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, 2023
Commission File No. 001-33037
PRIMIS FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Virginia
20-1417448
(State or other jurisdiction
(I.R.S. Employer Identification No.)
of incorporation or organization)
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, 2023, there were 24,685,064 shares of common stock, $0.01 par value, outstanding.
March 31, 2023
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022
2
Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three months ended March 31, 2023 and 2022
3
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2023 and 2022
4
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022
5
Notes to Condensed Unaudited Consolidated Financial Statements
6
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
45
Item 4 – Controls and Procedures
47
PART II - OTHER INFORMATION
Item 1 – Legal Proceedings
Item 1A – Risk Factors
48
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
49
Signatures
51
PRIMIS FINANCIAL CORP.CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
March 31,
December 31,
2023
2022
ASSETS
(unaudited)
Cash and cash equivalents:
Cash and due from financial institutions
$
7,078
6,868
Interest-bearing deposits in other financial institutions
600,047
70,991
Total cash and cash equivalents
607,125
77,859
Securities available-for-sale, at fair value
231,468
236,315
Securities held-to-maturity, at amortized cost (fair value of $12,230 and $12,449, respectively)
13,115
13,520
Loans held for sale, at fair value
42,011
27,626
Loans held for investment
3,043,732
2,948,836
Less: allowance for credit losses
(35,727)
(34,544)
Net loans
3,008,005
2,914,292
Stock in Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB)
12,083
25,815
Bank premises and equipment, net
25,136
25,257
Assets held for sale
3,115
Operating lease right-of-use assets
9,352
5,335
Goodwill
104,609
Intangible assets, net
2,930
3,254
Bank-owned life insurance
67,591
67,201
Deferred tax assets, net
18,825
18,289
Other assets
60,041
49,050
Total assets
4,205,406
3,571,537
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits
497,531
582,556
Interest-bearing deposits:
NOW accounts
835,348
617,687
Money market accounts
865,115
811,365
Savings accounts
971,439
245,713
Time deposits
498,564
465,057
Total interest-bearing deposits
3,170,466
2,139,822
Total deposits
3,667,997
2,722,378
Securities sold under agreements to repurchase - short term
4,346
6,445
FHLB advances
—
325,000
Junior subordinated debt - long term
9,794
9,781
Senior subordinated notes - long term
85,588
85,531
Operating lease liabilities
9,799
5,767
Other liabilities
27,617
22,232
Total liabilities
3,805,141
3,177,134
Commitments and contingencies (See Note 8)
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 5,000,000 shares; no shares issued and outstanding
Common stock, $0.01 par value. Authorized 45,000,000 shares; 24,685,064 and 24,680,097 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively
246
Additional paid in capital
312,903
312,722
Retained earnings
110,591
107,285
Accumulated other comprehensive loss
(23,475)
(25,850)
Total stockholders' equity
400,265
394,403
Total liabilities and stockholders' equity
See accompanying notes to unaudited condensed consolidated financial statements.
PRIMIS FINANCIAL CORP.CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except per share amounts) (Unaudited)
For the Three Months Ended March 31,
Interest and dividend income:
Interest and fees on loans
41,351
24,749
Interest and dividends on taxable securities
1,483
1,325
Interest and dividends on tax exempt securities
101
105
Interest and dividends on other earning assets
4,224
406
Total interest and dividend income
47,159
26,585
Interest expense:
Interest on deposits
15,044
2,373
Interest on other borrowings
3,705
1,358
Total interest expense
18,749
3,731
Net interest income
28,410
22,854
Provision for credit losses
5,187
99
Net interest income after provision for credit losses
23,223
22,755
Noninterest income:
Account maintenance and deposit service fees
1,216
1,351
Income from bank-owned life insurance
420
375
Mortgage banking income
4,315
Gain on sale of loans
478
Credit enhancement income
4,886
Other noninterest income
217
364
Total noninterest income
11,532
2,090
Noninterest expenses:
Salaries and benefits
15,028
9,625
Occupancy expenses
1,445
1,457
Furniture and equipment expenses
1,577
1,100
Amortization of intangible assets
317
341
Virginia franchise tax expense
849
813
Data processing expense
2,251
1,490
Marketing expense
569
465
Telephone and communication expense
377
382
Net gain on other real estate owned
(59)
Professional fees
862
1,094
Credit enhancement costs
873
Other operating expenses
3,249
2,279
Total noninterest expenses
27,397
18,987
Income before income taxes
7,358
5,858
Income tax expense
1,583
1,265
Net income
5,775
4,593
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale securities
3,006
(13,376)
Tax (benefit) expense
631
(2,809)
Other comprehensive income (loss)
2,375
(10,567)
Comprehensive income (loss)
8,150
(5,974)
Earnings per share, basic
0.23
0.19
Earnings per share, diluted
PRIMIS FINANCIAL CORP.CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITYFOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022
For the Three Months Ended March 31, 2023
Accumulated
Additional
Other
Common Stock
Paid in
Retained
Comprehensive
Shares
Amount
Capital
Earnings
Income (loss)
Total
Balance December 31, 2022
24,680,097
Changes in other comprehensive income on investment securities (net of tax expense, $631)
Dividends on common stock ($0.10 per share)
(2,469)
Issuances of common stock
8,000
Shares retired to unallocated
(1,033)
Stock option exercises
85
Restricted stock forfeited
(2,000)
Repurchase of restricted stock
(12)
Stock-based compensation expense
108
Balance - March 31, 2023
24,685,064
For the Three Months Ended March 31, 2022
Income (Loss)
Balance December 31, 2021
24,574,619
245
311,127
99,397
1,112
411,881
Changes in other comprehensive loss on investment securities (net of tax benefit, $2,809)
(2,457)
(538)
Restricted stock granted
1,500
(6)
751
Shares issued in lieu of bonus
47,158
Balance - March 31, 2022
24,622,739
311,872
101,533
(9,455)
404,195
PRIMIS FINANCIAL CORP.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022
Operating activities:
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation and amortization
2,138
1,596
Net amortization (accretion) of premiums and discounts
(794)
166
Origination of loans held for sale
(123,165)
Proceeds from sale of loans held for sale
107,749
Net gains on mortgage banking
(4,315)
Net gains on sale of loans
(478)
Earnings on bank-owned life insurance
(390)
(375)
Gain on bank-owned life insurance death benefit
(30)
Gain on other real estate owned
(4,886)
Provision (benefit) for deferred income taxes
(1,167)
Net (increase) decrease in other assets
(1,726)
469
Net increase (decrease) in other liabilities
4,839
(4,197)
Net cash and cash equivalents (used in) provided by operating activities
(11,155)
3,043
Investing activities:
Purchases of securities available-for-sale
(22,585)
Proceeds from paydowns, maturities and calls of securities available-for-sale
7,599
8,516
