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 March 31, 2022
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 May 2, 2022, there were 24,622,739 shares of common stock, $0.01 par value, outstanding.
March 31, 2022
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021
2
Consolidated Statements of Income and Comprehensive Income (Loss) for the three months ended March 31, 2022 and 2021
3
Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2022 and 2021
4
Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021
5
Notes to Unaudited Consolidated Financial Statements
6
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
42
Item 4 – Controls and Procedures
44
PART II - OTHER INFORMATION
Item 1 – Legal Proceedings
45
Item 1A – Risk Factors
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
46
Signatures
48
PRIMIS FINANCIAL CORP.CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
March 31,
December 31,
2022
2021
(unaudited)
*
ASSETS
Cash and cash equivalents:
Cash and due from financial institutions
$
7,220
8,380
Interest-bearing deposits in other financial institutions
291,010
521,787
Total cash and cash equivalents
298,230
530,167
Securities available-for-sale, at fair value
271,626
271,332
Securities held-to-maturity, at amortized cost (fair value of $15,927 and $23,364, respectively)
16,138
22,940
Total loans
2,393,669
2,339,986
Less allowance for credit losses
(29,379)
(29,105)
Net loans
2,364,290
2,310,881
Stock in Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB)
11,927
15,521
Bank premises and equipment, net
29,872
30,410
Operating lease right-of-use assets
5,305
5,866
Goodwill
101,954
Core deposit intangibles, net
4,121
4,462
Bank-owned life insurance
67,099
66,724
Other real estate owned
1,041
1,163
Deferred tax assets, net
12,380
9,571
Other assets
35,893
36,362
Total assets
3,219,876
3,407,353
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits
559,682
530,282
Interest-bearing deposits:
NOW accounts
730,235
849,738
Money market accounts
831,580
799,759
Savings accounts
225,291
222,862
Time deposits
339,456
360,575
Total interest-bearing deposits
2,126,562
2,232,934
Total deposits
2,686,244
2,763,216
Securities sold under agreements to repurchase - short term
11,231
9,962
FHLB advances
—
100,000
Junior subordinated debt - long term
9,743
9,731
Senior subordinated notes - long term
85,356
85,297
Operating lease liabilities
5,897
6,498
Other liabilities
17,210
20,768
Total liabilities
2,815,681
2,995,472
Commitments and contingencies (See Note 9)
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; 24,622,739 and 24,574,619 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively
245
Additional paid in capital
311,872
311,127
Retained earnings
101,533
99,397
Accumulated other comprehensive income (loss)
(9,455)
1,112
Total stockholders' equity
404,195
411,881
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 (LOSS)
(dollars in thousands, except per share amounts) (Unaudited)
For the Three Months Ended
Interest and dividend income:
Interest and fees on loans
24,749
28,957
Interest and dividends on taxable securities
1,325
919
Interest and dividends on tax exempt securities
105
123
Interest and dividends on other earning assets
406
309
Total interest and dividend income
26,585
30,308
Interest expense:
Interest on deposits
2,373
3,816
Interest on repurchase agreements
13
26
Interest on other borrowings
1,345
1,511
Total interest expense
3,731
5,353
Net interest income
22,854
24,955
Provision for (recovery of) credit losses
99
(1,372)
Net interest income after (recovery of) provision for credit losses
22,755
26,327
Noninterest income:
Account maintenance and deposit service fees
1,351
1,664
Income from bank-owned life insurance
375
386
Other noninterest income
364
299
Total noninterest income
2,090
2,349
Noninterest expenses:
Salaries and benefits
9,625
9,372
Occupancy expenses
1,457
1,539
Furniture and equipment expenses
1,100
816
Amortization of core deposit intangible
341
Virginia franchise tax expense
813
675
Data processing expense
1,490
799
Telephone and communication expense
382
522
Net gain on other real estate owned
(59)
(60)
Professional fees
1,094
1,134
Other operating expenses
2,744
2,885
Total noninterest expenses
18,987
18,023
Income from continuing operations before income taxes
5,858
10,653
Income tax expense
1,265
2,301
Income from continuing operations
4,593
8,352
Income from discontinued operation before income taxes
1,315
284
Income from discontinued operation
1,031
Net income
9,383
Other comprehensive income (loss):
Unrealized loss on available-for-sale securities
(13,376)
(1,736)
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale
189
Net unrealized loss
(1,547)
Tax effect
(2,809)
(325)
Other comprehensive loss
(10,567)
(1,222)
Comprehensive income (loss)
(5,974)
8,161
Earnings per share from continuing operations, basic
0.19
0.35
Earnings per share from discontinued operation, basic
0.00
0.04
Earnings per share from continuing operations, diluted
0.34
Earnings per share from discontinued operation, diluted
PRIMIS FINANCIAL CORP.CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITYFOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021
For the Three Months Ended March 31, 2022
Accumulated
Additional
Other
Common
Paid in
Retained
Comprehensive
Stock
Capital
Earnings
Income (loss)
Total
Balance December 31, 2021
Changes in other comprehensive loss on investment securities (net of tax benefit, $2,809)
Dividends on common stock ($0.10 per share)
(2,457)
Repurchase of restricted stock
(6)
Stock-based compensation expense
751
Balance - March 31, 2022
For the Three Months Ended March 31, 2021
Income
Balance December 31, 2020
243
308,870
77,956
3,485
390,554
Changes in other comprehensive income on investment securities (net of tax benefit, $325)
(2,442)
Stock options exercised
1
1,237
1,238
(7)
482
Balance - March 31, 2021
244
310,582
84,897
2,263
397,986
PRIMIS FINANCIAL CORP.CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021
For the Three Months Ended March 31,
Operating activities:
Net income from continuing operations
Adjustments to reconcile net income from continuing operations to net cash and cash equivalents provided by operating activities:
Depreciation and amortization
1,596
1,603
Net amortization (accretion) of premiums and discounts
166
(43)
Provision for (recovery of) for credit losses
Earnings on bank-owned life insurance
(375)
(380)
Gain on bank-owned life insurance death benefit
Gain on other real estate owned
Provision (benefit) for deferred income taxes
(39)
Net decrease in other assets
469
2,337
Net decrease in other liabilities
(4,197)
(2,025)
Net cash and cash equivalents provided by operating activities from continuing operations
3,043
8,849
Investing activities:
Purchases of available-for-sale investment securities
(22,585)
(28,155)
Proceeds from paydowns, maturities and calls of available-for-sale investment securities
8,516
9,096
Proceeds from paydowns, maturities and calls of held-to-maturity investment securities
6,775
7,632
Net decrease of FRB and FHLB stock
3,594
1,406
Net (increase) decrease in loans
(53,248)
49,678
Proceeds from bank-owned life insurance death benefit
225
Proceeds from sales of other real estate owned, net of improvements
181
882
Purchases of bank premises and equipment
(47)
(383)
Net cash and cash equivalents provided by (used in) investing activities from continuing operations
(56,814)
40,381
Financing activities:
Net (decrease) increase in deposits
(76,972)
255,980
Cash dividends paid on common stock
Proceeds from exercised stock options
Extinguishment of senior subordinated notes
(20,000)
Repayment of FHLB advances
(100,000)
Increase in securities sold under agreements to repurchase
1,269
380
Net cash and cash equivalents provided by (used in) financing activities from continuing operations
(178,166)
235,149
Net change in cash and cash equivalents from continuing operations
(231,937)
284,379
Cash flows used in discontinued operation:
Net cash and cash equivalents used in operating activities
(284)
Net change in cash and cash equivalents from discontinued operation
Net change in cash and cash equivalents
284,095
Cash and cash equivalents at beginning of period
196,185
Cash and cash equivalents at end of period
480,280
Supplemental disclosure of cash flow information
Cash payments for:
Interest
4,259
6,964
Income taxes
55
1. ACCOUNTING POLICIES
Primis Financial Corp. (“Primis,” “we,” “us,” “our” or the “Company”) is the bank holding company for Primis Bank (“Primis Bank” or the “Bank”), a Virginia state-chartered bank which commenced operations on April 14, 2005. Primis Bank provides a range of financial services to individuals and small and medium-sized businesses.
