ACCOUNTING POLICIES (Revised and Restated)

6 Months Ended

Jun. 30, 2023

ACCOUNTING POLICIES (Revised and Restated) [Abstract]

ACCOUNTING POLICIES (Revised and Restated)

1.ACCOUNTING POLICIES (Revised and Restated)

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.

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

The accounting policies and practices of Primis and its subsidiaries conform to U.S. generally accepted accounting principles (“U.S. GAAP”) and to general practice within the banking industry. Major policies and practices are described below and have not changed significantly from the policies and practices disclosed in the Company’s restated Annual Report on Form 10-K/A for the year ended December 31, 2022, except where specifically indicated below.

Principles of Consolidation

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

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

Operating Segments

The Company, through its Bank subsidiary, provides a broad range of financial services. While the Company’s chief operating decision makers monitor the revenue streams of the various financial products and services, operations are managed and financial performance is evaluated on an organization-wide basis. Management has determined that the Company has two reportable operating segments: Primis Mortgage and Primis Bank, as discussed in Note 11 – Segment Information.

Basis of Presentation

The unaudited consolidated financial statements and notes thereto have been prepared in accordance with U.S. GAAP for interim financial information and instructions for Form 10-Q and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in Primis’ restated Annual Report on Form 10-K/A for the year ended December 31, 2022.

Reclassifications

In certain instances, amounts reported in the prior year annual audited consolidated financial statements or the interim condensed consolidated financial statements have been reclassified to conform to the current financial statement presentation.

Use of Estimates

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

Interest Rate Swaps

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

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

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

	June 30, 2023						December 31, 2022
(dollars in thousands)		Amortized Cost Basis		Hedged Asset		Basis Adjustment		Amortized Cost Basis		Hedged Asset		Basis Adjustment
Fixed rate assets	$	440,935	$	195,739	$	(4,261)	$	—	$	—	$	—

Transfers of Financial Assets

The Company follows the guidance in ASC 860, Transfers and Servicing, when accounting for loan participations and other partial loan sales. Transfers of an entire financial asset (i.e. loan sales), a group of entire financial assets, or a participating interest in an entire financial asset (i.e. loan participations sold) are accounted for as sales when control over the assets have been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Participations or other partial loan sales that do not meet the definition of a participating interest would remain on the balance sheet and the proceeds are recorded as a secured borrowing. Secured borrowings are initially recorded at fair value which corresponds to the proceeds received for the transfer of the assets, and any failed sale discount is amortized into income over the life of the related asset. The Company retains servicing rights on loans transferred under secured borrowings, but in accordance with U.S. GAAP does not record a servicing asset. The Company transferred $5.7 million and $20.8 million in principal balance of loans to another financial institution during the three and six months ended June 30, 2023, respectively, that were accounted for as secured borrowings. As of June 30, 2023 the amortized cost of those loans recorded in loans held for investment in our balance sheet was $20.7 million. None of the loans were past due or on nonaccrual as of June 30, 2023 and we had no charge-offs of these loans during the three or six months ended June 30, 2023. See Note 7 – Debt and Other Borrowings – for additional information on transfers accounted for as secured borrowings.

Retained Earnings Revisions

During the second quarter of 2023, the Company discovered an employee loan fraud with total exposure of approximately $2.5 million. The fraud dated back to the origination of several loans to a customer in 2010. Management believes, on the advice of its counsel, its insurance broker and a third party forensic auditor, that the losses are recoverable under the Company’s insurance policies and is working through the claims process. The Company has evaluated the effect of the error, both qualitatively and quantitatively, and believes the impact to prior years is immaterial to each respective period assessed. However, the Company’s quantitative and qualitative assessments of the fraud losses on its projected 2023 annual earnings was expected to be material at the time the evaluation was performed as of June 30, 2023. Accordingly, the Company made the decision to report the losses in the respective periods in which they were incurred in its future Form 10-Q and Form 10-K filings by revising impacted periods beginning with the Quarterly Report on Form 10-Q as of June 30, 2023. For all of its filings on and after June 30, 2023, the Company revised opening retained earnings of the earliest period presented for losses incurred in earlier periods and revised all prior periods presented in the filing for losses incurred related to the period. Accordingly, the Company has revised prior periods presented in this Form 10-Q/A to reflect the fraud losses in the respective period incurred, with any losses incurred prior to January 1, 2022 adjusted in the January 1, 2022 opening retained earnings balance as previously reported in the Company’s restated Annual Report on Form 10-K/A for the year ended December 31, 2022.