Proceeds from paydowns, maturities and calls of securities held-to-maturity
395
6,775
Net decrease of FRB and FHLB stock
13,732
3,594
Net (increase) decrease in loans
(97,841)
(53,248)
Proceeds from bank-owned life insurance death benefit
Proceeds from sales of other real estate owned, net of improvements
181
Purchases of bank premises and equipment
(461)
(47)
Net cash and cash equivalents used in investing activities
(75,703)
(56,814)
Financing activities:
Net (decrease) increase in deposits
945,619
(76,972)
Cash dividends paid on common stock
Proceeds from exercised stock options
Repayment of short-term borrowings
(325,000)
(100,000)
Increase (decrease) in securities sold under agreements to repurchase
(2,099)
1,269
Net cash and cash equivalents provided by financing activities
616,124
(178,166)
Net change in cash and cash equivalents
529,266
(231,937)
Cash and cash equivalents at beginning of period
530,167
Cash and cash equivalents at end of period
298,230
Supplemental disclosure of cash flow information
Cash payments for:
Interest
16,288
4,259
Income taxes
Non-cash investing and financing activities:
Initial recognition of operating lease right-of-use assets
4,017
Notes to Unaudited Condensed Consolidated Financial Statements
1. ACCOUNTING POLICIES
Primis Financial Corp. (“Primis,” “we,” “us,” “our” or the “Company”) is the bank holding company for Primis Bank (“Primis Bank” or the “Bank”), a Virginia state-chartered bank which commenced operations on April 14, 2005. Primis Bank provides a range of financial services to individuals and small and medium-sized businesses.
At March 31, 2023, Primis Bank had thirty-two full-service branches in Virginia and Maryland and also provided services to customers through certain online and mobile applications. Thirty full-service retail branches are in Virginia and two full-service retail branches are in Maryland. The Company is headquartered in McLean, Virginia and has administrative offices in Tysons Corner, Virginia and Glen Allen, Virginia and an operations center in Atlee, Virginia.
The accounting policies and practices of Primis and its subsidiaries conform to U.S. generally accepted accounting principles (“U.S. GAAP”) and to general practice within the banking industry. Major policies and practices are described below.
Principles of Consolidation
The consolidated financial statements include the accounts of Primis and its subsidiaries Primis Bank, Primis Mortgage Company and EVB Statutory Trust I (the “Trust”). Significant inter-company accounts and transactions have been eliminated in consolidation. Primis consolidates subsidiaries in which it holds, directly or indirectly, more than 50 percent of the voting rights or where it exercises control. Entities where Primis holds 20 to 50 percent of the voting rights, or has the ability to exercise significant influence, or both, are accounted for under the equity method. Primis owns the Trust which is an unconsolidated subsidiary and the junior subordinated debt owed to the Trust is reported as a liability of Primis.
We determine whether we have a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (“VIE”) under U.S. GAAP. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. We consolidate voting interest entities in which we have all, or at least a majority of, the voting interest. As defined in applicable accounting standards, VIEs are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when an enterprise has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. The Company has investments in VIE’s for which we are not the primary beneficiary and, as such, are not included in our consolidated financial statements.
On May 31, 2022, Primis Bank completed the acquisition (the “Acquisition”) of 100% of the outstanding capital stock of SeaTrust Mortgage Company (“SeaTrust”), a North Carolina corporation from Community First Bank, Inc. (the “Seller”) pursuant to the Stock Purchase Agreement, dated as of April 28, 2022 (the “Purchase Agreement”) by and among the Bank, Seller, and SeaTrust. As a result, SeaTrust became a wholly owned subsidiary of Primis Bank on May 31, 2022. Following the closing of the Acquisition, on June 1, 2022, the Bank changed the name of SeaTrust to Primis Mortgage Company (“Primis Mortgage”). Pursuant to the Purchase Agreement, the Bank paid an aggregate purchase price of $7.0 million in cash to Seller at closing and assumed $19.3 million of SeaTrust’s indebtedness under certain warehouse lending facilities.
The table below illustrates the unaudited pro forma revenue and net income of the combined entities had the acquisition taken place on January 1, 2022. The unaudited combined pro forma revenue and net income combines the historical results of SeaTrust with the Company's consolidated statements of operations for the periods listed below and, while no material adjustments were made for the estimated effect of certain fair value adjustments and other acquisition-related activity, they
are not indicative of what would have occurred had the acquisition actually taken place on January 1, 2022. The pro forma financial information does not include the impact of possible business model changes, nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies or other factors.
(dollars in thousands)
Total revenues
58,691
30,810
4,450
Operating Segments
The Company, through its Bank subsidiary, provides a broad range of financial services. While the Company’s chief operating decision makers monitor the revenue streams of the various financial products and services, operations are managed and financial performance is evaluated on an organization-wide basis. Management has determined that the Company has two reportable operating segments: Primis Mortgage and Primis Bank, as discussed in Note 10 – Segment Information.
Basis of Presentation
The unaudited consolidated financial statements and notes thereto have been prepared in accordance with U.S. GAAP for interim financial information and instructions for Form 10-Q and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in Primis’ Annual Report on Form 10-K for the year ended December 31, 2022.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Estimates that are particularly susceptible to change in the near term include: the determination of the allowance for credit losses, the fair value of investment securities, credit impairment of investment securities, the valuation of goodwill and deferred tax assets. Management monitors and continually reassess these at each reporting period.
Recent Accounting Pronouncements
In March 2022, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 2022-02, Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance on troubled debt restructurings (TDRs) for creditors in ASC 310-40 and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination. The ASU also updates the requirements related to accounting for credit losses under FASB ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancing and restructurings for borrowers experiencing financial difficulty. The Company adopted the guidance in the first quarter of 2023, which did not have a material impact on the Company’s consolidated financial statements and disclosures.
