What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-15 compared with 2022-03-14 · 555 added, 373 removed, 1098 unchanged (46% of the section changed)

1 unchanged sentence

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and the Board of Directors

To the Shareholders and the Board of Directors

Primis Financial Corp.

1 unchanged sentence

We have audited the accompanying consolidated balance sheets of Primis Financial Corp.

(the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements").

In our opinion, based on our audits and the report of the other auditors, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S.

generally accepted accounting principles.

We did not audit the financial statements of Southern Trust Mortgage, LLC (“STM”) as of and for the year ended December 31, 2020.

(the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

We did not audit the financial statements of Southern Trust Mortgage, LLC (“STM”) for the year ended December 31, 2020.

STM, an affiliate of the Company as of December 31, 2020, was accounted for as an equity method investment.

The Company’s financial statements for the year ended December 31, 2020 reported an equity gain from mortgage affiliate totaling $10.8 million, or approximately 36% of the Company’s income before income taxes.

STM’s financial statements were audited by other auditors whose report was furnished to us, and our opinion, insofar as it relates to the amounts included for STM as of and for the year ended December 31, 2020, is based solely on the report of the other auditors.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2022 expressed an unqualified opinion thereon.

Adoption of New Accounting Standard

As discussed in Note 1 to the financial statements, the Company changed its method of accounting for credit losses effective January 1, 2020 due to the adoption of Accounting Standards Codification (ASC) Topic 326, Financial Instruments – Credit Losses .

The Company’s consolidated financial statements for the year ended December 31, 2020 reported income from discontinued operations $8.4 million, or approximately 36% of the Company’s net income.

STM’s financial statements were audited by other auditors whose report was furnished to us, and our opinion, insofar as it relates to the amounts included for STM for the year ended December 31, 2020, is based solely on the report of the other auditors.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework:

(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2023, expressed an unqualified opinion thereon .

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audits.

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

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We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

The critical audit matters communicated below are matters arising from the current-period audit of the consolidated financial statements that were communicated or required to be communicated to the Audit Committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Credit Losses

As described in Notes 1 and 3 to the financial statements, the Company’s allowance for credit losses was $29.1 million at December 31, 2021.

The Company’s allowance for credit losses (“ACL”) is measured on a collective basis when similar risk characteristics exist, and by individually evaluating loans that do not share similar risk characteristics.

The Company measures the ACL using a combination of probability of default (PD), probability of attrition (PA), loss given default (LGD), and exposure at default (EAD), calculated based on the application of historical loss experience, and adjusted for a reasonable and supportable forecast.

The Company’s allowance for credit losses (ACL) on loans held for investment was $34.5 million as of December 31, 2022.

The determination of the ACL has been identified by the Company as a critical accounting policy.

The ACL is measured on a collective basis when similar loan risk characteristics exist, and by individually evaluating loans that do not share similar risk characteristics.

As further described in Notes 1 and 4 to the consolidated financial statements, the Company measures the ACL using a combination of probability of default (PD), probability of attrition (PA), loss given default (LGD), and exposure at default (EAD), calculated based on the application of historical loss experience, and adjusted for a reasonable and supportable forecast.

Estimates are qualitatively adjusted for risk factors that are not considered within the quantitative modeling process.

Estimating an appropriate allowance requires management to make numerous assumptions about losses that will occur over the remaining contractual life of loans recorded as of the balance sheet date.

The most significant judgments in the ACL as of December 31, 2021 include the determination of a reasonable and supportable forecast and the impact of qualitative factors.

We identified the ACL as a critical audit matter.

The principal considerations for our determination of the ACL as a critical audit matter included the high degree of judgment and subjectivity relating to management’s determination of reasonable and supportable forecasts and the identification and measurement of the qualitative factors.

In turn, auditing management’s judgments regarding credit loss estimates and assumptions, specifically the determination of reasonable and supportable forecasts and qualitative factors involved a high degree of subjectivity and an increased extent of audit effort.

The primary procedures we performed to address this critical audit matter included:

● We tested the design and operating effectiveness of controls relating to management’s determination of the ACL, including controls relating to the:

The most significant judgments in the ACL as of December 31, 2022 included the determination of a reasonable and supportable forecast and the impact of qualitative factors.

We identified the Company’s estimate of the ACL as a critical audit matter.

The principal considerations for that determination were the degree of subjectivity and judgment required to audit management’s identification of reasonable and supportable forecasts and the identification and measurement of the qualitative factors.

The primary procedures we performed to address this critical audit matter included the following:

● We evaluated the design and tested the operating effectiveness of controls relating to management’s determination of the ACL, including controls over:

o Completeness and accuracy of inputs into the model used to determine the ACL;

o Performance of an independent model validation and appropriate responses to any findings.

o The determination of a reasonable and supportable forecast.

o The determination of a reasonable and supportable forecast, and;

o The determination of qualitative factors.

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We also utilized our internal valuation specialists to assist us in testing the application of the forecast to the ACL calculation.

● We evaluated the mathematical accuracy of the ACL, including the mathematical application of the qualitative adjustments on the loan segments.

● We assessed the overall trends in credit quality, including adjustments for the qualitative factors by comparing the overall ACL to those recorded by the Company’s peer institutions.

● We involved our internal valuation specialists to assist in evaluating the appropriateness of model inputs and assumptions and testing the design of the model calculation through a re-performance of the discounted cash flow.

/s/ Dixon Hughes Goodman LLP

● We tested the mathematical accuracy of the ACL, including the mathematical application of the qualitative adjustments on the loan segments.

Goodwill Impairment Assessment

The Company has recorded goodwill of $104.6 million as of December 31, 2022.

The determination of the annual goodwill impairment assessment has been identified by the Company as a critical accounting policy.

As further described in Notes 1 and 8 to the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level, occurring as of September 30th every year, or more frequently if events or circumstances warrant.

The Company engaged a third-party valuation specialist in performing its quantitative impairment analysis, which included a combination of valuation approaches to determine the fair value of the Bank reporting unit.

These valuation approaches required certain assumptions such as the discount rate, economic conditions impacting interest and growth rates, the control premium, and a relative weighting given to the fair value derived by each of the valuation approaches used.

We identified the Company’s quantitative goodwill impairment assessment for the Bank reporting unit, as of September 30, as a critical audit matter.

The principal considerations for that determination were the degree of subjectivity and judgment required to audit management’s goodwill impairment assessment.

Specifically, evaluating the valuation approaches selected and key assumptions used by management in performing its assessment, such as the selection of comparable publicly-traded companies and control premium utilized in the valuation approaches.

The primary procedures we performed to address this critical audit matter included the following:

● We evaluated the design and tested the operating effectiveness of controls related to management’s goodwill impairment assessment including controls over management’s review of the quantitative analysis performed on the Bank reporting unit, including the key assumptions used to determine the fair value of the Bank reporting unit.

● We tested key financial data used within the valuation approaches by agreeing key inputs to internal and external sources.

● We evaluated, with the assistance of our internal valuation specialists, appropriateness of valuation approaches selected by management, the selection of a control premium and of comparable publicly-traded companies, and the overall reasonableness of the estimated fair value of the Bank reporting unit.

/s/ FORVIS, LLP (Formerly, Dixon Hughes Goodman LLP)

We have served as the Company’s auditor since 2013.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and the Board of Directors

To the Shareholders and the Board of Directors

Primis Financial Corp.

Opinion on Internal Control Over Financial Reporting

We have audited Primis Financial Corp.’s (the “Company”) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of December 31, 2021 and 2020, and for each of the three years in the period ended December 31, 2021, and our report dated March 14, 2022, expressed an unqualified opinion on those consolidated financial statements.

Opinion on the Internal Control over Financial Reporting

We have audited Primis Financial Corp.’s (the “Company”) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework:

(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework:

(2013) issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of December 31, 2022 and 2021, and for each of the years in the three-year period ended December 31, 2022, and our report dated March 15, 2023, expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

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Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

As described in management’s report on internal control over financial reporting, the scope of management’s assessment of internal control over financial reporting as of December 31, 2022, has excluded Primis Mortgage Company (“Primis Mortgage,” formerly named SeaTrust Mortgage Company) acquired on May 31, 2022.

We have also excluded Primis Mortgage from the scope of our audit of internal control over financial reporting.

Primis Mortgage represented one percent of consolidated total assets as of December 31, 2022 and four percent of consolidated revenues for the year then ended.

Definitions and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of reliable financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide

reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting

principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Dixon Hughes Goodman LLP

/s/ FORVIS, LLP (Formerly, Dixon Hughes Goodman LLP)

Greenville, North Carolina

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Securities held-to-maturity, at amortized cost (fair value of $ 12,449 and $ 23,364 , respectively)

Less allowance for credit losses

Loans held for sale, at fair value

Loans held for investment

allowance for credit losses

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

Investments in mortgage company - held for sale

Preferred investment in mortgage company

Bank premises and equipment, net

Assets held for sale

Operating lease right-of-use assets

Core deposit intangibles, net

Intangible assets, net

Bank-owned life insurance

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Deferred tax assets, net

Accrued interest receivable

LIABILITIES AND STOCKHOLDERS' EQUITY

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Retained earnings

Accumulated other comprehensive income

Accumulated other comprehensive income (loss)

Total stockholders' equity

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PRIMIS FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands, except per share amounts)

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Interest on deposits

Interest on FRB borrowings

Interest on repurchase agreements

Interest on junior subordinated debt

Interest on senior subordinated notes

Interest on other borrowings

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Provision for (recovery of) credit losses

Net interest income after (recovery of) provision for credit losses

Net interest income after provision for (recovery of) credit losses

Noninterest income:

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Gain on debt extinguishment

Mortgage banking income

Gain on sale of other investment

Credit enhancement income

Realized losses on sales of investment securities

Recoveries related to acquired charged-off loans and investment securities

Other noninterest income

Total noninterest income

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Furniture and equipment expenses

Amortization of core deposit intangible

Amortization of intangible assets

Virginia franchise tax expense

Data processing expense

Marketing expense

Telephone and communication expense

Net (gain) loss on other real estate owned

Net loss on other real estate owned

Loss on bank premises and equipment and assets held for sale

Professional fees

Credit enhancement costs

Other operating expenses

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Income from discontinued operation

Other comprehensive income:

Other comprehensive income (loss):

Unrealized gain (loss) on available-for-sale securities

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Net unrealized gain (loss)

