Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2021
Commission File No. 001-33037
PRIMIS FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Virginia
20-1417448
(State or other jurisdiction
(I.R.S. Employer Identification No.)
of incorporation or organization)
6830 Old Dominion Drive
McLean, Virginia 22101
(Address of principal executive offices) (zip code)
(703) 893-7400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading symbol
Name of each exchange on which registered:
Common Stock, par value $0.01 per share
FRST
NASDAQ Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b–2 of the Exchange Act:
Large accelerated filer ☐
Accelerated filer ☒
Smaller reporting company ☐
Non-accelerated filer ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of November 2, 2021, there were 24,574,619 shares of common stock, $0.01 par value, outstanding.
September 30, 2021
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020
2
Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2021 and 2020
3
Consolidated Statement of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020
4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020
6
Notes to Unaudited Consolidated Financial Statements
7
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
37
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
51
Item 4 – Controls and Procedures
53
PART II - OTHER INFORMATION
Item 1 – Legal Proceedings
Item 1A – Risk Factors
54
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 – Defaults Upon Senior Securities
Item 4 – Mine Safety Disclosures
Item 5 – Other Information
Item 6 - Exhibits
55
Signatures
57
PRIMIS FINANCIAL CORP.CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
September 30,
December 31,
2021
2020
(unaudited)
*
ASSETS
Cash and cash equivalents:
Cash and due from financial institutions
$
8,667
8,585
Interest-bearing deposits in other financial institutions
642,079
187,600
Total cash and cash equivalents
650,746
196,185
Securities available for sale, at fair value
206,821
153,233
Securities held to maturity, at amortized cost (fair value of $27,091 and $41,832, respectively)
26,412
40,721
Total loans
2,314,584
2,440,496
Less allowance for credit losses
(30,386)
(36,345)
Net loans
2,284,198
2,404,151
Stock in Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB)
15,521
16,927
Investments in mortgage affiliate - held for sale
10,050
12,952
Preferred investment in mortgage affiliate
3,005
Bank premises and equipment, net
30,686
30,306
Operating lease right-of-use assets
6,331
7,511
Goodwill
101,954
Core deposit intangibles, net
4,803
5,826
Bank-owned life insurance
66,336
65,409
Other real estate owned
1,312
3,078
Deferred tax assets, net
13,571
14,646
Accrued interest receivable
13,643
19,998
Other assets
17,028
12,771
Total assets
3,452,417
3,088,673
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits
535,706
440,674
Interest-bearing deposits:
NOW accounts
921,667
714,752
Money market accounts
758,259
603,318
Savings accounts
216,470
183,814
Time deposits
374,965
490,048
Total interest-bearing deposits
2,271,361
1,991,932
Total deposits
2,807,067
2,432,606
Securities sold under agreements to repurchase - short term
13,348
16,065
FHLB advances
100,000
Junior subordinated debt - long term
9,719
9,682
Senior subordinated notes - long term
85,723
105,647
Operating lease liabilities
7,000
8,238
Other liabilities
20,931
25,881
Total liabilities
3,043,788
2,698,119
Commitments and contingencies (See Note 6)
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 5,000,000 shares; no shares issued and outstanding
—
Common stock, $0.01 par value. Authorized 45,000,000 shares; 24,574,619 and 24,368,612 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
245
243
Additional paid in capital
311,021
308,870
Retained earnings
94,204
77,956
Accumulated other comprehensive income
3,159
3,485
Total stockholders' equity
408,629
390,554
Total liabilities and stockholders' equity
* Derived from audited consolidated financial statements
See accompanying notes to unaudited consolidated financial statements.
PRIMIS FINANCIAL CORP.CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(dollars in thousands, except per share amounts) (Unaudited)
For the Three Months Ended
For the Nine Months Ended
Interest and dividend income:
Interest and fees on loans
26,181
27,266
80,320
81,051
Interest and dividends on taxable securities
968
1,006
2,846
3,382
Interest and dividends on tax exempt securities
115
123
352
355
Interest and dividends on other earning assets
537
312
1,222
1,072
Total interest and dividend income
27,801
28,707
84,740
85,860
Interest expense:
Interest on deposits
3,160
4,357
10,365
16,006
Interest on FRB borrowings
180
201
Interest on repurchase agreements
17
24
68
65
Interest on junior subordinated debt
95
89
285
349
Interest on senior subordinated notes
1,232
3,791
2,392
Interest on other borrowings
90
91
269
861
Total interest expense
4,594
5,709
14,778
19,874
Net interest income
23,207
22,998
69,962
65,986
Provision for (recovery of) credit losses
1,085
2,000
(4,502)
16,349
Net interest income after (recovery of) provision for credit losses
22,122
20,998
74,464
49,637
Noninterest income:
Account maintenance and deposit service fees
1,843
1,633
5,444
4,820
Income from bank-owned life insurance
387
394
1,152
1,165
Recoveries related to acquired charged-off loans and investment securities
481
288
784
2,707
Other
(26)
130
423
574
Total noninterest income
2,685
2,445
7,803
9,266
Noninterest expenses:
Salaries and benefits
9,032
7,817
27,214
27,464
Occupancy expenses
1,552
1,432
4,538
4,776
Furniture and equipment expenses
971
719
2,651
1,977
Amortization of core deposit intangible
341
1,023
Virginia franchise tax expense
732
615
2,166
1,844
Data processing expense
1,003
701
2,818
2,364
Telephone and communication expense
415
382
1,351
1,119
Net (gain) loss on other real estate owned
(16)
Professional fees
1,208
1,494
3,784
3,560
Other operating expenses
1,640
1,779
6,901
5,004
Total noninterest expenses
16,894
15,264
52,463
49,186
Income from continuing operations before income taxes
7,913
8,179
29,804
9,717
Income tax expense
1,697
1,647
6,438
1,956
Income from continuing operations
6,216
6,532
23,366
7,761
Income (loss) from discontinued operations before income taxes
(2,899)
3,826
294
8,218
Income tax expense (benefit)
(622)
770
63
1,655
Income (loss) from discontinued operations
(2,277)
3,056
231
6,563
Net income
3,939
9,588
23,597
14,324
Other comprehensive income:
Unrealized gain (loss) on available for sale securities
(104)
23
(602)
3,353
Accretion of amounts previously recorded upon transfer to held to maturity from available for sale
189
10
Net unrealized gain (loss)
26
(413)
3,363
Tax effect
(22)
5
(87)
706
Other comprehensive income (loss)
(82)
21
(326)
2,657
Comprehensive income
3,857
9,609
23,271
16,981
Earnings per share from continuing operations, basic
0.25
0.27
0.96
0.32
Earnings per share from discontinued operations, basic
(0.09)
0.13
0.01
Earnings per share from continuing operations, diluted
0.95
Earnings per share from discontinued operations, diluted
0.12
See accompanying notes to unaudited consolidated financial statements
PRIMIS FINANCIAL CORP.CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITYFOR THE THREE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
For the Three Months Ended September 30, 2021
Accumulated
Additional
Common
Paid in
Retained
Comprehensive
Stock
Capital
Earnings
Income
Total
Balance - June 30, 2021
310,735
92,719
3,241
406,940
Changes in other comprehensive loss on investment securities (net of tax $(22))
Dividends on common stock ($0.10 per share)
(2,454)
Issuance of common stock under Stock Incentive Plan
202
Stock-based compensation expense
84
Balance - September 30, 2021
For the Three Months Ended September 30, 2020
Balance - June 30, 2020
308,672
69,335
3,419
381,669
Changes in other comprehensive income on investment securities (net of tax $5)
(2,437)
50
92
Balance - September 30, 2020
308,814
76,486
3,440
388,983
PRIMIS FINANCIAL CORP.CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITYFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
For the Nine Months Ended September 30, 2021
Balance - December 31, 2020
Changes in other comprehensive loss on investment securities (net of tax $(87))
Dividends on common stock ($0.30 per share)
(7,349)
1,524
1,526
Repurchase of restricted stock
(14)
641
For the Nine Months Ended September 30, 2020
Balance - December 31, 2019
241
306,755
69,462
783
377,241
Changes in other comprehensive income on investment securities (net of tax $706)
(7,300)
576
1,485
PRIMIS FINANCIAL CORP.CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
For the Nine Months Ended September 30,
Operating activities:
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation and amortization
4,194
3,946
Amortization of operating lease right-of-use assets
1,813
2,255
Accretion of loan discount
(1,532)
(3,596)
Provision (recovery) for credit losses
Earnings on bank-owned life insurance
(1,146)
(1,165)
Income from discontinued operations before income taxes
(294)
(8,218)
Gain on bank-owned life insurance death benefit
(6)
Loss on other real estate owned
Benefit for deferred income taxes
1,161
(3,395)
Net decrease (increase) in other assets
2,098
(15,141)
Net increase (decrease) in other liabilities
(3,624)
3,370
Net cash and cash equivalents provided by operating activities
22,417
10,269
Investing activities:
Purchases of held to maturity investment securities
(15,197)
Purchases of available for sale investment securities
(84,959)
(29,284)
Proceeds from paydowns, maturities and calls of available for sale investment securities
29,693
38,451
Proceeds from paydowns, maturities and calls of held to maturity investment securities
14,269
37,998
Net decrease of FRB and FHLB stock
1,406
905
Net (increase) decrease in loans
125,836
(335,156)
Proceeds from bank-owned life insurance death benefit
224
Sales of other real estate owned, net of improvements
1,901
1,041
Purchases of bank premises and equipment
(2,133)
(965)
Net cash and cash equivalents provided by (used in) investing activities
86,237
(302,207)
Financing activities:
Net increase in deposits
374,461
91,756
Cash dividends paid on common stock
Issuance of subordinated notes, net of cost
58,686
Net decrease in long-term borrowings
(20,000)
Net increase in Paycheck Protection Program Liquidity Facility borrowings
283,906
Net decrease in other borrowings
(2,717)
(18,342)
Net cash and cash equivalents provided by financing activities
345,907
409,282
Increase in cash and cash equivalents
454,561
117,344
Cash and cash equivalents at beginning of period
31,928
Cash and cash equivalents at end of period
149,272
Supplemental disclosure of cash flow information
Cash payments for:
Interest
16,710
21,704
Income taxes
6,146
4,187
1. 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” 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 Bank provides a range of financial services to individuals and small and medium sized businesses.
