3.28

3.53

3.66

3.97

3.46

Commercial real estate - nonowner occupied

 

Pass

$

1,472

$

59,088

$

120,978

$

43,528

$

41,039

$

281,105

$

1,884

$

5,085

$

554,179

Special Mention

1,548

20,291

601

22,440

Substandard

19,186

19,186

Doubtful

$

1,472

$

59,088

$

120,978

$

45,076

$

41,039

$

320,582

$

1,884

$

5,686

$

595,805

Current period gross charge offs

$

$

$

$

$

$

$

$

$

Weighted average risk grade

3.15

3.27

3.08

3.83

3.95

3.84

2.86

3.21

3.63

Secured by farmland

 

Pass

$

514

$

$

13

$

108

$

$

3,627

$

328

$

176

$

4,766

Special Mention

Substandard

2

503

505

Doubtful

$

514

$

$

13

$

108

$

2

$

4,130

$

328

$

176

$

5,271

Current period gross charge offs

$

$

$

$

$

$

$

$

$

Weighted average risk grade

N/A

N/A

4.00

4.00

6.00

4.02

3.92

3.12

3.97

Construction and land development

 

Pass

$

15,392

$

61,912

$

71,105

$

544

$

2,522

$

21,805

$

807

$

9

$

174,096

Special Mention

951

951

Substandard

26

26

Doubtful

$

15,392

$

61,912

$

71,105

$

544

$

2,522

$

22,782

$

807

$

9

$

175,073

Current period gross charge offs

$

$

$

$

$

$

$

$

$

Weighted average risk grade

3.55

3.21

3.39

3.39

3.29

3.57

3.37

4.00

3.36

Residential 1-4 family

 

Pass

$

12,664

$

153,892

$

154,811

$

42,560

$

57,486

$

162,489

$

1,908

$

2,736

$

588,546

Special Mention

179

179

Substandard

118

2,363

732

3,213

Doubtful

$

12,664

$

153,892

$

154,811

$

42,560

$

57,604

$

165,031

$

1,908

$

3,468

$

591,938

Current period gross charge offs

$

$

$

$

$

94

$

$

$

$

94

Weighted average risk grade

3.16

3.08

3.04

3.07

3.07

3.22

3.92

3.64

3.12

Multi- family residential

 

Pass

$

$

8,257

$

21,678

$

18,045

$

6,997

$

76,520

$

649

$

648

$

132,794

Special Mention

Substandard

669

291

960

Doubtful

$

$

8,257

$

21,678

$

18,045

$

6,997

$

77,189

$

649

$

939

$

133,754

Current period gross charge offs

$

$

$

$

$

$

$

$

$

Weighted average risk grade

N/A

3.69

3.00

3.90

3.00

3.41

4.00

4.62

3.42

Home equity lines of credit

 

Pass

$

75

$

492

$

423

$

50

$

52

$

3,201

$

57,009

$

880

$

62,182

Special Mention

Substandard

54

553

19

626

Doubtful

$

75

$

492

$

423

$

50

$

52

$

3,255

$

57,562

$

899

$

62,808

Current period gross charge offs

$

$

$

$

$

$

$

$

$

Weighted average risk grade

3.00

3.00

3.00

3.00

3.00

3.89

3.05

3.93

3.11

Commercial loans

 

 

 

 

 

 

 

 

 

Pass

$

116,586

$

283,911

$

54,530

$

6,648

$

2,888

$

28,008

$

81,285

$

6,947

$

580,803

Special Mention

12

144

1,311

360

1,827

Substandard

3

66

1,552

1,621

Doubtful

$

116,586

$

283,911

$

54,530

$

6,663

$

3,098

$

29,560

$

82,596

$

7,307

$

584,251

Current period gross charge offs

$

$

$

$

$

$

1,590

$

$

$

1,590

Weighted average risk grade

2.74

3.01

3.36

3.36

3.98

3.47

3.20

3.82

3.06

19

Table of Contents

Revolving

Loans

Revolving

Converted

2023

2022

2021

2020

 

2019

Prior

Loans

To Term

 

Total

Paycheck Protection Program loans

Pass

$

$

$

1,115

$

967

$

$

$

$

$

2,082

Special Mention

61

61

Substandard

Doubtful

$

$

$

1,115

$

1,028

$

$

$

$

$

2,143

Current period gross charge offs

$

$

$

$

$

$

$

$

$

Weighted average risk grade

N/A

N/A

2.00

2.24

N/A

N/A

N/A

N/A

2.11

Consumer loans

 

Pass

$

281,151

$

248,630

$

26,879

$

1,209

$

200

$

4,176

$

5,872

$

186

$

568,303

Special Mention

67

67

Substandard

382

387

769

Doubtful

$

281,151

$

249,012

$

27,266

$

1,209

$

200

$

4,243

$

5,872

$

186

$

569,139

Current period gross charge offs

$

$

3,729

$

751

$

$

$

$

$

$

4,480

Weighted average risk grade

3.50

2.70

3.67

3.99

3.97

4.02

2.93

4.00

3.16

PCD

 

 

 

Pass

$

$

$

$

$

$

2,908

$

$

$

2,908

Special Mention

1,618

1,618

Substandard

1,523

1,523

Doubtful

$

$

$

$

$

$

6,049

$

$

$

6,049

Current period gross charge offs

$

$

$

$

$

$

$

$

$

Weighted average risk grade

N/A

N/A

N/A

N/A

N/A

4.67

N/A

N/A

4.67

Total

$

449,130

$

906,238

$

513,869

$

133,727

$

133,164

$

857,581

$

154,438

$

25,491

$

3,173,638

Current period gross charge offs

$

$

3,729

$

751

$

$

94

$

1,590

$

$

$

6,164

Weighted average risk grade

3.29

3.00

3.21

3.50

3.40

3.59

3.16

3.73

3.29

20

Table of Contents

The following table presents weighted-average risk grades for all loans, by class and year of origination/renewal as of December 31, 2022 (in thousands):

Revolving

Loans

Revolving

Converted

2022

2021

2020

2019

 

2018

Prior

Loans

To Term

 

Total

Commercial real estate - owner occupied

Pass

$

116,545

$

58,202

$

19,178

$

21,985

$

27,397

$

202,484

$

3,389

$

6,740

$

455,920

Special Mention

988

988

Substandard

2,958

2,958

Doubtful

$

116,545

$

58,202

$

19,178

$

21,985

$

27,397

$

206,430

$

3,389

$

6,740

$

459,866

Weighted average risk grade

3.25

3.45

3.38

3.27

3.43

3.50

3.52

3.96

3.42

Commercial real estate - nonowner occupied

 

Pass

$

28,128

$

126,291

$

44,696

$

41,631

$

55,702

$

228,735

$

4,173

$

3,065

$

532,421

Special Mention

1,566

926

24,580

601

27,673

Substandard

13,066

6,573

19,639

Doubtful

$

28,128

$

126,291

$

46,262

$

41,631

$

69,694

$

259,888

$

4,173

$

3,666

$

579,733

Weighted average risk grade

3.36

3.16

3.82

3.95

4.01

3.82

2.87

3.33

3.68

Secured by farmland

 

Pass

$

141

$

16

$

110

$

$

$

2,279

$

1,697

$

85

$

4,328

Special Mention

649

112

761

Substandard

6

875

881

Doubtful

$

141

$

16

$

110

$

6

$

$

3,803

$

1,697

$

197

$

5,970

Weighted average risk grade

4.00

4.00

4.00

6.00

N/A

4.20

3.98

3.70

4.13

Construction and land development

 

Pass

$

44,253

$

73,226

$

847

$

3,006

$

6,937

$

19,553

$

822

$

17

$

148,661

Special Mention

Substandard

29

29

Doubtful

$

44,253

$

73,226

$

847

$

3,006

$

6,937

$

19,582

$

822

$

17

$

148,690

Weighted average risk grade

3.21

3.06

3.60

3.42

3.17

3.69

3.36

4.00

3.20

Residential 1-4 family

 

Pass

$

152,178

$

157,233

$

43,812

$

61,268

$

40,707

$

138,782

$

1,837

$

3,437

$

599,254

Special Mention

30

30

Substandard

285

8,099

1,310

716

10,410

Doubtful

$

152,463

$

157,233

$

43,812

$

69,367

$

40,707

$

140,122

$

1,837

$

4,153

$

609,694

Weighted average risk grade

3.09

3.04

3.07

3.41

3.13

3.23

3.92

3.54

3.15

Multi- family residential

 

Pass

$

9,953

$

21,927

$

18,338

$

7,064

$

1,804

$

75,370

$

4,192

$

676

$

139,324

Special Mention

Substandard

702

295

997

Doubtful

$

9,953

$

21,927

$

18,338

$

7,064

$

1,804

$

76,072

$

4,192

$

971

$

140,321

Weighted average risk grade

3.58

3.00

3.90

3.00

3.21

3.31

4.00

4.61

3.37

Home equity lines of credit

 

Pass

$

463

$

431

$

52

$

63

$

230

$

4,093

$

58,312

$

957

$

64,601

Special Mention

Substandard

54

476

21

551

Doubtful

$

463

$

431

$

52

$

63

$

230

$

4,147

$

58,788

$

978

$

65,152

Weighted average risk grade

3.00

3.00

3.00

3.00

3.00

3.94

3.05

3.89

3.12

Commercial loans

 

 

 

 

 

 

 

 

 

Pass

$

295,459

$

59,642

$

7,332

$

6,658

$

9,228

$

19,830

$

100,407

$

17,381

$

515,937

Special Mention

396

64

74

519

388

1,441

Substandard

5

90

1,678

1,590

3,363

Doubtful

$

295,459

$

60,038

$

7,401

$

6,822

$

9,228

$

21,508

$

102,516

$

17,769

$

520,741

Weighted average risk grade

3.14

3.41

3.38

3.90

3.42

3.70

3.47

3.33

3.29

Paycheck Protection Program loans

Pass

$

$

2,119

$

2,435

$

$

$

$

$

$

4,554

Special Mention

Substandard

10

10

Doubtful

$

$

2,129

$

2,435

$

$

$

$

$

$

4,564

Weighted average risk grade

N/A

2.02

2.00

N/A

N/A

N/A

N/A

N/A

2.01

21

Table of Contents

Revolving

Loans

Revolving

Converted

2022

2021

2020

2019

 

2018

Prior

Loans

To Term

 

Total

Consumer loans

 

Pass

$

365,842

$

29,184

$

1,493

$

340

$

534

$

4,319

$

2,918

$

$

404,630

Special Mention

65

65

Substandard

70

513

583

Doubtful

$

365,912

$

29,697

$

1,493

$

340

$

534

$

4,384

$

2,918

$

$

405,278

Weighted average risk grade

3.24

3.74

3.99

3.98

4.00

4.02

3.81

N/A

3.30

PCD

 

 

 

Pass

$

$

$

$

$

$

3,692

$

$

$

3,692

Special Mention

1,320

1,320

Substandard

1,616

1,616

Doubtful

$

$

$

$

$

$

6,628

$

$

$

6,628

Weighted average risk grade

N/A

N/A

N/A

N/A

N/A

4.54

N/A

N/A

4.54

Total

$

1,013,317

$

529,190

$

139,928

$

150,284

$

156,531

$

742,564

$

180,332

$

34,491

$

2,946,637

Weighted average risk grade

3.20

3.19

3.48

3.54

3.60

3.57

3.35

3.53

3.36

Revolving loans that converted to term during the reported periods were as follows (in thousands):

For the three months ended June 30, 2023

For the six months ended June 30, 2023

Commercial real estate - owner occupied

$

214

$

214

Commercial real estate - non-owner occupied

2,057

Secured by farmland

Construction and land development

 

 

Residential 1-4 family

142

142

Multi- family residential

Home equity lines of credit

Commercial loans

 

 

186

Paycheck Protection Program loans

Consumer loans

 

 

Total loans

$

356

$

2,599

The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was $0.3 million and $0.1 million at June 30, 2023 and December 31, 2022, respectively.

Allowance For Credit Losses – Loans

The allowance for credit losses on loans is a contra-asset valuation account, calculated in accordance with ASC 326 that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. The amount of the allowance represents management's best estimate of current expected credit losses on loans considering available information, from internal and external sources, relevant to assessing collectability over the loans' contractual terms, adjusted for expected prepayments when appropriate.