Tax (benefit) expense

Other comprehensive income (loss)

Comprehensive income

Comprehensive income (loss)

Earnings per share from continuing operations, basic

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(dollars in thousands, except per share amounts)

For the Year Ended December 31, 2021

Comprehensive

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Balance - December 31, 2019

Impact of adoption of ASU 2016-13

Adjusted beginning balance

Changes in other comprehensive income on investment securities (net of tax expense, $ 719 )

Dividends on common stock ($ 0.40 per share)

Issuances of common stock

Shares retired to unallocated

Stock Option exercises

Restricted stock granted

Vesting of restricted stock

Repurchase of restricted stock

Stock-based compensation expense

Balance - December 31, 2020

Impact of adoption of ASU 2016-13

Adjusted beginning balance

Changes in other comprehensive income on investment securities (net of tax expense, $ 719 )

Changes in other comprehensive loss on investment securities (net of tax benefit $ 669 )

Dividends on common stock ($ 0.40 per share)

Issuances of common stock

Shares retired to unallocated

Stock Option exercises

Vesting of restricted stock

Restricted stock granted

Restricted stock forfeited

Repurchase of restricted stock

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Dividends on common stock ($ 0.40 per share)

Issuances of common stock

Shares retired to unallocated

Stock option exercises

Restricted stock granted

Restricted stock forfeited

Repurchase of restricted stock

Stock-based compensation expense

Shares issued in lieu of cash bonus

Balance - December 31, 2022

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Depreciation and amortization

Amortization of operating lease right-of-use assets

Accretion of loan discount

Amortization of FDIC indemnification asset

Provision (recovery) for credit losses

Net amortization (accretion) of premiums and discounts

Provision for (recovery of) for credit losses

Origination of loans held for sale

Proceeds from sale of loans held for sale

Net gains on mortgage banking

Loss on bank premises and equipment and assets held for sale

Earnings on bank-owned life insurance

Gain on bank-owned life insurance death benefit

Stock-based compensation expense

Loss on sales of investment securities

Gain on bank-owned life insurance death benefit

(Gain) loss on other real estate owned

Loss on other real estate owned

Gain on debt extinguishment

Gain on sale of other investment

Credit enhancement income

Provision (benefit) for deferred income taxes

Net decrease (increase) in other assets

Net increase in other assets

Net increase (decrease) in other liabilities

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Investing activities:

Proceeds from sales of held-to-maturity investment securities

Proceeds from sales of available-for-sale investment securities

Purchases of held-to-maturity investment securities

Purchases of available-for-sale investment securities

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

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

Net decrease of FRB and FHLB stock

Proceeds from sales of securities held-to-maturity

Proceeds from sales of securities available-for-sale

Purchases of securities held-to-maturity

Purchases of securities available-for-sale

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

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

Net (increase) decrease of FRB and FHLB stock

Net (increase) decrease in loans

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Purchases of bank premises and equipment

Net cash and cash equivalents provided by (used in) investing activities from continuing operations

Proceeds from sale of other investment

Purchases of other investments

Business acquisition, net of cash acquired

Net cash and cash equivalents (used in) provided by investing activities from continuing operations

Financing activities:

Net increase in deposits

Net (decrease) increase in deposits

Cash dividends paid on common stock

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Issuance of subordinated notes, net of cost

Extinguishment of subordinated debt

Net decrease in other borrowings

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

Extinguishment of senior subordinated notes

Repayment of FHLB advances, long-term

Proceeds from short-term FHLB advances, net of repayments

Repayment of short-term borrowings acquired

Increase (decrease) in securities sold under agreements to repurchase

Net cash and cash equivalents provided by financing activities from continuing operations

Net change in cash and cash equivalents from continuing operations

Cash flows provided by (used in) discontinued operation:

Cash flows provided from discontinued operation:

Net cash and cash equivalents used in operating activities

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Supplemental schedule of noncash investing and financing activities:

Bank premises transferred to held for sale

Shares issued in lieu of cash bonus

Proceeds from sale of other investment included in other assets

Proceeds from bank-owned life insurance death benefit included in other assets

Transfer from loans to other real estate owned

Notes receivable from discontinued operation, included in loans

Fair value of assets and liabilities from acquisition:

Fair value of tangible assets acquired

Other intangible assets acquired

Fair value of liabilities assumed

Total merger consideration, net of $ 2,446 of cash acquired

See accompanying notes to consolidated financial statements.

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

On March 31, 2021, the Company changed its name from Southern National Bancorp of Virginia, Inc.

(“Southern National”) to Primis Financial Corp.

(“Primis,” “we,” “us,” “our” or the “Company”) and Sonabank changed its name to Primis Bank.

Primis 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 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 December 31, 2021, Primis Bank had forty full-service branches in Virginia and Maryland and also provides services to customers through certain online and mobile applications.

Thirty-five full-service retail branches are in Virginia and five full-service retail branches are in Maryland.

The Company has administrative offices in Warrenton and Glen Allen, Virginia.

At December 31, 2022, 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 administrative offices in Tysons Corner, Virginia and Glen Allen, Virginia and an operations center in Atlee, Virginia.

In 2022, Primis successfully launched its new digital bank platform that includes an all-new mobile banking application that provides quick and seamless banking experience all from within the app.

Also in the fourth quarter of 2021, Primis launched its new V1BE service, a bank delivery app for on-demand ordering of branch services.

V1BE brings in-branch banking services right to the customer’s doorstep, including cash delivery/withdrawals, cash pick-up/deposits, check deposits, change orders, cashier checks, and the instant issue of replacement debit cards.

In 2021, V1BE was piloted in the Richmond market but now covers the majority of our footprint including the greater Washington, D.C.

With V1BE, Primis is able to support any market and grow customer relationships without the need for a large branch presence.

The accounting policies and practices of Primis and its subsidiaries conform to U.S.

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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.

In addition, Primis Bank has an interest in one mortgage company, Southern Trust Mortgage, LLC (“STM”).

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 accounting principles generally accepted in the United States.

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, their accounts are not included in our consolidated financial statements.

On April 28, 2022, Primis Bank entered into a definitive agreement to acquire 100 % of the issued and outstanding capital stock of SeaTrust Mortgage Company (“SeaTrust”), a North Carolina corporation.

On May 31, 2022, Primis Bank completed the acquisition (the “Acquisition”) of 100 % of the outstanding capital stock of SeaTrust from Community First Bank, Inc.

(the “Seller”) pursuant to the Stock Purchase Agreement, dated as of April 28, 2022 (the “Purchase Agreement”) by and among the Bank, Seller, and SeaTrust.

As a result, SeaTrust became a wholly owned subsidiary of Primis Bank on May 31, 2022.

Following the closing of the Acquisition, on June 1, 2022, the Bank changed the name of SeaTrust to Primis Mortgage Company (“Primis Mortgage”).

At the time of acquisition, Primis Mortgage originated mortgages primarily in

North and South Carolina, Florida and Tennessee from eight offices but has since expanded its ability to originate mortgages to the majority of the U.S.

Pursuant to the Purchase Agreement, the Bank paid an aggregate purchase price of $ 7.0 million in cash to Seller at closing and assumed $ 19.3 million of SeaTrust’s indebtedness under certain warehouse lending facilities.

Discontinued Operation

Primis Bank had an interest in one mortgage company, Southern Trust Mortgage, LLC (“STM”).

Prior to December 31, 2021, Primis Bank owned 43.28 % and 100 % of STM’s common and preferred stock, respectively, and STM was considered an unconsolidated affiliate of the Company.

On September 23, 2021, Primis Bank announced that it entered into an agreement with STM, whereby STM agreed to purchase all of the Bank's common membership interests and a portion of the Bank's preferred interests in STM for a combination of $ 1.6 million in cash and a promissory note for $ 8.5 million.

On September 23, 2021, Primis Bank entered into an agreement with STM, whereby STM agreed to purchase all of the Bank's common membership interests and a portion of the Bank's preferred interests in STM for a combination of $ 1.6 million in cash and the assumption of a promissory note in the amount of $ 8.5 million.

The transaction closed on December 31, 2021.

Upon closing, STM continues to be a borrower of the Bank, but the Bank is no longer a minority owner of STM and STM is no longer considered an affiliate of the Company.

Upon closing, STM continued to be a borrower of the Bank, but the Bank is no longer a minority owner of STM and STM is no longer considered an affiliate of the Company.

The Company still holds 100 % of STM’s preferred stock at December 31, 2022 but no longer has a position on STM’s board of directors and STM no longer represents a reportable operating segment of the Company.

Discontinued Operation

As discussed above the Company disposed of all of its common stock ownership and a portion of its preferred stock ownership in STM on December 31, 2021.

The common stock investment was accounted for using the equity method of accounting and efffective July 1, 2021, in accordance with the terms of the agreement, the Company no longer accrued earnings related to its common membership interests in STM;

however, the Company maintain significant influence over STM until closing of the transaction.

The preferrd stock investment is considered a non-marketable equity security that does not have a readily determinable fair value and is carried at cost, less impairment.

The historical investments in STM that were disposed of on December 31, 2021 have been classified as held for sale on the consolidated balance sheet as of December 31, 2020 and totaled $ 13.0 million and consisted of $ 12.7 million in equity method investment and $ 300 thousand in preferred stock.

The consolidated statements of income and comprehensive income have been adjusted to reflect the equity in earnings and income tax expense associated with the equity method investment as a discontinued operation, included in that amount for 2021 is a pre-tax impairment charge of approximately $ 2.9 million related to the transaction.

Pre-tax equity in earnings for the years ended December 31, 2021, 2020 and 2019 were $ 294 thousand, after impairment, $ 10.8 million, and $ 1.2 million, respectively.

For the years ended December 31, 2020 and 2019, STM was considered a reportable segment.

As of December 31, 2020 and 2019, total mortgage loans held for sale by STM were $ 143.4 million and $ 100.2 million, respectively.

STM’s warehouse lines of credit were $ 136.1 million and $ 92.1 million as of December 31, 2020 and 2019, respectively and total members’ equity was $ 26.4 million and $ 11.1 million as of December 31, 2020 and 2019.

For the years ended December 31, 2020 and 2019, STM’s net income was $ 22.2 million and $ 2.7 million, respectively.

The primary source of revenue for STM was gains on sale of mortgage loans held for sale, net of direct costs.