The table below discloses the net change (increase or (decrease)) included in each condensed consolidated statements of income and comprehensive income (loss) line items in this Form 10-Q/A, as a result of the revisions discussed above. The revisions to the six months ended June 30, 2022 resulted in a decline in common and basic EPS from continuing operations of $0.01. There was no change to previously reported basic and diluted EPS from continuing operations in any other period.

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
(dollars in thousands)	2023		2022		2023		2022
Income Statement:
Decrease in interest income	$	(26)	$	(29)	$	(71)		(54)
Increase in noninterest expenses		-		47		9		92
Decrease in income tax expense		(5)		(16)		(16)		(30)
Net decrease in net income from continuing operations	$	(21)	$	(60)	$	(64)	$	(116)

Restatement and Revision of Previously Issued Condensed Consolidated Financial Statements

On February 26, 2024, the Audit Committee of the Board of Directors of the Company and the Company’s management team concluded, following discussions with the Company’s independent registered public accounting firm, Forvis Mazars, LLP (“Forvis”), that the Company’s previously issued unaudited interim condensed consolidated financial statements as of and for the three and six months ended June 30, 2023 should no longer be relied upon.

The accounting matters underlying the Company’s conclusion related to transfers of loans by the Company’s subsidiary, Primis Bank, of approximately $20.8 million (the “Transferred Loans”) to another financial institution during the three and six months ended June 30, 2023. As part of the Company’s 2023 year-end reporting process in the first quarter of 2024, the Company determined that the transfer of the Transferred Loans from Primis Bank to the other financial institution did not qualify for sales treatment under U.S. GAAP and should have been accounted for as secured borrowings. The Company’s management team then undertook extensive discussions with Forvis regarding the effect of the mischaracterization of the transfers on the Company’s reported financial results, and ultimately determined that the Impacted Financial Statements should be restated.

Additionally, during the 2023 annual independent audit of the Company by Forvis, the Company pursued a pre-clearance process with the Office of the Chief Accountant of the SEC related accounting for the Consumer Program loan portfolio as more fully described in its Annual Report on Form 10-K for the year ended December 31, 2023.  The Company received a non-objection from the SEC to the Company’s accounting conclusions required to correct the prior accounting for the Consumer Program. As a result, in consultation with the Company’s Audit Committee to its Board of Directors and its independent registered public accounting firm, Forvis, management determined that the corrections to the Consumer Program accounting was material to the financial statements as of and for the three and six months ended June 30, 2023, which are also being restated in this Form 10-Q/A. The correction to the Consumer Program accounting in the financial statements as of and for the three and six months ended June 30, 2022 was not deemed to be material, but for comparison purposes to the current period in this Form 10-Q/A the Company has revised the prior period amounts as applicable.

The primary effects of the restatements for the failed loan sale and Consumer Program as of June 30, 2023, and for the three and six month periods then ended are shown below.