In calculating the allowance for credit losses, most loans are segmented into pools based upon similar characteristics and risk profiles. For allowance modeling purposes, our loan pools include but are not limited to (i) commercial real estate - owner occupied, (ii) commercial real estate - non-owner occupied, (iii) construction and land development, (iv) commercial, (v) agricultural loans, (vi) residential 1-4 family and (vii) consumer loans. We periodically reassess each pool to ensure the loans within the pool continue to share similar characteristics and risk profiles and to determine whether further segmentation is necessary. For each loan pool, we measure expected credit losses over the life of each loan utilizing a combination of inputs: (i) probability of default, (ii) probability of attrition, (iii) loss given default and (iv) exposure at default. Internal data is supplemented by, but not replaced by, peer data when required, primarily to determine the probability of default input. The various pool-specific inputs may be adjusted for current macroeconomic assumptions.

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Table of Contents

Significant macroeconomic variables utilized in our allowance models include, among other things, (i) VA Gross Domestic Product, (ii) VA House Price Index, and (iii) VA unemployment rates.

Management qualitatively adjusts allowance model results for risk factors that are not considered within our quantitative modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. Qualitative factor (“Q-Factor”) adjustments are driven by key risk indicators that management tracks on a pool-by-pool basis. 

In some cases, management may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation.

The following tables present details of the allowance for credit losses on loans segregated by loan portfolio segment as of June 30, 2023 and December 31, 2022, calculated in accordance with the current expected credit losses (“CECL”) methodology (in thousands). 

    

Commercial

    

Commercial

    

    

    

    

    

Home

    

    

    

    

Real Estate

Real Estate

Construction

Equity

 

Owner

Non-owner

Secured by

and Land

1-4 Family

Multi-Family

Lines Of

Commercial

Consumer

PCD

 

June 30, 2023

Occupied

Occupied

Farmland

Development

Residential 

Residential 

Credit

Loans

Loans

Loans

Total

Modeled expected credit losses

$

4,747

$

6,360

$

3

$

914

$

4,067

$

1,641

$

307

$

5,225

$

7,011

$

$

30,275

Q-factor and other qualitative adjustments

268

625

29

372

385

352

19

855

5

2,910

Specific allocations

 

2,454

843

1,932

 

5,229

Total

$

5,015

$

9,439

$

32

$

1,286

$

4,452

$

1,993

$

326

$

6,923

$

7,016

$

1,932

$

38,414

    

Commercial

    

Commercial

    

    

    

    

    

Home

    

    

    

    

Real Estate

Real Estate

Construction

Equity

 

Owner

Non-owner

Secured by

and Land

1-4 Family

Multi-Family

Lines Of

Commercial

Consumer

PCD

 

December 31, 2022

Occupied

Occupied

Farmland

Development

Residential 

Residential 

Credit

Loans

Loans

Loans

Total

Modeled expected credit losses

$

5,297

 

$

6,652

 

$

4

 

$

997

 

$

3,579

 

$

1,814

 

$

310

 

$

5,006

 

$

3,851

 

$

$

27,510

Q-factor and other qualitative adjustments

261

495

21

376

512

387

19

654

2

2,727

Specific allocations

 

2,193

42

2,072

 

4,307

Total

$

5,558

$

7,147

$

25

$

1,373

$

4,091

$

2,201

$

329

$

7,853

$

3,895

$

2,072

$

34,544

No allowance for credit losses has been recognized for PPP loans as such loans are fully guaranteed by the SBA.

23

Table of Contents

Activity in the allowance for credit losses by class of loan for the three months ended June 30, 2023 and 2022 is summarized below (in thousands):

Commercial

Commercial

    

    

    

    

    

    

    

    

 

Real Estate

Real Estate

Construction

Home Equity

 

Owner

Non-owner

Secured by

and Land

1-4 Family

Multi-Family

Lines Of

Commercial

Consumer

PCD

Three Months Ended June 30, 2023

Occupied

Occupied 

Farmland

Development

Residential

Residential 

Credit

Loans

Loans

Loans

Total

Allowance for credit losses:

  

  

  

  

  

  

  

  

  

  

  

Beginning balance

$

5,274

$

7,161

$

21

$

1,280

$

4,343

$

2,087

$

350

$

6,464

$

6,802

$

1,945

$

35,727

Provision (recovery)

(259)

 

2,278

 

11

 

6

 

203

 

(94)

 

(19)

 

468

 

1,720

 

(13)

4,301

Charge offs

 

 

 

 

 

(94)

 

 

(7)

 

(10)

 

(1,629)

 

 

(1,740)

Recoveries

 

 

 

 

 

 

 

2

 

1

 

123

 

 

126

Ending balance

$

5,015

$

9,439

$

32

$

1,286

$

4,452

$

1,993

$

326

$

6,923

$

7,016

$

1,932

$

38,414

Three Months Ended June 30, 2022

Allowance for credit losses:

Beginning balance

$

4,173

$

8,913

$

49

$

1,029

$

3,888

$

2,289

$

376

$

5,466

$

1,025

$

2,171

$

29,379

Provision (recovery)

142

 

(1,498)

 

 

(5)

 

384

 

(129)

 

(14)

 

962

 

625

 

(45)

422

Charge offs

 

(14)

 

 

 

 

 

 

 

 

(84)

 

 

(98)

Recoveries

 

 

502

 

 

 

 

 

1

 

 

3

 

 

506

Ending balance

$

4,301

$

7,917

$

49

$

1,024

$

4,272

$

2,160

$

363

$

6,428

$

1,569

$

2,126

$

30,209

Activity in the allowance for credit losses by class of loan for the six months ended June 30, 2023 and 2022 is summarized below (in thousands):

Commercial

Commercial

    

    

    

    

    

    

    

    

 

Real Estate

Real Estate

Construction

Home Equity

 

Owner

Non-owner

Secured by

and Land

1-4 Family

Multi-Family

Lines Of

Commercial

Consumer

PCD

Six Months Ended June 30, 2023

Occupied

Occupied 

Farmland

Development

Residential

Residential 

Credit

Loans

Loans

Loans

Total

Allowance for credit losses:

  

  

  

  

  

  

  

  

  

  

  

Beginning balance

$

5,558

$

7,147

$

25

$

1,373

$

4,091

$

2,201

$

329

$

7,853

$

3,895

$

2,072

$

34,544

Provision (recovery)

(543)

2,292

7

(199)

469

(208)

2

845

6,963

(140)

9,488

Charge offs

 

 

 

 

 

(269)

 

 

(7)

 

(1,776)

 

(4,112)

 

 

(6,164)

Recoveries

 

 

 

 

112

 

161

 

 

2

 

1

 

270

 

546

Ending balance

$

5,015

$

9,439

$

32

$

1,286

$

4,452

$

1,993

$

326

$

6,923

$

7,016

$

1,932

$

38,414

Six Months Ended June 30, 2022

Allowance for credit losses:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Beginning balance

$

4,562

$

9,028

$

56

$

998

$

3,588

$

3,280

$

437

$

4,088

$

787

$

2,281

$

29,105

Provision (recovery)

(247)

(1,613)

(7)

26

627

(1,120)

(61)

2,170

901

(155)

521

Charge offs

 

(14)

 

 

 

 

 

 

(14)

 

 

(131)

 

 

(159)

Recoveries

 

 

502

 

 

 

57

 

 

1

 

170

 

12

 

 

742

Ending balance

$

4,301

$

7,917

$

49

$

1,024

$

4,272

$

2,160

$

363

$

6,428

$

1,569

$

2,126

$

30,209

Generally, a commercial loan, or a portion thereof, is charged-off when it is determined, through the analysis of any available current financial information with regards to the borrower, that the borrower is incapable of servicing unsecured debt, there is little or no prospect for near term improvement and no realistic strengthening action of significance is pending or, in the case of secured debt, when it is determined, through analysis of current information with regards to our collateral position, that amounts due from the borrower are in excess of the calculated current fair value of the collateral. Losses on installment loans are recognized in accordance with regulatory guidelines. All other consumer loan losses are recognized when delinquency exceeds 120 cumulative days.

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Table of Contents

The following table presents loans that were evaluated for expected credit losses on an individual basis and the related specific allocations, by loan portfolio segment as of June 30, 2023 and December 31, 2022 (in thousands):

June 30, 2023

    

December 31, 2022

Loan

Specific

Loan

Specific

Balance

Allocations

Balance

Allocations

Commercial real estate - owner occupied

$

5,073

$

$

2,795

$

Commercial real estate - non-owner occupied

 

19,187

 

2,454

 

19,641

 

Secured by farmland

503

525

Construction and land development

 

 

 

 

Residential 1-4 family

1,655

9,636

Multi- family residential

960

996

Home equity lines of credit

21

Commercial loans

 

1,369

 

843

 

2,979

 

2,193

Consumer loans

259

42

Total non-PCD loans

28,747

3,297

36,852

2,235

PCD loans

6,051

1,932

6,628

2,072

Total loans

$

34,798

$

5,229

$

43,480

$

4,307

4.      FAIR VALUE

ASC 820 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability

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Table of Contents

Assets and liabilities measured at fair value on a recurring basis are summarized below:

Fair Value Measurements Using

Significant

 

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Total at

Identical Assets

Inputs

Inputs

(dollars in thousands)

    

June 30, 2023

    

(Level 1)

    

(Level 2)

    

(Level 3)

Assets:

Available-for-sale securities

Residential government-sponsored mortgage-backed securities

$

98,014

$

$

98,014

$

Obligations of states and political subdivisions

 

29,673

 

 

29,673

 

Corporate securities

 

12,956

 

 

12,956

 

Collateralized loan obligations

 

4,901

 

 

4,901

 

Residential government-sponsored collateralized mortgage obligations

 

28,568

 

 

28,568

 

Government-sponsored agency securities

 

13,360

 

 

13,360

 

Agency commercial mortgage-backed securities

 

30,794

 

 

30,794

 

SBA pool securities

 

4,821

 

 

4,821

 

 

223,087

 

 

223,087

 

Loans held for investment

195,739

195,739

Loans held for sale

57,704

 

 

57,704

 

Mortgage banking financial assets

269

 

 

 

269

Derivative assets

2,032

 

 

2,032

 

Interest rate swaps

4,232

4,232

Total assets

$

483,063

$

$

287,055

$

196,008

Liabilities:

Derivative liabilities

$

126

$

$

$

Total liabilities

$

126

$

$

$

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Table of Contents

Fair Value Measurements Using

Significant

 

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Total at

Identical Assets

Inputs

Inputs

(dollars in thousands)

    

December 31, 2022

    

(Level 1)

    

(Level 2)

    

(Level 3)

Assets:

Available-for-sale securities

 

  

 

  

 

  

 

  

Residential government-sponsored mortgage-backed securities

$

102,881

$

$

102,881

$

Obligations of states and political subdivisions

 

29,178

 

 

29,178

 

Corporate securities

 

14,828

 

 

14,828

 

Collateralized loan obligations

 

4,876

 

 

4,876

 

Residential government-sponsored collateralized mortgage obligations

 

26,595

 

 

26,595

 

Government-sponsored agency securities

 

14,616

 

 

14,616

 

Agency commercial mortgage-backed securities

 

37,417

 

 

37,417

 

SBA pool securities

 

5,924

 

 

5,924

 

236,315

 

 

236,315

 

Loans held for sale

27,626

 

 

27,626

 

Mortgage banking financial assets

21

 

 

 

21

Derivative assets

1,410

 

 

1,386

 

24

Total assets

$

265,372

$

$

265,327

$

45

Liabilities:

Mortgage banking financial liabilities

$

4

$

$

$

4

Derivative liabilities

122

115

7

Total liabilities

$

126

$

$

115

$

11

Assets measured at fair value on a non-recurring basis are summarized below:

Fair Value Measurements Using

Significant

 

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Total at

Identical Assets

Inputs

Inputs

(dollars in thousands)

    

June 30, 2023

    

(Level 1)

    

(Level 2)

    

(Level 3)

Collateral dependent loans

$

34,408

$

$

 

$

34,408

Assets held for sale

3,115

3,115

Fair Value Measurements Using

Significant

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Total at

Identical Assets

Inputs

Inputs

(dollars in thousands)

    

December 31, 2022

    

(Level 1)

    

(Level 2)

    

(Level 3)

Collateral dependent loans

$

47,832

$

$

 

$

47,832

Assets held for sale

3,115

3,115

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Table of Contents

Fair Value of Financial Instruments

The carrying amount, estimated fair values and fair value hierarchy levels (previously defined) of financial instruments were as follows (in thousands) for the periods indicated:

June 30, 2023

December 31, 2022

    

Fair Value

    

Carrying

    

Fair 

    

Carrying

    

Fair 

Hierarchy Level

Amount

Value

Amount

Value

Financial assets:

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

 

Level 1

$

100,868

$

100,868

$

77,859

$

77,859

Securities available-for-sale

 

Level 2

 

223,087

 

223,087

 

236,315

 

236,315

Securities held-to-maturity

 

Level 2

 

12,378

 

11,369

 