For the years ended December 31, 2020 and 2019, gains on sale of mortgage loans held for sale, net of direct costs were $ 107.1 million and $ 45.7 million, respectively.

STM’s salaries, commissions and benefits were $ 84.1 million and $ 39.0 million for the years ended December 31, 2020 and 2019, respectively.

Operating Segments

Operating segments are defined as components of a company about which separate financial information is available that is evaluated regularly by the chief financial officer and chief accounting officer in deciding how to allocate resources and in assessing performance.

Discrete financial information is not available other than on a company-wide basis.

Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

Reclassifications

In certain instances, due to the discontinued operation, amounts reported in prior years’ consolidated financial statements have been reclassified to conform to the current financial statement presentation.

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 18 – Segment Information.

Use of Estimates

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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.

the determination of the allowance for credit losses, fair value of investment securities, credit impairment of investment securities, mortgage banking derivatives, credit enhancement, valuation of goodwill and deferred tax assets.

Investment Securities

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The purchased premiums and discounts associated with these assets are amortized or accreted to interest income over the estimated life of the related assets.

The estimated life is calculated by projecting future prepayments and the resulting principal cash flows until maturity.

The estimated life is

calculated by projecting future prepayments and the resulting principal cash flows until maturity.

Prepayment rate projections utilize actual prepayment speed experience and available market information on like-kind instruments.

prepayment rates form the basis for income recognition of premiums and discounts on the related assets.

The prepayment rates form the basis for income recognition of premiums and discounts on the related assets.

Changes in prepayment estimates may cause the earnings recognized on these assets to vary over the term that the assets are held, creating volatility in the net interest margin.

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Non-marketable Equity Securities

Primis’ investment in STM’s preferred stock and fintech investments are considered to be non-marketable equity securities that do not have a readily determinable fair value.

Equity securities with no recurring market value data available are reviewed periodically and any observable market value change are adjusting through net income.

Primis’ investment in STM’s preferred stock and other investments are considered to be non-marketable equity securities that do not have a readily determinable fair value.

Equity securities with no recurring market value data available are reviewed periodically and any observable market value change is adjusted through net income.

Primis evaluates these non-marketable equity securities for impairment and recoverability of the recorded investment by considering positive and negative evidence, including the profitability and asset quality, dividend payment history and recent redemption experience.

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The Bank is also required to own FRB stock with a par value equal to 6 % of capital and FHLB stock of 4.25 % of borrowings outstanding.

FHLB and FRB stock are carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value.

FHLB and FRB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of the par value.

Both cash and stock dividends are reported as income.

Primis purchases mortgage loans from mortgage loans originators.

Loans Held for Sale

Loans held for sale are originated and held until sold to permanent investors.

The Company has elected to carry these loans at fair value on a recurring basis in accordance with the fair value option under FASB ASC 825, Financial Instruments .

The fair value is determined by utilizing quoted prices from dealers in such securities.

Gains and losses on loan sales are recorded in mortgage banking income and direct loan origination costs are included in noninterest expense in the consolidated statements of income and comprehensive income (loss).

Primis purchases mortgage loans from mortgage loans originators, including the Bank’s wholly-owned subsidiary Primis Mortgage Company.

Primis also provides commercial and consumer loans to customers.

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Commercial loans are generally secured by business assets such as equipment, accounts receivable, inventory, or any other asset excluding real estate and generally made to finance capital expenditures or operations.

Primis’ risk exposure is related to deterioration in the value of collateral securing the loan

should foreclosure become necessary.

Primis’ risk exposure is related to deterioration in the value of collateral securing the loan should foreclosure become necessary.

Generally, business assets used or produced in operations do not maintain their value upon foreclosure which may require Primis to write-down the value significantly to sell.

Commercial loans also include Life Premium Finance loans.

These loans are utilized to pay the annual premiums due on the whole or universal life policy.

The Life Premium Finance loans are fully secured by the cash value of the policy and personal liquid assets of the borrower or guarantor.

Residential real estate loans consist of loans to individuals for the purchase of primary residences with repayment primarily through wage or other income sources of the individual borrower.

Primis’ loss exposure to these loans is dependent on local market conditions for residential properties as loan amounts are determined, in part, by the fair value of the property at origination.

STM is a regional mortgage banking company headquartered in Virginia Beach, Virginia that has mortgage banking originators in Delaware, Virginia, Maryland, North Carolina and South Carolina.

STM only originated retail mortgage products.

Other consumer loans are comprised of loans to individuals both unsecured and secured and home equity loans secured by real estate (closed and open-end), with repayment dependent on individual wages and other income.

The risk of loss on consumer loans is elevated as the collateral securing these loans, if any, rapidly depreciate in value or may be worthless and/or difficult to locate if repossession is necessary.

Other consumer loans also include Life Premium Finance loans and Panacea consumer loans comprising of student loan refinancing and pro re nata (“PRN’) loans.

PRN loans may be utilized by graduating doctors to fund costs as they move into their chosen professions.

The risk of loss on consumer loans is elevated as the collateral securing these loans, if any, may rapidly depreciate in value or may be worthless and/or difficult to locate if repossession is necessary.

Losses in this portfolio are generally relatively low, however, due to the small individual loan size and the balance outstanding as a percentage of Primis’ entire portfolio.

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We adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , on January 1, 2020 which requires the Bank to record purchased financial assets with credit deterioration (PCD assets), defined as a more-than-insignificant deterioration in credit quality since origination or issuance, at the purchase price plus the allowance for credit losses expected at the time of acquisition.

Under this method, there is no credit loss expense affecting net income on acquisition of PCD assets.

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Any non-credit discount or premium resulting from acquiring a pool of purchased financial assets with credit deterioration shall be allocated to each individual asset.

At the acquisition date, the initial allowance for credit losses determined on a collective basis shall be allocated to individual assets to appropriately allocate any non-credit discount or premium.

At the acquisition

date, the initial allowance for credit losses determined on a collective basis shall be allocated to individual assets to appropriately allocate any non-credit discount or premium.

The non-credit discount or premium, after the adjustment for the allowance for credit losses, shall be accreted to interest income using the interest method based on the effective interest rate determined after the adjustment for credit losses at the adoption date.

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This combined discount or premium shall be accreted to interest income using the effective yield method.

Allowance for Credit Losses (“ACL”)

Allowance for Credit Losses

Allowance For Credit Losses - Held-to-Maturity Securities

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Management has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses.

Further information regarding our policies and methodology used to estimate the allowance for credit losses on loans is presented in Note 3 – Loans and Allowance.

information regarding our policies and methodology used to estimate the allowance for credit losses on loans is presented in Note 4 – Loans and Allowance.

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

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Further information regarding our policies and methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures is presented in Note 15 – Financial Instruments with Off-Balance-Sheet Risks.

Third Party Loan Originations

Primis Bank entered into a Loan Origination Agreement with a third party on July 7, 2021 under which the third party will source and service certain loans to be originated by Primis.

The Bank will periodically remit payment to third party for the funding of program loans deemed originated and allocated to the Bank.

The Bank will retain all interest on each originated loan such that the Bank achieves a margin equal to the lower bound of the Federal Funds Rate plus 5.00 % per annum.

This rate is periodically adjusted on the last day of each calendar quarter.

All interest received above this amount will be paid to the third party to cover the finder’s fee, servicing cost and credit enhancement.

The third party will establish and maintain at the Bank a waterfall reserve account (“the Reserve Account”) to serve as collateral for balances owed to Primis under the program.

Interest Income:

Contractual interest due from the borrower is recorded under the Bank’s loan interest income.

The arrangement with third party is designed such that Primis retains all contractual interest received from the originated loans and in turn pays fees to the third party that are, in substance, designed to cover the following costs:

● Loan originations:

No deferral is necessary as the fee is not paid at the inception of the loan, but is paid over time.

Consistent with other loan origination costs, the expense is recognized through loan interest income.

● Credit enhancement:

Credit enhancement is purchased on a standalone basis and the cost of the instrument is recognized over the life of the loan as noninterest expense.

● Servicing costs:

Costs paid to the third party to service loans that are held for investment are charged as noninterest expenses as they are incurred.

Allowance for Credit Losses:

The credit enhancement is entered into separate and apart from the agreement with the borrower to extend credit.

The Bank estimates an allowance for credit losses on these loans without consideration of the Reserve Account.

The timing and amount of charge-offs do not contemplate the Reserve Account.

Charge-offs are recognized through the allowance for credit losses in accordance with regulatory guidance and the Bank’s policy.

Recoveries received from the borrower are recognized as recoveries, consistent with the Bank’s policy.

With respect to recoveries received from the third party under the credit enhancement, the Bank recognizes a recovery asset through noninterest income and at the same time the Bank recognizes expected credit losses, using assumptions consistent with the loss estimate and giving additional consideration to the third party’s ability and willingness to absorb credit losses and to continue to fund the Reserve Account.

As recoveries are received from the third party, the recovery receivable is reduced.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished.

Control over transferred assets is deemed to be surrendered when the assets have been isolated from Primis, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and Primis does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Control over transferred assets is deemed to be surrendered when the assets have been isolated from Primis, the transferee obtains

the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and Primis does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

If the transfer does not satisfy the aforementioned control criteria, the transaction is recorded as a secured borrowing with the transferred loans remaining on the Company’s consolidated balance sheet and proceeds recognized as a liability.

Bank Premises and Equipment

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Furniture, fixtures, equipment and software are depreciated using the straight-line method with useful lives ranging from 3 to 10 years .

Assets Held for Sale

The Company classifies its assets as held for sale in accordance with FASB ASC 360, Property, Plant, and Equipment .

When assets are identified as held for sale, the Company discontinues depreciating (amortizing) the assets and estimates the fair value, net of selling costs, of such assets.

Assets held for sale is recorded at the lower of the net carrying amount of the assets or the estimated net fair value.

If the estimated net fair value of the assets held for sale is less than the net carrying amount of the assets, an impairment charge is recorded in the condensed consolidated statements of income.

The Company assesses the net fair value of assets held for sale each reporting period the assets remain classified as held for sale.

Subsequent changes, if any, in the net fair value of the assets held for sale that require an adjustment to the carrying amount are recorded in the condensed consolidated statements of income, unless the adjustment causes the carrying amount of the assets to exceed the net carrying amount upon initial classification as held for sale.

If circumstances arise that the Company previously considered unlikely and, as a result, the Company decides not to sell assets previously classified as held for sale, they are reclassified to another classification.