At March 31, 2022, Primis Bank had forty full-service branches in Virginia and Maryland and also provides services to customers through certain online and mobile applications. Thirty-five full-service retail branches are in Virginia and five full-service retail branches are in Maryland. The Company is headquartered in McLean, Virginia and has administrative offices in Warrenton, Virginia and Glen Allen, Virginia. Our deposits are insured, up to applicable limits, by the Federal Deposit Insurance Corporation (the “FDIC”).
Primis offers a wide range of commercial banking services; however, we are focused 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, including home equity lines of credit. We are a Small Business Administration (“SBA”) lender with Preferred Lending Partner (“PLP”) status that allows us to offer this program nationwide. We also invest in real estate-related securities, including collateralized mortgage obligations and agency mortgage backed securities. Our principal sources of funds for loans and investing in securities are deposits and, to a lesser extent, borrowings. We offer a broad range of deposit products, including checking, NOW, savings, and money market accounts and certificates of deposit, supporting the needs of businesses and individuals. We actively pursue business relationships by utilizing the business contacts of our senior management, other bank officers and our directors, thereby capitalizing on our knowledge of our 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.
Discontinued Operation
Primis Bank had an interest in one mortgage company, Southern Trust Mortgage, LLC (“STM”). Prior to December 31, 2021, Primis Bank owned 43.28% and 100% of STM’s common and preferred stock, respectively, and STM was considered an unconsolidated affiliate of the Company. On September 23, 2021, Primis Bank entered into an agreement with STM, whereby STM agreed to purchase all of the Bank's common membership interests and a portion of the Bank's preferred interests in STM for a combination of $1.6 million in cash and a promissory note for $8.5 million. The transaction closed on December 31, 2021. Upon closing, STM continued to be a borrower of the Bank, but the Bank is no longer a minority owner of STM and STM is no longer considered an affiliate of the Company. The Company still holds 100% of STM’s preferred stock at March 31, 2022 but no longer has a position on STM’s board of directors and STM no longer represents a reportable operating segment of the Company.
Operating Segments
Operating segments are defined as components of a company about which separate financial information is available that is evaluated regularly by the chief financial officer and chief accounting officer in deciding how to allocate resources
and in assessing performance. Discrete financial information is not available other than on a company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.
Basis of Presentation
The unaudited consolidated financial statements and notes thereto 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’ Annual Report on Form 10-K for the year ended December 31, 2021.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Estimates that are particularly susceptible to change in the near term include: the determination of the allowance for credit losses, the fair value of investment securities, credit impairment of investment securities, the valuation of goodwill and deferred tax assets.
Reclassifications
In certain instances, amounts reported in prior years’ consolidated financial statements have been reclassified to conform to the current financial statement presentation. Such reclassifications had no effect on previously reported cash flows, stockholders’ equity or net income.
Recent Accounting Pronouncements
New Accounting Standards Not Yet Adopted:
In March 2022, FASB issued ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance on troubled debt restructurings (TDRs) for creditors in ASC 310-402 and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination. The ASU also updates the requirements related to accounting for credit losses under Accounting Standards Codification (“ASC”) 326 and adds enhanced disclosures for creditors with respect to loan refinancing and restructurings for borrowers experiencing financial difficulty. ASU 2022-02 is effective for annual periods beginning after December 15, 2022, including interim periods within those annual periods. Early adoption is permitted. Primis is currently in the process of evaluating the impact of adopting the new guidance on its consolidated financial statements and disclosures.
7
2. INVESTMENT SECURITIES
The amortized cost and fair value of available-for-sale investment securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows (in thousands):
Amortized
Gross Unrealized
Fair
Cost
Gains
Losses
Value
Residential government-sponsored mortgage-backed securities
127,180
102
(6,532)
120,750
Obligations of states and political subdivisions
34,852
172
(1,988)
33,036
Corporate securities
16,000
147
(24)
16,123
Collateralized loan obligations
5,026
(48)
4,978
Residential government-sponsored collateralized mortgage obligations
23,137
25
(594)
22,568
Government-sponsored agency securities
17,683
(1,433)
16,253
Agency commercial mortgage-backed securities
51,843
81
(1,809)
50,115
SBA pool securities
7,873
19
(89)
7,803
283,594
549
(12,517)
December 31, 2021
122,506
740
(636)
122,610
30,728
755
(252)
31,231
13,000
685
13,685
(16)
5,010
19,671
297
(161)
19,807
17,671
32
(215)
17,488
52,452
513
(298)
52,667
8,870
(84)
8,834
269,924
3,070
(1,662)
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
12,553
(238)
12,319
3,123
35
(11)
3,147
462
461
(255)
15,927
8
13,616
296
(1)
13,911
3,805
93
3,898
519
532
5,000
23
5,023
425
23,364
During the three months ended March 31, 2022 and 2021, $22.6 million and $28.2 million, respectively, of available-for-sale investment securities were purchased. No held-to-maturity investments were purchased during the three months ended March 31, 2022 and 2021. No investment securities were sold during the three months ended March 31, 2022 and 2021.