At September 30, 2021, Primis Bank had forty full-service branches in Virginia and Maryland and also provides services to customers through certain internet and mobile applications. Thirty-six full-service retail branches are in Virginia (Ashland, Burgess, Callao, Central Garage, Charlottesville, Chester, Clifton Forge, Colonial Heights, Courtland, Fairfax, Front Royal, Gloucester, Gloucester Point, Hampton, Hartfield, Heathsville, Kilmarnock, Leesburg, McLean, Mechanicsville (2), Middleburg, Midlothian, New Market, Newport News, Quinton, Reston, Richmond, Surry, Tappahannock (2), Urbanna, Warrenton, Waverly, and Williamsburg) and five full-service retail branches are in Maryland (Bethesda, Brandywine, Owings, Rockville, and Upper Marlboro). The Company has administrative offices in Warrenton and Glen Allen, Virginia.
While Primis Bank offers a wide range of commercial banking services, it focuses on making loans secured primarily by commercial real estate and other types of secured and unsecured commercial loans to small and medium-sized businesses in a number of industries, as well as loans to individuals for a variety of purposes. Primis Bank invests in real estate-related securities, including collateralized mortgage obligations and agency mortgage backed securities. Primis Bank’s principal sources of funds for loans and investing in securities are deposits and, to a lesser extent, borrowings. Primis Bank offers a broad range of deposit products, including checking (NOW), savings, money market accounts and certificates of deposit. Primis Bank actively pursues business relationships by utilizing the business contacts of its senior management, other bank officers and its directors, thereby capitalizing on its knowledge of its local market areas.
Principles of Consolidation
The consolidated financial statements include the accounts of Primis and its subsidiaries Primis Bank 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. In addition, Primis Bank has an interest in one affiliate, Southern Trust Mortgage, LLC (“STM”). Primis Bank owns 43.28% and 100% of STM’s common and preferred stock, respectively.
On September 23, 2021, Primis Bank announced that it entered into an agreement with STM, whereby STM intends 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. The transaction is expected to close in the fourth quarter of 2021. At closing, STM will continue to be a borrower of the Bank, but the Bank will no longer be a minority owner of STM. Effective July 1, 2021, the Company will also no longer accrue earnings related to the Bank's common membership interests in STM. The Company recorded a pre-tax charge of approximately $2.9 million related to the transaction in the third quarter of 2021. The investments in STM in the consolidated balance sheets have been classified as held for sale and the effect of the equity in earnings/impairment loss in the statements of income have been presented as discontinued operations. The prior period financial information has been retrospectively adjusted for the impact of the transaction.
Investments in Mortgage Affiliate – Held for Sale
Primis Bank’s investment in STM’s common stock – held for sale is accounted for using the equity method. Under the equity method, the carrying value of Primis Bank’s investment in STM was originally recorded at cost but was adjusted periodically to record Primis Bank’s proportionate share of STM’s earnings or losses through noninterest income and decreased by the amount of cash dividends or similar distributions received from STM. Our equity investment in STM – held for sale as of September 30, 2021 and December 31, 2020 was $9.8 million and $12.7 million, respectively. The Company recorded a pre-tax charge of approximately $2.9 million in the third quarter of 2021.
Primis Bank’s investment in STM’s preferred stock – held for sale and investment in STM’s preferred stock are considered to be a 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 Bank evaluated this non-marketable equity security for impairment and recoverability of the recorded investment by considering positive and negative evidence, including the profitability and asset quality of STM, dividend payment history and recent redemption experience. Impairment is assessed at each reporting period and if identified, is recognized in noninterest income. Our preferred investment in STM – held for sale was $300 thousand as of September 30, 2021 and December 31, 2020 and our preferred investment in STM was $3.0 million as of September 30, 2021 and December 31, 2020.
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. The Company had determined it has one unconsolidated reportable segment, which consisted of Primis Bank's investment in STM. Primis Bank’s share of equity in earnings from STM for the three months ended September 30, 2020 was $3.8 million, and for the nine months ended September 30, 2021 and 2020 were $3.2 million and $8.2 million, respectively.
The chief financial officer and chief accounting officer evaluate segment performance based on STM’s net income. Net income was $6.0 million and $7.9 million for the three months ended September 30, 2021 and 2020, respectively, and $13.6 million and $17.0 million for the nine months ended September 30, 2021 and 2020, respectively. The primary source of revenue for this segment is total mortgage revenue. For the three months ended September 30, 2021 and 2020, total mortgage revenue was $21.1 million and $34.2 million, respectively. For the nine months ended September 30, 2021 and 2020, total mortgage revenue was $70.5 million and $80.8 million, respectively. In evaluating STM’s net income, the chief financial officer and chief accounting officer also assess salaries, commissions and benefits, which were $16.3 million and $25.7 million for the three months ended September 30, 2021 and 2020, respectively, and $58.8 million and $61.7 million for the nine months ended September 30, 2021 and 2020, respectively.
In addition, the chief financial officer and chief accounting officer evaluate segment performance based on STM’s balance sheet. Total mortgage loans held for sale by STM were $126.8 million and $143.4 million as of September 30, 2021 and December 31, 2020, respectively. Warehouse lines of credit were $125.5 million and $136.1 million as of September 30, 2021 and December 31, 2020, respectively. STM’s total members’ equity was $32.0 million and $26.4 million as of September 30, 2021 and December 31, 2020, respectively.
The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“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’ (formerly Southern National’s) Annual Report on Form 10-K for the year ended December 31, 2020.
8
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 (formerly the allowance for loan losses), the fair value of investment securities, credit impairment of investment securities, the valuation of goodwill, other real estate owned (“OREO”) and deferred tax assets.
Lending Operations And Accommodations To Borrowers In Response To COVID-19
As a result of the economic impact of the coronavirus disease 2019 (“COVID-19”), businesses in the Company’s markets have experienced significant operational disruptions. In accordance with regulatory guidelines to work with borrowers during the unstable economic environment, the Company provided certain modifications, including interest only or principal and interest deferments. As of September 30, 2021 and December 31, 2020, total modified loans or loans with requests for modifications were $7.0 million and $122.0 million, respectively. The Company anticipates minimal additional deferrals in the remainder of 2021.
With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”) and as extended, the Company is actively assisting its customers with loan applications through the program. PPP loans have a two or five year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of September 30, 2021, the Company had originated 6,257 PPP loans, with origination amount totaling $488.4 million to its customers. Loans funded through the PPP program are guaranteed by the SBA and loans that meet certain regulatory criteria are subject to forgiveness. In the event that the PPP loans are not fully guaranteed by the SBA, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings. PPP loans forgiveness commenced in the fourth quarter of 2020 and we continue to expect additional forgiveness in the remainder of 2021.
Recent Accounting Pronouncements
Adoption of New Accounting Standards:
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. 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.
9
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.
2. 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 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.
A summary of the activity in the stock option plan during the nine months ended September 30, 2021 follows:
Weighted
Average
Aggregate
Remaining
Intrinsic
Exercise
Contractual
Value
Shares
Price
Term
(in thousands)
Options outstanding, beginning of period
450,800
10.50
3.8
727
Forfeited
(1,500)
11.99
Expired
(6,500)
11.14
Exercised
(159,000)
9.60
Options outstanding, end of period
283,800
10.98
2.5
988
Exercisable at end of period
Stock-based compensation expense associated with stock options was zero and $16 thousand for the three months ended September 30, 2021 and 2020, respectively and was zero and $118 thousand for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, we do not have any unrecognized compensation expense associated with the stock options.
A summary of the activity in the restricted stock plan during the nine months ended September 30, 2021 follows:
Grant-Date
Fair Value
Per Share
Unvested restricted stock outstanding, beginning of period
96,300
14.17
Granted
114,605
14.96
Granted - Units
59,355
15.00
Vested
(45,400)
15.06
(7,200)
12.11
Unvested restricted stock outstanding, end of period
217,660
14.58
6.7
Restricted stock compensation expense totaled $84 thousand and $76 thousand for the three months ended September 30, 2021 and 2020, respectively and $641 thousand and $1.4 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, unrecognized compensation expense associated with restricted stock was $1.2 million, which is expected to be recognized over a weighted average period of 3.5 years.
During the three months ended September 30, 2021, the Company issued non-transferrable performance-based restricted stock units convertible, on a one-on-one basis, into shares of Stock (the “Units”) to eligible employees, granted pursuant to and subject to the provisions of the 2017 Plan.
Units granted under the 2017 Plan have a service and performance condition. The Units vest based on the achievement of performance metrics, at the end of five years, comprising 1) the Company’s Adjusted Earnings per Share Compound Annual Growth measured for the Performance Period and 2) Performance factor. Payouts between performance levels will be determined based on straight line interpolation.
The performance-based units granted in 2021 and the units outstanding as of September 30, 2021 were 59,335 units.
The Company did not have any compensation expense associated with the performance-based Units for the three and nine months ended September 30, 2021. Grant date fair value per unit granted during the three months ended September 30, 2021 was $15.00. The potential unrecognized compensation expense associated with the performance-based units was $1.3 million.
11
3. INVESTMENT SECURITIES
The amortized cost and fair value of available for sale investment securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows (in thousands):
Amortized
Gross Unrealized
Fair
Cost
Gains
Losses
Residential government-sponsored mortgage-backed securities
68,390
1,179
(74)
69,495
Obligations of states and political subdivisions
28,296
936
(132)
29,100
Corporate securities
13,000
620
13,620
Asset-backed securities
5,027
(11)
5,016
Residential government-sponsored collateralized mortgage obligations
22,229
502
(55)
22,676
Government-sponsored agency securities
10,835
105
10,940
Agency commercial mortgage-backed securities
45,883
1,009
(63)
46,829
SBA pool securities
9,162
73
(90)
9,145
202,822
4,424
(425)
December 31, 2020
35,442
1,618
37,060
22,966
1,076
24,042
15,000
81
(2)
15,079
28,680
737
(1)
29,416
5,985
6,075
29,118
1,087
(15)
30,190
11,441
80
(150)
11,371
148,632
4,769
(168)
The amortized cost, gross unrecognized gains and losses, allowance for credit losses and fair value of investment securities held to maturity were as follows (in thousands):
Gross Unrecognized
Allowance for
Credit Losses
15,529
477
16,005
5,248
5,363
635
661
5,000
62
5,062
680
27,091
25,037
729
25,764
9,594
183
9,776
1,090
39
1,129
163
5,163
1,114
41,832
During the three and nine months ended September 30, 2021, $16.5 million and $85.0 million, respectively, of available for sale investment securities were purchased. No held to maturity investments were purchased during the three and nine
12
months ended September 30, 2021. During the three and nine months ended September 30, 2020, $14.3 million and $29.3 million, respectively, of available for sale investment securities were purchased. During the nine months ended September 30, 2020, $15.2 million of held to maturity investment securities were purchased. No held to maturity investment securities were purchased during the three months ended September 30, 2020. No investment securities were sold during the three and nine months ended September 30, 2021 and 2020.