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
116,844
(14,927)
101,917
Obligations of states and political subdivisions
34,026
21
(4,047)
30,000
Corporate securities
16,000
(1,922)
14,078
Collateralized loan obligations
5,021
(130)
4,891
Residential government-sponsored collateralized mortgage obligations
27,388
26
(1,779)
25,635
Government-sponsored agency securities
17,731
(2,631)
15,100
Agency commercial mortgage-backed securities
38,871
(4,274)
34,597
SBA pool securities
5,302
11
(63)
5,250
261,183
58
(29,773)
December 31, 2022
119,371
1
(16,491)
102,881
34,103
(4,927)
29,178
(1,172)
14,828
5,022
(146)
4,876
28,643
(2,048)
26,595
17,719
(3,103)
14,616
42,180
(4,763)
37,417
5,998
13
(87)
5,924
269,036
16
(32,737)
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
10,146
(841)
9,305
2,722
(32)
2,694
247
(16)
231
(889)
12,230
10,522
(1,007)
9,515
2,721
(46)
2,678
277
(21)
256
(1,074)
12,449
No available-for-sale investment securities were purchased during the three months ended March 31, 2023. During the three months ended March 31, 2022, $22.6 million of available-for-sale investment securities were purchased. No held-
8
to-maturity investments were purchased during the three months ended March 31, 2023 and 2022. No investment securities were sold during the three months ended March 31, 2023 and 2022.
The amortized cost and fair value of available-for-sale and held-to-maturity investment securities as of March 31, 2023, by contractual maturity were as follows (in thousands). Investment securities not due at a single maturity date are shown separately.
Available-for-Sale
Held-to-Maturity
Fair Value
Due within one year
1,493
Due in one to five years
10,021
9,258
868
Due in five to ten years
25,747
1,519
1,491
Due after ten years
32,079
27,571
335
Investment securities with a carrying amount of approximately $97.9 million and $99.4 million at March 31, 2023 and December 31, 2022, respectively, were pledged to secure public deposits, certain other deposits, a line of credit for advances from the Federal Home Loan Bank (“FHLB”) of Atlanta, and repurchase agreements.
Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to U.S. Treasury and residential mortgage-backed securities issued by the U.S. government, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost basis of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued by States and political subdivisions and other held-to-maturity securities, management considers (i) issuer bond ratings, (ii) historical loss rates for given bond ratings, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities and (iv) internal forecasts. As of March 31, 2023, Primis had an immaterial allowance for credit losses on held-to-maturity securities.
The unrealized losses related to investment securities available-for-sale identified as of March 31, 2023 and December 31, 2022, relate to changes in interest rates relative to when the investment securities were purchased, and do not indicate credit-related impairment. Primis performs quantitative and qualitative analysis in this determination. As a result of the Company’s analysis, none of the securities were deemed to require an allowance for credit losses at March 31, 2023 and
9
December 31, 2022. Primis has the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses.
The following tables present information regarding investment securities available-for-sale and held-to-maturity in a continuous unrealized loss position as of March 31, 2023 and December 31, 2022 by duration of time in a loss position (in thousands):
Less than 12 months
12 Months or More
Unrealized
value
5,551
(232)
96,257
(14,695)
101,808
4,246
(24)
22,042
(4,023)
26,288
5,684
(316)
8,394
(1,606)
5,793
(149)
15,087
(1,630)
20,880
1,114
(7)
33,483
(4,267)
23
(0)
3,322
3,345
22,411
(728)
198,576
(29,045)
220,987
Unrecognized
626
(28)
8,679
(813)
504
(1)
403
907
61
(2)
170
(14)
1,191
(31)
9,253
(857)
10,443
23,484
(2,268)
79,283
(14,223)
102,767
10,026
(388)
17,609
(4,539)
27,635
22,343
(1,375)
4,252
(673)
1,484
13,132
(3,087)
13,031
(371)
24,386
(4,392)
529
(38)
3,243
(49)
3,772
85,725
(5,628)
146,781
(27,109)
232,506
10
9,457
(1,002)
(5)
1,255
75
(4)
(17)
10,787
(1,052)
239
(22)
11,026
Changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2023 and 2022 are shown in the tables below. All amounts are net of tax (in thousands).
Unrealized Holding
Gains (Losses) on
For the three months ended March 31, 2023
Beginning balance
Current period other comprehensive income (loss)
Ending balance
Gains on
For the three months ended March 31, 2022
3. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The following table summarizes the composition of our loan portfolio as of March 31, 2023 and December 31, 2022 (in thousands):
Loans held for sale
Loans secured by real estate:
Commercial real estate - owner occupied
459,008
459,866
Commercial real estate - non-owner occupied
576,065
579,733
Secured by farmland
6,092
7,116
Construction and land development
151,880
148,690
Residential 1-4 family
606,293
609,694
Multi-family residential
139,978
140,321
Home equity lines of credit
64,606
65,152
Total real estate loans
2,003,922
2,010,572
Commercial loans
545,834
521,794
Paycheck Protection Program loans
2,603
4,564
Consumer loans
485,252
405,278
Total Non-PCD loans
3,037,611
2,942,208
PCD loans
6,121
6,628
Total loans held for investment
Accrued Interest Receivable
Accrued interest receivable on loans totaled $16.8 million and $13.8 million at March 31, 2023 and December 31, 2022, respectively, and is included in other assets in the consolidated balance sheets.
Nonaccrual and Past Due Loans
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, we consider the borrower’s debt service capacity through the analysis of current financial information, if available, and/or current information with regards to our collateral position. Regulatory provisions would typically require the placement of a loan on nonaccrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on nonaccrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.
12
The following tables present the aging of the recorded investment in past due loans by class of loans held for investment as of March 31, 2023 and December 31, 2022 (in thousands):
30 - 59
60 - 89
90
Days
Loans Not
Past Due
or More
Loans
54
103
157
458,851
15
19,336
19,351
556,714
514
1,146
1,660
4,432
971
150,909
2,742
286
573
3,601
602,692
Multi- family residential
378
199
244
821
63,785
599
1,366
1,965
543,869
64
1,625
1,699
904
2,653
1,197
3,851
481,401
7,376
3,555
23,145
34,076
3,003,535
1,261
4,860
24,406
35,337
3,008,395
55
459,811
290
169
19,641
20,100
559,633
46
148,644
2,180
410
304
2,894
606,800
431
96
249
776
64,376
39
2,956
2,995
518,799
3,360
3,391
1,173
2,079
1,421
200
3,700
401,578
5,136
2,111
26,710
33,957
2,908,251
1,328
5,300
28,038
35,285
2,913,551
The amortized cost, by class, of loans and leases on nonaccrual status at March 31, 2023 and December 31, 2022, were as follows (in thousands):
Less Than
Nonaccrual With
90 Days
Nonaccrual
No Credit
Loans (1)
Loss Allowance (2)
501
14,538
517
27
8,782
9,355
9,354
297
541
86
1,452
82
407
408
21,520
10,616
32,136
25,968
22,781
33,397
27,229
509
713
29
8,995
9,299
301
550
121
3,077
134
334
299
23,350
10,806
34,156
31,165
24,678
35,484
32,493
There were $1.6 million and $3.4 million of Paycheck Protection Program (“PPP”) loans greater than 90 days past due and still accruing at March 31, 2023 and December 31, 2022, respectively.