Assets that are reclassified are measured at the lower of (a) their carrying amount before they were classified as held for sale, adjusted for any depreciation (amortization) expense that would have been recognized had the assets remained in their previous classification, or (b) their fair value at the date of the subsequent decision not to sell.

Operating Leases

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Goodwill and Intangible Assets

Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.

The Company follows ASC 350, Goodwill and Other Intangible Assets , which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition.

Goodwill resulting from business combinations is generally

determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.

Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but evaluated for impairment on an annual basis or more frequently if events or circumstances warrant.

Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.

Goodwill is the only intangible asset with an indefinite life on our balance sheet and is subject to an impairment analysis when there are triggering events.

Other intangible assets consist of core deposit intangible assets arising from whole-bank and branch acquisitions and are amortized over their estimated useful lives, which range from 6 to 15 years .

Goodwill is the only intangible asset with an indefinite life on our consolidated balance sheet.

The Company performs the analysis annually on September 30 of each year at the reporting unit level whereby the Company compares the estimated fair value of the reporting unit to its carrying value.

In the second quarter of 2022, the Company added a second reporting unit with the acquisition of Primis Mortgage.

If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is not considered impaired.

The Company engaged a third-party valuation specialist to assist management in performing its annual goodwill impairment analysis on our Bank reporting unit.

The Company also performed a qualitative analysis on our Primis Mortgage reporting unit as of December 31, 2022.

To determine the fair value of the Bank reporting unit, the Company utilizes a combination of three or four valuation approaches:

the comparable transactions approach, the control premium approach, the public market peers control premium approach, and the discounted cash flow approach.

The comparable transactions approach is based on pricing ratios recently paid in the sale or merger of comparable banking franchises;

the control premium approach is based on the Company’s trading price, adjusted for holding company assets and an industry based control premium;

the public market peers control premium approach is based on market pricing ratios of public banking companies adjusted for an industry based control premium;

and the discounted cash flow approach considers the earnings and cash flows that a hypothetical acquirer could realize in an acquisition of the Bank reporting unit.

Assumptions that are used as part of these calculations include:

the selection of comparable publicly-traded companies and selection of market comparable acquisition transactions.

In addition, other assumptions include the discount rate, economic conditions, which impact the assumptions related to interest and growth rates, the control premium associated with the reporting unit and a relative weight given to the valuations derived by the valuation methods.

Other intangible assets consist of core deposit intangible assets arising from whole-bank and branch acquisitions and other intangibles from Primis Mortgage acquisition and are amortized over their estimated useful lives, which range from 6 to 15 years .

Stock-Based Compensation

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Compensation cost for stock options and restricted shares is recognized over the required service period, generally defined as the vesting period.

For awards with graded vesting, compensation cost is recognized

on a straight-line basis over the requisite service period for the entire award.

Compensation cost for performance Units is measured based on the grant date fair value of the units, adjusted for the Company’s best estimate of the outcome of vesting conditions at the end of the performance period.

For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

Compensation cost for restricted stock unit awards that contain performance conditions is measured based on the grant date fair value of the units, adjusted for the Company’s best estimate of the outcome of vesting conditions at the end of the performance period.

Bank-Owned Life Insurance

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Total costs paid is capitalized upon initial launch and production rollout and classified in other assets in our consolidated balance sheet.

Depreciation/amortization is set up based on the estimated life of the core infrastructure as it relates to obsolescence, technology, competition, and the nature of changes in software.

Amortization is based on the estimated life of the core infrastructure as it relates to obsolescence, technology, competition, and the nature of changes in software.

Operating costs such as monthly licensing, usage, and storage are expensed as incurred in data processing expense on our consolidated statements of income and comprehensive income.

As of December 31, 2021, the Company had gross cloud computing arrangements totaling $ 5.8 million and accumulated amortization of $ 0.1 million.

As of December 31, 2022 and 2021, the Company had gross cloud computing arrangements of $ 11.5 million and $ 5.8 million, respectively, and accumulated amortization of $ 1.1 million and $ 0.1 million, respectively.

Impairment of Long-Lived Assets

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If impaired, the assets are recorded at fair value.

Mortgage Banking Derivatives and Financial Instruments

Derivative assets and liabilities are recorded at fair value.

Mortgage loan commitments known as interest rate lock commitments that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives accounting guidance FASB ASC 815, Derivatives and Hedging .

Loan commitments that are classified as derivatives are recognized at fair value on the consolidated balance sheets in other assets and other liabilities with changes in their fair values recorded in mortgage banking income in the consolidated statements of income.

To-be-announced mortgage-backed securities trades (“TBA”) is a contract to buy or sell mortgage-backed securities on a specific date while the underlying mortgages are not announced until just prior to settlement.

These TBA trades provide an economic hedge against the effect of changes in interest rates resulting from interest rate lock commitments.

TBAs are accounted for under the derivatives accounting guidance FASB ASC 815, Derivatives and Hedging when either of the following conditions exist:

(i) when settlement of the TBA trade is not expected to occur at the next regular settlement date (which is typically the next month) or (ii) a mechanism exists to settle the contract on a net basis.

As a result, these instruments are recorded at fair value on the consolidated balance sheets as other assets and other liabilities with changes in their fair values recorded in mortgage banking income in the consolidated statements of income.

The fair value of the TBA trades is based on the gain or loss that would occur if the Company were to pair-off the trade at the measurement date.

Forward loan sale commitments are commitments to sell individual mortgage loans using both best efforts and mandatory delivery at a fixed price to an investor at a future date.

Forward loan sale commitments that are mandatory delivery are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to settle the derivative financial instrument at the balance sheet date.

Forward loan sale commitments that are best efforts are not derivatives but can be and have been accounted for at fair value, determined in a similar manner to those that are mandatory delivery.

Forward loan sale commitments are recorded on the consolidated balance sheets as other assets and other liabilities with changes in their fair values recorded in mortgage banking income in the consolidated statements of income.

Retirement Plans

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Diluted EPS reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to net income that would result from the assumed issuance.

Potential common shares that may be issued by Primis relate solely to outstanding stock options and restricted stock units and are determined using the treasury stock method.

Potential common shares that may be issued by Primis relate solely to outstanding stock options, restricted stock awards, and restricted stock units and are determined using the treasury stock method.

Performance awards cannot be dilutive until the Company’s best estimate of the outcome of vesting conditions become probable.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive (loss) income.

Other comprehensive (loss) income includes unrealized gains and losses on investment securities available-for-sale which are also recognized as a separate component of equity.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income and other comprehensive income (loss).

Other comprehensive income (loss) includes unrealized gains and losses on investment securities available-for-sale which are also recognized as a separate component of equity.

Off-Balance Sheet Credit Related Financial Instruments

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Recent Accounting Pronouncements

New Accounting Standards Adopted:

In December 2019, Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) .

This ASU simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences.

This ASU also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting transactions that result in a step-up in the tax basis of goodwill.

ASU 2019-12 is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods.

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.

ASU 2022-02 was effective for annual periods beginning after December 15, 2022, including interim periods within those annual periods.

Early adoption was permitted.

The Company adopted ASU 2019-12 in the first quarter of 2021 and it did not have a material impact on the Company’s consolidated financial statements.

In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting .

This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform.

The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued.

The ASU is intended to help stakeholders during the global market-wide reference rate transition period.

ASU 2020-04 is effective upon issuance and can be applied through December 31, 2022.

The Company adopted ASU 2020-04 in the first quarter of 2021 and it did not have a material impact on the Company’s consolidated financial statements.

In October 2020, FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs.

This ASU clarifies the accounting for the amortization of purchase premiums for callable debt securities with multiple call dates.

ASU 2020-08 is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods.

Early adoption was not permitted.

The Company adopted ASU 2020-08 in the first quarter of 2021 and it did not have a material impact on the Company’s consolidated financial statements.

In October 2020, FASB issued ASU 2020-10, Codification Improvements.

This ASU clarifies various topics in the Codification, including the addition of existing disclosure requirements to the relevant disclosure sections.

ASU 2020-10 is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods.

Early adoption is permitted.

The Company adopted ASU 2020-10 in the first quarter of 2021 and it did not have a material impact on the Company’s consolidated financial statements and disclosures.

The Company adopted the guidance in the first quarter of 2023 and does not believe that this standard will have a material impact on the Company’s consolidated financial statements and disclosures.

BUSINESS COMBINATION

On April 28, 2022, Primis Bank entered into a definitive agreement to acquire 100 % of the issued and outstanding capital stock of SeaTrust.

On May 31, 2022, Primis Bank completed the acquisition of 100 % of the outstanding capital stock of SeaTrust from the Seller, pursuant to the Purchase Agreement.

As a result, SeaTrust became a wholly owned subsidiary of Primis Bank on May 31, 2022.

Following the closing of the Acquisition, on June 1, 2022, the Bank changed the name of SeaTrust to Primis Mortgage Company.

In connection with the SeaTrust acquisition, the following table details the consideration paid, the initial estimated fair value of identifiable assets acquired and liabilities assumed as of the date of the acquisition, the subsequent adjustments to estimates, the final valuation of the fair value of identifiable assets acquired and liabilities assumed as of the date of the acquisition, and the resulting goodwill recorded (in thousands):

(dollars in thousands)

Consideration paid:

Value of consideration

Assets acquired:

Cash and due from banks

Mortgage loans held for sale

Premises and equipment, net

Leases right-of-use asset

Derivative assets

Other intangibles

Deferred tax asset, net

Liabilities assumed:

Short term borrowings

Leases liability

Other liabilities

Total liabilities

Net identifiable assets acquired

Goodwill resulting from acquisition

The table below illustrates the unaudited pro forma revenue and net income of the combined entities had the acquisition taken place on January 1, 2020.

The unaudited combined pro forma revenue and net income combines the historical results of SeaTrust with the Company's consolidated statements of operations for the periods listed below and, while no material adjustments were made for the estimated effect of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition actually taken place on January 1, 2020.

The pro forma financial information does not include the impact of possible business model changes, nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies or other factors.

For the Year Ended December 31,

(dollars in thousands)

Total revenues

Included in the Company’s consolidated statements of income for the twelve months ended December 31, 2022 is $ 5.1 million of mortgage banking income related to Primis Mortgage since its acquisition on May 31, 2022.

The Company incurred merger expenses of $ 0.4 million for the year ended December 31, 2022 related to the acquisition.