The fair value and carrying amount of available for sale and held to maturity investment securities as of September 30, 2021, by contractual maturity were as follows (in thousands). Investment securities not due at a single maturity date are shown separately.
Available for Sale
Held to Maturity
Due in one to five years
4,611
4,795
3,395
3,460
Due in five to ten years
18,982
19,808
1,518
1,567
Due after ten years
33,565
34,073
5,335
5,398
Investment securities with a carrying amount of approximately $135.3 million and $125.3 million at September 30, 2021 and December 31, 2020, respectively, were pledged to secure public deposits, certain other deposits, a line of credit for advances from the Federal Home Loan Bank (“FHLB”) of Atlanta, and repurchase agreements.
Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to U.S. Treasury and residential mortgage-backed securities issued by the U.S. government, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued by States and political subdivisions and other held-to-maturity securities, management considers (i) issuer bond ratings, (ii) historical loss rates for given bond ratings, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities and (iv) internal forecasts. As of September 30, 2021, Primis did not have any allowance for credit losses on held-to-maturity securities.
13
The following tables present information regarding investment securities available for sale and held to maturity in a continuous unrealized loss position as of September 30, 2021 and December 31, 2020 by duration of time in a loss position (in thousands):
Less than 12 months
12 Months or More
Unrealized
value
15,938
11,863
5,986
1,734
(3)
2,106
(60)
3,840
4,680
40,537
(275)
6,786
47,323
Unrecognized
329
998
954
2,170
8,119
4,122
(18)
12,241
331
126
457
14
Changes in accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2021 and 2020 are shown in the tables below. All amounts are net of tax (in thousands).
Unrealized Holding
Gains on
For the three months ended September 30, 2021
Securities
Beginning balance
3,243
Current period other comprehensive income (loss)
Ending balance
3,161
For the three months ended September 30, 2020
3,573
(154)
Current period other comprehensive income
19
3,592
(152)
For the nine months ended September 30, 2021
3,636
(151)
Current period other comprehensive (loss) income
(475)
149
For the nine months ended September 30, 2020
943
(160)
2,649
15
4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The following table summarizes the composition of our loan portfolio as of September 30, 2021 and December 31, 2020 (in thousands):
Loans secured by real estate:
Commercial real estate - owner occupied
420,503
434,816
Commercial real estate - non-owner occupied
628,864
599,578
Secured by farmland
9,326
11,687
Construction and land development
109,686
103,401
Residential 1-4 family
530,274
557,953
Multi- family residential
153,310
107,130
Home equity lines of credit
75,745
91,748
Total real estate loans
1,927,708
1,906,313
Commercial loans
201,476
187,797
Paycheck Protection Program loans
140,465
314,982
Consumer loans
36,346
22,496
Total Non-PCD loans
2,305,995
2,431,588
PCD loans
8,589
8,908
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.
Accrued Interest Receivable
Accrued interest receivable on loans totaled $12.6 million and $19.0 million at September 30, 2021 and December 31, 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 troubled debt restructurings (“TDR”) for borrowers experiencing COVID-19-related financial difficulty. Primis applied this regulatory guidance during its 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 are currently unable to meet their contractual payment obligations because of the adverse economic effects of COVID-19. To help mitigate these effects, loan customers may apply for a deferral of payments, or portions thereof, for up to 90 days. After 90 days, customers may apply for an additional deferral, and a small proportion of our customers have requested such an additional deferral. In the absence of other intervening factors, such short-term modifications made on a good faith basis are not categorized as TDR, nor are 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 September 30, 2021, there were 4 loans
16
in COVID-19-related deferment with an aggregate outstanding balance of $7.0 million and were current as of September 30, 2021.
Accretion
Accretable discount on the acquired loans totaled $4.7 million and $6.2 million at September 30, 2021 and December 31, 2020, respectively. Accretion associated with the acquired loans held for investment of $469 thousand and $1.1 million was recognized during the three months ended September 30, 2021 and 2020, respectively and $1.5 million and $3.6 million was recognized during the nine months ended September 30, 2021 and 2020, respectively.
Non-Accrual 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. 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. 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. 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 September 30, 2021 and December 31, 2020 (in thousands):
30 - 59
60 - 89
Days
Loans Not
Past Due
or More
Loans (1)
2,348
3,259
5,607
414,896
589
704
1,293
8,033
587
4,575
5,162
104,524
9,421
193
9,816
520,458
148
343
541
75,204
3,409
1,575
1,890
6,874
194,602
140,444
25
48
36,298
16,433
10,973
29,362
2,276,633
42
1,767
1,809
6,780
16,475
12,740
31,171
2,283,413
2,641
432,175
1,098
10,589
103,339
1,235
1,512
3,096
554,857
310
523
872
90,876
64
33
2,104
2,201
185,596
207
220
22,276
1,839
464
7,887
10,190
2,421,398
1,853
7,055
9,740
12,043
2,428,453
18
The amortized cost, by class, of loans and leases on nonaccrual status at September 30, 2021 and December 31, 2020, were as follows (in thousands):
Nonaccrual
3,274
703
34
4,609
403
604
4,376
344
369
713
366
2,256
10,987
5,585
16,572
1,780
12,754
5,598
18,352
1,525
4,481
228
2,332
4,722
12,609
14,462
We did not have any loans and leases greater than 90 days past due and still accruing at September 30, 2021 and December 31, 2020.
The following table presents non-accrual loans as of September 30, 2021 and December 31, 2020, segregated by class of loans (in thousands):
Non-Accrual With
No Credit
Non-Accrual (1)
Loss Allowance (2)
605
164
712
707
582
Total non-PCD loans
15,012
9,498
Total non-accrual loans
The following table presents non-accrual loans as of September 30, 2021 by class and year of origination (in thousands):
Revolving
Loans
Converted
2019
2018
2017
Prior
To Term
404
2,870
305
300
619
93
1,213
67
966
Total non-PCD non-accruals
4,601
1,224
1,174
8,551
393
Total non-accrual loans (1)
2,941
8,564
20
Interest received on non-accrual loans was $239 thousand and $333 thousand for the three and nine months ended September 30, 2021, respectively.
Troubled Debt Restructurings
A modification is classified as a TDR if both of the following exist: (1) the borrower is experiencing financial difficulty and (2) the Bank has granted a concession to the borrower. The Bank determines that a borrower may be experiencing financial difficulty if the borrower is currently delinquent on any of its debt, or if the Bank is concerned that the borrower may not be able to perform in accordance with the current terms of the loan agreement in the foreseeable future. Many aspects of the borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty, particularly as it relates to commercial borrowers due to the complex nature of the loan structure, business/industry risk and borrower/guarantor structures. Concessions may include the reduction of an interest rate at a rate lower than current market rates for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, or principal forgiveness. When evaluating whether a concession has been granted, the Bank also considers whether the borrower has provided additional collateral or guarantors and whether such additions adequately compensate the Bank for the restructured terms, or if the revised terms are consistent with those currently being offered to new loan customers. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty and whether a concession has been granted is subjective in nature and management’s judgment is required when determining whether a modification is a TDR.
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 nine months ended September 30, 2021, there were nine TDR loans outstanding in the amount of $3.7 million primarily due to the economic impact of COVID-19. There have been no defaults of TDRs modified during the past twelve months.
Credit Quality Indicators
Through its system of internal controls, Primis evaluates and segments loan portfolio credit quality using regulatory definitions for Special Mention, Substandard and Doubtful. Special Mention loans are considered to be criticized. Substandard and Doubtful loans are considered to be classified.
Special Mention loans are loans that have a potential weakness that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position.
Substandard loans may be inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Primis had no loans classified Doubtful at September 30, 2021 or December 31, 2020.
In monitoring credit quality trends in the context of assessing the appropriate level of the allowance for credit losses on loans, we monitor portfolio credit quality by the weighted-average risk grade of each class of loan.
The following table present weighted-average risk grades for all loans, by class and year of origination/renewal as of September 30, 2021 (in thousands):
Pass
44,711
20,159
35,752
43,930
49,327
209,181
2,683
6,682
412,425
Special Mention
142
1,196
1,338
Substandard
1,018
5,318
6,740
Doubtful
36,770
49,873
215,695
Weighted average risk grade
3.32
3.38
3.51
3.28
3.58
3.56
3.31
4.00
3.50
Commercial real estate - nonowner occupied
90,619
56,272
27,107
78,642
61,361
280,991
4,123
599,115
12,096
17,653
310,740
3.08
3.47
3.87
3.44
3.81
3.80
3.16
N/A
3.62
785
453
3,847
2,176
7,328
852
417
1,269
2,008
4,264
3.64
6.00
5.04
3.61
3.96
4.01
36,796
13,660
19,213
9,582
8,436
16,957
399
105,077
23,788
16,991
3.14
3.57
4.11
3.45
3.91
3.53
3.75
3.55
127,685
56,577
81,032
52,227
48,465
148,842
1,896
3,634
520,358
8,547
1,069
1,369
89,579
149,911
3,934
3.02
3.06
3.25
3.13
3.27
3.89
3.33
3.15
20,460
19,143
8,800
7,766
36,578
49,863
5,231
147,841
5,169
5,469
55,032
3.00
3.66
3.85
3.49
242
3,622
70,414
147
74,757
276
71,309
240
3.95
3.10
4.78
19,823
17,345
15,259
11,243
12,619
20,480
93,768
4,902
195,439
2,524
3,436
6,037
17,355
13,767
12,686
23,916
3.70
3.21
3.93
4.06
3.94
3.60
88,668
51,797
2.00
22
21,400
2,522
1,194
324
6,449
3,284
36,249
87
1,086
6,536
3.99
4.02
PCD
5,223
30
5,253
1,395
174
1,941
6,792
4.08
4.47
451,189
237,552
202,523
207,003
221,827
793,499
184,899
16,092
2.95
3.07
3.37
3.65
3.39
Revolving loans that converted to term during 2021 were as follows (in thousands):
360
1,673
2,030
The amount of foreclosed residential real estate property held at September 30, 2021 and December 31, 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 $62 thousand and $1.4 million at September 30, 2021 and December 31, 2020, respectively.