13,520

 

12,449

Stock in Federal Reserve Bank and Federal Home Loan Bank

 

Level 2

 

12,083

 

12,083

 

25,815

 

25,815

Preferred investment in mortgage company

 

Level 2

 

3,005

3,005

 

3,005

3,005

Net loans

 

Level 3

 

3,135,224

 

2,995,950

 

2,912,093

 

2,809,163

Loans held for sale

 

Level 2

 

57,704

57,704

 

27,626

27,626

Accrued interest receivable

 

Level 2

 

20,238

 

20,238

 

14,938

 

14,938

Mortgage banking financial assets

Level 3

269

269

21

21

Derivative assets

 

Level 2 and 3

 

2,032

 

2,032

 

1,410

 

1,410

Interest rate swaps

Level 2

4,232

4,232

Credit enhancement

Level 2

4,247

4,247

1,504

1,504

Financial liabilities:

 

  

 

 

 

 

Demand deposits and NOW accounts

 

Level 2

$

1,298,557

$

1,298,557

$

1,200,243

$

1,200,243

Money market and savings accounts

 

Level 2

 

1,547,109

 

1,547,109

 

1,057,078

 

1,057,078

Time deposits

 

Level 3

 

471,330

 

468,551

 

465,057

 

462,376

Securities sold under agreements to repurchase

 

Level 1

 

3,921

 

3,921

 

6,445

 

6,445

FHLB advances

 

Level 1

 

 

 

325,000

 

325,000

Junior subordinated debt

 

Level 2

 

9,806

 

9,018

 

9,781

 

9,181

Senior subordinated notes

 

Level 2

 

85,647

 

83,123

 

85,531

 

84,347

Accrued interest payable

 

Level 2

 

7,350

 

7,350

 

3,261

 

3,261

Mortgage banking financial liabilities

Level 3

4

4

Derivative liabilities

 

Level 2 and 3

 

126

 

126

 

122

 

122

Carrying amount is the estimated fair value for cash and cash equivalents, loans held for sale, accrued interest receivable and payable, mortgage banking financial assets and liabilities, derivative assets and liabilities, interest rate swaps, demand deposits, savings accounts, money market accounts and FHLB advances and securities sold under agreements to repurchase.  

Fair value of long-term debt is based on current rates for similar financing. Carrying amount of Federal Reserve Bank and FHLB stock is a reasonable estimate of fair value as these securities are not readily marketable and are based on the ultimate recoverability of the par value. The fair value of off-balance-sheet items is not considered material. Fair value of net loans, time deposits, junior subordinated debt, and senior subordinated notes are measured using the exit-price notion.

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Table of Contents

5.      LEASES

The Company leases certain premises under operating leases. In recognizing lease right-of-use assets and related liabilities, we account for lease and non-lease components (such as taxes, insurance, and common area maintenance costs) separately as such amounts are generally readily determinable under our lease contracts. At June 30, 2023 and December 31, 2022, the Company had operating lease liabilities totaling $11.5 million and $5.8 million, respectively, and right-of-use assets totaling $10.7 million and $5.3 million, respectively, related to these leases. Operating lease liabilities and right-of-use assets are reflected in our consolidated balance sheets. We do not currently have any financing leases. For the three months ended June 30, 2023 and 2022, our net operating lease costs were $0.6 million and $0.4 million, respectively and for the six months ended June 30, 2023 and 2022, our net operating lease costs were $1.2 million and $1.0 million, respectively. These net operating lease costs are reflected in occupancy expenses on our consolidated statements of income and comprehensive income (loss).

The following table presents other information related to our operating leases:

For the Six Months Ended

(in thousands except for percent and period data)

June 30, 2023

June 30, 2022

Other information:

Weighted-average remaining lease term - operating leases, in years

7.5

4.5

Weighted-average discount rate - operating leases

 

3.8

%

 

2.8

%

The following table summarizes the maturity of remaining lease liabilities:

As of

(dollars in thousands)

June 30, 2023

Lease payments due:

2023

$

1,019

2024

1,829

2025

1,683

2026

1,657

2027

1,635

Thereafter

 

5,729

Total lease payments

13,552

Less: imputed interest

(2,006)

Lease liabilities

$

11,546

     As of June 30, 2023, the Company had one operating lease that has not yet commenced that will create additional lease liabilities and right-of-use assets for the Company.

6.     DEBT AND OTHER BORROWINGS

Other borrowings can consist of FHLB convertible advances, FHLB of Atlanta overnight advances, FHLB advances maturing within one year, federal funds purchased, Federal Reserve Board Discount Window and securities sold under agreements to repurchase (“repo”) that mature within one year, which are secured transactions with customers. The balance in repo accounts at June 30, 2023 and December 31, 2022 was $3.9 million and $6.5 million, respectively.

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Table of Contents

At June 30, 2023 and December 31, 2022, we had pledged callable agency securities, residential government-sponsored mortgage-backed securities and collateralized mortgage obligations with a carrying value of $4.6 million and $14.2 million, respectively, to customers who require collateral for overnight repurchase agreements and deposits.

We repaid our short-term FHLB advances of $325.0 million that were outstanding as of December 31, 2022 and matured in the first quarter of 2023. As a result, we have all of our FHLB capacity available for future liquidity needs. At June 30, 2023, Primis Bank had lendable collateral value in the form of residential 1-4 family mortgages, HELOCs, commercial mortgage loans, and investment securities supporting borrowing capacity of approximately $580.8 million from the FHLB.

In June 2023, the Bank began participating in the Federal Reserve discount window borrowing program. At June 30, 2023, the Bank had borrowing capacity of $489.6 million within the program.

In March 2023, the Federal Reserve established the Bank Term Funding Program (“BTFP”) in response to industry disruption, offering loans with up to one year in maturity to eligible depository institutions in exchange for pledged collateral in the form of U.S. Treasuries, agency debt and mortgage-backed securities and other qualifying assets. Borrowing capacity under the BTFP is based on the par value, not fair value, of the collateral. At June 30, 2023, we had securities available of $138.0 million for utilization with the BTFP, with no borrowings outstanding under the program at June 30, 2023.

In 2017, the Company assumed $10.3 million of trust preferred securities that were issued on September 17, 2003 and placed through a trust in a pooled underwriting totaling approximately $650 million. At June 30, 2023 and December 31, 2022, there was $10.3 million outstanding, net of approximately $0.5 million of debt issuance costs. As of June 30, 2023 and December 31, 2022, the interest rate payable on the trust preferred securities was 8.46% and 7.69%, respectively. At June 30, 2023, all of the trust preferred securities qualified as Tier 1 capital.

On January 20, 2017, Primis completed the sale of $27.0 million of its fixed-to-floating rate senior Subordinated Notes due 2027. Interest is currently payable at an annual floating rate equal to three-month LIBOR plus a spread of 3.95% until maturity or early redemption. At June 30, 2023, 60% of these notes qualified as Tier 2 capital.

On August 25, 2020, Primis completed the sale of $60.0 million of its fixed-to-floating rate Subordinated Notes due 2030. Interest is payable at an initial annual fixed rate of 5.40% and after September 1, 2025, at a floating rate equal to a benchmark rate, which is expected to be Three-Month Term SOFR, plus a spread of 531 basis points. At June 30, 2023, all of these notes qualified as Tier 2 capital.

At June 30, 2023 and December 31, 2022, the remaining unamortized debt issuance costs related to the senior Subordinated Notes totaled $1.4 million and $1.5 million, respectively.

7.      STOCK-BASED COMPENSATION

The 2017 Equity Compensation Plan (the “2017 Plan”) has a maximum number of 750,000 shares reserved for issuance. The purpose of the 2017 Plan is to promote the success of the Company by providing greater incentives to employees, non-employee directors, consultants and advisors to associate their personal financial interests with the long-term financial success of the Company, including its subsidiaries, and with growth in stockholder value, consistent with the Company’s risk management practices.

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A summary of stock option activity for the six months ended June 30, 2023 follows:

    

    

    

Weighted

    

 

Weighted

Average 

Aggregate

Average

Remaining

Intrinsic

Exercise

Contractual

Value

Shares

Price

Term

(in thousands)

Options outstanding, beginning of period

 

203,300

$

11.41

 

1.3

$

102

Expired

(113,500)

Exercised

 

(8,000)

Options outstanding, end of period

 

81,800

$

11.49

2.1

Exercisable at end of period

 

81,800

$

11.49

2.1

$

There was no stock-based compensation expense associated with stock options for the three and six months ended June 30, 2023 and 2022. As of June 30, 2023, we do not have any unrecognized compensation expense associated with the stock options.

A summary of time vested restricted stock awards for the six months ended June 30, 2023 follows:

    

    

Weighted

    

Weighted

    

Average

Average 

Grant-Date

Remaining

Fair Value

Contractual

Shares

Per Share

Term

Unvested restricted stock outstanding, beginning of period

 

68,700

$

14.24

2.4

 

Granted

 

5,000

7.58

 

  

 

Vested

 

(21,350)

14.28

 

  

 

Forfeited

 

(2,000)

15.43

 

 

Unvested restricted stock outstanding, end of period

 

50,350

$

13.51

2.4

Stock-based compensation expense for time vested restricted stock awards totaled $0.1 million for the three months ended both June 30, 2023 and 2022, and $0.1 million and $0.8 million for the six months ended June 30, 2023 and 2022, respectively. As of June 30, 2023, unrecognized compensation expense associated with restricted stock awards was $0.5 million, which is expected to be recognized over a weighted average period of 2.4 years.

A summary of performance-based restricted stock units (the “Units”) for the six months ended June 30, 2023 follows:

    

    

Weighted

    

Weighted

Average

Average 

Grant-Date

Remaining

Fair Value

Contractual

Shares

Per Share

Term

Unvested Units outstanding, beginning of period

 

153,960

$

13.02

 

3.6

Granted

 

 

  

Vested

 

 

  

Unvested Units outstanding, end of period

 

153,960

13.02

2.6

These Units are subject to service and performance conditions. These Units vest based on the achievement of both conditions. Achievement of the performance condition will be determined at the end of the five-year performance period (the “Performance Period”) by evaluating the: 1) Company’s adjusted earnings per share compound annual growth measured for the Performance Period and 2) performance factor achieved. Payouts between performance levels will be determined based on straight line interpolation.

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The Company did not recognize any stock-based compensation expense associated with these Units for the three and six months ended June 30, 2023 and 2022 because it is not probable that these Units will vest. The potential unrecognized compensation expense associated with these Units was $3.0 million and $1.3 million at June 30, 2023 and 2022, respectively.

8.     COMMITMENTS AND CONTINGENCIES

Financial Instruments with Off-Balance Sheet Risk

Primis is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and guarantees of credit card accounts. These instruments involve elements of credit and funding risk in excess of the amount recognized in the consolidated balance sheets. Letters of credit are written conditional commitments issued by Primis to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. We had letters of credit outstanding totaling $10.7 million as of both June 30, 2023 and December 31, 2022.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit is based on the contractual amount of these instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Unless noted otherwise, we do not require collateral or other security to support financial instruments with credit risk.

Allowance For Credit Losses - Off-Balance-Sheet Credit Exposures

The allowance for credit losses on off-balance-sheet credit exposures is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if we have the unconditional right to cancel the obligation. Off-balance-sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit detailed above. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment or other off-balance-sheet exposure. The likelihood and expected amount of funding are based on historical utilization rates. The amount of the allowance represents management's best estimate of expected credit losses on commitments expected to be funded over the contractual life of the commitment. Estimating credit losses on amounts expected to be funded uses the same methodology as described for loans in Note 3 - Loans and Allowance for Credit Losses, as if such commitments were funded. The allowance for credit losses on off-balance-sheet credit exposures is reflected in other liabilities in our consolidated balance sheets.

The following table details activity in the allowance for credit losses on off-balance-sheet credit exposures:

    

2023

    

2022

Balance as of January 1

$

1,416

$

977

Credit loss expense (recovery)

 

(143)

 

92

Balance as of June 30,

$

1,273

$

1,069

Commitments

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments are made predominately for adjustable rate loans, and generally have fixed expiration dates of up to three months or other termination clauses and usually require payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis.

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We had $81.5 million of Primis mortgage loan commitments outstanding as of June 30, 2023, all of which contractually expire within thirty years.

At June 30, 2023 and December 31, 2022, we had unfunded lines of credit and undisbursed construction loan funds totaling $495.4 million and $540.6 million, respectively, not all of which will ultimately be drawn. Virtually all of our unfunded lines of credit and undisbursed construction loan funds are variable rate. The amount of certificate of deposit accounts maturing in less than one year was $379.6 million as of June 30, 2023, including $75.0 million of brokered CDs. Management anticipates that funding requirements for these commitments can be met in the normal course.