INVESTMENT SECURITIES

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Corporate securities

Collateralized loan obligations

Residential government-sponsored collateralized mortgage obligations

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Residential government-sponsored collateralized mortgage obligations

Government-sponsored agency securities

Gross Unrecognized

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Government-sponsored agency securities

During 2021 and 2020, $ 160.5 million and $ 38.9 million, respectively, of available-for-sale investment securities were purchased.

No held-to-maturity investments were purchased in 2021.

During 2020, $ 15.2 million of held-to-maturity investment securities were purchased.

No investment securities were sold during 2021.

During 2022, 2021 and 2020, $ 37.4 million, $ 160.5 million and $ 38.9 million, respectively, of available-for-sale investment securities were purchased.

No held-to-maturity investments were purchased in 2022 and 2021.

During 2020, $ 15.2 million of held-to-maturity investments were purchased.

No investment securities were sold during 2022 and 2021.

During 2020, $ 1.9 million and $ 1.7 million, respectively, of available-for-sale investment securities and held-to-maturity investment securities were sold.

Realized losses on sales of investment securities of $ 620 thousand were recorded for the year ended December 31, 2020.

The fair value and carrying amount of available-for-sale and held-to-maturity investment securities as of December 31, 2021, by contractual maturity were as follows (in thousands).

The amortized cost and fair value of available-for-sale and held-to-maturity investment securities as of December 31, 2022, by contractual maturity were as follows (in thousands).

Investment securities not due at a single maturity date are shown separately.

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With regard to U.S.

Treasury and residential mortgage-backed securities issued by the 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 bases of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S.

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As of December 31, 2022, Primis did not have any allowance for credit losses on held-to-maturity securities.

The unrealized losses related to investment securities available-for-sale identified as of December 31, 2022 or 2021, relate to changes in interest rates relative to when the investment securities were purchased, and do not indicate credit-related impairment.

Primis performs quantitative analysis and if needed, a qualitative analysis in this determination.

As a result, none of the securities were deemed to require an allowance for credit losses.

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 December 31, 2022 and 2021 by duration of time in a loss position (in thousands):

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Obligations of states and political subdivisions

Corporate securities

Collateralized loan obligations

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Residential government-sponsored mortgage-backed securities

Obligations of states and political subdivisions

Residential government-sponsored collateralized mortgage obligations

Less than 12 months

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Available-for-Sale

Corporate securities

Residential government-sponsored mortgage-backed securities

Obligations of states and political subdivisions

Collateralized loan obligations

Residential government-sponsored collateralized mortgage obligations

Government-sponsored agency securities

Agency commercial mortgage-backed securities

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Unrealized Holding

Gains (Losses) on

Held-to-Maturity

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Beginning balance

Current period other comprehensive income

Current period other comprehensive income (loss)

Ending balance

Unrealized Holding

Gains (Losses) on

Held-to-Maturity

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Beginning balance

Current period other comprehensive income

Current period other comprehensive income (loss)

Ending balance

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December 31, 2021

Loans held for sale

Loans held for investment

Loans secured by real estate:

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Total Non-PCD loans

The accounting policy related to the allowance for credit losses is considered a critical policy given the level of estimation, judgment, and uncertainty in the levels of the allowance required to account for the inherent probable losses in the loan portfolio and the material effect such estimation, judgment, and uncertainty can have on the consolidated financial results.

Total loans held for investment

The accounting policy related to the allowance for credit losses is considered a critical policy given the level of estimation, judgment, and uncertainty in the levels of the allowance required to account for the expected losses in the loan portfolio and the material effect such estimation, judgment, and uncertainty can have on the consolidated financial results.

Accrued Interest Receivable

Accrued interest receivable on loans totaled $ 10.8 million and $ 19.0 million at December 31, 2021 and 2020, respectively and is included in accrued interest receivable in the consolidated balance sheets.

COVID-19 Loan Deferments

The Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus was published by banking regulators in April 2020 to clarify expectations around loan modifications and the determination of TDRs for borrowers experiencing COVID-19-related financial difficulty.

Primis applied this regulatory guidance during its troubled debt restructurings (“TDR”) identification process for short-term loan forbearance agreements as a result of COVID-19 and in most cases is not recording these as TDRs, except as disclosed below.

Certain borrowers were unable to meet their contractual payment obligations because of the adverse economic effects of COVID-19.

To help mitigate these effects, loan customers could apply for a deferral of payments, or portions thereof, for up to six months.

After six months, customers could apply for an additional deferral in 90 days increments, and a small proportion of our customers requested such an additional deferral.

In the absence of other intervening factors, such short-term modifications made on a good faith basis were not categorized as TDR, nor were loans granted payment deferrals related to COVID-19 reported as past due or placed on non-accrual status (provided the loans were not past due or on non-accrual status prior to the deferral).

We implemented deferral arrangements for TDRs in accordance with the Coronavirus Aid, Relief and Economic Security (“CARES” Act) and bank regulatory guidance.

At December 31, 2021, there were no loans in COVID-19 related deferment.

At December 31, 2020, there were 44 loans in COVID-19 related deferment with an aggregate outstanding balance of $ 122.0 million, all of which were current as of December 31, 2020.

The accretable discount on the acquired loans totaled $ 4.3 million and $ 6.2 million at December 31, 2021 and 2020, respectively.

Accretion associated with the acquired loans held for investment of $ 2.0 million, $ 4.3 million and $ 3.9 million was recognized during the twelve months ended December 31, 2021, 2020 and 2019, respectively.

Non-Accrual and Past Due Loans

Accrued interest receivable on loans totaled $ 13.8 million and $ 10.8 million at December 31, 2022 and 2021, 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 non-accrual 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.

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 non-accrual 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 non-accrual status regardless of whether or not such loans are considered past due.

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 non-accrual loans is recognized only to the extent that cash payments are received in excess of principal due.

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.

The following tables present the aging of the recorded investment in past due loans by class of loans as of December 31, 2021 and 2020 (in thousands):

The following tables present the aging of the recorded investment in past due loans by class of loans held for investment as of December 31, 2022 and 2021 (in thousands):

December 31, 2022

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Total Non-PCD loans

(1) Includes $ 122.0 million of loans that were subject to deferrals at December 31, 2020.

The amortized cost, by class, of loans and leases on nonaccrual status at December 31, 2022 and 2021, were as follows (in thousands):

Nonaccrual With

December 31, 2022

Loss Allowance (2)

Commercial real estate - owner occupied

Commercial real estate - non-owner occupied

Secured by farmland

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Residential 1-4 family

Multi- family residential

Home equity lines of credit

Commercial loans

Consumer loans

Total Non-PCD loans

December 31, 2020

Commercial real estate - owner occupied

Secured by farmland

Residential 1-4 family

Multi- family residential

Home equity lines of credit

Commercial loans

Paycheck Protection Program loans

Consumer loans

Total Non-PCD loans

(1) Nonaccrual loans include SBA guaranteed amounts totaling $ 1.1 million and $ 3.1 million at December 31, 2021 and 2020, respectively.

We had $ 283 thousand of PPP loans greater than 90 days past due and still accruing at December 31, 2021 and did not have any loans and leases greater than 90 days past due and still accruing at December 31, 2020.

The following table presents non-accrual loans as of December 31, 2021 and 2020, segregated by class of loans (in thousands):

December 31, 2021

Nonaccrual With

December 31, 2021

Non-Accrual With

Non-Accrual (1)

Loss Allowance (2)

Non-Accrual (1)

Loss Allowance (2)

Commercial real estate - owner occupied

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Total Non-PCD loans

Total non-accrual loans

(1) Nonaccrual loans include SBA guaranteed amounts totaling $ 0.6 million and $ 1.1 million at December 31, 2022 and 2021, respectively.

(2) Nonaccrual loans with no credit loss allowance include SBA guaranteed amounts totaling $ 0.6 million and $ 1.1 million at December 31, 2022 and 2021, respectively.

The following table presents non-accrual loans as of December 31, 2021 by class and year of origination (in thousands):

There were $ 3.4 million and $ 0.3 million of Paycheck Protection Program (“PPP”) loans greater than 90 days past due and still accruing at December 31, 2022 and 2021, respectively.

The following table presents nonaccrual loans as of December 31, 2022 by class and year of origination (in thousands):

Commercial real estate - owner occupied

Commercial real estate - non-owner occupied

Secured by farmland

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Commercial loans

Paycheck Protection Program loans

Consumer loans

Total non-PCD non-accruals

Total non-accrual loans (1)

(1) Nonaccrual loans include SBA guaranteed amounts totaling $ 1.1 million and $ 3.1 million at December 31, 2021 and 2020, respectively.

Interest received on non-accrual loans was $ 523 thousand and $ 469 thousand for the years ended December 31, 2021 and 2020, respectively.

Total non-PCD nonaccruals

Total nonaccrual loans

Interest received on nonaccrual loans was $ 1.2 million and $ 0.5 million for the years ended December 31, 2022 and 2021, respectively.

Troubled Debt Restructurings

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Although each occurrence is unique to the borrower and is evaluated separately, for all portfolio segments, TDRs 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 year ended December 31, 2021, there were ten TDR loans outstanding in the amount of $ 3.4 million primarily due to the economic impact of COVID-19.

For the year ended December 31, 2022, there were eighteen TDR loans outstanding in the amount of $ 3.6 million primarily due to the economic impact of COVID-19 on certain of the Bank’s borrowers.

There have been no defaults of TDRs modified during the past twelve months.

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Weighted average risk grade

Revolving loans that converted to term during 2021 were as follows (in thousands):

The following table presents weighted-average risk grades for all loans, by class and year of origination/renewal as of December 31, 2021 (in thousands):

Commercial real estate - owner occupied

Special Mention

Weighted average risk grade

Commercial real estate - nonowner occupied

Special Mention

Weighted average risk grade

Secured by farmland

Special Mention

Weighted average risk grade

Construction and land development

Special Mention

Weighted average risk grade

Residential 1-4 family

Special Mention

Weighted average risk grade

Multi- family residential

Special Mention

Weighted average risk grade

Home equity lines of credit

Special Mention

Weighted average risk grade

Commercial loans

Special Mention

Weighted average risk grade

Paycheck Protection Program loans

Special Mention

Weighted average risk grade

Consumer loans

Special Mention

Weighted average risk grade

Special Mention

Weighted average risk grade

Revolving loans that converted to term during 2022 and 2021were as follows (in thousands):

For the year ended December 31, 2022

For the year ended December 31, 2021

Commercial real estate - owner occupied

Commercial real estate - non-owner occupied

Secured by farmland

Residential 1-4 family

Multi- family residential

Home equity lines of credit

Commercial loans

The amount of foreclosed residential real estate property held at December 31, 2021 and 2020 was $ 0.9 million and $ 1.0 million, respectively.