The amortized cost and fair value of available-for-sale and held-to-maturity investment securities as of March 31, 2022, 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
Fair Value
Due within one year
404
407
Due in one to five years
11,008
10,619
865
881
Due in five to ten years
26,566
26,113
1,519
1,524
Due after ten years
35,987
33,658
335
Investment securities with a carrying amount of approximately $169.5 million and $180.7 million at March 31, 2022 and December 31, 2021, 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 March 31, 2022, Primis did not have any allowance for credit losses on held-to-maturity securities.
9
The following tables present information regarding investment securities available-for-sale and held-to-maturity in a continuous unrealized loss position as of March 31, 2022 and December 31, 2021 by duration of time in a loss position (in thousands):
Less than 12 months
12 Months or More
Unrealized
value
104,457
(6,162)
4,171
(370)
108,628
15,774
(1,325)
5,059
(663)
20,833
976
14,553
(371)
3,003
(223)
17,556
14,750
26,892
(1,611)
1,926
(198)
28,818
978
(13)
4,208
(76)
5,186
183,358
(10,987)
18,367
(1,530)
201,725
Unrecognized
11,545
(237)
119
11,664
422
256
12,223
(254)
12,342
84,123
14,472
5,589
15,956
20,786
(194)
2,027
(104)
22,813
4,544
145,936
(1,474)
6,571
(188)
152,507
324
10
Changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2022 and 2021 are shown in the tables below. All amounts are net of tax (in thousands).
Unrealized Holding
Gains on
For the three months ended March 31, 2022
Securities
Beginning balance
Current period other comprehensive income (loss)
Ending balance
For the three months ended March 31, 2021
3,636
(151)
Current period other comprehensive income
(1,371)
149
2,265
(2)
3. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The following table summarizes the composition of our loan portfolio as of March 31, 2022 and December 31, 2021 (in thousands):
Loans secured by real estate:
Commercial real estate - owner occupied
404,957
387,703
Commercial real estate - non-owner occupied
613,282
588,000
Secured by farmland
7,527
8,612
Construction and land development
116,288
121,444
Residential 1-4 family
574,688
547,560
Multi-family residential
152,266
164,071
Home equity lines of credit
72,410
73,846
Total real estate loans
1,941,418
1,891,236
Commercial loans
335,537
301,980
Paycheck Protection Program loans
31,404
77,319
Consumer loans
77,383
60,996
Total Non-PCD loans
2,385,742
2,331,531
PCD loans
7,927
8,455
The accounting policy related to the allowance for credit losses is considered a critical policy given the level of estimation, judgment, and uncertainty in the levels of the allowance required to account for the inherent probable losses in the loan portfolio and the material effect such estimation, judgment, and uncertainty can have on the consolidated financial results.
Accrued Interest Receivable
Accrued interest receivable on loans totaled $10.0 million and $10.8 million at March 31, 2022 and December 31, 2021, respectively, and is included in other assets in the consolidated balance sheets.
11
Nonaccrual and Past Due Loans
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, we consider the borrower’s debt service capacity through the analysis of current financial information, if available, and/or current information with regards to our collateral position. Regulatory provisions would typically require the placement of a loan on nonaccrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on nonaccrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.
12
The following tables present the aging of the recorded investment in past due loans by class of loans as of March 31, 2022 and December 31, 2021 (in thousands):
30 - 59
60 - 89
90
Days
Loans Not
Past Due
or More
Loans
304
404,653
790
6,737
4,575
4,594
111,694
9,515
503
154
10,172
564,516
Multi- family residential
329
704
71,706
1,386
1,243
2,629
332,908
98
553
1,837
2,488
28,916
66
77
77,306
1,067
8,138
21,758
2,363,984
1,424
1,436
6,491
13,977
1,079
23,194
2,370,475
194
346
540
387,163
791
7,821
204
131
4,910
116,534
9,384
254
137
9,775
537,785
331
171
502
73,344
387
1,246
1,633
300,347
4,954
8,559
283
13,796
63,523
193
130
325
60,671
16,438
9,420
6,414
32,272
2,299,259
1,717
6,738
18,155
33,989
2,305,997
The amortized cost, by class, of loans and leases on nonaccrual status at March 31, 2022 and December 31, 2021, were as follows (in thousands):
Less Than
Nonaccrual With
90 Days
Nonaccrual
No Credit
Loans (1)
Loss Allowance (2)
830
811
4,607
572
726
4,226
247
576
454
1,697
724
20
6,321
7,184
13,505
12,527
8,620
14,941
842
836
34
4,609
411
548
4,301
253
424
476
1,722
745
16
18
6,131
7,169
13,300
12,315
1,729
8,898
15,029
We had $1.8 million and $0.3 million of PPP loans greater than 90 days past due and still accruing at March 31, 2022 and December 31, 2021, respectively.
14
The following table presents nonaccrual loans as of March 31, 2022 by class and year of origination (in thousands):
Revolving
Converted
2020
2019
2018
Prior
To Term
361
21
659
451
274
725
24
577
236
295
1,158
Total non-PCD nonaccruals
5,065
241
6,031
1,842
298
Total nonaccrual loans
7,467
Interest received on nonaccrual loans was $0.2 million and $0.05 million for the three months ended March 31, 2022 and 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 three months ended March 31, 2022, there were 10 TDR loans outstanding in the amount of $3.1 million primarily due to the economic impact of COVID-19 on certain of the Bank’s borrower’s. There have been no defaults of TDRs modified during the past twelve months.
15
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 March 31, 2022 or December 31, 2021.
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 presents weighted-average risk grades for all loans, by class and year of origination/renewal as of March 31, 2022 (in thousands):
Pass
18,786
62,589
18,223
35,051
28,082
227,050
3,758
6,887
400,426
Special Mention
1,252
Substandard
468
2,811
3,279
Doubtful
35,519
231,113
Weighted average risk grade
3.31
3.58
3.42
3.47
3.45
3.53
3.54
3.96
3.52
Commercial real estate - nonowner occupied
17,975
120,873
55,594
31,815
74,741
277,237
3,769
582,004
926
29,751
601
31,278
75,667
306,988
3.03
3.16
3.89
3.48
3.75
2.96
5.00
3.56
60
3,629
1,585
95
5,673
1,043
5,331
1,716
N/A
4.00
6.00
4.40
4.12
2.00
4.26
5,425
61,664
13,115
1,831
7,513
21,125
980
28
111,681
6,406
21,157
3.05
3.15
5.35
3.24
3.65
3.41
65,324
159,643
48,315
69,839
46,723
169,839
1,804
3,457
564,944
8,481
989
1,263
78,320
170,828
3.02
3.04
3.06
3.28
3.13
3.23
3.98
3.29
3.14
3,337
23,595
18,733
7,186
5,284
78,136
5,385
141,656
5,327
4,983
300
5,283
88,446
3.60
3.00
3.90
3.70
3.50
56
567
57
74
239
4,638
65,042
884
71,557
276
65,871
908
3.81
3.08
4.05
85,663
70,858
10,283
9,287
10,188
27,638
107,456
5,242
326,615
1,997
784
2,781
1,502
1,883
2,748
6,141
10,291
11,284
11,690
29,521
110,988
3.38
3.97
3.77
3.74
3.49
3.95
26,803
4,581
31,384
26,823
2.73
3.92
17
2017
33,232
32,034
2,122
840
782
5,517
2,767
77,294
787
5,601
3.94
3.99
4.01
4.02
PCD
4,933
30
4,963
1,369
1,595
7,897
4.43
229,798
558,950
171,091
171,465
175,985
871,520
197,068
17,792
3.33
3.55
3.40
3.37
3.88
3.44
Revolving loans that converted to term during 2022 were as follows (in thousands):
257
746
1,279
The amount of foreclosed residential real estate property held at March 31, 2022 and December 31, 2021 was $0.8 million and $0.9 million, respectively. There were no recorded investments in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure at March 31, 2022 and December 31, 2021.