14
The following table presents nonaccrual loans as of March 31, 2023 by class and year of origination (in thousands):
Revolving
Converted
2021
2020
2019
Prior
To Term
149
19,187
281
7,962
836
276
467
20
1,448
230
143
35
Total non-PCD nonaccruals
511
292
7,965
22,566
502
296
Total nonaccrual loans
23,827
Interest received on nonaccrual loans was $0.4 million and $0.2 million for the three months ended March 31, 2023 and 2022, respectively.
Modifications Provided to Borrowers Experiencing Financial Difficulty
The Bank determines that a borrower may be experiencing financial difficulty if the borrower is currently delinquent on any of its debt, or if the Bank is concerned that the borrower may not be able to perform in accordance with the current terms of the loan agreement in the foreseeable future. Many aspects of the borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty, particularly as it relates to commercial borrowers due to the complex nature of the loan structure, business/industry risk and borrower/guarantor structures. Concessions may include the reduction of an interest rate at a rate lower than current market rates for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, or principal forgiveness. When evaluating whether a concession has been granted, the Bank also considers whether the borrower has provided additional collateral or guarantors and whether such additions adequately compensate the Bank for the restructured terms, or if the revised terms are consistent with those currently being offered to new loan customers.
The assessments of whether a borrower is experiencing financial difficulty at the time a concession has been granted is subjective in nature and management’s judgment is required when determining whether the concession results in a modification that is accounted for as a new loan or a continuation of the existing loan under U.S. GAAP.
Although each occurrence is unique to the borrower and is evaluated separately, for all portfolio segments, loans modified as a result of borrowers experiencing financial difficulty are typically modified through reduction in interest rates, reductions in payments, changing the payment terms from principal and interest to interest only, and/or extensions in term maturity.
For the quarter ended March 31, 2023, one loan from our residential 1-4 family loan portfolio on an amortized cost basis of $0.9 million, was modified to a borrower experiencing financial difficulty. This modification allowed a six month
deferral of principal and interest of $0.1 million for the three months ended March 31, 2023, with contractual payments expected to resume in August of this year. This loan, which has had no payment delinquencies since origination, represents only 0.15% of total loans in the secured by first liens pool.
The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies certain loans by providing principal forgiveness. When principal forgiveness is provided, the amortized cost basis of the loan is written off against the allowance. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.
If it is determined that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. At that time, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.
Credit Quality Indicators
Through its system of internal controls, Primis evaluates and segments loan portfolio credit quality using regulatory definitions for Special Mention, Substandard and Doubtful. Special Mention loans are considered to be criticized. Substandard and Doubtful loans are considered to be classified.
Special Mention loans are loans that have a potential weakness that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position.
Substandard loans may be inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Primis had no loans classified Doubtful at March 31, 2023 or December 31, 2022.
In monitoring credit quality trends in the context of assessing the appropriate level of the allowance for credit losses on loans, we monitor portfolio credit quality by the weighted-average risk grade of each class of loan.
The following table presents weighted-average risk grades for all loans, by class and year of origination/renewal as of March 31, 2023 (in thousands):
Pass
5,925
114,614
58,757
18,861
21,735
224,374
3,753
6,902
454,921
Special Mention
220
917
1,137
Substandard
2,950
Doubtful
58,977
228,241
Current period gross charge offs
Weighted average risk grade
3.77
3.24
3.47
3.38
3.27
3.49
3.61
3.96
3.42
Commercial real estate - nonowner occupied
2,187
28,404
125,141
44,144
41,243
284,940
4,111
3,046
533,216
1,557
21,355
601
23,513
125,290
45,701
325,482
3,647
3.43
3.37
3.08
3.82
3.95
3.84
2.87
3.33
3.65
100
110
3,676
1,488
187
5,575
4,190
N/A
4.00
4.02
3.98
3.13
3,513
54,072
63,604
838
3,199
24,851
809
150,898
955
25,833
3.75
3.19
3.05
3.60
3.59
3.22
6,938
151,893
157,220
43,273
59,156
171,404
1,747
3,157
594,788
2,334
747
11,324
152,174
67,118
173,919
3,904
175
3.09
3.04
3.07
3.15
11,190
21,793
18,195
7,029
76,582
3,549
662
139,000
685
293
978
77,267
3.00
3.90
3.31
4.61
3.39
495
435
50
4,286
57,804
945
64,066
466
540
4,340
58,270
965
3.89
3.12
61,781
272,191
56,018
6,984
5,385
29,173
104,379
7,157
543,068
62
661
374
1,110
66
1,586
1,656
7,001
5,513
30,759
105,040
7,531
159
1,590
1,749
2.64
3.11
3.36
17
1,558
1,045
2.00
217,755
228,234
27,779
1,344
274
4,608
4,561
484,555
65
232
365
632
228,466
28,144
4,673
4,596
60
2,222
201
2,483
4.01
2.79
3.71
3.99
3.41
PCD
3,264
1,312
1,545
4.62
298,099
861,706
513,053
136,419
146,164
880,825
183,363
24,103
4,424
3.69
3.06
3.17
3.50
3.54
3.57
3.78
3.35
18
The following table presents weighted-average risk grades for all loans, by class and year of origination/renewal as of December 31, 2022 (in thousands):
2018
116,545
58,202
19,178
21,985
202,484
3,389
6,740
455,920
988
2,958
206,430
3.25
3.45
3.52
28,128
126,291
44,696
41,631
55,702
228,735
4,173
3,065
532,421
1,566
926
24,580
27,673
13,066
6,573
19,639
46,262
69,694
259,888
3,666
3.16
3.68
141
3,425
1,697
5,474
649
112
761
875
881
4,949
197
6.00
4.20
3.70
4.13
44,253
73,226
847
6,937
19,553
822
148,661
19,582
3.21
3.20
152,178
157,233
43,812
61,268
40,707
138,782
1,837
3,437
599,254
30
285
8,099
1,310
716
10,410
152,463
69,367
140,122
4,153
3.23
3.92
9,953
21,927
18,338
7,064
1,804
75,370
4,192
676
139,324
702
295
997
76,072
3.58
463
52
63
4,093
58,312
957
64,601
476
551
4,147
58,788
3.94
295,459
59,642
7,332
6,658
9,228
20,883
100,407
17,381
516,990
396
74
519
388
1,441
1,678
3,363
60,038
7,401
6,822
22,561
102,516
17,769
3.14
3.29
2,119
2,435
4,554
2,129
2.02
2.01
19
365,842
29,184
340
534
4,319
2,918
404,630
70
513
583
365,912
29,697
4,384
3.74
3.81
3.30
3,692
1,320
1,616
4.54
1,013,317
529,190
139,928
150,284
156,531
744,763
180,332
34,491
3.48
3.53
Revolving loans that converted to term during the reported periods were as follows (in thousands):
216
95
155
257
746
Total loans
371
1,279
There were no foreclosed residential real estate property held at March 31, 2023 and December 31, 2022. The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was zero and $0.1 million at March 31, 2023 and December 31, 2022, respectively.