The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was zero and $ 1.4 million at December 31, 2021 and 2020, respectively.

The amount of foreclosed residential real estate property held at December 31, 2022 and 2021 was zero and $ 0.9 million, respectively.

The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was $ 0.1 million and zero at December 31, 2022 and 2021, respectively.

Allowance For Credit Losses – Loans

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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.

The contractual term excludes expected extensions, renewals and modifications unless (i) management has a reasonable expectation that a TDR will be executed with an individual borrower or (ii) such extension or renewal options are not unconditionally cancellable by us and, in such cases, the borrower is likely to meet applicable conditions and likely to request extension or renewal.

Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts.

While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors.

The allowance for credit losses is measured on a collective basis for portfolios of loans when similar risk characteristics exist.

Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation.

Expected credit losses for collateral dependent loans, including loans where the borrower is experiencing financial difficulty but foreclosure is not probable, are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

Credit loss expense related to loans reflects the totality of actions taken on all loans for a particular period including any necessary increases or decreases in the allowance related to changes in credit loss expectations associated with specific loans or pools of loans.

Portions of the allowance may be allocated for specific credits;

however, the entire allowance is

available for any credit that, in management’s judgment, should be charged off.

While management utilizes its best judgment and information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

In calculating the allowance for credit losses, most loans are segmented into pools based upon similar characteristics and risk profiles.

Common characteristics and risk profiles include the type/purpose of loan, underlying collateral, geographical similarity and historical/expected credit loss patterns.

In developing these loan pools for the purposes of modeling expected credit losses, we also analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic conditions and scenarios as well as other portfolio stress factors.

For allowance modeling purposes, our loan pools include (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.

For allowance modeling purposes, our loan pools include but 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 (“PD”), which is the likelihood that the loan will stop performing/default, (ii) probability of attrition (“PA”), which is the likelihood that a loan will pay-off prior to maturity, (iii) loss given default (“LGD”), which is the expected loss rate for loans in default and (iv) exposure at default (“EAD”), which is the estimated outstanding principal balance of the loans upon default, including the expected funding of unfunded commitments outstanding as of the measurement date.

Inputs are pool-specific, though not necessarily solely reliant on internally-sourced data.

Internal data is supplemented by, but not replaced by, peer data when required, primarily to determine the PD input.

The various pool-specific inputs may be adjusted for current macroeconomic assumptions, as further discussed below, and other factors such as differences in underwriting standards, portfolio mix, or when historical asset terms do not reflect the contractual terms of the financial assets being evaluated as of the measurement date.

Each time we measure expected credit losses, we assess the relevancy of historical information and consider any necessary adjustments to address any differences in current asset-specific characteristics.

(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.

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.

The macroeconomic variables utilized as inputs in forecast modeling were subjected to a variety of analysis procedures and were selected primarily based on statistical relevancy and correlation to historical credit losses, where historical credit losses may be fully internally-sourced or supplemented with peer data.

PDs were estimated by analyzing the relationship between the historical performance of each loan pool and historical economic trends over a complete economic cycle.

Historical performance data is either fully internally-sourced or supplemented with peer data where necessary.

PDs are adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period.

We have determined that we are reasonably able to forecast the macroeconomic variables used in our forecast modeling processes with an acceptable degree of confidence for a total of four quarters.

This forecast period is followed by an additional eight quarter reversion process whereby the forecasted macroeconomic variables are reverted to their historical mean on a straight-line basis.

By reverting these economic inputs to their historical mean and considering loan/borrower specific attributes, our allowance models are intended to yield a measurement of expected credit losses that reflects average historical loss rates (which may be supplemented by peer data) for periods subsequent to the initial twelve-quarters consisting of the forecast and reversion periods.

The LGD is linked to PD based on benchmark historical loss averages for each loan pool.

LGD is dynamic with PD;

as PD increases, so will LGD, and vice versa.

In this context, “benchmark” refers to the use of third-party data, and “historical loss averages” refers to the fraction of defaulted balance that tends to be lost.

By nature of its connection to PD, LGD is by extension adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over the four-quarter forecast period and eight-quarter reversion process, which management considers to be both reasonable and supportable.

This same forecast/reversion period is used for all macroeconomic variables used in all of our economic forecast models.

PA and EAD are estimated using either a Discounted Cash Flow or Remaining Life model, both of which use various timing inputs to estimate the loan balance that remains at various future points in time, and thus also at the time of a default event.

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.

The risk factors are large relationship concentrations, borrower debt service coverage exceptions, loan-to-value exceptions, and excessive growth in the loan pool.

The framework established by management calculates suggested Q-Factor adjustments each period as these key risk indicators exceed certain thresholds.

Management also has the ability to modify the suggested amounts based on management’s understanding of changes in the pool.

In fourth quarter of 2021, management modified suggested qualitative reserves for seven loan pools related to loan growth and concentration components that were triggered by either the introduction of a new business line, reclassification of loans by loan pool or accounting system, isolated and identifiable projects driving growth and qualitative factors already recognized in another measure.

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.

Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things.

A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.

In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral.

We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis.

The fair value of real estate collateral supporting collateral dependent loans is evaluated by our internal appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice.

The fair value of collateral supporting collateral dependent construction loans is based on an “as is” valuation.

The following tables present details of the allowance for credit losses on loans segregated by loan portfolio segment as of December 31, 2021 and 2020, calculated in accordance with the CECL methodology described above (in thousands).

The following tables present details of the allowance for credit losses on loans segregated by loan portfolio segment as of December 31, 2022 and 2021, calculated in accordance with the current expected credit losses (“CECL”) methodology (in thousands).

December 31, 2022

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As part of management’s ongoing review process and as an annual requirement, during the third quarter of 2022, the Company refreshed and recalibrated the historical loss rates, forecast assumptions, and qualitative factor framework of the CECL model.

Management considered the need to qualitatively adjust expected credit losses for information not already captured in the loss estimation process.

Qualitative reserve adjustments were driven by key risk indicators, that management tracked on a pool-by-pool basis, which included loan-to-value, borrower debt service coverage exceptions and large concentrations.

Updated peer groups were also determined in collaboration with the Company’s CECL consultant.

Management included banks in Virginia, Maryland, North Carolina, and Pennsylvania that were between $2.0 billion and $10.0 billion in asset size.

Additionally, in this peer group the Company included the historical loss experience of Eastern Virginia Bank, which was acquired in 2017.

The peer group population was further narrowed using statistical analysis with a focus on total loans, percent of charge-offs, portfolio yields, and percent of charge-offs during recession.

the updated loss drivers displayed higher default expectations as compared to the prior models.

This is a direct result of the peers included in the analysis yielding higher predicted probability of defaults under the new model applied in the third quarter 2021.

Additionally, qualitative factors related to COVID-19 uncertainty were eliminated.

COVID-19 related factors contributed 62% or $11.0 million to the first quarter of 2021 and 27% or $3.5 million to the second quarter of 2021 total qualitative reserves.

While the asset range and geography were unchanged from the prior iteration, changes in the Primis portfolio and the portfolios of other institutions resulted in changes to the final peer groups.

The most notable changes are in the construction and land development and residential 1-4 family peer groups, each of which displays less risk than the prior year's group.

Other segments' groups are mostly consistent.

Generally, the updated loss drivers displayed similar default expectations as compared to the prior models.

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

Activity in the allowance for credit losses by class of loan for the years ended December 31, 2022 and 2021 is summarized below (in thousands):

December 31, 2021

Year Ended December 31, 2022

Allowance for credit losses:

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Ending balance

December 31, 2020

Year Ended December 31, 2021

Allowance for credit losses:

Beginning balance

Adoption of ASC 326

Provision (recovery)

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Total non-PCD loans

(1) Includes SBA guarantees of $ 681 thousand and $ 2.5 million as of December 31, 2021 and 2020, respectively.

(1) Includes SBA guarantees of $ 0.5 million and $ 0.7 million as of December 31, 2022 and 2021, respectively.

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.

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The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Assets Measured on a Recurring Basis:

Assets and Liabilities Measured on a Recurring Basis:

Investment Securities Available-for-sale

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In certain cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy.

Currently, a majority of Primis’

available-for-sale debt investment securities are considered to be Level 2 investment securities, except for a few corporate securities that are classified as Level 3 investment securities.

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

Currently, all of Primis’ available-for-sale debt investment securities are considered to be Level 2 investment securities.

Loans Held for Sale

The fair value of loans held for sale is determined by obtaining prices at which they could be sold in the principal market at the measurement date and are classified within Level 2 of the fair value hierarchy.

The fair value is determined on a recurring basis by utilizing quoted prices from dealers in such securities.

Mortgage Banking Derivative and Financial Assets and Liabilities

Interest Rate Lock Commitments (“IRLC ”) :

The Company determines the value of IRLCs by comparing the market price to the price locked in with the customer, adding fees or points to be collected at closing, subtracting commissions to be paid at closing, and subtracting estimated remaining loan origination costs to the bank based on the processing status of the loan.

IRLCs are classified within Level 3 of the valuation hierarchy.

Best Efforts Forward Loan Sales Commitments:

Best efforts forward loan sales commitments are classified within Level 2 of the valuation hierarchy.

Best efforts forward loan sales commitments fix the forward sales price that will be realized upon the sale of mortgage loans into the secondary market.

Best efforts forward loan sales commitments are entered into for loans at the time the borrower commitment is made.

These best efforts forward loan sales commitments are valued using the committed price to the counterparty against the current market price of the interest rate lock commitment or mortgage loan held for sale.

Mandatory Forward Loan Sales Commitments:

Fair values for mandatory forward loan sales commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised.

observable inputs used by Primis, best efforts mandatory loan sales commitments are classified within Level 3 of the valuation hierarchy.

To-Be-Announced Mortgage-Backed Securities Trades:

Fair values for TBA’s are based on the gain or loss that would occur if the Company were to pair-off transaction at the measurement date and are classified within Level 3 of the valuation hierarchy.

TBA’s are recorded at fair value on a recurring basis.