Allowance For Credit Losses – Loans
The allowance for credit losses on loans is a contra-asset valuation account, calculated in accordance with ASC 326 that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. The amount of the allowance represents management's best estimate of current expected credit losses on loans considering available information, from internal and external sources, relevant to assessing collectability over the loans' contractual terms, adjusted for expected prepayments when appropriate.
In calculating the allowance for credit losses, most loans are segmented into pools based upon similar characteristics and risk profiles. For allowance modeling purposes, our loan pools include (i) commercial real estate - owner occupied, (ii) commercial real estate - non-owner occupied, (iii) construction and land development, (iv) commercial, (v) agricultural loans, (vi) residential 1-4 family and (vii) consumer loans. We periodically reassess each pool to ensure the loans within the pool continue to share similar characteristics and risk profiles and to determine whether further segmentation is necessary. For each loan pool, we measure expected credit losses over the life of each loan utilizing a combination of inputs: (i) probability of default, (ii) probability of attrition, (iii) loss given default and (iv) exposure at default. Internal data is supplemented by, but not replaced by, peer data when required, primarily to determine the probability of default input. The various pool-specific inputs may be adjusted for current macroeconomic assumptions. Significant macroeconomic variables utilized in our allowance models include, among other things, (i) VA Gross Domestic Product, (ii) VA House Price Index, and (iii) VA unemployment rates.
Management qualitatively adjusts allowance model results for risk factors that are not considered within our quantitative modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools.
Qualitative factor (“Q-Factor”) adjustments are driven by key risk indicators that management tracks on a pool-by-pool basis.
In some cases, management may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation.
The following tables present details of the allowance for credit losses on loans segregated by loan portfolio segment as of March 31, 2022 and December 31, 2021, 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
3,875
7,845
556
3,228
1,849
275
3,083
1,025
21,745
Q-factor and other qualitative adjustments
1,068
40
473
660
440
101
776
3,856
Specific allocations
1,607
2,171
3,778
4,173
8,913
49
1,029
3,888
2,289
376
5,466
29,379
4,281
8,020
3,012
1,885
273
2,154
786
20,960
281
1,008
47
458
1,395
164
1,276
5,205
658
2,281
2,940
4,562
9,028
998
3,588
3,280
437
4,088
29,105
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 March 31, 2022 and 2021 is summarized below (in thousands):
Home Equity
Unallocated
Allowance for credit losses:
Provision (recovery)
(389)
(115)
31
(991)
1,208
(110)
Charge offs
(14)
(61)
Recoveries
170
March 31, 2021
6,699
11,426
104
1,815
9,579
1,412
901
1,498
517
2,394
36,345
(2,555)
2,378
1,251
(2,810)
(166)
760
(133)
(28)
(74)
(36)
4,144
13,804
111
3,066
6,770
825
2,192
369
2,366
34,893
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 March 31, 2022 and December 31, 2021 (in thousands):
Loan
Specific
Balance (1)
Allocations
3,291
18,256
681
536
541
10,610
5,378
5,235
3,688
Total non-PCD loans
24,923
36,417
32,850
44,872
4. FAIR VALUE
ASC 820 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability
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, collateralized loan obligations 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, all of Primis’ available-for-sale debt investment securities are considered to be Level 2 investment securities.
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
(dollars in thousands)
(Level 1)
(Level 2)
(Level 3)
Available-for-sale securities
Assets and Liabilities Measured on a Non-recurring Basis:
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.
Collateral-dependent loans are measured at fair value on a non-recurring basis and are evaluated individually. These collateral-dependent loans are deemed to be at fair value if there is an associated allowance for credit losses or if a charge-off has been recorded in the previous 12 months. Collateral values are determined using appraisals or other third-party value estimates of the subject property discounted based on estimated selling costs, generally between 5% and 10%, and immaterial adjustments for other external factors that may impact the marketability of the collateral. The weighted average discount for estimated selling costs applied was 6%.
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 March 31, 2022 and December 31, 2021. Fair value is classified as Level 3 in the fair value hierarchy. OREO is further evaluated quarterly for any additional impairment. At March 31, 2022 and December 31, 2021, the total amount of OREO was $1.0 million and $1.2 million, respectively.
Assets measured at fair value on a non-recurring basis are summarized below:
Collateral dependent loans
30,868
Other real estate owned:
266
775
44,331
897
22
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
Amount
Financial assets:
Cash and cash equivalents
Level 1
Securities available-for-sale
Level 2
Securities held-to-maturity
Stock in Federal Reserve Bank and Federal Home Loan Bank
Level 3
2,320,024
2,278,456
Financial liabilities:
Demand deposits and NOW accounts
1,289,917
1,380,020
Money market and savings accounts
1,056,871
1,022,621
340,949
362,902
Securities sold under agreements to repurchase
Junior subordinated debt
10,692
10,367
Senior subordinated notes
89,522
91,141
Carrying amount is the estimated fair value for cash and cash equivalents (including federal funds sold), accrued interest receivable and payable, demand deposits, savings accounts, money market accounts and FHLB advances and securities sold under agreements to repurchase.
Fair value of long-term debt is based on current rates for similar financing. 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.
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 March 31, 2022 and December 31, 2021, the Company had operating lease liabilities totaling $5.9 million and $6.5 million, respectively, and right-of-use assets totaling $5.3 million and $5.9 million, respectively, related to these leases. Operating lease liabilities and right-of-use assets are reflected in our consolidated balance sheets. We do not currently have any financing leases. For the three months ended March 31, 2022 and 2021, our net operating lease cost was $0.6 million and was reflected in occupancy expenses on our consolidated income statements.