Allowance For Credit Losses – Loans
The allowance for credit losses on loans is a contra-asset valuation account, calculated in accordance with ASC 326 that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. The amount of the allowance represents management's best estimate of current expected credit losses on loans considering available information, from internal and external sources, relevant to assessing collectability over the loans' contractual terms, adjusted for expected prepayments when appropriate. 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. 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.
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. These qualitative factor (“Q-Factor”) adjustments may increase or decrease management's estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. The various risks that may be considered in making Q-Factor adjustments include, among other things, the impact of (i) changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries, (ii) actual and expected changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the loan pools, (iii) changes in the nature and volume of the loan pools and in the terms of the underlying loans, (iv) changes in the experience, ability, and depth of our lending management and staff, (v) changes in volume and severity of past due financial assets, the volume of non-accrual assets, and the volume and severity of adversely classified or graded assets, (vi) changes in the quality of our credit review function, (vii) changes in the value of the underlying collateral for loans that are non-collateral dependent, (viii) the existence, growth, and effect of any concentrations of credit and (ix) other factors such as the regulatory, legal and technological environments; competition; and events such as natural disasters or health pandemics.
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 September 30, 2021 and December 31, 2020, calculated in accordance with the current expected credit losses (“CECL”) methodology described above (in thousands).
Commercial
Home
Real Estate
Construction
Equity
Paycheck
Owner
Non-owner
Secured by
and Land
1-4 Family
Multi-Family
Lines Of
Protection
Consumer
Occupied
Farmland
Development
Residential
Credit
Program
Modeled expected credit losses
4,807
9,509
824
3,470
1,910
336
1,374
656
22,897
Q-factor and other qualitative adjustments
309
863
47
572
516
1,445
166
418
1
4,337
Specific allocations
800
2,311
3,152
5,116
10,372
58
1,396
4,025
3,355
2,592
659
30,386
2,565
3,959
1,297
4,579
649
534
544
306
14,491
4,134
7,467
46
4,963
763
367
917
194
19,367
2,394
2,487
6,699
11,426
104
1,815
9,579
1,412
901
1,498
517
36,345
As part of management’s ongoing review process and as an annual requirement, during the third quarter of 2021, the Company refreshed and recalibrated the historical loss rates, forecast assumptions, and qualitative factor framework of the
CECL model. 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. As a result of the refresh, modeled expected credit losses increased $8.4 million and the reliance on qualitative factors decreased $15.0 million since December 31, 2020. Additionally, qualitative factors related to COVID-19 uncertainty were eliminated.
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 three months ended September 30, 2021 and 2020 is summarized below (in thousands):
Home Equity
Unallocated
Allowance for credit losses:
11,235
2,691
4,451
601
3,582
428
2,338
31,265
Provision (recovery)
354
(863)
(1,295)
(44)
2,266
(100)
279
(27)
Charge offs
(7)
(383)
(1,528)
(53)
(1,971)
Recoveries
September 30, 2020
Allowance for loan losses (1):
3,558
7,592
52
717
3,645
734
209
5,490
903
23,627
Provision (recovery) for non-purchased loans
1,480
304
(39)
(388)
(201)
909
(59)
(78)
Provision for purchase credit impaired loans
Total provision (recovery)
(47)
(12)
(86)
238
5,038
7,900
724
3,252
799
191
6,387
826
25,779
Activity in the allowance for credit losses by class of loan for the nine months ended September 30, 2021 and 2020 is summarized below (in thousands):
(1,407)
(1,054)
(46)
(419)
(5,182)
1,943
(400)
1,930
216
(83)
(176)
(1,602)
(107)
(2,268)
766
811
810
1,596
683
1,049
119
217
5,418
190
10,261
4,223
6,295
41
2,380
(172)
475
16,205
144
1,366
(352)
(232)
(482)
(92)
(1,218)
206
85
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Generally, a commercial loan, or a portion thereof, is charged-off when it is determined, through the analysis of any available current financial information with regards to the borrower, that the borrower is incapable of servicing unsecured debt, there is little or no prospect for near term improvement and no realistic strengthening action of significance is pending
or, in the case of secured debt, when it is determined, through analysis of current information with regards to our collateral position, that amounts due from the borrower are in excess of the calculated current fair value of the collateral. Losses on installment loans are recognized in accordance with regulatory guidelines. All other consumer loan losses are recognized when delinquency exceeds 120 cumulative days.
The following table presents loans that were evaluated for expected credit losses on an individual basis and the related specific allocations, by loan portfolio segment as of September 30, 2021 and December 31, 2020 (in thousands):
Loan
Specific
Balance (1)
Allocations
4,965
23,397
18,454
77
550
1,918
5,472
94
3,973
5,515
38,094
841
39,941
46,683
48,849
5. LEASES
The Company leases certain premises and equipment under operating leases. In recognizing lease right-of-use assets and related liabilities, we account for lease and non-lease components (such as taxes, insurance, and common area maintenance costs) separately as such amounts are generally readily determinable under our lease contracts. At September 30, 2021 and December 31, 2020, the Company had operating lease liabilities totaling $7.0 million and $8.2 million, respectively, and right-of-use assets totaling $6.3 million and $7.5 million, respectively, related to these leases. Operating lease liabilities and right-of-use assets are reflected in our consolidated balance sheets. We do not currently have any financing leases. Our net operating lease costs for the three months ended September 30, 2021 and 2020, was $597 thousand and $609 thousand, respectively, and for the nine months ended September 30, 2021 and 2020, was $1.8 million and $2.3 million, respectively, and were reflected in occupancy expenses on our income statements.
The following table presents supplemental cash flow and other information related to our operating leases:
(in thousands except for percent and period data)
Supplemental cash flow information:
Cash paid for amounts included in the measurement of lease liabilities
3,724
Other information:
Weighted-average remaining lease term - operating leases, in years
4.5
5.3
Weighted-average discount rate - operating leases
%
2.6
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The following table summarizes the maturity of remaining lease liabilities:
As of
(dollars in thousands)
Lease payments due:
Less than one year
2,552
One to three years
2,933
Three to five years
834
More than five years
1,154
Total lease payments
7,473
Less: imputed interest
(473)
Lease liabilities
As of September 30, 2021, 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.
6. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
Primis is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and guarantees of credit card accounts. These instruments involve elements of credit and funding risk in excess of the amount recognized in the consolidated balance sheet. Letters of credit are written conditional commitments issued by Primis to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. We had letters of credit outstanding totaling $14.4 million and $15.9 million as of September 30, 2021 and December 31, 2020, respectively.
Our exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit is based on the contractual amount of these instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Unless noted otherwise, we do not require collateral or other security to support financial instruments with credit risk.
Allowance For Credit Losses - Off-Balance-Sheet Credit Exposures
The allowance for credit losses on off-balance-sheet credit exposures is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if we have the unconditional right to cancel the obligation. Off-balance-sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit detailed above. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment or other off-balance-sheet exposure. The likelihood and expected amount of funding are based on historical utilization rates. The amount of the allowance represents management's best estimate of expected credit losses on commitments expected to be funded over the contractual life of the commitment. Estimating credit losses on amounts expected to be funded uses the same methodology as described for loans in Note 4 - Loans and Allowance, as if such commitments were funded.
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The following table details activity in the allowance for credit losses on off-balance-sheet credit exposures:
Balance as of January 1
740
Impact of adopting ASU 2016-13
Credit loss expense
389
Balance as of September 30,
Commitments
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments are made predominately for adjustable rate loans, and generally have fixed expiration dates of up to three months or other termination clauses and usually require payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis.
At September 30, 2021 and December 31, 2020, we had unfunded lines of credit and undisbursed construction loan funds totaling $420.6 million and $355.3 million, respectively. Virtually all of our unfunded lines of credit and undisbursed construction loan funds are variable rate.
7. EARNINGS PER SHARE
The following is a reconciliation of the denominators of the basic and diluted earnings per share (“EPS”) computations (amounts in thousands, except per share data):
(Numerator)
(Denominator)
Amount
Basic EPS from continuing operations
24,474
Effect of dilutive stock options and unvested restricted stock
160
Diluted EPS from continuing operations
24,634
Basic EPS from discontinued operations
Diluted EPS from discontinued operations
24,270
24,375
(0.01)
24,425
158
24,583
24,229
121
24,350
The Company did not have any anti-dilutive options as of September 30, 2021 and 2020.
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8. FAIR VALUE
ASC 820 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability
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:
Investment Securities Available for Sale
Where quoted prices are available in an active market, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include highly liquid government bonds and mortgage products. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of investment securities with similar characteristics or discounted cash flow. Level 2 investment securities include U.S. agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. 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.
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Assets measured at fair value on a recurring basis are summarized below:
Fair Value Measurements Using
Significant
Quoted Prices in
Active Markets for
Observable
Unobservable
Total at
Identical Assets
Inputs
(Level 1)
(Level 2)
(Level 3)
Available for sale securities
14,079
1,000
152,233
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 September 30, 2021 was zero. No corporate securities that are classified as Level 3 above were purchased or sold during 2021 or 2020. These corporate securities did not have a material impact on the income statement for the three and nine months ended September 30, 2021 and 2020.
Assets and Liabilities Measured on a Non-recurring Basis:
Investments in mortgage affiliate – held for sale
The investment in common stock – held for sale of our mortgage affiliate is accounted for using the equity method. Under the equity method, the carrying value of Primis’ investment in STM was originally recorded at cost but is adjusted periodically to record Primis’ proportionate share of STM’s earnings or losses through noninterest income and decreased by the amount of cash dividends or similar distributions received from STM. The investment in preferred stock – held for sale of our mortgage affiliate is considered to be a non-marketable equity security that does not have a readily determinable fair value. Non-marketable equity securities with no recurring market value data available are reviewed periodically and any observable market value change is adjusted through noninterest income. Primis evaluates its investments in this non-marketable equity security for impairment and recoverability of the recorded investment by considering positive and negative evidence, including the profitability and asset quality of STM, dividend payment history and recent redemption
experience. Impairment is assessed at each reporting period and if identified, is recognized in noninterest income. No impairment was recorded for the three and nine months ended September 30, 2021 and 2020.