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

Fair Value Measurements Using

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SBA pool securities

Loans held for sale

Mortgage banking financial assets

Derivative assets

Mortgage banking financial liabilities

Derivative liabilities

Total liabilities

Fair Value Measurements Using

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Corporate securities

Collateralized loan obligations

Residential government-sponsored collateralized mortgage obligations

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SBA pool securities

At December 31, 2020, the Company had $ 1.0 million of corporate securities that were classified as Level 3.

During 2021, these securities matured and the balance at December 31, 2021 was zero .

No corporate securities that are classified as Level 3 above were purchased or sold during 2020.

Assets and Liabilities Measured on a Non-recurring Basis:

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These adjustments to fair value usually result from the application of lower of amortized cost or fair value accounting or write-downs of individual assets due to impairment.

Following the adoption of ASC 326, the population of loans measured at fair value on a non-recurring basis has greatly diminished and is limited to collateral-dependent loans evaluated individually.

Collateral-dependent loans are measured at fair value on a non-recurring basis and are evaluated individually.

These collateral-dependent loans are deemed to be at fair value if there is an associated allowance for credit losses or if a charge-off has been recorded in the previous 12 months.

Collateral values are determined using appraisals or other third-party value estimates of the subject property discounted based on estimated selling costs, generally between 5 % and 10 %, and immaterial adjustments for

other external factors that may impact the marketability of the collateral.

The weighted average discount for estimated selling costs applied was 6 %.

Assets Held for Sale

Assets held for sale are valued based on third-party appraisals less estimated disposal costs.

Primis considers third party appraisals, as well as independent fair value assessments from realtors or persons involved in selling bank premises, furniture and equipment, in determining the fair value of particular properties.

Accordingly, the valuation of assets held for sale is subject to significant external and internal judgment.

Primis periodically reviews premises, furniture and equipment held for sale to determine if the fair value of the property, less disposal costs, has declined below its recorded book value and records any adjustments accordingly.

Other Real Estate Owned

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OREO is further evaluated quarterly for any additional impairment.

At December 31, 2021 and 2020, the total amount of OREO was $ 1.2 million and $ 3.1 million, respectively.

At December 31, 2022 and 2021, the total amount of OREO was zero and $ 1.2 million, respectively.

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

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Collateral dependent loans

Other real estate owned:

Construction and land development

Residential 1-4 family

Assets held for sale

Fair Value Measurements Using

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Other real estate owned:

Commercial real estate - non-owner occupied

Construction and land development

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Securities available-for-sale

Level 2 & Level 3

Securities held-to-maturity

Stock in Federal Reserve Bank and Federal Home Loan Bank

Investments in mortgage company - held for sale

Preferred investment in mortgage company

Loans held for sale

Accrued interest receivable

Mortgage banking financial assets

Derivative assets

Level 2 and 3

Credit enhancement

Financial liabilities:

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Accrued interest payable

Mortgage banking financial liabilities

Derivative liabilities

Level 2 and 3

Carrying amount is the estimated fair value for cash and cash equivalents (including federal funds sold), accrued interest receivable and payable, 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.

The 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.

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.

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We do not currently have any financing leases.

For the year ended December 31, 2021 and 2020, our net operating lease cost was $ 2.4 million and $ 2.9 million, respectively, and was reflected in occupancy expenses on our income statements.

The following table presents supplemental cash flow and other information related to our operating leases:

For the year ended December 31, 2022 and 2021, our net operating lease cost was $ 2.3 million and $ 2.4 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 Year Ended

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Lease liabilities

As of December 31, 2021 and 2020, the Company did not have any operating leases that have not yet commenced that will create additional lease liabilities and right-of-use assets for the Company.

As of December 31, 2022, the Company had two operating leases that have not yet commenced that will create additional lease liabilities and right-of-use assets for the Company.

GOODWILL AND INTANGIBLE ASSETS

Primis has recorded $101.9 million of goodwill at December 31, 2021 and 2020.

Goodwill is primarily related to the acquisition of other banks.

Primis has recorded $ 104.6 million and $101.9 million of goodwill at December 31, 2022 and 2021, respectively.

Goodwill is primarily related to the acquisition of other banks before 2022 and Primis Mortgage in 2022.

Goodwill is evaluated for impairment on an annual basis or more frequently if events or circumstances warrant.

Our annual assessment occurs during the third calendar quarter.

For the 2021 assessment, we performed a qualitative assessment to determine if it was more likely than not that the fair value of our single reporting unit is less than its carrying amount.

We concluded that the fair value of our single reporting unit exceeded its carrying amount and that it was not necessary to perform the quantitative impairment test pursuant to ASC 350-20.

Our qualitative assessment considered many factors including, but not limited to, our actual and projected operating performance and profitability, as well as consideration of recent bank merger and acquisition transaction metrics.

Our annual assessment occurs as of September 30th every year.

For our annual 2022 assessment, we performed a step one quantitative assessment to determine if the fair value of our Bank reporting unit was less than its carrying amount.

We concluded that the fair value of our Bank reporting unit exceeded its carrying amount and no impairment was present based on management’s assessment.

No impairment was indicated in 2022, 2021 or 2020.

We determined that for Primis Mortgage, we did not need a quantitative assessment and performed a qualitative assessment.

No impairment was indicated for 2022 for the Primis Mortgage reporting unit.

Intangible Assets

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Gross Carrying

Amortizable core deposit intangibles

Amortizable Intangibles

December 31, 2021

Gross Carrying

Amortizable core deposit intangibles

Amortizable intangibles

Estimated amortization expense of intangibles for the years ended December 31 were as follows (in thousands):

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The balance in repo accounts at December 31, 2022 and 2021 was $ 6.5 million and $ 10.0 million, respectively.

At December 31, 2021 and 2020, we have pledged callable agency securities, residential government-sponsored mortgage-backed securities and collateralized mortgage obligations with a carrying value of $ 21.7 million and $ 31.1 million, respectively, to customers who require collateral for overnight repurchase agreements and deposits.

At December 31, 2022 and 2021, we had pledged callable agency securities, residential government-sponsored mortgage-backed securities and collateralized mortgage obligations with a carrying value of $ 14.2 million and $ 21.7 million, respectively, to customers who require collateral for overnight repurchase agreements and deposits.

Other borrowings consist of the following (in thousands):

FHLB collateral advances maturing 3/1/2030

Short-term FHLB advances maturing 1/3/2023

Short-term FHLB advances maturing 1/13/2023

Short-term FHLB advances maturing 1/23/2023

Short-term FHLB advances maturing 1/27/2023

Total FHLB advances

Securities sold under agreements to repurchase

Weighted average interest rate at year end

Our FHLB convertible advances of $ 100.0 million was called on March 1, 2022.

Our FHLB convertible advances of $ 100.0 million were called on March 1, 2022.

Each FHLB advance is payable at its maturity date, with a prepayment penalty for fixed rate advances paid off earlier than maturity.

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The trust issuer invested the total proceeds from the sale of the trust preferred securities in Floating Rate Junior Subordinated Deferrable Interest Debentures.

At December 31, 2021 and 2020, there was $ 10.3 million outstanding, net of approximately $ 600 thousand of debt issuance costs.

At December 31, 2022 and 2021, there was $ 10.3 million outstanding, net of approximately $ 0.6 million of debt issuance costs.

These securities pay cumulative cash distributions quarterly at a variable rate per annum, reset quarterly, equal to the three-month LIBOR plus 2.95 % .

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On January 20, 2017, Primis completed the sale of $ 27.0 million of its fixed-to-floating rate senior Subordinated Notes due 2027.

These notes initially beared interest at 5.875 % per annum until January 31, 2022;

These notes initially bore interest at 5.875 % per annum until January 31, 2022;

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 December 31, 2021, all of these notes qualified as Tier 2 capital.

At December 31, 2022, 80 % of these notes qualified as Tier 2 capital.

In 2017, the Company assumed a Senior Subordinated Note Purchase Agreement, dated April 22, 2015, entered into with certain institutional accredited investors, pursuant to which $ 20.0 million in aggregate principal amount of its 6.50 % Fixed-to-Floating Rate Subordinated Notes due 2025 was sold to the investors.

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These notes will bear interest at an initial rate of 5.40 % per annum, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2021.

From and including September 1, 2025 to, but excluding the maturity date or the date of earlier redemption (the “floating rate period”), the interest rate will reset quarterly to an annual interest rate equal to the Benchmark rate, which is expected to be three-month Term Secured Overnight Financing Rate, plus 531 basis points, for each quarterly interest period during the floating rate period, payable quarterly in arrears

on March 1, June 1, September 1, and December 1 of each year, commencing on December 1, 2025.

Notwithstanding the foregoing, in the event that the Benchmark rate is less than zero, the Benchmark rate shall be deemed to be zero.

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Lease liability

Federal AMT credit carryforward

Net unrealized loss on investment securities available for sale

Federal low income housing credit carryforward

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During 2021, the Company remeasured the beginning of year allowance for credit losses deferred tax asset by $ 0.4 million, net, to reflect an adjustment in the 2020 adoption of ASU 2016-13.

During 2019, the Company completed its formal assessment of the Section 382 limitation and rebooked $ 1.2 million deferred tax asset stemming from a $ 5.5 million acquired net operating loss carryforward that was written off in the fourth quarter of 2018.

Additionally, the Company remeasured the depreciation deferred tax liability by $ 0.6 million, net, to reflect a 2018 adjustment to the assets held for sale not previously included.

EMPLOYEE BENEFITS

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The 401(k) plan provides for discretionary matching contributions by Primis.

Expense for 2021, 2020 and 2019 was $ 995 thousand, $ 795 thousand and $ 704 thousand, respectively.

The Bank maintains a deferred compensation plan in the form of Supplemental Executive Retirement Plan (“SERP”) for four (4) former executives.

The expense for 2022, 2021 and 2020 was $ 1.3 million, $ 1.0 million and $ 0.8 million, respectively.

The Bank previously maintained a deferred compensation plan in the form of Supplemental Executive Retirement Plan (“SERP”) for four (4) former executives.

Under the plan, the Bank pays each participant, or their beneficiary, compensation deferred plus accrued interest for a period of 15 to 17 years after their retirement or age 62 depending on the terms and conditions of each plan.

A liability is accrued for the obligations under these plans.

The expense incurred for the deferred compensation plans in 2021, 2020 and 2019 was $ 361 thousand, $ 1.3 million and $ 1.2 million, respectively.