The following table presents other information related to our operating leases:
(in thousands except for percent and period data)
Other information:
Weighted-average remaining lease term - operating leases, in years
4.4
4.7
Weighted-average discount rate - operating leases
2.5
%
The following table summarizes the maturity of remaining lease liabilities:
As of
Lease payments due:
1,786
2023
1,700
2024
949
2025
421
2026
357
Thereafter
1,080
Total lease payments
6,293
Less: imputed interest
(396)
Lease liabilities
As of March 31, 2022 and December 31, 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. 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 March 31, 2022 and December 31, 2021 was $11.2 million and $10.0 million, respectively.
At March 31, 2022 and December 31, 2021, we have pledged callable agency securities, residential government-sponsored mortgage-backed securities and collateralized mortgage obligations with a carrying value of $19.4 million and $21.7 million, respectively, to customers who require collateral for overnight repurchase agreements and deposits.
7. 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. At March 31, 2022 and December 31, 2021, there was $10.3 million outstanding, net of approximately $0.6 million of debt issuance costs. These securities pay cumulative cash distributions quarterly at a variable rate per annum, reset quarterly, equal to the three-month LIBOR plus 2.95%. As of March 31, 2022 and December 31, 2021, the interest rate was 3.86% and 3.17%, respectively. The dividends paid to holders of these 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 March 31, 2022, all of the trust preferred securities qualified as Tier 1 capital.
On January 20, 2017, Primis completed the sale of $27.0 million of its fixed-to-floating rate senior Subordinated Notes due 2027. These notes initially beared interest at 5.875% per annum until January 31, 2022; interest is currently payable at an annual floating rate equal to three-month LIBOR plus a spread of 3.95% until maturity or early redemption. At March 31, 2022, all of these notes qualified as Tier 2 capital.
In 2017, the Company assumed a Senior Subordinated Note Purchase Agreement, dated April 22, 2015, entered into with certain institutional accredited investors, pursuant to which $20.0 million in aggregate principal amount of its 6.50% Fixed-to-Floating Rate Subordinated Notes due 2025 was sold to the investors. On February 1, 2021, the Company redeemed all of these notes.
On August 25, 2020, Primis completed the sale of $60.0 million of its fixed-to-floating rate Subordinated Notes due 2030. These notes will bear interest at an initial rate of 5.40% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2021. From and including September 1, 2025 to, but excluding the maturity date or the date of earlier redemption (the “floating rate period”), the interest rate will reset quarterly to an annual interest rate equal to the Benchmark rate, which is expected to be three-month Term Secured Overnight Financing Rate, plus 531 basis points, for each quarterly interest period during the floating rate period, payable quarterly in arrears on March 1, June 1, September 1, and December 1 of each year, commencing on December 1, 2025. Notwithstanding the foregoing, in the event that the Benchmark rate is less than zero, the Benchmark rate shall be deemed to be zero. At March 31, 2022, all of these notes qualified as Tier 2 capital.
At March 31, 2022 and December 31, 2021, the remaining unamortized debt issuance costs related to the senior Subordinated Notes totaled $1.6 million and $1.7 million, respectively.
8. STOCK-BASED COMPENSATION
The 2017 Equity Compensation Plan (the “2017 Plan”) has a maximum number of 750,000 shares reserved for issuance. The purpose of the 2017 Plan is to promote the success of the Company by providing greater incentives to employees, non-employee directors, consultants and advisors to associate their personal 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 stock option activity for the three months ended March 31, 2022 follows:
Weighted
Average
Aggregate
Remaining
Intrinsic
Exercise
Contractual
Shares
Price
Term
(in thousands)
Options outstanding, beginning of period
283,800
10.98
2.2
1,153
Expired
(2,000)
6.24
Options outstanding, end of period
281,800
11.01
1.9
834
Exercisable at end of period
There was no stock-based compensation expense associated with stock options for the three months ended March 31, 2022 and 2021. As of March 31, 2022, we do not have any unrecognized compensation expense associated with the stock options.
A summary of time vested restricted stock awards for 2022 follows:
Grant-Date
Per Share
Unvested restricted stock outstanding, beginning of period
98,050
14.58
3.3
Granted
48,658
13.85
Vested
(67,008)
14.19
Unvested restricted stock outstanding, end of period
79,700
14.15
3.1
Stock-based compensation expense for time vested restricted stock awards totaled $0.8 million and $0.5 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, unrecognized compensation expense associated with restricted stock awards was $1.0 million, which is expected to be recognized over a weighted average period of 3.1 years.
A summary of performance-based restricted stock units (the “Units”) for 2022 follows:
Unvested Units outstanding, beginning of period
59,335
15.00
4.0
Forfeited
Unvested Units outstanding, end of period
3.8
In September 2021, the Company issued 59,335 non-transferrable Units convertible, on a one-on-one basis, into shares of stock to eligible employees, granted pursuant to and subject to the provisions of the 2017 Plan.
These Units are subject to service and performance conditions. These Units vest based on the achievement of both conditions. Achievement of the performance condition will be determined at the end of the five-year performance period (the “Performance Period”) by evaluating the: 1) Company’s adjusted earnings per share compound annual growth measured for the Performance Period and 2) performance factor achieved. Payouts between performance levels will be determined based on straight line interpolation.
The Company did not recognize any stock-based compensation expense associated with these Units for the three months ended March 31, 2022 because it is not probable that these Units will vest. The grant date fair value of these Units was $15.00 per Unit. The potential unrecognized compensation expense associated with these Units is $1.3 million at March 31, 2022.
9. 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 $12.7 million and $13.1 million as of March 31, 2022 and December 31, 2021, 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 3 - Loans and Allowance for Credit Losses, as if such commitments were funded. The allowance for credit losses on off-balance-sheet credit exposures is reflected in other liabilities in our consolidated balance sheets.
The following table details activity in the allowance for credit losses on off-balance-sheet credit exposures:
Balance as of January 1
977
Credit loss expense
260
711
Balance as of March 31,
1,451
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 March 31, 2022 and December 31, 2021, we had unfunded lines of credit and undisbursed construction loan funds totaling $396.7 million and $411.0 million, respectively. Virtually all of our unfunded lines of credit and undisbursed construction loan funds are variable rate.
Primis also had commitments on the subscription agreements entered into for the investments in non-marketable equity securities of $4.6 million and $3.5 million at March 31, 2022 and December 31, 2021, respectively. These commitments on subscription agreements are reflected in other liabilities in our consolidated balance sheets.