We may be required to measure certain financial assets at fair value on a nonrecurring basis. 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. 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%.
Other Real Estate Owned (“OREO”)
OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or evaluation less cost to sell. In some cases appraised value is net of costs to sell. Selling costs have been in the range from 5% to 10% of collateral valuation at September 30, 2021 and December 31, 2020. Fair value is classified as Level 3 in the fair value hierarchy. OREO is further evaluated quarterly for any additional impairment. At September 30, 2021 and December 31, 2020, the total amount of OREO was $1.3 million and $3.1 million, respectively.
Assets measured at fair value on a non-recurring basis are summarized below:
Collateral dependent loans
Other real estate owned:
385
927
47,001
865
1,221
992
Fair Value of Financial Instruments
The carrying amount, estimated fair values and fair value hierarchy levels (previously defined) of financial instruments were as follows (in thousands) for the periods indicated:
Carrying
Hierarchy Level
Financial assets:
Cash and cash equivalents
Level 1
Securities available for sale
Level 2 & Level 3
Securities held to maturity
Level 2
Stock in Federal Reserve Bank and Federal Home Loan Bank
Level 3
2,384,125
2,435,612
Financial liabilities:
Demand deposits and NOW accounts
1,457,373
1,155,426
Money market and savings accounts
974,729
787,132
377,711
495,022
Securities sold under agreements to repurchase
Junior subordinated debt
10,180
8,863
Senior subordinated notes
91,793
109,276
Accrued interest payable
1,126
3,057
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.
The investment in preferred stock of our mortgage affiliate is considered to be a non-marketable equity security that does not have a readily determinable fair value. Non-marketable equity securities with no recurring market value data available are reviewed periodically and any observable market value change is adjusted through noninterest income. Primis evaluates its investments in this non-marketable equity security for impairment and recoverability of the recorded investment by considering positive and negative evidence, including the profitability and asset quality of STM, dividend payment history and recent redemption experience. Impairment is assessed at each reporting period and if identified, is recognized in noninterest income. No impairment was recorded for the three and nine months ended September 30, 2021 and 2020.
Fair value of long-term debt is based on current rates for similar financing. Carrying amount of Federal Reserve Bank and FHLB stock is a reasonable estimate of fair value as these securities are not readily marketable and are based on the ultimate recoverability of the par value. The fair value of off-balance-sheet items is not considered material. Fair value of net loans, time deposits, junior subordinated debt, and senior subordinated notes are measured using the exit-price notion.
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9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
Other borrowings can consist of FHLB convertible advances, FHLB of Atlanta overnight advances, FHLB advances maturing within one year, federal funds purchased and securities sold under agreements to repurchase (“repo”) that mature within one year, which are secured transactions with customers. The balance in repo accounts at September 30, 2021 and December 31, 2020 was $13.3 million and $16.0 million, respectively.
10. JUNIOR SUBORDINATED DEBT AND SENIOR SUBORDINATED NOTES
In 2017, the Company assumed $10.3 million of trust preferred securities that were issued on September 17, 2003 and placed through a trust in a pooled underwriting totaling approximately $650 million. The trust issuer invested the total proceeds from the sale of the trust preferred securities in Floating Rate Junior Subordinated Deferrable Interest Debentures (“Junior Subordinated Debt”). At September 30, 2021 and December 31, 2020, we had $9.7 million of Junior Subordinated Debt outstanding. The trust preferred securities pay cumulative cash distributions quarterly at a variable rate per annum, reset quarterly, equal to the three-month LIBOR plus 2.95%. As of September 30, 2021 and December 31, 2020, the interest rate was 3.07% and 3.18%, respectively. The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax purposes.
The trust preferred securities may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. At September 30, 2021, all of the trust preferred securities qualified as Tier 1 capital.
On January 20, 2017, Primis completed the sale of $27.0 million of its fixed-to-floating rate Subordinated Notes due 2027 (the “SNBV Senior Subordinated Notes”). The SNBV Senior Subordinated Notes will initially bear interest at 5.875% per annum until January 31, 2022; thereafter, the SNBV Senior Subordinated Notes will be payable at an annual floating rate equal to three-month LIBOR plus a spread of 3.95% until maturity or early redemption. At September 30, 2021, all of the SNBV Senior Subordinated Notes qualified as Tier 2 capital.
In 2017, the Company assumed the Senior Subordinated Note Purchase Agreement dated April 22, 2015 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 (“Senior Subordinated Notes”) was sold to the investors. On February 1, 2021, the Company redeemed all of the aggregate amount of the Senior Subordinated Notes.
On August 25, 2020, Primis completed the sale of $60.0 million of its fixed-to-floating rate Subordinated Notes due 2030 (the “SNBV Subordinated Notes”). The SNBV Subordinated 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 SOFR, 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. At September 30, 2021, all of the SNBV Subordinated Notes qualified as Tier 2 capital.
At September 30, 2021 and December 31, 2020, the remaining unamortized debt issuance costs related to the Subordinated Notes totaled $1.8 million and $1.9 million, respectively.
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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Primis. This discussion and analysis should be read with the consolidated financial statements, the footnotes thereto, and the other financial data included in this report and in our annual report on Form 10-K for the year ended December 31, 2020. Results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of results that may be attained for any other period. The emphasis of this discussion will be on the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be the balances as of September 30, 2021 compared to December 31, 2020. This discussion and analysis contains statements that may be considered “forward-looking statements” as defined in, and subject to the protections of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. See the following section for additional information regarding forward-looking statements.
FORWARD-LOOKING STATEMENTS
Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control, particularly with regard to developments related to the novel coronavirus (“COVID-19”) and the related variants. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. The words “believe,” “may,” “forecast,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “continue,” “would,” “could,” “hope,” “might,” “assume,” “objective,” “seek,” “plan,” “strive” or similar words, or the negatives of these words, identify forward-looking statements.
Forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the expectations of future results we express or imply in any forward-looking statements. In addition to the Risk Factors contained in this Quarterly Report on Form 10-Q, as well as the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, factors that could contribute to those differences include, but are not limited to:
Forward-looking statements are not guarantees of performance or results and should not be relied upon as representing management’s views as of any subsequent date. A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe we have chosen these assumptions or bases in good faith and that they are reasonable. We caution you, however, that assumptions or bases almost always vary from actual results,
38
and the differences between assumptions or bases and actual results can be material. When considering forward-looking statements, you should refer to the risk factors and other cautionary statements in this Quarterly Report on Form 10-Q and in our periodic and current reports filed with the SEC for specific factors that could cause our actual results to be different from those expressed or implied by our forward-looking statements. These statements speak only as of the date of this Quarterly Report on Form 10-Q (or an earlier date to the extent applicable). Except as required by applicable law, we undertake no obligation to update publicly these statements in light of new information or future events.
OVERVIEW
Primis (formerly Southern National) is a corporation that was formed on July 28, 2004 under the laws of the Commonwealth of Virginia and is the holding company for Primis Bank (formerly Sonabank), 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 September 30, 2021, Primis Bank had forty full-service branches in Virginia and Maryland and also provides services to customers through certain internet and mobile applications. Thirty-five full-service retail branches are in Virginia (Ashland, Burgess, Callao, Central Garage, Charlottesville, Chester, Clifton Forge, Colonial Heights, Courtland, Fairfax, Front Royal, Gloucester, Gloucester Point, Hampton, Hartfield, Heathsville, Kilmarnock, Leesburg, McLean, Mechanicsville (2), Middleburg, Midlothian, New Market, Newport News, Quinton, Reston, Richmond, Surry, Tappahannock (2), Urbanna, Warrenton, Waverly, and Williamsburg) and five full-service retail branches are in Maryland (Bethesda, Brandywine, Owings, Rockville, and Upper Marlboro). The Company has administrative offices in Warrenton and Glen Allen, Virginia.
FINANCIAL HIGHLIGHTS
Impact of COVID-19 Pandemic
The COVID-19 pandemic and related restrictive measures taken by governments, businesses and individuals have caused and continue to cause unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve. As the restrictive measures eased during the latter part of 2020 and continued to ease during 2021, the U.S. economy has begun to improve from 2020, and with the availability and distribution of COVID-19 vaccines, we anticipate continued improvements in commercial and consumer activity and the U.S. economy.
While positive trends exist, we recognize that our business and consumer customers are continuing to experience varying degrees of financial distress, which we expect to continue, though to a lesser degree, throughout 2021. Commercial activity has improved, but has not returned to the levels existing prior to the outbreak of the COVID-19 pandemic, which may result in our customers’ inability to meet their loan obligations to us. In addition, the economic pressures and uncertainties related to the COVID-19 pandemic, including the emergence and spread of variants, have seemingly resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. Our borrowing base includes customers in industries such as hotels, restaurants, retail and commercial real estate, which have been significantly impacted by the COVID-19 pandemic. We recognize that these industries may take longer to recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the COVID-19 pandemic. We continue to monitor these customers closely.
We have taken deliberate actions to meet our goal of ensuring that we have the balance sheet strength to serve our clients and communities, including by seeking to increase our liquidity and manage our assets and liabilities in order to maintain a strong capital position; however, future economic conditions are subject to significant uncertainty. Uncertainties associated with the COVID-19 pandemic include the duration of the COVID-19 outbreak and any related variants, the effectiveness and acceptance of COVID-19 vaccines, the impact to our customers, employees and vendors and the impact to the economy as a whole. COVID-19 had a significant adverse impact on our business, financial position and operating results for the year ended December 31, 2020 and while uncertainty still exists, we believe we are well-positioned to operate effectively through the present economic environment.
Our branch locations are currently open and operating during normal business hours. We continue to take additional precautions within our branch locations, including enhanced cleaning procedures, to ensure the safety of our customers and our employees.
RESULTS OF OPERATIONS
Net Income
Three-Month Comparison. Net income from continuing operations for the three months ended September 30, 2021 was $6.2 million, or $0.25 basic and diluted earnings per share, compared to net income from continuing operations of $6.5 million, or $0.27 basic and diluted earnings per share, for the three months ended September 30, 2020. Net income from continuing operations decreased $316 thousand during the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The 5% decrease in net income was primarily driven by higher management restructuring expenses in the current year.