Allowance For Credit Losses – Loans
The allowance for credit losses on loans is a contra-asset valuation account, calculated in accordance with ASC 326 that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. The amount of the allowance represents management's best estimate of current expected credit losses on loans considering available information, from internal and external sources, relevant to assessing collectability over the loans' contractual terms, adjusted for expected prepayments when appropriate.
In calculating the allowance for credit losses, most loans are segmented into pools based upon similar characteristics and risk profiles. For allowance modeling purposes, our loan pools include but are not limited to (i) commercial real estate - owner occupied, (ii) commercial real estate - non-owner occupied, (iii) construction and land development, (iv) commercial, (v) agricultural loans, (vi) residential 1-4 family and (vii) consumer loans. We periodically reassess each pool to ensure the loans within the pool continue to share similar characteristics and risk profiles and to determine whether further segmentation is necessary. For each loan pool, we measure expected credit losses over the life of each loan utilizing a combination of inputs: (i) probability of default, (ii) probability of attrition, (iii) loss given default and (iv) exposure at default. Internal data is supplemented by, but not replaced by, peer data when required, primarily to determine the probability of default input. The various pool-specific inputs may be adjusted for current macroeconomic assumptions. 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, 2023 and December 31, 2022, calculated in accordance with the current expected credit losses (“CECL”) methodology (in thousands).
Commercial
Home
Real Estate
Construction
Equity
Owner
Non-owner
Secured by
and Land
1-4 Family
Multi-Family
Lines Of
Consumer
Occupied
Farmland
Development
Residential
Credit
Modeled expected credit losses
4,879
6,203
872
3,890
1,723
328
4,752
6,798
29,447
Q-factor and other qualitative adjustments
727
453
22
869
3,261
Specific allocations
843
1,945
3,019
5,274
7,161
1,280
4,343
2,087
350
6,464
6,802
35,727
5,297
6,652
3,579
1,814
310
5,006
27,510
261
376
512
387
654
2,727
2,193
42
2,072
4,307
5,558
7,147
25
1,373
4,091
2,201
329
7,853
3,895
34,544
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, 2023 and 2022 is summarized below (in thousands):
Home Equity
Three Months Ended March 31, 2023
Allowance for credit losses:
Provision (recovery)
(284)
(205)
266
(114)
5,243
(127)
Charge offs
(175)
(1,766)
(2,483)
(4,424)
Recoveries
161
147
Three Months Ended March 31, 2022
4,562
9,028
56
998
3,588
3,280
437
4,088
787
2,281
29,105
(389)
(115)
31
243
(991)
1,208
(110)
(61)
57
236
8,913
1,029
3,888
2,289
5,466
1,025
2,171
29,379
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, 2023 and December 31, 2022 (in thousands):
Loan
Specific
Balance (1)
Allocations
2,790
2,795
525
9,903
9,636
996
1,370
2,979
-
259
Total non-PCD loans
34,742
1,074
36,852
2,235
40,863
43,480
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
Assets and liabilities measured at fair value on a recurring basis are summarized below:
Fair Value Measurements Using
Significant
Quoted Prices in
Active Markets for
Observable
Unobservable
Total at
Identical Assets
Inputs
(Level 1)
(Level 2)
(Level 3)
Assets:
Available-for-sale securities
Mortgage banking financial assets
Derivative assets
2,255
275,834
275,734
Liabilities:
Derivative liabilities
126
1,410
1,386
24
265,372
265,327
Mortgage banking financial liabilities
122
115
Assets measured at fair value on a non-recurring basis are summarized below:
Collateral dependent loans
40,453
47,832
Fair Value of Financial Instruments
The carrying amount, estimated fair values and fair value hierarchy levels (previously defined) of financial instruments were as follows (in thousands) for the periods indicated:
Carrying
Hierarchy Level
Financial assets:
Cash and cash equivalents
Level 1
Securities available-for-sale
Level 2
Securities held-to-maturity
Stock in Federal Reserve Bank and Federal Home Loan Bank
Preferred investment in mortgage company
3,005
Level 3
2,923,102
2,811,362
Accrued interest receivable
18,705
14,938
Level 2 and 3
Credit enhancement
4,514
1,504
Financial liabilities:
Demand deposits and NOW accounts
1,332,879
1,200,243
Money market and savings accounts
1,836,554
1,057,078
496,343
462,376
Securities sold under agreements to repurchase
Junior subordinated debt
8,734
9,181
Senior subordinated notes
83,987
84,347
Accrued interest payable
5,721
Carrying amount is the estimated fair value for cash and cash equivalents, 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, 2023 and December 31, 2022, the Company had operating lease liabilities totaling $9.8 million and $5.8 million, respectively, and right-of-use assets totaling $9.4 million and $5.3 million, respectively, related to these leases. Operating lease liabilities and right-of-use assets are reflected in our consolidated balance sheets. We do not currently have any financing leases. For the three months ended March 31, 2023 and 2022, our net operating lease costs were $0.6 million. These net operating lease costs are reflected in occupancy expenses on our consolidated statements of income and comprehensive income (loss).