Primis also had commitments on the subscription agreements entered into for investments in non-marketable equity securities of $2.4 million and $3.2 million at June 30, 2023 and December 31, 2022, respectively.

9.      EARNINGS PER SHARE

The following is a reconciliation of the denominators of the basic and diluted earnings per share (“EPS”) computations (amounts in thousands, except per share data):

    

    

Weighted

    

 

Average

 

Income 

Shares

Per Share

(Numerator)

(Denominator)

Amount

For the three months ended June 30, 2023

Basic EPS

$

(188)

 

24,639

$

(0.01)

Effect of dilutive stock options and unvested restricted stock

 

 

 

Diluted EPS

$

(188)

 

24,639

$

(0.01)

For the three months ended June 30, 2022

Basic EPS

$

4,948

 

24,563

$

0.20

Effect of dilutive stock options and unvested restricted stock

 

 

118

 

Diluted EPS

$

4,948

 

24,681

$

0.20

For the six months ended June 30, 2023

 

  

 

  

 

  

Basic EPS

$

5,765

 

24,632

$

0.23

Effect of dilutive stock options and unvested restricted stock

 

 

53

 

Diluted EPS

$

5,765

 

24,685

$

0.23

For the six months ended June 30, 2022

 

  

 

  

 

  

Basic EPS

$

9,484

 

24,534

$

0.39

Effect of dilutive stock options and unvested restricted stock

 

 

132

 

(0.01)

Diluted EPS

$

9,484

 

24,666

$

0.38

The Company had 81,800 anti-dilutive options as of June 30, 2023 and did not have any anti-dilutive options as of June 30, 2022.

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10.         SEGMENT INFORMATION

The Company's management reporting process measures the performance of its operating segment based on internal operating structure, which is subject to change from time to time. Accordingly, the Company operates two reportable segments for management reporting purposes as discussed below:

Primis Bank. This segment specializes in providing financing services to businesses in various industries and deposit-related services to businesses, consumers and other customers. The primary source of revenue for this segment is net interest income from the origination of loans.

Primis Mortgage. This segment specializes in originating mortgages in a majority of the U.S. The primary source of revenue for this segment is noninterest income and the origination and sale of mortgage loans.

The following table provides financial information for the Company's reportable segments. The information provided under the caption “Primis Bank” includes operations not considered to be reportable segments and/or general operating expenses of the Company, and includes the parent company and elimination adjustments to reconcile the results of the operating segment to the consolidated financial statements prepared in conformity with GAAP.

As of and for the three months ended June 30, 2023

As of and for the six months ended June 30, 2023

    

Primis Mortgage

    

Primis Bank

    

Consolidated

    

Primis Mortgage

    

Primis Bank

    

Consolidated

Interest income

$

701

$

51,978

$

52,679

$

1,097

$

98,696

$

99,793

Interest expense

 

 

26,522

 

26,522

 

 

45,271

 

45,271

Net interest income

 

701

 

25,456

 

26,157

 

1,097

 

53,425

 

54,522

Provision for credit losses

 

4,301

4,301

 

9,488

9,488

Noninterest income

 

5,217

3,269

8,486

 

9,532

10,486

20,018

Noninterest expense

 

5,271

25,281

30,552

 

10,259

47,697

57,956

Income (loss) before income taxes

 

647

 

(857)

 

(210)

 

370

 

6,726

 

7,096

Income tax expense (benefit)

 

162

(184)

(22)

 

96

1,235

1,331

Net income (loss)

$

485

$

(673)

$

(188)

$

274

$

5,491

$

5,765

Assets

$

63,563

$

3,784,930

$

3,848,493

$

63,563

$

3,784,930

$

3,848,493

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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Primis. This discussion and analysis should be read with the consolidated financial statements, the footnotes thereto, and the other financial data included in this report and in our annual report on Form 10-K for the year ended December 31, 2022. Results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of results that may be attained for any other period. The emphasis of this discussion will be on the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 for the consolidated statements of income (loss) and comprehensive income (loss). For the consolidated balance sheets, the emphasis of this discussion will be the balances as of June 30, 2023 compared to December 31, 2022. This discussion and analysis contains statements that may be considered “forward-looking statements” as defined in, and subject to the protections of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. See the following section for additional information regarding forward-looking statements.

FORWARD-LOOKING STATEMENTS

Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. The words “believe,” “may,”  “forecast,” “should,” “anticipate,” “contemplate,” “estimate,” “expect,” “project,” “predict,”  “intend,” “continue,” “would,” “could,” “hope,” “might,” “assume,” “objective,” “seek,” “plan,” “strive” or similar words, or the negatives of these words, identify forward-looking statements.

Forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the expectations of future results we express or imply in any forward-looking statements. In addition to the Risk Factors contained in this Quarterly Report on Form 10-Q, as well as the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, and the other reports we file with the Securities and Exchange Commission, factors that could contribute to those differences include, but are not limited to:

the effects of future economic, business and market conditions and disruptions in the credit and financial markets, domestic and foreign;
potential impacts of the recent adverse developments in the banking industry highlighted by high-profile bank failures, including impacts on customer confidence, deposit outflows, liquidity and the regulatory response thereto;
potential increases in the provision for credit losses and other general competitive, economic, political, and market factors, including those affecting our business, operations, pricing, products, or services;
fraudulent and negligent acts by loan applicants, mortgage brokers and our employees;
our ability to recover certain losses related to fraudulent loans under the Company's insurance policies and to successfully complete the claims process and minimize the financial impact of these loans;
our ability to implement our various strategic and growth initiatives, including our Panacea Financial and Life Premium Finance Divisions, new digital banking platform, V1BE fulfillment service and Primis Mortgage Company as well as our cost saving project to reduce administrative and branch expenses;
adverse results from current or future litigation, regulatory examinations or other legal and/or regulatory actions;

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changes in the local economies in our market areas which adversely affect our customers and their ability to transact profitable business with us, including the ability of our borrowers to repay their loans according to their terms or a change in the value of the related collateral;
changes in interest rates, inflation, loan demand, real estate values, or competition, as well as labor shortages, supply chain disruptions, the threat of recession and volatile equity capital markets;
changes in the availability of funds resulting in increased costs or reduced liquidity, as well as the adequacy of our cash flow from operations and borrowings to meet our short-term liquidity needs;
a deterioration or downgrade in the credit quality and credit agency ratings of the investment securities in our investment securities portfolio;
impairment concerns and risks related to our investment securities portfolio of collateralized mortgage obligations, agency mortgage-backed securities and obligations of states and political subdivisions;
the incurrence and possible impairment of goodwill associated with current or future acquisitions and possible adverse short-term effects on our results of operations;
increased credit risk in our assets and increased operating risk caused by a material change in commercial, consumer and/or real estate loans as a percentage of our total loan portfolio, including as a result of rising interest rates, inflation and recessionary concerns;
the concentration of our loan portfolio in loans collateralized by real estate;
our level of construction and land development and commercial real estate loans;
our ability to identify and address potential cybersecurity risks on our systems and/or third party vendors and service providers on which we rely, heightened by increased use of our virtual private network platform, including data security breaches, credential stuffing, malware, “denial-of-service” attacks, “hacking” and identity theft, a failure of which could disrupt our business and result in the disclosure of and/or misuse or misappropriation of confidential or proprietary information, disruption or damage to our systems, increased costs, losses, or adverse effects to our reputation;
changes in the levels of loan prepayments and the resulting effects on the value of our loan portfolio;
the failure of assumptions and estimates underlying the establishment of and provisions made to the allowance for credit losses;
our ability to expand and grow our business and operations, including the acquisition of additional banks, and our ability to realize the cost savings and revenue enhancements we expect from such activities;
government intervention in the U.S. financial system, including the effects of legislative, tax, accounting and regulatory actions and reforms, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau, the capital ratios of Basel III as adopted by the federal banking authorities, the Tax Cuts and Jobs Act of 2017 and the CARES Act, as well as the possibility that the U.S. could default on its debt obligations and the risk of inflation and interest rate increases resulting from monetary and fiscal stimulus response, which may have unanticipated adverse effects on our customers, and our financial condition and results of operations;
uncertainty related to the transition away from the London Inter-bank Offered Rate (“LIBOR”);
increased competition for deposits and loans adversely affecting rates and terms;
the continued service of key management personnel;
the potential payment of interest on demand deposit accounts to effectively compete for customers;
potential environmental liability risk associated with properties that we assume upon foreclosure;
increased asset levels and changes in the composition of assets and the resulting impact on our capital levels and regulatory capital ratios;
risks of current or future mergers and acquisitions, including the related time and cost of implementing transactions and the potential failure to achieve expected gains, revenue growth or expense savings;
increases in regulatory capital requirements for banking organizations generally, which may adversely affect our ability to expand our business or could cause us to shrink our business;
acts of God or of war or other conflicts, including the current Ukraine/Russia conflict, acts of terrorism, pandemics or other catastrophic events that may affect general economic conditions;
changes in accounting policies, rules and practices and applications or determinations made thereunder, including the impact of the adoption of the current expected credit losses (“CECL”) methodology;
failure to maintain effective internal controls and procedures;

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the risk that our deferred tax assets could be reduced if future taxable income is less than currently estimated, if corporate tax rates in the future are less than current rates, or if sales of our capital stock trigger limitations on the amount of net operating loss carryforwards that we may utilize for income tax purposes;
our ability to attract and retain qualified employees, including as a result of heightened labor shortages;
risks related to environmental, social and governance ("ESG") strategies and initiatives, the scope and pace of which could alter our reputation and shareholder, associate, customer and third-party affiliations; and
other factors and risks described under “Risk Factors” herein and in any of our subsequent reports that we file with the Securities and Exchange Commission (the “Commission” or “SEC”) under the Exchange Act.

Forward-looking statements are not guarantees of performance or results and should not be relied upon as representing management’s views as of any subsequent date. A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe we have chosen these assumptions or bases in good faith and that they are reasonable. We caution you, however, that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. When considering forward-looking statements, you should refer to the risk factors and other cautionary statements in this Quarterly Report on Form 10-Q and in our periodic and current reports filed with the SEC for specific factors that could cause our actual results to be different from those expressed or implied by our forward-looking statements. These statements speak only as of the date of this Quarterly Report on Form 10-Q (or an earlier date to the extent applicable). Except as required by applicable law, we undertake no obligation to update publicly these statements in light of new information or future events.

OVERVIEW

Primis Financial Corp. (“Primis,” “we,” “us,” “our” or the “Company”) is the bank holding company for Primis Bank (“Primis Bank” or the “Bank”), a Virginia state-chartered bank which commenced operations on April 14, 2005. Primis Bank provides a range of financial services to individuals and small and medium-sized businesses. At June 30, 2023, Primis Bank had thirty-two full-service branches in Virginia and Maryland and also provides services to customers through certain online and mobile applications. Thirty full-service retail branches are in Virginia and two full-service retail branches are in Maryland. The Company is headquartered in McLean, Virginia and has an administrative office in Glen Allen, Virginia and an operations center in Atlee, Virginia. Our deposits are insured, up to applicable limits, by the Federal Deposit Insurance Corporation (the “FDIC”). Primis Mortgage Company, a residential mortgage lender headquartered in Wilmington, North Carolina, is also a consolidated subsidiary of Primis Bank.

As part of a cost saving initiative, the Bank plans to consolidate eight branch locations, reducing total branches from thirty-two to twenty-four, with an expected effective date of October 31, 2023.

While Primis Bank offers a wide range of commercial banking services, it focuses on making loans secured primarily by commercial real estate and other types of secured and unsecured commercial loans to small and medium-sized businesses in a number of industries, as well as loans to individuals for a variety of purposes. Primis Bank invests in real estate-related securities, including collateralized mortgage obligations and agency mortgage backed securities. Primis Bank’s principal sources of funds for loans and investing in securities are deposits and, to a lesser extent, borrowings. Primis Bank offers a broad range of deposit products, including checking (NOW), savings, money market accounts and certificates of deposit. Primis Bank actively pursues business relationships by utilizing the business contacts of its senior management, other bank officers and its directors, thereby capitalizing on its knowledge of its local market areas.

Current Economic Environment

The U.S. economy expanded in the second quarter of 2023, with Real Gross Domestic Product growing by an annualized 2.4%. According to the U.S. Bureau of Labor and Statistics, the rate of unemployment was relatively stable compared to year end at 3.5% in July 2023. The Federal Reserve (the “Fed”) has now raised rates 525 bps in total since March of 2022, a pace that has not been experienced in more than 40 years. This rate level is continuing to put strong margin pressure on all banks, including Primis, as the cost of deposits is increasing while many loans are fixed due to

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borrowers locking in historic low rates in the past few years. Inflation, while beginning to show signs of moderating, remains higher than the Fed’s long term target rate. This has resulted in the Fed continuing to raise borrowing rates in an attempt to get inflation to its 2% target rate. The path of future rate hikes by the Fed is uncertain as it indicated their rate decisions going forward will be data-dependent, which could result in additional increases in the second half of 2023.