Net loss from discontinued operations for the three months ended September 30, 2021 was $2.3 million, or $(0.09) basic and diluted earnings per share, compared to net income from discontinued operations of $3.1 million, or $0.13 basic and $0.12 diluted earnings per share, for the three months ended September 30, 2020. On September 23, 2021, Primis Bank announced that it entered into an agreement with Southern Trust Mortgage (“STM”), whereby STM intends 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 cash and a promissory note. The transaction is expected to close in the fourth quarter of 2021. At closing, STM will continue to be a borrower of the Bank, but the Bank will no longer be a minority owner of STM. Effective July 1, 2021, the Company will also no longer accrue earnings related to the Bank's common membership interests in STM. The investments in STM in the consolidated balance sheets have been classified as held for sale and the effect of the equity in earnings/impairment loss in the statements of income have been presented as discontinued operations. The prior period
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financial information has been retrospectively adjusted for the impact of the transaction. The Company recorded a pre-tax charge of approximately $2.9 million related to the transaction in the third quarter of 2021.
Nine-Month Comparison. Net income from continuing operations for the nine months ended September 30, 2021 was $23.4 million, or $0.96 basic and $0.95 diluted earnings per share, compared to net income from continuing operations of $7.8 million, or $0.32 basic and diluted earnings per share, for the nine months ended September 30, 2020. The 201% increase in the net income from continuing operations during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily driven by recoveries for loan losses in 2021 compared to provision for loan losses in 2020 as loans on deferral and the economic impact of COVID-19 declined dramatically in 2021. The increase in net income was offset by a decrease in recoveries related to acquired charged-off loans and investment securities in the current year.
Net income from discontinued operations for the nine months ended September 30, 2021 was $231 thousand, or $0.01 basic and diluted earnings per share, compared to net income from discontinued operations of $6.6 million, or $0.27 basic and diluted earnings per share, for the nine months ended September 30, 2020. The decline in net income from discontinued operations is primarily driven by the pre-tax charge of approximately $2.9 million related to the STM transaction in the third quarter of 2021.
Net Interest Income
Our operating results depend primarily on our net interest income, which is the difference between interest and dividend income on interest-earning assets such as loans and investments, and interest expense on interest-bearing liabilities such as deposits and borrowings.
Three-Month Comparison. Net interest income was $23.2 million for the three months ended September 30, 2021, compared to $23.0 million for the three months ended September 30, 2020. Primis’ net interest margin for the three months ended September 30, 2021 was 2.87%, compared to 3.18% for the three months ended September 30, 2020. Net interest margin was impacted heavily by the origination of Paycheck Protection Program (PPP) loans. Excluding the effects of PPP loans, the Company’s net interest margin for the three months ended September 30, 2021 would have been 2.66%, compared to 3.28% for the three months ended September 30, 2020. Net interest margin, excluding the effects of PPP loans, continues to be negatively impacted by unusually high cash balances at the Bank. Total income on interest-earning assets was $27.8 million and $28.7 million for the three months ended September 30, 2021 and 2020, respectively. The yield on average interest-earning assets decreased 53 basis points to 3.44% during the three months ended September 30, 2021, compared to the 3.97% yield on average interest-earning assets during the three months ended September 30, 2020, primarily driven by market conditions. The cost of average interest-bearing liabilities decreased 45 basis points to 0.56% during the three months ended September 30, 2021, compared to 1.01% cost on average interest-bearing liabilities during the three months ended September 30, 2020. Interest and fees on loans totaled $26.2 million and $27.3 million for the third quarters of 2021 and 2020, respectively. The accretion of the discount on loans acquired contributed $469 thousand to net interest income during the three months ended September 30, 2021, compared to $1.1 million during the three months ended September 30, 2020. The decrease in accretion was due to slowdown in the volume of acquired loan prepayments and payoffs. Average loans during the third quarter of 2021 were $2.29 billion, compared to $2.50 billion during the third quarter of 2020.
Total interest expense was $4.6 million and $5.7 million for the three months ended September 30, 2021 and 2020, respectively. Interest on deposits was $3.2 million and $4.4 million for the three months ended September 30, 2021 and 2020, respectively. Total average interest-bearing deposits for the third quarter of 2021 and 2020 were $2.26 billion and $1.72 billion, respectively. The yield on total average interest-bearing deposits was 0.56% and 1.01% for the quarter ended September 30, 2021 and 2020, respectively. Interest expense on total average borrowings, which include securities sold under agreements to repurchase, FHLB advances, junior subordinated debt and senior subordinated notes, was $1.4 million and $1.4 million for the three months ended September 30, 2021 and 2020, respectively. Total average borrowings were $215.7 million and $547.2 million for the three months ended September 30, 2021 and 2020, respectively.
The following table details average balances of interest-earning assets and interest-bearing liabilities, the amount of interest earned/paid on such assets and liabilities, and the yield/rate for the periods indicated:
Average Balance Sheets and Net Interest
Analysis For the Three Months Ended
Income/
Yield/
Balance
Expense
Rate
(Dollar amounts in thousands)
Assets
Interest-earning assets:
Loans, net of deferred fees (1) (2)
2,291,945
4.53
2,501,614
4.34
Investment securities
229,906
1,083
1.87
213,039
2.11
Other earning assets
689,084
0.31
163,159
0.76
Total earning assets
3,210,935
2,877,812
3.97
Allowance for credit losses
(30,598)
(23,640)
12,621
9,453
Total non-earning assets
260,714
270,471
3,453,672
3,134,096
Liabilities and stockholders' equity
Interest-bearing liabilities:
NOW and other demand accounts
920,203
1,062
0.46
451,583
807
0.71
744,280
1,056
0.56
504,887
0.63
213,859
165
176,305
0.29
380,233
877
0.92
590,263
2,620
1.77
2,258,575
1,723,038
1.01
Borrowings
215,670
1,434
2.64
547,182
1,352
0.98
Total interest-bearing liabilities
2,474,245
0.74
2,270,220
1.00
Noninterest-bearing liabilities:
Demand deposits
547,500
452,500
21,718
25,869
3,043,463
2,748,589
Stockholders' equity
410,209
385,507
Interest rate spread
2.83
2.97
Net interest margin
2.87
3.18
Nine-Month Comparison. Net interest income was $70.0 million for the nine months ended September 30, 2021, compared to $66.0 million for the nine months ended September 30, 2020, which was a result of lower costs of deposits in 2021. Primis’ net interest margin for the nine months ended September 30, 2021 was 3.02%, compared to 3.27% for the nine months ended September 30, 2020. Net interest margin was impacted by lower levels of PPP fee income recognition and significantly higher cash balances in 2021. Total income on interest-earning assets was $84.7 million and $85.9 million for the nine months ended September 30, 2021 and 2020, respectively. The yield on average interest-earning assets was 3.65% and 4.26% for the nine months ended September 30, 2021 and 2020, respectively. The decrease was primarily driven by market conditions. Interest and fees on loans totaled $80.3 million and $81.1 million for the nine months ended September 30, 2021 and 2020, respectively. The accretion of the discount on loans acquired in the acquisitions of Eastern Virginia Bankshares, Inc., Greater Atlantic Bank, HarVest and Prince Georges Federal Savings Bank contributed $1.5 million to net interest income during the nine months ended September 30, 2021, compared to $3.6 million during the nine months ended September 30, 2020. The decrease in accretion was due to slowdown in the volume of acquired loan prepayments and payoffs. Average loans during the nine months ended September 30, 2021 were $2.35 billion, compared to $2.37 billion during the nine months ended September 30, 2020.
Total interest expense was $14.8 million and $19.9 million for the nine months ended September 30, 2021 and 2020, respectively. Interest on deposits was $10.4 million and $16.0 million for the nine months ended September 30, 2021 and 2020, respectively. Total average interest-bearing deposits for the nine months ended September 30, 2021 and 2020 were $2.18 billion and $1.75 billion, respectively. The yield on total average interest-bearing deposits was 0.63% and 1.22% for the nine months ended September 30, 2021 and 2020, respectively. Interest expense on total average borrowings, which include securities sold under agreements to repurchase, FHLB advances, junior subordinated debt, senior subordinated notes and Paycheck Protection Program Liquidity Facility borrowings, was $4.4 million and $3.9 million for the nine months ended September 30, 2021 and 2020, respectively. Total average borrowings were $219.9 million and $390.9 million for the nine months ended September 30, 2021 and 2020, respectively.
Analysis For the Nine Months Ended
2,351,410
4.57
2,368,541
213,128
3,198
2.01
222,285
3,737
2.25
536,781
0.30
103,283
1.39
3,101,319
2,694,109
4.26
(34,012)
(17,002)
12,659
6,601
262,373
263,705
3,342,339
2,947,413
854,360
3,178
0.50
412,083
706,215
3,294
0.62
487,791
3,204
0.88
204,286
162,575
353
418,161
3,429
1.10
685,253
10,111
1.97
2,183,022
1,747,702
1.22
219,947
4,413
2.68
390,856
3,868
1.32
2,402,969
0.82
2,138,558
1.24
514,318
401,616
22,947
24,055
2,940,234
2,564,229
402,105
383,184
2.98
Provision for Credit Losses
The provision for credit losses is a current charge to earnings made in order to adjust the allowance for credit losses to an appropriate level for inherent probable losses in the loan portfolio based on an evaluation of the loan portfolio, current economic conditions, changes in the nature and volume of lending, historical loan experience and other known internal
43
and external factors affecting loan collectability. Our allowance for credit losses is calculated by segmenting the loan portfolio by loan type and applying risk factors to each segment. The risk factors are determined by considering historical loss data, peer data, as well as applying management’s judgment.
The Company adopted ASU 2016-13 effective January 1, 2020. We implemented and recorded a gross cumulative effect adjustment of $8.3 million at December 31, 2020. Prior periods were not restated to reflect CECL adoption. The provision for credit losses for the three months ended September 30, 2021 was $1.1 million and recovery for credit losses for the nine months ended September 30, 2021 was $4.5 million. The Company recorded a provision of $1.1 million in the third quarter of 2021, primarily as a result of robust loan growth for the quarter. The provision for credit losses for the three and nine months ended September 30, 2020 was $2.0 million and $16.3 million, respectively. Net charge offs for the three and nine months ended September 30, 2021 was $2.0 million and $1.5 million, respectively, compared to net recoveries for the three months ended September 30, 2020 of $152 thousand and net charge offs for the nine months ended September 30, 2020 of $831 thousand.