27
10. 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)
Basic EPS from continuing operations
24,504
Effect of dilutive stock options and unvested restricted stock
159
Diluted EPS from continuing operations
24,663
Basic EPS from discontinued operation
Diluted EPS from discontinued operation
24,350
(0.01)
24,509
The Company did not have any anti-dilutive options as of March 31, 2022 and 2021.
11. SUBSEQUENT EVENT
On April 28, 2022, Primis Bank entered into a definitive agreement to acquire 100% of the issued and outstanding capital stock of SeaTrust Mortgage Company (“SeaTrust”), a North Carolina corporation. Primis anticipates closing the acquisition of SeaTrust in the second quarter of 2022, subject to the satisfaction or waiver of certain closing conditions.
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, 2021. Results of operations for the three months ended March 31, 2022 are not necessarily indicative of results that may be attained for any other period. The emphasis of this discussion will be on the three months ended March 31, 2022 compared to the three months ended March 31, 2021 for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be the balances as of March 31, 2022 compared to December 31, 2021. This discussion and analysis contains statements that may be considered “forward-looking statements” as defined in, and subject to the protections of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. See the following section for additional information regarding forward-looking statements.
FORWARD-LOOKING STATEMENTS
Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. The words “believe,” “may,” “forecast,” “should,” “anticipate,” “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, 2021, 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,
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.
CRITICAL ACCOUNTING POLICIES
We follow accounting and reporting policies that conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.
We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements.
Accounting policies related to the allowance for credit losses on financial instruments including loans and off-balance-sheet credit exposures are considered to be critical as these policies involve considerable subjective judgment and estimation by management. In the case of loans, the allowance for credit losses is a contra-asset valuation account, calculated in accordance with Accounting Standards Codification (“ASC”) 326, which is deducted from the amortized cost basis of loans to present the net amount expected to be collected. In the case of off-balance-sheet credit exposures, the allowance for credit losses is a liability account, calculated in accordance with ASC 326. The allowance is reported as a component of other liabilities in our consolidated balance sheets. Adjustments to the allowance are reported in our income statement as a component of other expenses.
The amount of each allowance account represents management's best estimate of current expected credit losses on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. 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. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. Refer to the 2021 Form 10-K for additional information regarding critical accounting policies.
Current Economic Environment
During the first quarter of 2022, the U.S. economy contracted for the first time since the second quarter 2020, as Gross Domestic Product (GDP) declined 1.4% on an annualized basis. The decline in real GDP reflected a decline in Federal national defense spending. However, consumer spending, a primary driver of economic activity, grew 2.7%, slightly above the fourth quarter 2021 rate of 2.5%. According to the U.S. Bureau of Labor and Statistics, the rate of unemployment again declined, falling to 3.6% in March 2022 from 3.9% in December 2021. At present, the epidemiological risks of COVID-19 have lessened and most of the social restrictions in response to those risks have been removed. However, lingering and pervasive economic effects of the pandemic remain, including supply chain backlogs, labor shortages and increased input costs, resulting in escalating inflationary conditions. Further, the recent military conflict between Russia and Ukraine has prompted concern over global commodity supply, intensifying inflationary pressures. In response to these conditions, in March 2022, the Federal Reserve approved the first interest rate increase in over three years. The 25-basis point interest rate increase is expected to be the first of potentially several increases in the next year.
Our markets continued to show moderate signs of improvement in the quarter. Despite the lingering economic effects of the COVID-19 pandemic and the emergence of new risks stemming from geopolitical conflict, overall credit loss outlook on our portfolio has not changed significantly.
The effect of rising inflation and the Federal Reserve's actions to counter those effects are likely to reduce economic growth. While the operating environment remains challenging, we expect the planned interest rate increases will contribute favorably to our net interest margin and income, and we do not expect the rate increases to significantly impact core loan growth guidance. We continue to focus on effectively managing our asset/liability mix to maximize resources.
Given the economic volatility experienced over the past two years, the remaining economic effects of the pandemic and the risks and uncertainties surrounding geopolitical unrest, it is not possible to accurately predict the extent, severity or duration that these conditions may have upon our results of operation. We continuously seek to monitor and anticipate developments as they relate to our business.
OVERVIEW
Primis Financial Corp. (“Primis,” “we,” “us,” “our” or the “Company”) is the bank holding company for Primis Bank (“Primis Bank” or the “Bank”), a Virginia state-chartered bank which commenced operations on April 14, 2005. Primis Bank provides a range of financial services to individuals and small and medium-sized businesses. At March 31, 2022, Primis Bank had forty full-service branches in Virginia and Maryland and also provides services to customers through certain online and mobile applications. Thirty-five full-service retail branches are in Virginia and five full-service retail branches are in Maryland. The Company is headquartered in McLean, Virginia and has administrative offices in Warrenton, Virginia and Glen Allen, Virginia. Our deposits are insured, up to applicable limits, by the Federal Deposit Insurance Corporation (the “FDIC”).
FINANCIAL HIGHLIGHTS
RESULTS OF OPERATIONS
Net Income
Three-Month Comparison. Net income from continuing operations for the three months ended March 31, 2022 was $4.6 million, or $0.19 basic and diluted earnings per share, compared to $8.4 million, or $0.35 basic and $0.34 diluted earnings per share, for the three months ended March 31, 2021. The 45% decrease in net income during the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily driven by lower net interest income in the current year. However, net interest income, excluding the effect of PPP fees, increased $2.5 million during the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The decrease in net income was also attributable to provision for credit losses in 2022 compared to a recovery of credit losses in 2021 primarily as a result of robust loan growth and a slightly weaker economic outlook due to global uncertainty.
Net income from discontinued operation for the three months ended March 31, 2022 was zero, or zero basic and diluted earnings per share, compared to net income from discontinued operation of $1.0 million, or $0.04 basic and diluted earnings per share, for the three months ended March 31, 2021. The decline in net income from discontinued operation is related to the closing of the STM transaction in 2021, as discussed in Note 1 - Accounting Policies.
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 $22.9 million for the three months ended March 31, 2022, compared to $25.0 million for the three months ended March 31, 2021. Primis’ net interest margin for the three months ended March 31, 2022 was 2.96%, compared to 3.41% for the three months ended March 31, 2021. Net interest margin was impacted heavily by the origination of PPP loans in 2021 and 2020. Net PPP fee income recognized was $0.3 million for the three months ended March 31, 2022 versus $5.0 million for the three months ended March 31, 2021, a material decline from the first quarter of 2021. Net interest margin excluding the effects of PPP loans was 2.96% for the three months ended March 31, 2022, compared to 2.99% for the three months ended March 31, 2021. Total income on interest-earning assets was $26.6 million and $30.3 million for the three months ended March 31, 2022 and 2021, respectively. The yield on average interest-earning assets was 3.44% and 4.14% for the three months ended March 31, 2022 and 2021, respectively. The decrease was primarily driven by market conditions. The cost of average interest-bearing deposits decreased 30 basis points to 0.44% for the three months ended March 31, 2022, compared to 0.74% cost on average interest-bearing deposits for the three months ended March 31, 2021. Interest and fees on loans totaled $24.8 million and $29.0 million for the three months ended March 31, 2022 and 2021, respectively. Average loans during the three months ended March 31, 2022 were $2.36 billion compared to $2.43 billion during the three months ended March 31, 2021.