Further, on August 1, 2023, Fitch Ratings downgraded the United States of America's Long-Term Foreign-Currency Issuer Default Rating to 'AA+' from 'AAA', citing expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions. The full extent of the impact of these factors is uncertain and may have a negative impact on the U.S. economy, including the possibility of an economic recession in the near or mid-term.

FINANCIAL HIGHLIGHTS

Net loss for the three months ended June 30, 2023 totaled $0.2 million, or $0.01 basic and diluted loss per share, compared to net income of $5.0 million, or $0.20 basic and diluted earnings per share for the three months ended June 30, 2022. Net income for the six months ended June 30, 2023 totaled $5.8 million, or $0.23 basic and diluted earnings per share, compared to $9.5 million, or $0.39 basic and $0.38 per diluted earnings per share for the six months ended June 30, 2022.
Total assets as of June 30, 2023 were $3.85 billion, an increase of 8% compared to December 31, 2022.
Total cash and cash equivalents grew to $100.9 million, up from $77.9 million at December 31, 2022.
Total loans, excluding Paycheck Protection Program (“PPP”) balances as of June 30, 2023, were $3.17 billion, an increase of $229.4 million, or 8%, from December 31, 2022.
Total deposits were $3.32 billion at June 30, 2023, an increase of 22% compared to December 31, 2022.
Non-time deposits increased to $2.85 billion at June 30, 2023, an increase of $588.3 million, or 26%, compared to December 31, 2022.
The ratio of gross loans to deposits has declined to 96% at June 30, 2023, from 108% at December 31, 2022.
Net interest margin of 2.65% in the second quarter of 2023 was down from 3.33% in the second quarter of 2022.
Allowance for credit losses to total loans was 1.21% at June 30, 2023, compared to 1.17% at December 31, 2022.
Recently announced cost savings initiative and structural changes to branch and digital deposit gathering is expected to reduce costs by an estimated $9.4 million per year and is expected to be fully implemented by October 2023.
Reduction in branch count will push total deposits per branch to approximately $153 million compared to approximately $85 million per branch at the end of 2022.
During the second quarter of 2023, the Company discovered an employee loan fraud with total exposure of approximately $2.5 million. The Company has evaluated the effect of the error, both qualitatively and quantitatively, and believes the impact to prior years is immaterial to each respective period assessed. Regardless, the Company has revised prior periods to reflect the fraud losses in the respective period incurred instead of recording in the current period when we discovered them because the losses are projected to have a material impact to the expected 2023 annual results. When reflecting the losses in prior periods, any losses incurred prior to January 1, 2022 were adjusted in the January 1, 2022 opening retained earnings balance. The revisions resulted in retained earnings as of January 1, 2022 being $2.0 million lower than previously reported in prior periods. Additionally, the revisions resulted in a decrease in loans held for investment as of December 31, 2022, of $2.0 million and a decrease in net income for the three and six months ended June 30, 2022, of $61 thousand and $118 thousand, respectively.

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RESULTS OF OPERATIONS

Net Income

Three-Month Comparison. Net loss for the three months ended June 30, 2023 totaled $0.2 million, or $0.01 basic and diluted loss per share, compared to net income of $4.9 million, or $0.20 basic and diluted earnings per share for the three months ended June 30, 2022. The 104% decrease in net income during the three months ended June 30, 2023 compared to the three months ended June 30, 2022 was driven by higher noninterest expenses mainly from an increase in employee compensation and benefits expense in the second quarter of 2023 related to increased head count at the Bank, Primis Mortgage and Panacea. The decrease in net income was also attributable to higher data processing expense driven by substantially higher application volume on the digital deposit platform as a result of a savings account rate promotion offered during 2023. We also experienced a $3.9 million increase in the provision for loan losses, a substantial amount of which was due to specific loans that are in the process of resolution. These decreases were partially offset by higher interest income and from mortgage banking income in the second quarter of 2023.

Six-Month Comparison. Net income for the six months ended June 30, 2023 totaled $5.8 million, or $0.23 basic and diluted earnings per share, compared to $9.5 million, or $0.39 basic and $0.38 per diluted earnings per share for the six months ended June 30, 2022. The 39% decrease in net income during the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily driven by higher noninterest expenses from an increase in employee compensation and benefits expense and higher data processing expense in the current year, partially offset by higher mortgage banking and credit enhancement income in 2023.

Net Interest Income

Our operating results depend primarily on our net interest income, which is the difference between interest and dividend income on interest-earning assets such as loans and investments, and interest expense on interest-bearing liabilities such as deposits and borrowings.

Three-Month Comparison. Net interest income was $26.2 million for the three months ended June 30, 2023, compared to $24.6 million for the three months ended June 30, 2022. Primis’ net interest margin for the three months ended June 30, 2023 was 2.65%, compared to 3.33% for the three months ended June 30, 2022. Net interest margin for three months ended June 30, 2023 was affected by excess cash balances that were not earning the higher rates of our loans combined with the climbing rates of our interest bearing deposits. Total income on interest-earning assets was $52.7 million and $28.2 million for the three months ended June 30, 2023 and 2022, respectively. The yield on average interest-earning assets was 5.34% and 3.82% for the three months ended June 30, 2023 and 2022, respectively. Increase in yield on average interest-earnings assets was driven by higher rates on cash and loans in the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The cost of average interest-bearing deposits increased 265 basis points to 3.10% for the three months ended June 30, 2023, compared to 0.45% for the three months ended June 30, 2022. Interest and fees on loans totaled $44.0 million and $26.3 million for the three months ended June 30, 2023 and 2022, respectively. Average loans during the three months ended June 30, 2023 were $3.15 billion, compared to $2.51 billion during the three months ended June 30, 2022.

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The following table details average balances of interest-earning assets and interest-bearing liabilities, the amount of interest earned/paid on such assets and liabilities, and the yield/rate for the periods indicated:

Average Balance Sheets and Net Interest Margin

Analysis For the Three Months Ended

June 30, 2023

June 30, 2022

Interest

Interest

Average

Income/

Yield/

Average

Income/

Yield/

    

Balance

    

Expense

    

Rate

    

Balance

    

Expense

    

Rate

    

(Dollar amounts in thousands)

Assets

Interest-earning assets:

  

  

  

  

Loans held for sale

$

48,698

$

700

5.77

%  

$

6,936

$

93

5.38

%  

Loans, net of deferred fees (1) (2)

3,101,946

43,270

5.60

%  

2,507,779

26,244

4.20

%  

Investment securities

240,700

1,551

2.58

%  

287,722

1,445

2.01

%  

Other earning assets

568,251

7,158

5.05

%  

158,817

448

1.13

%  

Total earning assets

3,959,595

52,679

5.34

%  

2,961,254

28,230

3.82

%  

Allowance for credit losses

(35,694)

(29,844)

Total non-earning assets

294,742

259,052

Total assets

$

4,218,643

$

3,190,462

Liabilities and stockholders' equity

  

  

  

  

Interest-bearing liabilities:

  

  

  

  

NOW and other demand accounts

$

826,598

$

4,343

2.11

%  

$

695,481

$

557

0.32

%  

Money market accounts

858,532

6,231

2.91

%  

810,781

938

0.46

%  

Savings accounts

1,026,085

10,405

4.07

%  

222,274

142

0.26

%  

Time deposits

495,721

3,804

3.08

%  

329,198

674

0.82

%  

Total interest-bearing deposits

3,206,936

24,783

3.10

%  

2,057,734

2,311

0.45

%  

Borrowings

99,794

1,739

6.99

%  

107,784

1,341

4.99

%  

Total interest-bearing liabilities

3,306,730

26,522

3.22

%  

2,165,518

3,652

0.68

%  

Noninterest-bearing liabilities:

  

  

  

  

Demand deposits

473,295

596,714

Other liabilities

37,265

22,095

Total liabilities

3,817,290

2,784,327

Stockholders' equity

401,353

406,135

Total liabilities and stockholders' equity

$

4,218,643

$

3,190,462

Net interest income

$

26,157

$

24,578

Interest rate spread

2.12

%  

3.15

%  

Net interest margin

2.65

%  

3.33

%  

(1)Includes loan fees in both interest income and the calculation of the yield on loans.
(2)Calculations include non-accruing loans in average loan amounts outstanding.

Six-Month Comparison. Net interest income was $54.5 million for the six months ended June 30, 2023, compared to $47.4 million for the six months ended June 30, 2022. Primis’ net interest margin for the six months ended June 30, 2023 was 2.89%, compared to 3.14% for the six months ended June 30, 2022. Continued upward pressure on deposit account rates and consumer preferences shifting from non-interest bearing to higher rate products are impacting interest expense and net interest income for the Company and the industry as a whole. Net interest margin for the Company was further affected by excess cash balances, that are part of average other earning assets that earned lower rates compared to the rates earned by our loan portfolio. Total income on interest-earning assets was $99.8 million and $54.8 million for the six months ended June 30, 2023 and 2022, respectively. The yield on average interest-earning assets was 5.29% and 3.63% for the six months ended June 30, 2023 and 2022, respectively. Increase in yield on average interest-earnings assets was driven by higher rates on cash and loans in 2023 compared to 2022. The cost of average interest-bearing deposits increased 231 basis points to 2.75% for the six months ended June 30, 2023, compared to 0.44% for the six months ended June 30, 2022. Interest and fees on loans totaled $85.3 million and $51.1 million for the six months ended June 30, 2023 and 2022, respectively. Average loans during the six months ended June 30, 2023 were $3.08 billion, compared to $2.44 billion during the six months ended June 30, 2022.

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The following table details average balances of interest-earning assets and interest-bearing liabilities, the amount of interest earned/paid on such assets and liabilities, and the yield/rate for the periods indicated:

Average Balance Sheets and Net Interest Margin

Analysis For the Six Months Ended

June 30, 2023

June 30, 2022

Interest

Interest

Average

Income/

Yield/

Average

Income/

Yield/

    

Balance

    

Expense

    

Rate

    

Balance

    

Expense

    

Rate

    

(Dollar amounts in thousands)

Assets

Interest-earning assets:

  

  

  

  

  

  

Loans held for sale

$

37,086

$

1,091

5.93

%  

$

3,487

$

93

5.38

%  

Loans, net of deferred fees (1) (2)

3,047,259

84,185

5.57

%  

2,433,593

50,967

4.22

%  

Investment securities

243,536

3,135

2.60

%  

295,036

2,875

1.96

%  

Other earning assets

478,786

11,382

4.79

%  

312,033

854

0.55

%  

Total earning assets

3,806,667

99,793

5.29

%  

3,044,149

54,789

3.63

%  

Allowance for credit losses

(34,901)

(29,543)

Total non-earning assets

291,459

257,472

Total assets

$

4,063,225

3,272,078

Liabilities and stockholders' equity

Interest-bearing liabilities:

NOW and other demand accounts

$

774,878

$

6,610

1.72

%  

$

756,118

$

1,222

0.33

%  

Money market accounts

841,630

11,032

2.64

%  

810,124

1,797

0.45

%  

Savings accounts

811,148

15,156

3.77

%  

223,489

291

0.26

%  

Time deposits

492,412

7,029

2.88

%  

339,724

1,374

0.82

%  

Total interest-bearing deposits

2,920,068

39,827

2.75

%  

2,129,455

4,684

0.44

%  

Borrowings

191,859

5,444

5.72

%  

139,363

2,699

3.91

%  

Total interest-bearing liabilities

3,111,927

45,271

2.93

%  

2,268,818

7,383

0.66

%  

Noninterest-bearing liabilities:

Demand deposits

514,657

571,264

Other liabilities

33,135

22,573

Total liabilities

3,659,719

2,862,655

Stockholders' equity

403,506

409,423

Total liabilities and stockholders' equity

$

4,063,225

3,272,078

Net interest income

$

54,522

$

47,406

Interest rate spread

2.35

%

2.97

%

Net interest margin

2.89

%

3.14

%

(1)Includes loan fees in both interest income and the calculation of the yield on loans.
(2)Calculations include non-accruing loans in average loan amounts outstanding.

Provision for Credit Losses

The provision for credit losses is a current charge to earnings made in order to adjust the allowance for credit losses for current expected losses in the loan portfolio based on an evaluation of the loan portfolio, current economic conditions, changes in the nature and volume of lending, historical loan experience and other known internal and external factors affecting loan collectability. Our allowance for credit losses is calculated by segmenting the loan portfolio by loan type and applying risk factors to each segment. The risk factors are determined by considering historical loss data, peer data, as well as applying management’s judgment.