The following table presents other information related to our operating leases:
For the Three Months Ended
(in thousands except for percent and period data)
March 31, 2022
Other information:
Weighted-average remaining lease term - operating leases, in years
7.6
4.4
Weighted-average discount rate - operating leases
3.7
%
2.5
The following table summarizes the maturity of remaining lease liabilities:
As of
Lease payments due:
1,572
2024
1,655
2025
1,230
2026
1,169
2027
1,133
Thereafter
4,810
Total lease payments
11,569
Less: imputed interest
(1,770)
Lease liabilities
As of March 31, 2023, the Company had one operating lease that has not yet commenced that will create additional lease liabilities and right-of-use assets for the Company.
6. DEBT AND OTHER BORROWINGS
Other borrowings can consist of FHLB convertible advances, FHLB of Atlanta overnight advances, FHLB advances maturing within one year, federal funds purchased 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, 2023 and December 31, 2022 was $4.3 million and $6.5 million, respectively.
At March 31, 2023 and December 31, 2022, we had pledged callable agency securities, residential government-sponsored mortgage-backed securities and collateralized mortgage obligations with a carrying value of $13.9 million and $14.2 million, respectively, to customers who require collateral for overnight repurchase agreements and deposits.
We repaid our short-term FHLB advances of $325.0 million that were outstanding as of December 31, 2022 and matured in the first quarter of 2023. As a result, we have all of our FHLB capacity available for future liquidity needs. At March 31, 2023, Primis Bank had lendable collateral value in the form of residential 1-4 family mortgages, HELOCs, commercial mortgage loans, and investment securities supporting borrowing capacity of approximately $541.6 million from the FHLB.
In March 2023, the Federal Reserve established the Bank Term Funding Program (“BTFP”) in response to recent industry disruption, offering loans with up to one year in maturity to eligible depository institutions in exchange for pledged collateral in the form of U.S. Treasuries, agency debt and mortgage-backed securities and other qualifying assets. Borrowing capacity under the BTFP is based on the par value, not fair value, of the collateral. At March 31, 2023, we had securities available of $165.0 million for utilization with the BTFP, with no borrowings outstanding under the program at March 31, 2023.
In 2017, the Company assumed $10.3 million of trust preferred securities that were issued on September 17, 2003 and placed through a trust in a pooled underwriting totaling approximately $650 million. At March 31, 2023 and December 31, 2022, there was $10.3 million outstanding, net of approximately $0.5 million of debt issuance costs. As of March 31, 2023 and December 31, 2022, the interest rate was 7.86% and 7.69%, respectively. At March 31, 2023, all of the trust preferred securities qualified as Tier 1 capital.
On January 20, 2017, Primis completed the sale of $27.0 million of its fixed-to-floating rate senior Subordinated Notes due 2027. Interest is currently payable at an annual floating rate equal to three-month LIBOR plus a spread of 3.95% until maturity or early redemption. At March 31, 2023, 60% of these notes qualified as Tier 2 capital.
On August 25, 2020, Primis completed the sale of $60.0 million of its fixed-to-floating rate Subordinated Notes due 2030. Interest is payable at an initial annual fixed rate of 5.40% and after September 1, 2025, at a floating rate equal to a benchmark rate, which is expected to be Three-Month Term SOFR, plus a spread of 531 basis points. At March 31, 2023, all of these notes qualified as Tier 2 capital.
At March 31, 2023 and December 31, 2022, the remaining unamortized debt issuance costs related to the senior Subordinated Notes totaled $1.4 million and $1.5 million, respectively.
7. STOCK-BASED COMPENSATION
The 2017 Equity Compensation Plan (the “2017 Plan”) has a maximum number of 750,000 shares reserved for issuance. The purpose of the 2017 Plan is to promote the success of the Company by providing greater incentives to employees, non-employee directors, consultants and advisors to associate their personal financial interests with the long-term financial success of the Company, including its subsidiaries, and with growth in stockholder value, consistent with the Company’s risk management practices.
A summary of stock option activity for the three months ended March 31, 2023 follows:
Weighted
Average
Aggregate
Remaining
Intrinsic
Exercise
Contractual
Price
Term
(in thousands)
Options outstanding, beginning of period
203,300
11.41
1.3
102
Expired
(12,000)
Exercised
(8,000)
Options outstanding, end of period
183,300
11.47
1.1
Exercisable at end of period
1.1464
There was no stock-based compensation expense associated with stock options for the three months ended March 31, 2023 and 2022. As of March 31, 2023, we do not have any unrecognized compensation expense associated with the stock options.
A summary of time vested restricted stock awards for the three months ended March 31, 2023 follows:
Grant-Date
Per Share
Unvested restricted stock outstanding, beginning of period
68,700
14.24
2.4
Vested
(17,850)
15.12
Forfeited
15.43
Unvested restricted stock outstanding, end of period
48,850
13.87
2.3
Stock-based compensation expense for time vested restricted stock awards totaled $0.1 million and $0.8 million for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, unrecognized compensation expense associated with restricted stock awards was $0.6 million, which is expected to be recognized over a weighted average period of 2.3 years.
A summary of performance-based restricted stock units (the “Units”) for the three months ended March 31, 2023 follows:
Unvested Units outstanding, beginning of period
153,960
13.02
3.6
Granted
Unvested Units outstanding, end of period
2.9
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, 2023 and 2022 because it is not probable that these Units will vest. The potential unrecognized compensation expense associated with these Units was $3.0 million and $1.3 million, at March 31, 2023 and 2022, respectively.
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8. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
Primis is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and guarantees of credit card accounts. These instruments involve elements of credit and funding risk in excess of the amount recognized in the consolidated balance sheets. Letters of credit are written conditional commitments issued by Primis to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. We had letters of credit outstanding totaling $11.1 million and $10.7 million as of March 31, 2023 and December 31, 2022, 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
1,416
977
Credit loss expense
91
260
Balance as of March 31,
1,507
1,237
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.
We had $67.5 million of loan commitments outstanding as of March 31, 2023, all of which contractually expire within thirty years.
At March 31, 2023 and December 31, 2022, we had unfunded lines of credit and undisbursed construction loan funds totaling $526.3 million and $540.6 million, respectively, not all of which will ultimately be drawn. Virtually all of our unfunded lines of credit and undisbursed construction loan funds are variable rate. The amount of certificate of deposit
accounts maturing in less than one year was $380.3 million as of March 31, 2023, including $100.0 million of brokered CDs. Management anticipates that funding requirements for these commitments can be met in the normal course.