The Financial Condition Section of Management’s Discussion and Analysis provides information on our loan portfolio, past due loans, nonperforming assets and the allowance for credit losses.
Noninterest Income
The following table presents the major categories of noninterest income for the three months ended September 30, 2021 and 2020:
Change
210
(156)
Noninterest income increased 10% to $2.7 million for the three months ended September 30, 2021, compared to $2.4 million for the three months ended September 30, 2020. This excludes the pre-tax charge of approximately $2.9 million in the third quarter of 2021 and equity gains in prior periods from the Company’s mortgage affiliate, Southern Trust Mortgage, LLC (“STM”) which are now recorded in discontinued operations. The increase in noninterest income was primarily driven by an increase of $210 thousand from the year-ago period in income on account maintenance and deposit service fees primarily in account service charges and non-sufficient fund fees. Recoveries related to acquisition-related previously charged-off loans and investment securities also increased $193 thousand.
The following table presents the major categories of noninterest income for the nine months ended September 30, 2021 and 2020:
624
(13)
(1,923)
(1,463)
Noninterest income decreased 16% to $7.8 million for the nine months ended September 30, 2021, compared to $9.3 million for the nine months ended September 30, 2020. The $1.5 million decrease was primarily driven by a $1.9 million
44
decrease in recoveries related to acquired charged-off loans and investment securities, partially offset by $624 thousand increase in account maintenance and deposit service fees in the current year. The decrease in recoveries related to acquired charged-off loans and investment securities was attributable to a recovery related to a previously charged-off acquired loan of approximately $2.0 million during the third quarter of 2020. Increase of $624 thousand in account maintenance and deposit service fees was primarily in account service charges and non-sufficient funds fee.
Noninterest Expense
The following table presents the major categories of noninterest expense for the three months ended September 30, 2021 and 2020:
1,215
120
252
117
302
(286)
(139)
1,630
Noninterest expenses were $16.9 million during the three months ended September 30, 2021, compared to $15.3 million during the three months ended September 30, 2020. The 11% increase in noninterest expenses was primarily due to a $1.2 million increase in employee compensation and benefits expense due to higher management restructuring expenses in the third quarter of 2021. Occupancy and furniture and equipment expenses increased $372 thousand during the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase in noninterest expense during the three months ended September 30, 2021 was also attributable to a $302 thousand increase in data processing expense. Other expenses decreased in the third quarter of 2021 compared to third quarter of 2020. Included in other expense is unfunded commitment reserve recovery in the third quarter of 2021 of $470 thousand.
The following table presents the major categories of noninterest expense for the nine months ended September 30, 2021 and 2020:
(250)
(238)
674
322
454
232
(38)
1,897
3,277
Noninterest expenses were $52.5 million during the nine months ended September 30, 2021, compared to $49.2 million during the nine months ended September 30, 2020. The 7% increase in noninterest expenses was primarily due to an
45
increase in other operating expenses in 2021. Other expenses increased in 2021 compared to 2020, largely driven by a $389 thousand increase in the reserve for unfunded commitments. Occupancy and furniture and equipment expenses increased $436 thousand during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase in noninterest expense during the nine months ended September 30, 2021 was also attributable to a $454 thousand increase in data processing expense. Virginia franchise tax expense increased $322 million and professional fees increased $224 thousand in 2021 compared to 2020. Employee compensation and benefits expense totaled $27.2 million and $27.4 million for the nine months ended September 30, 2021 and 2020, respectively. The decrease was associated with higher management restructuring expenses in 2020.
FINANCIAL CONDITION
Balance Sheet Overview
Total assets were $3.45 billion as of September 30, 2021 and $3.09 billion as of December 31, 2020. Total loans decreased 5%, from $2.44 billion at December 31, 2020 to $2.31 billion at September 30, 2021. Excluding PPP loans, loans outstanding decreased $48.6 million, or 2%, since December 31, 2020. Total deposits were $2.81 billion at September 30, 2021, compared to $2.43 billion at December 31, 2020 and total equity was $408.6 million and $390.6 million at September 30, 2021 and December 31, 2020, respectively.
Loan Portfolio
Total loans were $2.31 billion and $2.44 billion at September 30, 2021 and December 31, 2020, respectively. PPP loan originations totaled $140.5 million at September 30, 2021. Excluding PPP loans, loans outstanding increased $48.6 million, or 2%, since December 31, 2020.
The Company ended the third quarter of 2021 with $7.0 million of loans on deferral, or 0.3% of total loans excluding PPP loans.
The composition of our loan portfolio consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):
Construction and land loans
Multi-family residential
Paycheck Protection Program
As of September 30, 2021 and December 31, 2020, substantially all of our loans were to customers located in Virginia and Maryland. We are not dependent on any single customer or group of customers whose insolvency would have a material adverse effect on operations.
Asset Quality
Asset quality remained solid during the first three quarters of 2021. The outbreak of COVID-19 and resulting economic instability has had and will likely continue to have an impact on our asset quality. While COVID-19 cases are no longer at their peak and vaccinations have stemmed the outbreak, the residual effect of COVID-19 and the delta variant continues to cause economic instability and uncertainty in evaluating the impact on our asset quality. We will generally place a loan on nonaccrual status when it becomes 90 days past due. Loans will also be placed on nonaccrual status in cases where we are uncertain whether the borrower can satisfy the contractual terms of the loan agreement. Cash payments received while a loan is categorized as nonaccrual will be recorded as a reduction of principal as long as doubt exists as to future collections. We defer COVID-impacted loans to the end of the deferral date and track delinquency from the end of that new deferral date. During the third and fourth quarters of 2020 and first, second and third quarters of 2021, the Company saw a substantial amount of deferred loans return to traditional loan terms.
We maintain appraisals on loans secured by real estate, particularly those categorized as nonperforming loans and potential problem loans. In instances where appraisals reflect reduced collateral values, we make an evaluation of the borrower’s overall financial condition to determine the need, if any, for impairment or write-down to their fair values. If foreclosure occurs, we record OREO at the lower of our recorded investment in the loan or fair value less our estimated costs to sell.
Our loss and delinquency experience on our loan portfolio has been limited by a number of factors, including our underwriting standards and the relatively short period of time since the loans were originated. Whether losses and delinquencies in our portfolio will increase significantly depends upon the value of the real estate securing the loans and economic factors, such as the overall economy in our market area, including as a result of the impact of COVID-19.
The following table presents a comparison of nonperforming assets as of September 30, 2021 and December 31, 2020 (in thousands):
Nonaccrual loans
Loans past due 90 days and accruing interest
Total nonperforming loans
Total nonperforming assets
19,664
17,540
Troubled debt restructurings
3,710
987
SBA guaranteed amounts included in nonaccrual loans
3,361
3,076
Allowance for credit losses to nonperforming loans
165.58
251.32
Allowance for credit losses to total loans
1.31
1.52
Nonperforming assets excluding SBA guaranteed loans to total assets
0.47
Not included in the table above are $7.0 million of loans that were subject to COVID-related deferrals at September 30, 2021. Some of these loans may become potential problem loans during the remainder of 2021.
OREO at September 30, 2021 was $1.3 million, compared to $3.1 million at December 31, 2020. The decrease was primarily driven by sale of properties and write-downs on OREO during 2021.
Nonaccrual loans were $18.4 million (excluding $3.4 million of loans fully covered by SBA guarantees) at September 30, 2021, compared to $14.5 million (excluding $3.1 million of loans fully covered by SBA guarantees) at December 31, 2020, an increase of 27%. The ratio of nonperforming assets (excluding the SBA guaranteed loans) to total assets was 0.47% and 0.47% at September 30, 2021 and December 31, 2020, respectively.
As of September 30, 2021, there were nine TDR loans in the amount of $3.7 million outstanding, primarily due to the economic impact of COVID-19. There have been no defaults of TDRs modified during the past twelve months.
We have an internal loan review and a loan committee, both of which provide on-going monitoring to identify and address issues with problem loans. The loan loss provision is determined after consideration of all known relevant internal and external factors affecting loan collectability to maintain the allowance for loan and lease losses at a level necessary to absorb estimated credit losses.
Investment Securities
Investment securities, available for sale and held to maturity, totaled $230.6 million at September 30, 2021, an increase of 19% from $194.0 million at December 31, 2020.
Investment securities in our portfolio as of September 30, 2021 were as follows:
Moody's
Standard & Poor's
Rating
Aaa
10,070
AAA
12,931
Aa1
9,152
AA+
10,019
Aa2
6,501
AA
5,219
Aa3
685
AA-
1,551
A1
1,299
A+
A2
A
797
NA
4,976
3,479
NR
1,443
34,462
During the three and nine months ended September 30, 2021, $16.5 million and $85.0 million, respectively, of available for sale investment securities were purchased. No held to maturity investment were purchased during the three and nine months ended September 30, 2021. During the three and nine months ended September 30, 2020, $14.3 million and $29.3 million, respectively, of available for sale investment securities were purchased. During the nine months ended September 30, 2020, $15.2 million of held to maturity investment securities were purchased. No held to maturity investment securities were purchased during the three months ended September 30, 2020. No investment securities were sold during the three and nine months ended September 30, 2021 and 2020.
Each of these investment securities has been evaluated for potential impairment under accounting guidelines. In performing a detailed cash flow analysis of each investment security, Primis works with independent third parties to identify the most reflective estimate of the cash flow estimated to be collected. If this estimate results in a present value of expected cash flows that is less than the amortized cost basis of an investment security (that is, credit loss exists), an other than temporary impairment is considered to have occurred. If there is no credit loss, any impairment is considered temporary.
We recognized no credit impairment charges related to credit losses during the three and nine months ended September 30, 2021 and 2020, respectively.