The Company recorded a provision for credit losses for the three and six months ended June 30, 2023 of $4.3 million and $9.5 million, respectively, compared to a provision for credit losses for the three and six months ended June 30, 2022 of $0.4 million and $0.5 million, respectively. For the three and six months ended June 30, 2023, $1.1 million and $6.0 million, respectively, were due to charge-offs and additional reserve calculated in our normal reserve process for a portfolio of loans that includes a third-party credit enhancement. As a result, this portion of the provision is fully offset by a gain

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recorded in noninterest income due to credit enhancement and has no effect on net income. Excluding this provision amount, the provision for credit losses would have been $3.2 million and $3.5 million for the three and six months ended June 30, 2023, respectively. We had charge-offs totaling $1.7 million and $0.1 million during the three months ended June 30, 2023 and 2022, respectively, and $6.2 million and $0.2 million during six months ended June 30, 2023 and 2022, respectively. During the three months ended June 30, 2023, the charge-offs were almost entirely related to the credit enhancement portfolio of loans. Approximately half of the charge-offs during the six months ended June 30, 2023, were related to the credit enhancement portfolio of loans and a majority of the remaining were due to three specific borrowers in which we determined portions of their loans were uncollectible. There were recoveries totaling $0.1 million and $0.5 million during three months ended June 30, 2023 and 2022, respectively, and $0.6 million and $0.7 million during six months ended June 30, 2023 and 2022, respectively.

The Financial Condition Section of Management’s Discussion and Analysis provides information on our loan portfolio, past due loans, nonperforming assets and the allowance for credit losses.

Noninterest Income

The following table presents the major categories of noninterest income for the three months ended June 30, 2023 and 2022:

For the Three Months Ended

June 30, 

(dollars in thousands)

    

2023

    

2022

     

Change

Account maintenance and deposit service fees

$

1,430

$

1,442

 

$

(12)

Income from bank-owned life insurance

 

394

 

378

 

16

Mortgage banking income

 

5,198

 

593

 

4,605

Gain on sale of loans

182

182

Credit enhancement income

1,152

1,152

Other noninterest income

 

130

 

217

 

(87)

Total noninterest income

$

8,486

$

2,630

$

5,856

Noninterest income increased 223% to $8.5 million for the three months ended June 30, 2023, compared to $2.6 million for the three months ended June 30, 2022. The increase in noninterest income was primarily related to $5.2 million of mortgage banking income and $1.2 million of credit enhancement income in the second quarter of 2023. The Company began accounting for certain third party credit enhancements on consumer lending during the third quarter of 2022, resulting in no income in the prior year and purchased Primis Mortgage late in the second quarter of 2022, which resulted in the lower level of income when compared to current year. During the second quarter of 2023, the Bank also realized $0.2 million of gains associated with a small sale of Panacea commercial loans.

The following table presents the major categories of noninterest income for the six months ended June 30, 2023 and 2022:

For the Six Months Ended

June 30, 

(dollars in thousands)

    

2023

    

2022

    

Change

Account maintenance and deposit service fees

$

2,646

$

2,793

 

$

(147)

Income from bank-owned life insurance

 

814

 

753

 

61

Mortgage banking income

 

9,513

 

593

 

8,920

Gain on sale of loans

660

660

Credit enhancement income

6,038

6,038

Other noninterest income

 

347

 

581

 

(234)

Total noninterest income

$

20,018

$

4,720

 

$

15,298

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Noninterest income increased 324% to $20.0 million for the six months ended June 30, 2023, compared to $4.7 million for the six months ended June 30, 2022. The increase in noninterest income was primarily related to $8.9 million of higher mortgage banking income and $6.0 million of credit enhancement income during the six months ended June 30, 2023. The increase in the mortgage banking income is related to the purchase of Primis Mortgage in May 2022 coupled with meaningful growth in the year since the purchase. Mortgage banking income includes fair value adjustments, origination income, and gains on sales of mortgage loans held for sale. The increase in the credit enhancement income was due to the significant increase in the consumer loan portfolio that receives the enhancement when comparing 2023 to 2022 and the increase in charge-offs in that portfolio over that time. Increase in noninterest income was also attributable to $0.7 million of gains associated with the sale of loans in 2023, primarily related to Panacea commercial loans.

Noninterest Expense

The following table presents the major categories of noninterest expense for the three months ended June 30, 2023 and 2022:

For the Three Months Ended

June 30, 

(dollars in thousands)

    

2023

    

2022

    

Change

Salaries and benefits

$

15,283

$

10,573

$

4,710

Occupancy expenses

 

1,593

 

1,418

 

175

Furniture and equipment expenses

 

1,852

 

1,128

 

724

Amortization of core deposit intangible

 

318

 

341

 

(23)

Virginia franchise tax expense

 

848

 

814

 

34

Data processing expense

 

2,828

 

1,293

 

1,535

Marketing expense

521

731

(210)

Telephone and communication expense

 

416

 

366

 

50

Net loss on bank premises and equipment

620

(620)

Professional fees

 

1,075

 

827

 

248

Credit enhancement costs

515

515

Other operating expenses

 

5,303

 

2,366

 

2,937

Total noninterest expenses

$

30,552

$

20,477

$

10,075

Noninterest expenses were $30.6 million during the three months ended June 30, 2023, compared to $20.5 million during the three months ended June 30, 2022. The 49% increase in noninterest expenses was primarily due to a $4.7 million increase in employee compensation in the second quarter of 2023 related to increased head count at the Bank, Primis Mortgage and Panacea compared to the second quarter of 2022, along with costs related to the cost savings initiative announced in the second quarter of 2023. The increase in noninterest expense during the three months ended June 30, 2023 was also attributable to a $1.5 million increase in data processing expense driven by substantially higher application volume on the digital deposit platform as a result of a savings account rate promotion offered during 2023. Furniture and equipment expenses increased $0.7 million due in large part to write-downs of assets related to the cost savings initiative announced in the second quarter of 2023. Noninterest expense for the three months ended June 30, 2023 included $0.5 million of credit enhancement costs related to servicing and other expenses for a third-party managed loan. A significant driver of the increase in other non-interest expenses were higher expenses related to Primis Mortgage in the second quarter of 2023. Other notable drivers of the increase in other operating expenses in the second quarter of 2023 included higher FDIC insurance costs due to the significant growth in deposits.

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The following table presents the major categories of noninterest expense for the six months ended June 30, 2023 and 2022:

For the Six Months Ended

June 30, 

(dollars in thousands)

    

2023

    

2022

    

Change

Salaries and benefits

$

30,311

$

20,198

$

10,113

Occupancy expenses

 

3,038

 

2,875

 

163

Furniture and equipment expenses

 

3,429

 

2,228

 

1,201

Amortization of core deposit intangible

 

635

 

682

 

(47)

Virginia franchise tax expense

 

1,697

 

1,627

 

70

Data processing expense

 

5,079

 

2,783

 

2,296

Marketing expense

1,090

1,196

(106)

Telephone and communication expense

 

793

 

748

 

45

Net (gain) loss on other real estate owned

 

 

(59)

 

59

Net loss on bank premises and equipment

620

(620)

Professional fees

 

1,937

 

1,921

 

16

Credit enhancement costs

1,388

1,388

Other operating expenses

 

8,559

 

4,690

 

3,869

Total noninterest expenses

$

57,956

$

39,509

$

18,447

Noninterest expenses were $58.0 million during the six months ended June 30, 2023, compared to $39.5 million during the six months ended June 30, 2022. The 47% increase in noninterest expenses was primarily attributable to a $10.1 million increase in employee compensation and benefits expense mainly related to increased head count at the Bank, Primis Mortgage and Panacea in the six months ended June 30, 2023 compared to 2022. The increase in noninterest expense during the six months ended June 30, 2023 was also driven by a $2.3 million increase in data processing expense in 2023 driven by substantially higher application volume on the digital deposit platform as a result of a savings account rate promotion offered during the first and second quarter of 2023. Noninterest expense for the six months ended June 30, 2023 included $1.4 million of credit enhancement costs related to servicing and other expenses for a third-party managed loan portfolio due to significant growth and charge-offs in that loan portfolio during 2023. Furniture and equipment expenses increased $1.2 million due to growth in the Bank, Primis Mortgage, and Panacea, and also due to write-downs of assets related to the cost savings initiative announced in the second quarter of 2023. Other expenses increased during the six months ended June 30, 2023 compared to the six months ended June 30, 2022, largely driven by higher expenses related to Primis Mortgage and higher FDIC insurance costs in 2023.

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Table of Contents

FINANCIAL CONDITION

Balance Sheet Overview

Total assets were $3.85 billion as of June 30, 2023 and $3.57 billion as of December 31, 2022. Total cash and cash equivalents were $100.9 million as of June 30, 2023 and $77.9 million as of December 31, 2022. Investment securities decreased from $249.8 million as of December 31, 2022 to $235.5 million as of June 30, 2023. Total loans increased 7%, from $2.95 billion at December 31, 2022 to $3.17 billion at June 30, 2023. Total deposits were $3.32 billion at June 30, 2023, compared to $2.72 billion at December 31, 2022 and total equity was $393.2 million and $392.4 million at June 30, 2023 and December 31, 2022, respectively.

Stockholder’s equity balances decreased $0.2 million from December 31, 2022 to June 30, 2023 as a result of a decrease in unrealized mark-to-market adjustments on the Company’s available-for-sale securities portfolio due to increases in market interest rates during the six months ended June 30, 2023. The Company has the intention to hold these securities until maturity or recovery of the value and does not anticipate realizing any losses on the investments.

Loans

Total loans were $3.17 billion and $2.95 billion at June 30, 2023 and December 31, 2022, respectively. PPP loans totaled $2.1 million at June 30, 2023 and $4.6 million at December 31, 2022, respectively. Excluding PPP loans, loans outstanding increased $229.4 million, or 8%, since December 31, 2022.

As of June 30, 2023 and December 31, 2022, a majority of our loans were to customers located in Virginia and Maryland. We are not dependent on any single customer or group of customers whose insolvency would have a material adverse effect on our operations.

The composition of our loans held for investment portfolio consisted of the following at June 30, 2023 and December 31, 2022 (in thousands):

June 30, 2023

December 31, 2022

    

Amount

    

Percent

    

Amount

    

Percent

    

Loans secured by real estate:

 

  

 

  

 

  

 

  

 

Commercial real estate - owner occupied

$

447,407

 

14.1

%  

$

459,866

 

15.6

%  

Commercial real estate - non-owner occupied

 

595,805

 

18.8

%  

 

579,733

 

19.7

%  

Secured by farmland

 

5,271

 

0.2

%  

 

5,970

 

0.2

%  

Construction and land development

 

175,073

 

5.5

%  

 

148,690

 

5.0

%  

Residential 1-4 family

 

591,938

 

18.7

%  

 

609,694

 

20.7

%  

Multi- family residential

 

133,754

 

4.2

%  

 

140,321

 

4.8

%  

Home equity lines of credit

 

62,808

 

2.0

%  

 

65,152

 

2.2

%  

Total real estate loans

 

2,012,056

 

63.4

%  

 

2,009,426

 

68.2

%  

Commercial loans

 

584,251

 

18.4

%  

 

520,741

 

17.7

%  

Paycheck protection program loans

2,143

0.1

%  

4,564

0.2

%  

Consumer loans

 

569,139

 

17.9

%  

 

405,278

 

13.8

%  

Total Non-PCD loans

 

3,167,589

 

99.8

%  

 

2,940,009

 

99.8

%  

PCD loans

6,049

0.2

%  

6,628

0.2

%  

Total loans

$

3,173,638

100.0

%  

$

2,946,637

100.0

%  

 

 

 

 

  

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The following table sets forth the contractual maturity ranges of our loans held for investment portfolio and the amount of those loans with fixed and floating interest rates in each maturity range as of June 30, 2023 (in thousands):

After 1 Year

After 5 Years

 

Through 5 Years

Through 15 Years

After 15 Years

 

One Year

Fixed

Floating

Fixed

Floating

Fixed

Floating

 

    

or Less

    

Rate

    

Rate

    

Rate

    

Rate

    

Rate

    

Rate

    

Total

Loans secured by real estate:

Commercial real estate - owner occupied

$

31,468

$

120,778

$

17,039

$

103,472

$

107,189

$

2,315

$

65,146

$

447,407

Commercial real estate - non-owner occupied

34,523

192,115

31,175

60,317

65,937

1,384

210,354

595,805

Secured by farmland

1,527

891

285

221

1,008

1,339

5,271

Construction and land development

122,162

25,535

19,291

757

5,013

681

1,634

175,073

Residential 1-4 family

15,602

48,619

8,306

30,035

54,093

72,286

362,997

591,938

Multi- family residential

5,677

56,640

18,783

7,078

18,562

27,014

133,754

Home equity lines of credit

9,468

996

11,142

30

3,002

33

38,137

62,808

Total real estate loans

220,427

445,574

106,021

201,910

254,804

76,699

706,621

2,012,056

Commercial loans

107,138

 

97,191

153,771

175,287

46,927

1,131

2,806

584,251

Paycheck protection program loans

25

1,918

200

2,143

Consumer loans

2,410

274,374

105,150

92,232

92,553

2,415

5

569,139

Total Non-PCD loans

330,000

819,057

364,942

469,629

394,284

80,245

709,432

3,167,589

PCD loans

 

3,060

1,337

1,114

398

140

 

6,049

Total loans

$

333,060

$

820,394

$

364,942

$

469,629

$

395,398

$

80,643

$

709,572

$

3,173,638

Asset Quality

While the impact of COVID-19 largely subsided in 2023, the residual effect of COVID-19 and its variants, as well as new risks emerging from geopolitical conflict, inflation, bank failures and the threat of a recession continue to cause economic instability. Despite this economic uncertainty, our asset quality remained strong during the first and second quarter of 2023. We will generally place a loan on nonaccrual status when it becomes 90 days past due. Loans will also be placed on nonaccrual status in cases where we are uncertain whether the borrower can satisfy the contractual terms of the loan agreement. Cash payments received while a loan is categorized as nonaccrual will be recorded as a reduction of principal as long as doubt exists as to future collections.  