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The following table details average balances of interest-earning assets and interest-bearing liabilities, the amount of interest earned/paid on such assets and liabilities, and the yield/rate for the periods indicated:
Average Balance Sheets and Net Interest
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)
2,360,782
4.25
2,436,713
4.82
Investment securities
302,431
1,430
1.92
193,364
1,042
2.19
Other earning assets
466,952
339,480
0.37
Total earning assets
3,130,165
2,969,557
4.14
Allowance for credit losses
(29,238)
(36,330)
Investments in mortgage affiliate - held for sale
12,629
Total non-earning assets
255,558
267,438
3,356,485
3,213,294
Liabilities and stockholders' equity
Interest-bearing liabilities:
NOW and other demand accounts
817,430
666
0.33
773,768
1,093
0.57
809,460
858
0.43
653,443
1,085
0.67
224,716
0.27
192,252
142
0.30
350,368
700
0.81
465,944
1,496
1.30
2,201,974
0.44
2,085,407
0.74
Borrowings
171,293
1,358
3.22
218,427
1,537
2.85
Total interest-bearing liabilities
2,373,267
0.64
2,303,834
0.94
Noninterest-bearing liabilities:
Demand deposits
545,530
477,812
23,057
33,510
2,941,854
2,815,156
Stockholders' equity
414,631
395,138
3,210,294
Interest rate spread
2.81
3.20
Net interest margin
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 and external factors affecting loan collectability. Our allowance for credit losses is calculated by segmenting the loan portfolio by loan type and applying risk factors to each segment. The risk factors are determined by considering historical loss data, peer data, as well as applying management’s judgment.
The Company recorded a provision for credit losses for the three months ended March 31, 2022 of $0.1 million compared to a recovery of credit losses for the three months ended March 31, 2021 of $1.4 million, primarily as a result of robust loan growth and a slightly weaker economic outlook due to global uncertainty. We had charge-offs totaling $0.1 million during three months ended March 31, 2022 and 2021. There were recoveries totaling $0.2 million during three months ended March 31, 2022 and $30 thousand during three months ended March 31, 2021.
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 March 31, 2022 and 2021:
Change
(313)
65
(259)
Noninterest income decreased 11.0% to $2.1 million for the three months ended March 31, 2022, compared to $2.3 million for the three months ended March 31, 2021. The decrease in noninterest income was primarily driven by a decrease of $0.3 million from the year-ago period in income on account maintenance and deposit service fees primarily due to reduction in income from new debit card contracts.
Noninterest Expense
The following table presents the major categories of noninterest expense for the three months ended March 31, 2022 and 2021:
(82)
138
691
(140)
Net (gain) loss on other real estate owned
(40)
(141)
964
Noninterest expenses were $19.0 million during the three months ended March 31, 2022, compared to $18.0 million during the three months ended March 31, 2021. The 5.3% increase in noninterest expenses was primarily due to a $0.7 million increase in data processing expense in 2022 driven by higher technology expenses in the current year. The increase in noninterest expense during the three months ended March 31, 2022 was also attributable to a $0.3 million increase in employee compensation and benefits expense. Occupancy and furniture and equipment expenses increased $0.2 million during the three months ended March 31, 2022 compared to the three months ended March 31, 2021. Virginia franchise tax expense increased $0.1 million in the first quarter of 2022 compared to the first quarter of 2021. Other expenses decreased in the first quarter of 2022 compared to first quarter of 2021, largely driven by a $0.2 million decrease in the reserve for unfunded commitments.
FINANCIAL CONDITION
Balance Sheet Overview
Total assets were $3.22 billion as of March 31, 2022 and $3.40 billion as of December 31, 2021. Total loans increased 2.3%, from $2.34 billion at December 31, 2021 to $2.39 billion at March 31, 2022. Excluding PPP loans, loans outstanding increased $99.6 million, or 4.4%, since December 31, 2021. Total deposits were $2.69 billion at March 31, 2022, compared to $2.76 billion at December 31, 2021 and total equity was $404.2 million and $411.9 million at March 31, 2022 and December 31, 2021, respectively.
Equity balances were reduced by $10.6 million from December 31, 2021 to March 31, 2022 because of unrealized mark-to-market adjustments on the Company’s available-for-sale securities portfolio due to dramatic increases in market interest rates during the quarter. The Company has the wherewithal to hold these securities until maturity or recovery of the value and does not anticipate realizing any losses on the investments.
Total loans were $2.39 billion and $2.34 billion at March 31, 2022 and December 31, 2021, respectively. PPP loans totaled $31.4 million at March 31, 2022 and $77.0 million at December 31, 2021, respectively. Excluding PPP loans, loans outstanding increased $99.6 million, or 4.4%, since December 31, 2021.
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At March 31, 2022 and December 31, 2021, the Company had no loans on COVID related deferral.
As of March 31, 2022 and December 31, 2021, 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.
The composition of our loan portfolio consisted of the following at March 31, 2022 and December 31, 2021 (in thousands):
Percent
16.9
16.6
25.6
25.1
0.3
0.4
4.9
5.2
24.0
23.4
6.4
7.0
3.0
3.2
81.1
80.8
14.0
12.9
Paycheck protection program loans
1.3
2.6
99.7
99.6
100.0
The following table sets forth the contractual maturity ranges of our loan portfolio and the amount of those loans with fixed and floating interest rates in each maturity range as of March 31, 2022 (in thousands):
After 1 Year
After 5 Years
Through 5 Years
Through 15 Years
After 15 Years
One Year
Fixed
Floating
or Less
35,650
106,850
13,267
66,414
98,511
1,731
82,534
230,793
8,211
50,341
41,216
1,432
251,768
1,792
543
1,581
1,521
54,129
32,265
21,808
39
4,392
2,955
19,969
47,750
5,683
27,147
51,823
81,883
340,433
13,465
60,717
18,312
8,626
19,307
31,839
11,883
1,290
15,667
8,973
34,597
166,707
481,457
82,948
153,110
225,803
85,746
745,647
129,182
51,713
35,558
86,379
26,562
3,350
2,793
866
30,538
14,323
22,946
597
30,712
6,474
2,325
311,078
586,654
119,103
270,201
258,839
91,421
748,446
5,469
303
1,597
412
146
316,547
586,957
260,436
91,833
748,592
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Asset Quality
Asset quality remained solid during the first quarter of 2022. 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 different variants, as well as new risks emerging from geopolitical conflict, continue 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 2021, the Company saw 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, interest rate increases and inflation.