As of and for the three and six months ended June 30, 2023
(In thousands, expect per share data)			As Revised1,
	As Reported		As Restated
Condensed Consolidated Balance Sheet
Loans held for investment	$	3,173,638	$	3,172,254
Loans held for investment, collateralizing secured borrowings		—		20,714
Allowance for credit losses		(38,414)		(38,541)
Net Loans		3,135,224		3,154,427
Deferred tax assets, net		20,391		22,639
Consumer Program derivative		-		10,627
Other assets		72,438		58,079
Total assets		3,848,493		3,866,212
Secured borrowings		—		20,595
Other liabilities		27,361		27,279
Total liabilities		3,455,277		3,475,790
Retained earnings		106,075		103,281
Stockholders’ equity		393,216		390,422
Total liabilities and stockholders' equity	$	3,848,493	$	3,866,212
Condensed Consolidated Statement of Income and Comprehensive Income (Loss)
Three months ended June 30, 2023
Interest and fees on loans	$	43,970	$	41,491
Total interest and dividend income		52,679		50,200
Interest on other borrowings		1,739		2,083
Total interest expense		26,522		26,866
Net interest income		26,157		23,334
Provision for credit losses		4,301		4,352
Net interest income after provision for credit losses		21,856		18,982
Gain on sale of loans		182		—
Consumer Program derivative		-		1,758
Credit enhancement income		1,152		-
Total noninterest income		8,486		8,937
Miscellaneous lending expenses		-		568
Other operating expenses		5,303		3,140
Total noninterest expenses		30,552		30,439
Income (loss) before income taxes		(210)		(2,520)
Income tax expense (benefit)		(22)		(526)
Net income (loss)	$	(188)	$	(1,994)
Comprehensive income (loss)	$	(2,794)	$	(4,600)
EPS – Basic	$	(0.01)	$	(0.08)
EPS – Diluted	$	(0.01)	$	(0.08)
Six months ended June 30, 2023
Interest and fees on loans	$	85,276	$	79,941
Total interest and dividend income		99,793		94,458
Interest on other borrowings		5,444		5,975
Total interest expense		45,271		45,802
Net interest income		54,522		48,656
Provision for credit losses		9,488		9,615
Net interest income after provision for credit losses		45,034		39,041
Gain on sale of loans		660		51
Consumer Program derivative		-		13,201
Credit enhancement income		6,038		-
Total noninterest income		20,018		26,607
Miscellaneous lending expenses		-		1,453
Other operating expenses		8,559		5,479
Total noninterest expenses		57,956		57,393
Income (loss) before income taxes		7,096		8,255

Income tax benefit		1,331		1,887
Net income (loss)	$	5,765	$	6,368
Comprehensive income (loss)	$	5,534	$	6,137
EPS – Basic	$	0.23	$	0.26
EPS – Diluted	$	0.23	$	0.26
Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three months ended
Total shareholders' equity, March 31, 2023	$	398,406	$	397,418
Retained Earnings, March 31, 2023		108,732		107,744
Net loss, three months ended June 30, 2023		(188)		(1,994)
Retained Earnings, June 30, 2023		106,075		103,281
Total shareholders' equity, June 30, 2023	$	393,216	$	390,422
Condensed Consolidated Statement of Changes in Stockholders’ Equity for the six months ended
Total shareholders' equity, December 31, 2022	$	392,365	$	388,968
Retained Earnings, December 31, 2022		105,247		101,850
Net income, six months ended June 30, 2023		5,765		6,368
Retained Earnings, June 30, 2023		106,075		103,281
Total shareholders' equity, June 30, 2023	$	393,216	$	390,422
Condensed Consolidated Statement of Cash Flows
Operating activities
Net income	$	5,765	$	6,368
Credit enhancement income		(6,038)		-
Provision for credit losses		9,488		9,615
Net gains on sales of loans		(660)		(51)
Benefit for deferred income taxes		(2,040)		(2,704)
Net change in fair value of Consumer Program derivative		-		(11,100)
Net increase in other assets		(8,830)		(5,539)
Net increase (decrease) in other liabilities		4,345		4,266
Net cash and cash equivalents (used in) provided by operating activities		(34,513)		(35,688)
Investing activities
Net increase in loans		(231,405)		(250,736)
Net cash and cash equivalents used in investing activities		(204,708)		(224,039)
Financing activities
Net (decrease) increase in deposits		594,618		594,529
Change in secured borrowings		—		20,595
Net cash and cash equivalents provided by financing activities	$	262,230	$	282,736
Cash payments for interest	$	41,182	$	41,605

¹ These balances include revisions from the Company’s original Quarterly Report on Form 10-Q for the three and six month periods ended June 30, 2023 to reflect adjustments related to the fraud losses, as described in the Company’s restated Annual Report on Form 10-K/A as of and for the year ended December 31, 2022.