We maintain appraisals on loans secured by real estate, particularly those categorized as nonperforming loans and potential problem loans. In instances where appraisals reflect reduced collateral values, we make an evaluation of the borrower’s overall financial condition to determine the need, if any, for impairment or write-down to their fair values. If foreclosure occurs, we record OREO at the lower of our recorded investment in the loan or fair value less our estimated costs to sell.

Our loan portfolio losses and delinquencies have been primarily limited by our underwriting standards and portfolio management practices. Whether losses and delinquencies in our portfolio will increase significantly depends upon the value of the real estate securing the loans and economic factors, such as the overall economy in our market area, rising interest rates, historically high inflation, and recessionary concerns.

Total calculated reserves increased by $3.9 million to $38.4 million at the end of June 30, 2023 compared to $34.5 million at December 31, 2022, driven by growth in the third-party managed loan portfolio and secondarily due to the $227.0 million in overall loan growth experienced in 2023.

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The following table presents a comparison of nonperforming assets as of June 30, 2023 and December 31, 2022 (in thousands):

    

June 30, 

December 31, 

2023

    

2022

    

Nonaccrual loans

$

25,290

$

35,484

Loans past due 90 days and accruing interest

 

1,714

 

3,361

Total nonperforming assets

 

27,004

 

38,845

SBA guaranteed amounts included in nonperforming loans

$

2,331

$

3,969

Allowance for credit losses to total loans

 

1.21

%  

 

1.17

%  

Allowance for credit losses to nonaccrual loans

 

151.90

%  

 

97.35

%  

Allowance for credit losses to nonperforming loans

 

142.25

%  

 

88.93

%  

Nonaccrual to total loans

 

0.80

%  

 

1.20

%  

Nonperforming assets excluding SBA guaranteed loans to total assets

 

0.64

%  

 

0.98

%  

Nonaccrual loans decreased 29% to $25.3 million (excluding $0.6 million of loans fully covered by SBA guarantees) at June 30, 2023, compared to $35.5 million (excluding $0.6 million of loans fully covered by SBA guarantees) at December 31, 2022. A substantial portion of the Bank’s nonperforming assets in previous periods were comprised of two relationships with a combined balance of approximately $27.0 million. A large residential property with a balance of approximately $8.0 million included in that total was sold in the second quarter of 2023. The other relationship, primarily consisting of assisted living facilities, is currently at the end of a receiver-managed marketing process with all three facilities under contract to close in the third quarter of 2023. When including the receipt of funds and removal of these loans, the Bank would have had approximately $5.0 million of nonperforming loans at June 30, 2023, an 86% decrease from year end.  

At June 30, 2023, our total substandard loans were $33.7 million compared to $41.0 million at December 31, 2022, an 18% decline. Included in the total substandard loans were SBA guarantees of $0.8 million in both periods. Special mention loans totaled $32.4 million at June 30, 2023 and $32.3 million at December 31, 2022.

For the quarter ended June 30, 2023, two loans from our owner occupied commercial real estate loan portfolio with an amortized cost basis of $0.4 million, were modified to a borrower experiencing financial difficulty. This modification resulted in reamortization of the balance of the notes over a 25 year period, while maintaining the original maturity date of February and July 2027. Contractual payments for both notes, prior to modification, for the three month period would have totaled $0.03 million. This newly originated financial difficulty modification had no payment delinquencies in the second quarter and represents 0.09% of our total owner occupied commercial real estate loans.

An existing modification performed in the first quarter of 2023, comprised of one loan with a $0.9 million amortized cost, which will resume contractual payments in August 2023. This existing modification has had no payment delinquencies since its modification and accounts for only 0.15% of our total 1-4 family residential loans.

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Investment Securities

Our investment securities portfolio provides us with required liquidity and collateral to pledge secure public deposits, certain other deposits, advances from the FHLB of Atlanta, and repurchase agreements.

We classify our investment securities as either held-to-maturity or available-for-sale. Debt investment securities that Primis has the positive intent and ability to hold to maturity are classified as held-to-maturity and carried at amortized cost. Investment securities classified as available-for-sale are those debt securities that may be sold in response to changes in interest rates, liquidity needs or other similar factors. Investment securities available-for-sale are carried at fair value, with unrealized gains or losses net of deferred taxes, included in accumulated other comprehensive income (loss) in stockholders’ equity. Our portfolio of available-for-sale securities currently contains a material amount of unrealized mark-to-market adjustments due to increases in market interest rates since the original purchase of many of these securities. We have the intention to hold these securities until maturity or recovery of the value and do not anticipate realizing any losses on the investments.

Investment securities, available-for-sale and held-to-maturity, totaled $235.5 million at June 30, 2023, a decrease of 6% from $249.8 million at December 31, 2022, primarily due to paydowns, maturities, and calls of the investments over the past six months.

The following table sets forth a summary of the investment securities portfolio as of the dates indicated. Available-for-sale investment securities are reported at fair value, and held-to-maturity investment securities are reported at amortized cost (in thousands).

June 30, 

December 31, 

    

2023

    

2022

Available-for-sale investment securities:

 

  

 

  

Residential government-sponsored mortgage-backed securities

$

98,014

$

102,881

Obligations of states and political subdivisions

 

29,673

 

29,178

Corporate securities

 

12,956

 

14,828

Collateralized loan obligations

 

4,901

 

4,876

Residential government-sponsored collateralized mortgage obligations

 

28,568

 

26,595

Government-sponsored agency securities

 

13,360

 

14,616

Agency commercial mortgage-backed securities

 

30,794

 

37,417

SBA pool securities

 

4,821

 

5,924

Total

$

223,087

$

236,315

Held-to-maturity investment securities:

 

  

 

  

Residential government-sponsored mortgage-backed securities

$

9,753

$

10,522

Obligations of states and political subdivisions

 

2,388

 

2,721

Residential government-sponsored collateralized mortgage obligations

 

237

 

277

Total

$

12,378

$

13,520

We recognized an immaterial amount of credit impairment charges related to credit losses on our held-to-maturity investment securities during the three and six months ended June 30, 2023 and no credit losses during the three and six months ended June 30, 2022.

Deposits

The market for deposits is competitive. We offer a line of traditional deposit products that currently include noninterest-bearing and interest-bearing checking (or NOW accounts), commercial checking, money market accounts, savings accounts and certificates of deposit. We compete for deposits through our banking branches with competitive pricing, as well as nationally through advertising and online banking. We use deposits as a principal source of funding for our lending, purchasing of investment securities and for other business purposes.

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Total deposits increased 22% to $3.32 billion at June 30, 2023 from $2.72 billion at December 31, 2022. The increase in deposits from year-end was primarily driven by the substantial growth in the Bank’s new digital deposit platform in the first and second quarter of 2023. The majority of the growth was in savings accounts with the remainder largely in NOW accounts. Savings accounts increased 184% from $245.7 million as of December 31, 2022 to $696.8 million at June 30, 2023. NOW accounts increased 32% from $617.7 million at December 31, 2022 to $817.7 million at June 30, 2023. Our deposits are diversified in type and by underlying customer and lack significant concentrations to any type of customer (i.e. commercial, consumer, government) or industry.

Uninsured deposits are defined as the portion of deposit accounts in U.S. offices that exceed the FDIC insurance limit and amounts in any other uninsured investment or deposit account that are classified as deposits and are not subject to any federal or state deposit insurance regimes. Total uninsured deposits as calculated per regulatory guidance were $1.2 billion, or 35% of total deposits, at June 30, 2023. As further discussed below in “Liquidity and Funds Management” we took steps during the first six months of 2023 to bolster our available sources of liquidity and as of June 30, 2023, our total available sources of liquidity exceeds total uninsured deposits by $100 million.

The variety of deposit accounts we offer allows us to be competitive in obtaining funds and in responding to the threat of disintermediation (the flow of funds away from depository institutions such as banking institutions into direct investment vehicles such as government and corporate securities). Our ability to attract and maintain deposits, and the effect of such retention on our cost of funds, has been, and will continue to be, significantly affected by the general economy and market rates of interest.

For our deposit agreements with certain customers, we hold the collateral in a segregated custodial account. We are required to maintain adequate collateral levels. In the event the collateral fair value falls below stipulated levels, we will pledge additional securities. We closely monitor collateral levels to ensure adequate levels are maintained, while mitigating the potential risk of over-collateralization.

Liquidity and Funds Management

The objective of our liquidity management is to ensure the ability to meet our financial obligations. These obligations include the payment of deposits on demand or at maturity, the repayment of borrowings at maturity and the ability to fund commitments and other new business opportunities. We obtain funding from a variety of sources, including customer deposit accounts, customer certificates of deposit and payments on our loans and investments. If our level of core deposits are not sufficient to fully fund our lending activities, we have access to funding from additional sources, including but not limited to borrowing from the Federal Home Loan Bank of Atlanta and institutional certificates of deposits. In addition, we maintain federal funds lines of credit with two correspondent banks, totaling $65 million, and utilize securities sold under agreements to repurchase (“repo”) and reverse repurchase agreement borrowings from approved securities dealers, as needed.

We prepare a cash flow forecast on a 30, 60 and 90 day basis along with a one and two year basis. These projections incorporate expected cash flows on loans, investment securities, and deposits based on data used to prepare our interest rate risk analyses.

At June 30, 2023, we had substantial liquidity on the balance sheet with cash and equivalents of $100.9 million versus $77.9 million at December 31, 2022 largely due to the growth in digital platform deposits described above.

At June 30, 2023 and December 31, 2022, we had pledged callable agency securities, residential government-sponsored mortgage-backed securities and collateralized mortgage obligations with a carrying value of $4.6 million and $14.2 million, respectively, to customers who require collateral for overnight repurchase agreements and deposits.

The balance in repo accounts at June 30, 2023 and December 31, 2022 was $3.9 million and $6.5 million, respectively.

We repaid our short-term FHLB advances of $325.0 million that were outstanding as of December 31, 2022 and matured in the first quarter of 2023. As a result, we have all of our FHLB capacity available for future liquidity needs. At June 30, 2023, Primis Bank had lendable collateral value in the form of residential 1-4 family mortgages, HELOCs,

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commercial mortgage loans, and investment securities supporting borrowing capacity of approximately $580.8 million from the FHLB.

In June 2023, the Bank began participating in the Federal Reserve discount window borrowing program. At June 30, 2023, the Bank had borrowing capacity of $489.6 million within the program.

In March 2023, the Federal Reserve established the Bank Term Funding Program (“BTFP”) in response to recent industry disruption, offering loans with up to one year in maturity to eligible depository institutions in exchange for pledged collateral in the form of U.S. Treasuries, agency debt and mortgage-backed securities and other qualifying assets. Borrowing capacity under the BTFP is based on the par value, not fair value, of the collateral. At June 30, 2023, we had securities available of $138.0 million for utilization with the BTFP, with no borrowings outstanding under the program at June 30, 2023.

The Bank also utilizes institutional and brokered certificates of deposit to supplement customer funding. At June 30, 2023, we had $75.0 million of brokered deposits outstanding. We had remaining brokered CD capacity under internal policy of approximately $321.0 million.