The following table presents a comparison of nonperforming assets as of March 31, 2022 and December 31, 2021 (in thousands):
Nonaccrual loans
Loans past due 90 days and accruing interest
1,817
Total nonperforming loans
16,758
15,312
Total nonperforming assets
17,799
16,475
Troubled debt restructurings
3,103
3,401
SBA guaranteed amounts included in nonperforming loans
2,651
1,388
Allowance for credit losses to total loans
1.23
1.24
Allowance for credit losses to nonaccrual loans
196.63
193.66
Allowance for credit losses to nonperforming loans
175.31
190.09
Nonaccrual to total loans
0.62
Nonperforming assets excluding SBA guaranteed loans to total assets
0.47
OREO at March 31, 2022 was $1.0 million, compared to $1.2 million at December 31, 2021. The decrease was primarily driven by sale of properties during 2022.
Nonaccrual loans were $14.9 million (excluding $2.7 million of loans fully covered by SBA guarantees) at March 31, 2022, compared to $15.0 million (excluding $1.1 million of loans fully covered by SBA guarantees) at December 31, 2021, a decrease of 0.6%. The ratio of nonperforming assets (excluding the SBA guaranteed loans) to total assets was 0.47% and 0.44% at March 31, 2022 and December 31, 2021, respectively.
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At March 31, 2022, our total substandard loans totaled $23.6 million. Included in the total substandard loans were SBA guarantees of $1.0 million. Special mention loans totaled $51.9 million at March 31, 2022.
As of March 31, 2022, there were ten TDR loans in the amount of $3.1 million. 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 $287.8 million at March 31, 2022, a decrease of 2.2% from $294.3 million at December 31, 2021.
Investment securities in our portfolio as of March 31, 2022 were as follows:
The following table sets forth a summary of the investment securities portfolio as of the dates indicated. Available-for-sale investment securities are reported at fair value, and held-to-maturity investment securities are reported at amortized cost (in thousands).
Available-for-sale investment securities:
Held-to-maturity investment securities:
We recognized no credit impairment charges related to credit losses during the three months ended March 31, 2022 and 2021, 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. If our level of core deposits are not sufficient to fully fund our lending activities, we have access to funding from additional sources, including borrowing from the Federal Home Loan Bank of Atlanta, institutional certificates of deposit and the sale of available-for-sale investment securities. In addition, we maintain federal funds lines of credit with two 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.
At March 31, 2022, we had $396.7 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 $286.4 million as of March 31, 2022. Management anticipates that funding requirements for these commitments can be met from the normal sources of funds.
As of March 31, 2022, Primis was not aware of any known trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity. As of March 31, 2022, Primis has no material commitments or long-term debt for capital expenditures.
Capital Resources
Capital management consists of providing equity to support both current and future operations. Primis Financial Corp. and its subsidiary bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (“PCA”), we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. At March 31, 2022 and 2021, 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 March 31, 2022, 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
9.77
9.41
Common equity tier 1 capital ratio
4.50
12.64
13.09
Tier 1 risk-based capital ratio
13.06
13.52
Total risk-based capital ratio
8.00
17.66
18.52
Primis Bank
11.65
11.14
7.00
6.50
15.70
16.18
8.50
10.50
10.00
16.95
17.43
Primis Financial Corp. and Primis Bank are required to meet minimum capital requirements set forth by regulatory authorities. Bank regulatory agencies have approved regulatory capital guidelines (“Basel III”) aimed at strengthening existing capital requirements for banking organizations. The Basel III Capital Rules require Primis Financial Corp. and Primis Bank to maintain (i) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer”, (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer, (iii) a minimum ratio of Total capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer and (iv) a minimum leverage ratio of 4.0%. Failure to meet minimum capital requirements may result in certain actions by regulators which could have a direct material effect on the consolidated financial statements.
Primis Financial Corp. and Primis Bank remain well-capitalized under Basel III capital requirements. Primis Bank had a capital conservation buffer of 8.95% at March 31, 2022, which exceeded the 2.50% minimum requirement below which the regulators may impose limits on distributions.
Primis Bank’s capital position is consistent with being well- capitalized under the regulatory framework for prompt corrective action.
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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 including estimated loan prepayment rates, reinvestment rates and deposit decay rates.
The following tables are based on an analysis of our interest rate risk as measured by the estimated change in EVE resulting from instantaneous and sustained parallel shifts in the yield curve (plus 400 basis points or minus 100 basis points, measured in 100 basis point increments) as of March 31, 2022 and December 31, 2021. All changes are within our Asset/Liability Risk Management Policy guidelines.
Sensitivity of Economic Value of Equity
As of March 31, 2022
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
489,674
(17,855)
(3.52)
14.37
118.89
Up 300
496,399
(11,130)
(2.19)
14.57
120.52
Up 200
502,197
(5,332)
(1.05)
14.74
121.93
Up 100
510,494
2,965
0.58
14.98
123.94
Base
507,529
14.90
123.22
Down 100
462,426
(45,103)
(8.89)
13.57
112.27
As of December 31, 2021
419,520
10,937
2.68
12.31
101.85
419,238
10,655
2.61
12.30
101.79
417,156
8,573
2.10
12.24
101.28
418,107
9,524
2.33
12.27
101.51
408,583
11.99
99.20
341,573
(67,010)
(16.40)
10.02
82.93
43
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 March 31, 2022 and December 31, 2021 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 March 31, 2022 and December 31, 2021.
Sensitivity of Net Interest Income
Adjusted Net Interest Income
93,941
(937)
93,961
(917)
93,952
(926)
94,625
(253)
94,878
91,674
(3,204)
88,531
2,341
87,863
1,673
87,127
937
86,713
523
86,190
82,670
(3,520)
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in EVE and NII sensitivity requires the making of certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. Accordingly, although the EVE tables and NII tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net worth and NII. Sensitivity of EVE and NII are modeled using different assumptions and approaches.
ITEM 4 – CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this quarterly report on Form 10-Q, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d -15(e) under the Securities Exchange Act of 1934) utilizing the framework established in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that these controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control over Financial Reporting. 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 March 31, 2022.
ITEM 1A – RISK FACTORS
The Company disclosed risk factors in its Annual Report on Form 10-K for the year ended December 31, 2021. 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.
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
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)
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)
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.
The following materials from Primis Financial Corp. Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, 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
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)
May 10, 2022
/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