Primis also had commitments on the subscription agreements entered into for investments in non-marketable equity securities of $3.0 million and $3.2 million at March 31, 2023 and December 31, 2022, respectively.
9. EARNINGS PER SHARE
The following is a reconciliation of the denominators of the basic and diluted earnings per share (“EPS”) computations (amounts in thousands, except per share data):
Income
(Numerator)
(Denominator)
Basic EPS
24,626
Effect of dilutive stock options and unvested restricted stock
59
Diluted EPS
24,685
24,504
24,663
The Company did not have any anti-dilutive options as of March 31, 2023 and 2022.
10. SEGMENT INFORMATION
The Company's management reporting process measures the performance of its operating segment based on internal operating structure, which is subject to change from time to time. Accordingly, the Company operates two reportable segments for management reporting purposes as discussed below:
Primis Bank. This segment specializes in providing financing services to businesses in various industries and deposit-related services to businesses, consumers and other customers. The primary source of revenue for this segment is net interest income from the origination of loans.
Primis Mortgage. This segment specializes in originating mortgages in a majority of the U.S. The primary source of revenue for this segment is noninterest income and the origination and sale of mortgage loans.
For the three months ended March 31, 2022, we operated as one reportable segment.
The following table provides financial information for the Company's reportable segments. The information provided under the caption “Primis Bank” includes operations not considered to be reportable segments and/or general operating expenses of the Company, and includes the parent company and elimination adjustments to reconcile the results of the operating segment to the consolidated financial statements prepared in conformity with GAAP.
As of and for the year ended March 31, 2023
Primis Mortgage
Primis Bank
Consolidated
Interest income
46,763
Interest expense
28,014
Provision for loan losses
Noninterest income
7,217
Noninterest expense
4,988
22,409
(277)
7,635
Income tax expense (benefit)
(65)
1,648
Net income (loss)
(212)
5,987
Assets
46,877
4,158,529
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Primis. This discussion and analysis should be read with the consolidated financial statements, the footnotes thereto, and the other financial data included in this report and in our annual report on Form 10-K for the year ended December 31, 2022. Results of operations for the three months ended March 31, 2023 are not necessarily indicative of results that may be attained for any other period. The emphasis of this discussion will be on the three months ended March 31, 2023 compared to the three months ended March 31, 2022 for the consolidated statements of income and comprehensive income (loss). For the consolidated balance sheets, the emphasis of this discussion will be the balances as of March 31, 2023 compared to December 31, 2022. This discussion and analysis contains statements that may be considered “forward-looking statements” as defined in, and subject to the protections of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. See the following section for additional information regarding forward-looking statements.
FORWARD-LOOKING STATEMENTS
Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. The words “believe,” “may,” “forecast,” “should,” “anticipate,” “contemplate,” “estimate,” “expect,” “project,” “predict,” “intend,” “continue,” “would,” “could,” “hope,” “might,” “assume,” “objective,” “seek,” “plan,” “strive” or similar words, or the negatives of these words, identify forward-looking statements.
Forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the expectations of future results we express or imply in any forward-looking statements. In addition to the Risk Factors contained in this Quarterly Report on Form 10-Q, as well as the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, factors that could contribute to those differences include, but are not limited to:
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Forward-looking statements are not guarantees of performance or results and should not be relied upon as representing management’s views as of any subsequent date. A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe we have chosen these assumptions or bases in good faith and that they are reasonable. We caution you, however, that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. When considering forward-looking statements, you should refer to the risk factors and other cautionary statements in this Quarterly Report on Form 10-Q and in our periodic and current reports filed with the SEC for specific factors that could cause our actual results to be different from those expressed or implied by our forward-looking statements. These statements speak only as of the date of this Quarterly Report on Form 10-Q (or an earlier date to the extent applicable). Except as required by applicable law, we undertake no obligation to update publicly these statements in light of new information or future events.
OVERVIEW
Primis Financial Corp. (“Primis,” “we,” “us,” “our” or the “Company”) is the bank holding company for Primis Bank (“Primis Bank” or the “Bank”), a Virginia state-chartered bank which commenced operations on April 14, 2005. Primis Bank provides a range of financial services to individuals and small and medium-sized businesses. At March 31, 2023, Primis Bank had thirty-two full-service branches in Virginia and Maryland and also provides services to customers through certain online and mobile applications. Thirty full-service retail branches are in Virginia and two full-service retail branches are in Maryland. The Company is headquartered in McLean, Virginia and has administrative offices in Tysons Corner, Virginia and Glen Allen, Virginia and an operations center in Atlee, Virginia. Our deposits are insured, up to applicable limits, by the Federal Deposit Insurance Corporation (the “FDIC”). Primis Bank also owns Primis Mortgage Company, a residential mortgage lender.
While Primis Bank offers a wide range of commercial banking services, it focuses on making loans secured primarily by commercial real estate and other types of secured and unsecured commercial loans to small and medium-sized businesses in a number of industries, as well as loans to individuals for a variety of purposes. Primis Bank invests in real estate-related securities, including collateralized mortgage obligations and agency mortgage backed securities. Primis Bank’s principal sources of funds for loans and investing in securities are deposits and, to a lesser extent, borrowings. Primis Bank offers a broad range of deposit products, including checking (NOW), savings, money market accounts and certificates of deposit. Primis Bank actively pursues business relationships by utilizing the business contacts of its senior management, other bank officers and its directors, thereby capitalizing on its knowledge of its local market areas.
Current Economic Environment
The U.S. economy expanded in the first quarter of 2023, with Real Gross Domestic Product growing by an annualized 1.1%. According to the U.S. Bureau of Labor and Statistics, the rate of unemployment dropped to 3.5% in March 2023. The Federal Reserve (the “Fed”) has raised rates 500 bps since March of 2022 in an effort to temper inflation, a pace that has not been experienced in more than 40 years and now sits at a level not seen since 2006. This rate level is putting strong upward pressure on all banks including Primis’ cost of deposits as banks look for ways to increase liquidity. Inflation remains higher than the Fed’s long term target rate of 2%, and weakness in some areas of the economy and turmoil in the banking system has heightened recessionary concerns.
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FINANCIAL HIGHLIGHTS
RESULTS OF OPERATIONS
Net Income
Three-Month Comparison. Net income for the three months ended March 31, 2023 was $5.8 million, or $0.23 basic and diluted earnings per share, compared to $4.6 million, or $0.19 basic and diluted earnings per share, for the three months ended March 31, 2022. The 26% increase in net income during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was driven by higher interest income and from mortgage banking income in the first quarter of 2023. These increases were partially offset by higher noninterest expenses mainly from an increase in employee compensation and benefits expense in the first quarter of 2023 related to increased head count at the Bank, Primis Mortgage and Panacea.