Liquidity and Funds Management
The objective of our liquidity management is to ensure the ability to meet our financial obligations. These obligations include the payment of deposits on demand or at maturity, the repayment of borrowings at maturity and the ability to fund commitments and other new business opportunities. We obtain funding from a variety of sources, including customer deposit accounts, customer certificates of deposit and payments on our loans and investments. Historically, our level of core deposits has been insufficient to fully fund our lending activities. As a result, we have sought funding from additional sources, including institutional certificates of deposit and the sale of available for sale investment securities. In addition, we maintain lines of credit with the FHLB of Atlanta, federal funds lines of credit with three correspondent banks and utilize securities sold under agreements to repurchase and reverse repurchase agreement borrowings from approved securities dealers.
We prepare a cash flow forecast on a 30, 60 and 90 day basis along with a one and a two year basis. The projections incorporate expected cash flows on loans, investment securities, and deposits based on data used to prepare our interest rate risk analyses. To estimate loan growth, the projection incorporates the scheduled loan closings in the Loan Pipeline Report along with other management estimates.
During the nine months ended September 30, 2021, we funded our financial obligations with deposits and borrowings from the FHLB of Atlanta. At September 30, 2021, we had $420.6 million of unfunded lines of credit and undisbursed construction loan funds. The amount of certificate of deposit accounts maturing in less than one year was $272.1 million as of September 30, 2021. Management anticipates that funding requirements for these commitments can be met from the normal sources of funds.
On August 25, 2020, Primis completed the sale of $60.0 million of its fixed-to-floating rate Subordinated Notes due 2030 (the “SNBV Subordinated Notes”). The SNBV Subordinated 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 SOFR plus 531 basis points, for each quarterly interest period during the floating rate period, payable quarterly in arrears on March 1, September 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.
While the Company believes that wholesale funding markets have remained open to us in the economic environment caused by COVID-19, the rates for short term funding have recently been volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin. If an uneven economic recovery causes a large number of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding. As of September 30, 2021, Primis was not aware of any other known trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity. As of September 30, 2021, Primis has no material commitments or long-term debt for capital expenditures.
49
Capital Resources
Primis Financial Corp. and its subsidiary bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (“PCA”), we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. At September 30, 2021 and December 31, 2020, the most recent regulatory notifications categorized the Bank as well capitalized under regulatory framework for PCA.
Quantitative measures established by regulation to ensure capital adequacy require Primis to maintain minimum amounts and ratios of Total and Tier I capital (as defined in the regulations) to average assets (as defined). Management believes, as of September 30, 2021, that Primis meets all capital adequacy requirements to which it is subject.
The following table provides a comparison of the leverage and risk-weighted capital ratios of Primis Financial Corp. and Primis Bank at the periods indicated to the minimum and well-capitalized required regulatory standards:
Minimum
Required for
To Be
Actual Ratio at
Adequacy
Categorized as
Purposes
Well Capitalized (1)
Primis Financial Corp.
Leverage ratio
n/a
9.15
9.69
Common equity tier 1 capital ratio
4.50
13.85
13.05
Tier 1 risk-based capital ratio
14.31
13.52
Total risk-based capital ratio
8.00
19.60
19.58
Primis Bank
5.00
11.03
11.25
7.00
6.50
17.13
15.83
8.50
10.00
18.39
17.09
Primis Financial Corp. and Primis Bank are required to meet minimum capital requirements set forth by regulatory authorities. Bank regulatory agencies have approved regulatory capital guidelines (“Basel III”) aimed at strengthening existing capital requirements for banking organizations. The Basel III Capital Rules require Primis Financial Corp. and Primis Bank to maintain (i) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer”, (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer, (iii) a minimum ratio of Total capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer and (iv) a minimum leverage ratio of 4.0%. Failure to meet minimum capital requirements may result in certain actions by regulators which could have a direct material effect on the consolidated financial statements.
Primis Financial Corp. and Primis Bank remain well-capitalized under Basel III capital requirements. Primis Bank had capital conservation buffer of 9.75% at September 30, 2021, 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 prompt corrective action.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are engaged primarily in the business of investing funds obtained from deposits and borrowings into interest-earning loans and investments. Consequently, our earnings depend to a significant extent on our net interest income, which is the difference between the interest income on loans and other investments and the interest expense on deposits and borrowings. To the extent that our interest-bearing liabilities do not reprice or mature at the same time as our interest-earning assets, we are subject to interest rate risk and corresponding fluctuations in net interest income. Our Asset-Liability Committee (“ALCO”) meets regularly and is responsible for reviewing our interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk. The policies established by the ALCO are reviewed and approved by our Board of Directors. We have employed asset/liability management policies that seek to manage our net interest income, without having to incur unacceptable levels of credit or investment risk.
We use simulation modeling to manage our interest rate risk, and review quarterly interest sensitivity. This approach uses a model which generates estimates of the change in our economic value of equity (“EVE”) over a range of interest rate scenarios. EVE is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts using assumptions about estimated loan prepayment rates, reinvestment rates and deposit decay rates.
The following tables are based on an analysis of our interest rate risk as measured by the estimated change in EVE resulting from instantaneous and sustained parallel shifts in the yield curve (plus 400 basis points or minus 100 basis points, measured in 100 basis point increments) as of September 30, 2021 and December 31, 2020. All changes are within our Asset/Liability Risk Management Policy guidelines except for the change resulting from the 100 basis point decrease in interest rates at September 30, 2021 and December 31, 2020.
Sensitivity of Economic Value of Equity
As of September 30, 2021
Economic Value of
Economic Value of Equity
Equity as a % of
Change in Interest Rates
$ Change
% Change
in Basis Points (Rate Shock)
From Base
Book Value
(dollar amounts in thousands)
Up 400
411,119
25,356
6.57
11.91
100.61
Up 300
407,409
21,646
5.61
11.80
99.70
Up 200
401,930
16,167
4.19
11.64
98.36
Up 100
399,733
13,970
11.58
97.82
Base
385,763
11.17
94.40
Down 100
317,051
(68,712)
(17.81)
9.18
77.59
As of December 31, 2020
339,057
5,568
1.67
86.81
341,652
8,163
2.45
11.06
87.48
342,561
9,072
2.72
11.09
87.71
343,842
10,353
11.13
88.04
333,489
10.80
85.39
282,586
(50,903)
(15.26)
72.36
Our interest rate sensitivity is also monitored by management through the use of a model that generates estimates of the change in the net interest income (“NII”) over a range of interest rate scenarios. NII depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. In this regard, the model assumes that the composition of our interest sensitive assets and liabilities existing at September 30, 2021 and December 31, 2020 remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. All changes are within our ALM Policy guidelines at September 30, 2021 and December 31, 2020.
Sensitivity of Net Interest Income
Adjusted Net Interest Income
Net Interest Margin
Percent
86,704
2.85
0.14
85,703
3,263
2.82
0.11
84,646
2,206
2.79
0.07
83,828
1,388
2.76
0.05
82,440
2.71
79,825
(2,615)
2.63
78,988
(4,760)
2.89
(0.17)
80,341
(3,407)
2.94
(0.12)
81,604
(2,144)
2.99
(0.07)
83,039
(709)
3.04
(0.02)
83,748
82,667
(1,081)
(0.04)
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in EVE requires the making of certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. Accordingly, although the EVE tables and NII tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net worth and NII. Sensitivity of EVE and NII are modeled using different assumptions and approaches.
ITEM 4 – CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this quarterly report on Form 10-Q, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d -15(e) under the Securities Exchange Act of 1934) utilizing the framework established in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that these controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1 – LEGAL PROCEEDINGS
Primis and Primis Bank are from time to time a party, as both plaintiff and defendant, to various claims and proceedings arising in the ordinary course of the Bank’s business, including administrative and/or legal proceedings that may include employment-related claims, as well as claims of lender liability, breach of contract, and other similar lending-related claims. While the ultimate resolution of these matters cannot be determined at this time, the Bank’s management presently believes that such matters, individually and in the aggregate, will not have a material adverse effect on the Bank’s financial condition or results of operations. There are no proceedings pending, or to management’s knowledge, threatened, that represent a significant risk against Primis or Primis Bank as of September 30, 2021.
ITEM 1A – RISK FACTORS
The Company disclosed risk factors in its Annual Report on Form 10-K for the year ended December 31, 2020. The risks described may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition, and/or operating results.
Risk factors have been included in the Annual Report on Form 10-K for the year ended December 31, 2020 in response to the global market disruptions that have resulted from the COVID-19 pandemic. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. However, the effects could have a material impact on our results of operations and heighten many of our known risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
ITEM 4 – MINE SAFETY DISCLOSURES
ITEM 5 – OTHER INFORMATION
ITEM 6 - EXHIBITS
(a) Exhibits.
Exhibit No.
Description
3.1
Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to Primis Financial Corp.’s (formerly Southern National’s) Registration Statement on Form S-1 (Registration No. 333-136285) filed August 4, 2006)
3.2
Certificate of Amendment to the Articles of Incorporation dated January 31, 2005 (incorporated herein by reference to Exhibit 3.2 to Primis Financial Corp.’s (formerly Southern National’s) Registration Statement on Form S-1 (Registration No. 333-136285) filed on August 4, 2006)
3.3
Certificate of Amendment to the Articles of Incorporation dated April 13, 2006 (incorporated herein by reference to Exhibit 3.3 to Primis Financial Corp.’s (formerly Southern National’s) Registration Statement on Form S-1 (Registration No. 333-136285) filed on August 4, 2006)
3.4
Articles of Amendment to the Articles of Incorporation dated March 31, 2021 (incorporated herein by reference to Exhibit 3.1 to Primis Financial Corp.’s Current Report on Form 8-K filed on March 31, 2021)
3.5
Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.2 to Primis Financial Corp.’s Current Report on Form 8-K filed on March 31, 2021)
31.1*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
The following materials from Primis Financial Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL (Extensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income and Comprehensive Income (unaudited), (iii) Consolidated Statement of Changes in Stockholders’ Equity (unaudited), (iv) Consolidated Statements of Cash Flows (unaudited), and (v) Notes to Consolidated Financial Statements (unaudited).
The cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document).
+ Management contract or compensatory plan or arrangement
* Filed with this Quarterly Report on Form 10-Q
** Furnished with this Quarterly Report on Form 10-Q
56
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
November 9, 2021
/s/ Dennis J. Zember, Jr.
(Date)
Dennis J. Zember, Jr.
President and Chief Executive Officer
/s/ Matthew Switzer
Matthew Switzer
Executive Vice President and Chief Financial Officer