The expense incurred for the deferred compensation plans in 2022, 2021 and 2020 was $ 0.3 million, $ 0.4 million and $ 1.3 million, respectively.

The deferred compensation plan liability was $ 7.4 million and $ 7.8 million as of December 31, 2022 and 2021, respectively.

STOCK-BASED COMPENSATION

At the June 21, 2017 Annual Meeting of Stockholders of Primis (formerly Southern National), the 2017 Equity Compensation Plan (the “2017 Plan”) was approved as recommended by the Board of Directors.

The 2017 Plan replaced the 2010 Plan and has a maximum number of 750,000 shares reserved for issuance.

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 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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Exercisable at end of period

Stock-based compensation expense associated with stock options was zero , $ 188 thousand and $ 62 thousand for the years ended December 31, 2021, 2020 and 2019, respectively.

As of December 31, 2021, we do not have any unrecognized compensation expense associated with the stock options.

Stock-based compensation expense associated with stock options was zero , zero and $ 0.1 million for the years ended December 31, 2022, 2021 and 2020, respectively.

As of December 31, 2022, we do no t have any unrecognized compensation expense associated with the stock options.

A summary of time vested restricted stock awards for 2022 follows:

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Unvested restricted stock outstanding, end of period

Stock-based compensation expense for time vested restricted stock awards totaled $ 747 thousand, $ 1.4 million and $ 370 thousand for the years ended December 31, 2021, 2020 and 2019, respectively.

Stock-based compensation expense for time vested restricted stock awards totaled $ 0.4 million, $ 0.7 million and $ 1.4 million for the years ended December 31, 2022, 2021 and 2020, respectively.

As of December 31, 2022, unrecognized compensation expense associated with restricted stock awards was $ 0.7 million, which is expected to be recognized over a weighted average period of 2.4 years.

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Unvested Units outstanding, end of period

During 2021, the Company issued 59,335 non-transferrable Units convertible, on a one-on-one basis, into shares of stock to eligible employees, granted pursuant to and subject to the provisions of the 2017 Plan.

During 2022 and 2021, the Company issued 96,105 and 59,355 non-transferrable Units, respectively, convertible, on a one-on-one basis, into shares of stock to eligible employees, granted pursuant to and subject to the provisions of the 2017 Plan.

These Units are subject to service and performance conditions.

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Payouts between performance levels will be determined based on straight line interpolation.

At December 31, 2021, there were 59,335 of these Units unvested and outstanding.

The Company did not recognize any stock-based compensation expense associated with these Units for the year ended December 31, 2021 because it is not probable that these Units will vest.

The grant date fair value of these Units was $ 15.00 per Unit.

The potential unrecognized compensation expense associated with these Units is $ 1.3 million at December 31, 2021.

The Company did not recognize any stock-based compensation expense associated with these Units during the years ended December 31, 2022 or 2021 because it is not probable that these Units will vest.

The grant date fair value of these Units was $ 11.83 and $ 15.00 per Unit for the years ended December 31, 2022 and 2021, respectively.

The maximum potential unrecognized compensation expense associated with these Units was $ 3.0 million and $ 1.3 million, at December 31, 2022 and 2021, respectively.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

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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.

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, as if such commitments were funded.

Estimating credit losses on amounts expected to be funded uses the same methodology as described for loans in Note 4 - 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:

Balance as of January 1

Impact of adopting ASU 2016-13

Credit loss expense

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We evaluate each customer’s creditworthiness on a case-by-case basis.

We had $ 52.7 million of loan commitments outstanding as of December 31, 2022, all of which contractually expire within thirty years.

At December 31, 2022 and 2021, we had unfunded lines of credit and undisbursed construction loan funds totaling $ 540.6 million and $ 411.0 million, respectively.

Virtually all of our unfunded lines of credit and undisbursed construction loan funds are variable rate.

Primis also had commitments on the subscription agreements entered into for the investments in non-marketable equity securities of $ 3.5 million at December 31, 2021.

Primis also had commitments on the subscription agreements entered into for the investments in non-marketable equity securities of $ 3.2 million and $ 3.1 million, at December 31, 2022 and 2021, respectively.

EARNINGS PER SHARE

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December 31, 2021

Primis Financial Corp.

Leverage ratio

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Total risk-based capital ratio

Leverage ratio

Common equity tier 1 capital ratio

Tier 1 risk-based capital ratio

Total risk-based capital ratio

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

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and Primis Bank remain well-capitalized under Basel III capital requirements.

Primis Bank had capital conservation buffer of 9.43 % at December 31, 2021, which exceeded the 2.50% minimum requirement below which the regulators may impose limits on distributions.

Primis Financial Corp.

was not subject to various regulatory capital requirements administered by the federal banking agencies in 2020 as Primis did not meet the asset-sized threshold requirement in 2020.

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

Primis Bank had a capital conservation buffer of 5.84 % at December 31, 2022, 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.

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:

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 and the origination and sale of loans.

Primis Mortgage.

This segment specializes in originating mortgages in majority of the U.S.

The primary source of revenue for this segment is net interest income, noninterest income and the origination of mortgage loans.

Prior to the Primis Mortgage acquisition in 2022, we operated as one reportable segment.

The following table provides financial information for the Company's segment.

The information provided under the caption “Primis Bank” represents 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 year ended December 31, 2022

Primis Mortgage

Interest income

Interest expense

Net interest income

Provision for loan losses

Noninterest income

Noninterest expense

Income before income taxes

Income tax expense (benefit)

Net income (loss)

PARENT COMPANY FINANCIAL INFORMATION

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CONDENSED BALANCE SHEETS

Investment in subsidiary

Loans held for investment

Investment in subsidiaries

Preferred investment in mortgage company

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Retained earnings

Accumulated other comprehensive income

Accumulated other comprehensive income (loss)

Total stockholders' equity

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Cash dividends received from bank subsidiary

Interest income

Gain on debt extinguishment

Other investment income

Interest on junior subordinated debt

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Investing activities:

Net (increase) decrease in loans

Increase in preferred investment in mortgage company

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Cash and cash equivalents at end of period

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following is a summary of the accumulated other comprehensive income (loss) balances, net of tax (in thousands):

Current Period

December 31, 2020

December 31, 2021

Unrealized gain (loss) on investment securities available-for-sale

RELATED PARTY TRANSACTIONS

Prior to December 31, 2021, STM was a related party of the Company.

The Company continues to have a financial relationship with STM but STM is no longer a related party.

The following table summarizes the changes in the loan amount outstanding with STM during the periods indicated, during which STM was considered a related party (in thousands):

Balance at January 1,

Principal advances

Principal paid

Transfers (out) of related party status

Balance at December 31,

We purchased loans in an aggregate amount of $ 30.8 million and $ 80.6 million during 2021 and 2020, respectively, from STM.

During the year, officers, directors, principal shareholders, and their affiliates (related parties) were customers of and had transactions with the Company.

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Balance at December 31,

Primis has also entered into deposit transactions with its related parties including STM.

The aggregate amount of these deposit accounts were $ 22.4 million (not including STM) and $ 25.2 million (including STM) as of December 31, 2021 and 2020, respectively.

Primis has also entered into deposit transactions with its related parties.

The aggregate amount of these deposit accounts were $ 15.9 million and $ 22.4 million as of December 31, 2022 and 2021, respectively.

VARIABLE INTEREST ENTITIES

Variable interests are defined as contractual ownership or other interests in an entity that change with fluctuations in the fair value of an entity's net asset value.

The primary beneficiary consolidates the VIE.

The primary beneficiary is defined as the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity's

economic performance and the obligation to absorb losses or the right to receive benefits that could be significant to the VIE.

Our involvement with VIEs includes our investments in low income housing tax credit funds and non-marketable and other equity securities.

Low Income Housing Tax Credits

The general purpose of housing equity funds is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, deliver Federal Low Income Housing Credits to investors, allocate tax losses and other possible tax benefits to investors, and to preserve and protect project assets.

The investments in these funds were recorded as other assets on the consolidated balance sheets and were carried at $ 4.2 million and $ 5.1 million at December 31, 2021 and 2020, respectively.

These investments and related tax benefits have expected terms through 2034, with the majority maturing by 2027.

Non-Marketable and Other equity investments

The Company also has a limited interest in several funds that focus on providing venture capital to new and emerging financial technology companies, which are accounted for as VIEs.

Investments held by the Company in these third-party funds do not have controlling or significant variable interests.

The above investments meet the criteria of a VIE, however, the Company is not the primary beneficiary of the entities, as it does not have the power to direct the activities that most significantly impact the economic performance of the entities and their accounts are not included in our consolidated financial statements.

The Company’s investment in the unconsolidated VIEs were carried as other assets on the consolidated balance sheets.

The low income housing tax credit funds were carried at $ 3.4 million and $ 4.2 million at December 31, 2022 and 2021, respectively.

Tax credits, net of amortization recognized related to these investments during the years ended December 31, 2022 and 2021 were $( 4 ) thousand and $( 39 ) thousand, respectively.

Total projected tax credits to be received for 2021 are $ 446 thousand, which is based on the most recent quarterly estimates received from the funds.

Additional capital calls expected for the funds totaled $ 0.4 million and $ 2.9 million at December 31, 2021 and 2020, respectively, and are accrued for in other liabilities on the consolidated balance sheets.

SUBSEQUENT EVENT

On January 27, 2022, Primis’ board of directors approved the plan of branch closings and consolidation.

The Company anticipates seven branch consolidations and three branch closings throughout 2022.

The Company cannot estimate the potential financial impact of the plan of branch closings and consolidation.

Additional capital calls expected for the funds totaled $ 0.4 million at December 31, 2022 and 2021 and are accrued for in other liabilities on the consolidated balance sheets.

The non-marketable and other equity investments were carried at $ 4.4 million and $ 2.1 million at December 31, 2022 and 2021, respectively.

We also make commitments on the subscription agreements entered into for the investments in non-marketable equity securities.

For additional details, see Note 15 – Financial Instruments with Off-Balance-Sheet Risks.

The Company’s maximum exposure to loss from unconsolidated VIEs is the higher of the investment recorded on the Company’s consolidated balance sheets or the commitment on the investment.

As of December 31, 2022 and 2021, the maximum exposure to loss for our unconsolidated VIEs was $ 11.0 million and $ 9.4 million, respectively.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data