The primary effects of the revisions related to the Consumer Program as of June 30, 2022, and for the three- and six-month period then ended are shown below.

As of and for the three and six months ended June 30, 2022
(In thousands, expect per share data)
			As Revised1,
	As Reported		As Restated
Condensed Consolidated Statement of Income and Comprehensive Income (Loss)
Three months ended June 30, 2022
Interest and fees on loans	$	26,337	$	26,277
Total interest and dividend income		28,230		28,170
Total interest expense		3,652		3,664
Net interest income		24,578		24,506
Net interest income after provision for credit losses		24,156		24,084
Consumer program derivative		—		(238)
Total noninterest income		2,630		2,392
Miscellaneous lending expenses		—		104
Other operating expenses		2,366		2,251
Total noninterest expenses		20,477		20,523
Income before income taxes		6,309		5,953
Income tax expense		1,361		1,335
Net income	$	4,948	$	4,618
Comprehensive income (loss)	$	(3,462)	$	(3,853)
EPS – Basic	$	0.20	$	0.19
EPS – Diluted	$	0.20	$	0.19
Six months ended June 30, 2022
Interest and fees on loans	$	51,060	$	50,978
Total interest and dividend income		54,789		54,707
Total interest expense		7,383		7,408
Net interest income		47,406		47,299
Net interest income after provision for credit losses		46,885		46,778
Consumer Program derivative		-		(184)
Total noninterest income		4,720		4,536
Miscellaneous lending expenses		-		494
Other operating expenses		4,690		4,152
Total noninterest expenses		39,509		39,575
Income (loss) before income taxes		12,096		11,739
Income tax benefit		2,612		2,602
Net income (loss)	$	9,484	$	9,137
Comprehensive income (loss)	$	(9,436)	$	(9,901)
EPS – Basic	$	0.39	$	0.37
EPS – Diluted	$	0.38	$	0.37
Condensed Consolidated Statement of Changes in Stockholders’ Equity
Total stockholders' equity, March 31, 2022	$	402,372	$	402,279
Retained earnings, March 31, 2022		99,710		99,617
Net income, three months ended June 30, 2022		4,948		4,618
Retained earnings, June 30, 2022		102,193		101,770
Total stockholders' equity, June 30, 2022	$	396,753	$	396,330
Condensed Consolidated Statement of Changes in Stockholders’ Equity for the six months ended
Total stockholders' equity, December 31, 2021	$	410,115	$	410,039
Retained earnings, December 31, 2021		97,631		97,555
Net income, six months ended June 30, 2022		9,484		9,137
Retained Earnings, June 30, 2022		102,193		101,770
Total shareholders' equity, June 30, 2022	$	396,753	$	396,330
Condensed Consolidated Statement of Cash Flows
Operating activities

Net income	$	9,484	$	9,137
Net change in fair value of Consumer program derivative		—		273
Net increase in other assets		(3,008)		(2,510)
Net increase (decrease) in other liabilities		(2,631)		(3,147)
Net cash and cash equivalents (used in) provided by operating activities		12,526		12,434
Investing activities
Net increase in loans	$	(287,754)	$	(287,662)
Net cash and cash equivalents used in investing activities		(292,714)		(292,622)

¹ These balances include revisions from the Company’s original Quarterly Report on Form 10-Q for the three and six month periods ended June 30, 2022 to reflect adjustments related to the fraud losses, as described in the Company’s restated Annual Report on Form 10-K/A as of and for the year ended December 31, 2022.

Recent Accounting Pronouncements

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

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