At June 30, 2023, we had $495.4 million of unfunded lines of credit and undisbursed construction loan funds, not all of which will ultimately be drawn. The amount of certificate of deposit accounts maturing in less than one year was $379.6 million as of June 30, 2023, including $75.0 million of brokered CDs. Management anticipates that funding requirements for these commitments can be met in the normal course.

As of June 30, 2023, Primis was not aware of any known trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity. As of June 30, 2023, Primis has no material commitments for capital expenditures.

Capital Resources

Capital management consists of providing equity to support both current and future operations. Primis Financial Corp. and its subsidiary bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (“PCA”), we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. At June 30, 2023 and December 31, 2022, the most recent regulatory notifications categorized the Bank as well capitalized under regulatory framework for PCA.

Quantitative measures established by regulation to ensure capital adequacy require Primis to maintain minimum amounts and ratios of Total and Tier I capital (as defined in the regulations) to average assets (as defined). Management believes, as of June 30, 2023, that Primis meets all capital adequacy requirements to which it is subject.

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The following table provides a comparison of the leverage and risk-weighted capital ratios of Primis Financial Corp. and Primis Bank at the periods indicated to the minimum and well-capitalized required regulatory standards:

Minimum

 

Required for

 

Capital

To Be

Actual Ratio at

 

Adequacy

 Categorized as

June 30, 

December 31, 

    

Purposes

    

 Well Capitalized (1)

    

2023

    

2022

 

Primis Financial Corp.

 

  

 

  

 

 

  

Leverage ratio

 

4.00

%  

n/a

 

8.14

%  

9.68

%  

Common equity tier 1 capital ratio

 

4.50

%  

n/a

 

9.38

%  

10.30

%  

Tier 1 risk-based capital ratio

 

6.00

%  

n/a

 

9.68

%  

10.63

%  

Total risk-based capital ratio

 

8.00

%  

n/a

 

13.16

%  

14.57

%  

Primis Bank

 

 

Leverage ratio

 

4.00

%  

5.00

%  

9.41

%  

11.39

%  

Common equity tier 1 capital ratio

 

7.00

%  

6.50

%  

11.71

%  

12.64

%  

Tier 1 risk-based capital ratio

 

8.50

%  

8.00

%  

11.71

%  

12.64

%  

Total risk-based capital ratio

 

10.50

%  

10.00

%  

12.92

%  

13.84

%  

(1)Prompt corrective action provisions are not applicable at the bank holding company level.

Primis Financial Corp. and Primis Bank are required to meet minimum capital requirements set forth by regulatory authorities. Bank regulatory agencies have approved regulatory capital guidelines (“Basel III”) aimed at strengthening existing capital requirements for banking organizations. The Basel III Capital Rules require Primis Financial Corp. and Primis Bank to maintain (i) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer”, (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer, (iii) a minimum ratio of Total capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer and (iv) a minimum leverage ratio of 4.0%. Failure to meet minimum capital requirements may result in certain actions by regulators which could have a direct material effect on the consolidated financial statements.

Primis Financial Corp. and Primis Bank remain well-capitalized under Basel III capital requirements. Primis Bank had a capital conservation buffer of 4.92% at June 30, 2023, which exceeded the 2.50% minimum requirement below which the regulators may impose limits on distributions.

Primis Bank’s capital position is consistent with being well-capitalized under the regulatory framework for PCA.

CRITICAL ACCOUNTING POLICIES

The critical accounting policies are discussed in MD&A in our Annual Report on Form 10-K for the year ended December 31, 2022. Significant accounting policies and changes in accounting principles and effects of new accounting pronouncements are discussed in “Note 1. Organization and Significant Accounting Policies” in Form 10-K for the year ended December 31, 2022. Disclosures regarding changes in our significant accounting policies since year end and the effects of new accounting pronouncements are included in “Note 1. Accounting Policies” in this Form 10-Q.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are engaged primarily in the business of investing funds obtained from deposits and borrowings into interest-earning loans and investments. Consequently, our earnings depend to a significant extent on our net interest income, which is the difference between the interest income on loans and other investments and the interest expense on deposits and borrowings. To the extent that our interest-bearing liabilities do not reprice or mature at the same time as our interest-earning assets, we are subject to interest rate risk and corresponding fluctuations in net interest income. Our Asset-Liability Committee (“ALCO”) meets regularly and is responsible for reviewing our interest rate sensitivity position and

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establishing policies to monitor and limit exposure to interest rate risk. The policies established by the ALCO are reviewed and approved by our Board of Directors. We have employed asset/liability management policies that seek to manage our net interest income, without having to incur unacceptable levels of credit or investment risk.

We use simulation modeling to manage our interest rate risk, and review quarterly interest sensitivity. This approach uses a model which generates estimates of the change in our economic value of equity (“EVE”) over a range of interest rate scenarios. EVE is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts using assumptions including estimated loan prepayment rates, reinvestment rates and deposit decay rates.

The following tables are based on an analysis of our interest rate risk as measured by the estimated change in EVE resulting from instantaneous and sustained parallel shifts in the yield curve (plus 400 basis points or minus 100 basis points, measured in 100 basis point increments) as of June 30, 2023 and December 31, 2022. All changes are within our Asset/Liability Risk Management Policy guidelines.

Sensitivity of Economic Value of Equity

 

As of June 30, 2023

 

Economic Value of

 

Economic Value of Equity

Equity as a % of

 

Change in Interest Rates

$ Change

% Change

Total

Equity

 

in Basis Points (Rate Shock)

    

Amount

    

From Base

    

From Base

    

Assets

    

Book Value

 

(dollar amounts in thousands)

 

Up 400

$

503,320

$

(57,915)

 

(10.32)

%  

14.77

%  

122.20

%

Up 300

 

515,991

 

(45,244)

 

(8.06)

%  

15.14

%  

125.28

%

Up 200

 

527,895

 

(33,340)

 

(5.94)

%  

15.49

%  

128.17

%

Up 100

 

551,187

 

(10,048)

 

(1.79)

%  

16.18

%  

133.82

%

Base

 

561,235

 

 

%  

16.47

%  

136.26

%

Down 100

 

556,910

 

(4,325)

 

(0.77)

%  

16.34

%  

135.21

%

Down 200

 

534,924

 

(26,311)

 

(4.69)

%  

15.70

%  

129.87

%

Sensitivity of Economic Value of Equity

 

As of December 31, 2022

 

Economic Value of

 

Economic Value of Equity

Equity as a % of

 

Change in Interest Rates

$ Change

% Change

Total

Equity

 

in Basis Points (Rate Shock)

    

Amount

    

From Base

    

From Base

    

Assets

    

Book Value

 

(dollar amounts in thousands)

 

Up 400

$

481,135

$

(63,410)

 

(11.64)

%  

14.12

%  

116.81

%

Up 300

 

496,136

 

(48,409)

 

(8.89)

%  

14.56

%  

120.46

%

Up 200

 

510,807

 

(33,738)

 

(6.20)

%  

14.99

%  

124.02

%

Up 100

 

534,163

 

(10,382)

 

(1.91)

%  

15.68

%  

129.69

%

Base

 

544,545

 

 

%  

15.98

%  

132.21

%

Down 100

 

539,297

 

(5,248)

 

(0.96)

%  

15.83

%  

130.94

%

Our interest rate sensitivity is also monitored by management through the use of a model that generates estimates of the change in the net interest income (“NII”) over a range of interest rate scenarios. NII depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. In this regard, the model assumes that the composition of our interest sensitive assets and liabilities existing at June 30, 2023 and December 31, 2022 remains constant over the period being measured and also assumes that a particular change in interest rates is

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reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. All changes are within our ALM Policy guidelines at June 30, 2023 and December 31, 2022.

Sensitivity of Net Interest Income

As of June 30, 2023

Adjusted Net Interest Income

Change in Interest Rates

$ Change

in Basis Points (Rate Shock)

    

Amount

    

From Base

(dollar amounts in thousands)

Up 400

$

101,999

$

(13,566)

Up 300

 

104,695

 

(10,870)

Up 200

 

107,389

 

(8,176)

Up 100

 

112,004

 

(3,561)

Base

 

115,565

 

Down 100

 

117,594

 

2,029

Down 200

 

117,636

 

2,071

Sensitivity of Net Interest Income

As of December 31, 2022

Adjusted Net Interest Income

Change in Interest Rates

$ Change

in Basis Points (Rate Shock)

    

Amount

    

From Base

(dollar amounts in thousands)

Up 400

$

108,514

$

(12,447)

Up 300

 

111,127

 

(9,834)

Up 200

 

113,730

 

(7,231)

Up 100

 

117,811

 

(3,150)

Base

 

120,961

 

Down 100

 

122,070

 

1,109

Down 200

 

120,687

 

(274)

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in EVE and NII sensitivity requires the making of certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. Accordingly, although the EVE tables and NII tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net worth and NII. Sensitivity of EVE and NII are modeled using different assumptions and approaches.

ITEM 4 – CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this quarterly report on Form 10-Q, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d -15(e) under the Securities Exchange Act of 1934) utilizing the framework established in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting. As a result of the acquisition of Primis Mortgage, the Company is continuously working to integrate Primis Mortgage into its internal control over financial reporting process.

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There were no changes in our internal controls over financial reporting that occurred during the three and six months ended June 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

Primis and Primis Bank are from time to time a party, as both plaintiff and defendant, to various claims and proceedings arising in the ordinary course of the Bank’s business, including administrative and/or legal proceedings that may include employment-related claims, as well as claims of lender liability, breach of contract, and other similar lending-related claims. While the ultimate resolution of these matters cannot be determined at this time, the Bank’s management presently believes that such matters, individually and in the aggregate, will not have a material adverse effect on the Bank’s financial condition or results of operations. There are no proceedings pending, or to management’s knowledge, threatened, that represent a significant risk against Primis or Primis Bank as of June 30, 2023.

ITEM 1A – RISK FACTORS

In addition to the other information set forth in this Report, in evaluating an investment in the Company’s securities, investors should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1A of our 2022 Form 10-K, and as disclosed in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, which could materially affect the Company's business, financial position, results of operations, cash flows, or future results. Please be aware that these risks may change over time and other risks may prove to be important in the future. New risks may emerge at any time, and we cannot predict such risks or estimate the extent to which they may affect our business, financial condition or results of operations, or the trading price of our securities.

There are no material changes during the period covered by this Report to the risk factors previously disclosed in our 2022 Form 10-K or our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Not applicable.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 – OTHER INFORMATION

Pursuant to Item 408(a) of Regulation S-K, none of the Company's directors or executive officers adopted, terminated or modified a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2023.

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ITEM 6 - EXHIBITS

(a) Exhibits.

Exhibit No.

    

Description

3.1

Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to Primis Financial Corp.’s (formerly Southern National’s) Registration Statement on Form S-1 (Registration No. 333-136285) filed August 4, 2006)

3.2

Certificate of Amendment to the Articles of Incorporation dated January 31, 2005 (incorporated herein by reference to Exhibit 3.2 to Primis Financial Corp.’s (formerly Southern National’s) Registration Statement on Form S-1 (Registration No. 333-136285) filed on August 4, 2006)

3.3

Certificate of Amendment to the Articles of Incorporation dated April 13, 2006 (incorporated herein by reference to Exhibit 3.3 to Primis Financial Corp.’s (formerly Southern National’s) Registration Statement on Form S-1 (Registration No. 333-136285) filed on August 4, 2006)

3.4

Articles of Amendment to the Articles of Incorporation dated June 30, 2021 (incorporated herein by reference to Exhibit 3.1 to Primis Financial Corp.’s Current Report on Form 8-K filed on June 30, 2021)

3.5

Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.2 to Primis Financial Corp.’s Current Report on Form 8-K filed on June 30, 2021)

31.1*

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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101

The following materials from Primis Financial Corp. Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, formatted in Inline XBRL (Extensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) (unaudited), (iii) Consolidated Statement of Changes in Stockholders’ Equity (unaudited), (iv) Consolidated Statements of Cash Flows (unaudited), and (v) Notes to Consolidated Financial Statements (unaudited).

104

The cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document).

+     Management contract or compensatory plan or arrangement

*      Filed with this Quarterly Report on Form 10-Q

**    Furnished with this Quarterly Report on Form 10-Q

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    

Primis Financial Corp.

(Registrant)

August 9, 2023

/s/ Dennis J. Zember, Jr.

(Date)

Dennis J. Zember, Jr.

President and Chief Executive Officer

August 9, 2023

/s/ Matthew Switzer

(Date)

Matthew Switzer

Executive Vice President and Chief Financial Officer

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