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 $28.4 million for the three months ended March 31, 2023, compared to $22.9 million for the three months ended March 31, 2022. Primis’ net interest margin for the three months ended March 31, 2023 was 3.15%, compared to 2.96% for the three months ended March 31, 2022. Net interest margin was significantly impacted by the successful launch of the Bank’s digital deposit platform. Increased competition in the Company’s core banking markets increased the cost of deposits in the first quarter of 2023 compared to the first quarter of 2022. Total income on interest-earning assets was $47.2 million and $26.6 million for the three months ended March 31, 2023 and 2022, respectively. The yield on average interest-earning assets was 5.24% and 3.44% for the three months ended March 31, 2023 and 2022, respectively. Increase in yield on average interest-earnings assets was driven by higher rates on cash and loans in the first quarter of 2023. The cost of average interest-bearing deposits increased 188 basis points to 2.32% for the three months ended March 31, 2023, compared to 0.44% cost on average interest-bearing deposits for the three months ended March 31, 2022. Interest and fees on loans totaled $41.4 million and $24.8 million for the three months ended March 31, 2023 and 2022, respectively. Average loans during the three months ended March 31, 2023 were $3.02 billion, compared to $2.36 billion during the three months ended March 31, 2022. The Company’s loan growth over the past quarter and increase in deposits retained as interest-bearing cash on our balance sheet in the first quarter of 2023 have been the drivers of positive movements in both margins and net interest income.
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)
Interest-earning assets:
25,346
391
6.26
Loans, net of deferred fees (1) (2)
2,991,965
40,960
5.55
2,360,782
4.25
Investment securities
246,402
1,584
2.61
302,431
1,430
1.92
Other earning assets
388,327
4.41
466,952
0.35
Total earning assets
3,652,040
5.24
3,130,165
3.44
Allowance for credit losses
(34,099)
(29,238)
Investments in mortgage affiliate - held for sale
Total non-earning assets
288,103
255,558
3,906,044
3,356,485
Liabilities and stockholders' equity
Interest-bearing liabilities:
NOW and other demand accounts
722,584
2,267
1.27
817,430
666
0.33
824,541
4,801
2.36
809,460
858
0.43
593,823
4,750
224,716
0.27
489,066
3,226
2.68
350,368
700
0.81
2,630,014
2.32
2,201,974
0.44
Borrowings
284,946
5.27
171,293
Total interest-bearing liabilities
2,914,960
2,373,267
0.64
Noninterest-bearing liabilities:
Demand deposits
556,479
545,530
28,812
23,057
3,500,251
2,941,854
Stockholders' equity
405,793
414,631
Interest rate spread
2.63
2.81
Net interest margin
2.96
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 current expected losses in the loan portfolio based on an evaluation of the loan portfolio, current economic conditions, changes in the nature and volume of lending, historical loan experience and other known internal and external factors affecting loan collectability. Our allowance for credit losses is calculated by segmenting the loan portfolio by loan type and applying risk factors to each segment. The risk factors are determined by considering historical loss data, peer data, as well as applying management’s judgment.
The Company recorded a provision for credit losses for the three months ended March 31, 2023 and 2022 of $5.2 million and $0.1 million, respectively. Of this provision in the first quarter of 2023, $4.8 million was due to charge-offs and additional reserve calculated in our normal reserve process for a portfolio of loans that includes a third-party credit
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enhancement. As a result, this portion of the provision is fully offset by a gain recorded in noninterest income due to credit enhancement and has no effect on net income. Excluding this provision amount, the provision for credit losses would have been $0.5 million at March 31, 2023. We had charge-offs totaling $4.4 million and $0.1 million during the three months ended March 31, 2023 and 2022, respectively. There were recoveries totaling $0.4 million and $0.2 million during the three months ended March 31, 2023 and 2022, respectively.
The Financial Condition Section of Management’s Discussion and Analysis provides information on our loan portfolio, past due loans, nonperforming assets and the allowance for credit losses.
Noninterest Income
The following table presents the major categories of noninterest income for the three months ended March 31, 2023 and 2022:
Change
(135)
(147)
9,442
Noninterest income increased 452% to $11.5 million for the three months ended March 31, 2023, compared to $2.1 million for the three months ended March 31, 2022. The increase in noninterest income was primarily related to the $4.9 million of credit enhancement income and $4.3 million of mortgage banking income in the first quarter of 2023. The Company began accounting for certain third party credit enhancements on consumer lending during the third quarter of 2022 and purchased the mortgage platform in the second quarter of 2022. The increase in the credit enhancement income was due to the increase in charge-offs and allowance for credit losses experienced during the three months ending March 31, 2023 on the portfolio of loans for which we have received the credit enhancement. The increase in the mortgage banking income is due to the purchase of Primis Mortgage Company in May 2022 and the normal mortgage activities now reflected in our income statement during the first quarter, which included the fair value adjustments and gains on sales of mortgage loans held for sale.
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Noninterest Expense
The following table presents the major categories of noninterest expense for the three months ended March 31, 2023 and 2022:
5,403
477
Amortization of core deposit intangible
104
Net (gain) loss on other real estate owned
970
8,410
Noninterest expenses were $27.4 million during the three months ended March 31, 2023, compared to $19.0 million during the three months ended March 31, 2022. The 44% increase in noninterest expenses was primarily due to a $5.4 million increase in employee compensation in the first quarter of 2023 related to increased head count at the Bank, Primis Mortgage and Panacea compared to 2022. The increase in noninterest expense during the three months ended March 31, 2023 was also attributable to a $0.8 million increase in data processing expense driven by substantially higher application volume on the digital deposit platform as a result of a savings account rate promotion offered during the quarter. Noninterest expense for the three months ended March 31, 2023 included $0.9 million of credit enhancement costs related to servicing and other expenses for a third-party managed loan portfolio due to significant growth in that loan portfolio during the quarter. A significant driver of the increased other non-interest expenses were higher expenses related to Primis Mortgage in the first quarter of 2023. Other notable drivers of the increase in other operating expenses in the quarter include higher FDIC insurance costs and increased fraud losses, primarily driven by increased check fraud activity. Increases in noninterest expense were offset by a decline in professional fees due to expenses associated with bringing certain V1BE activities in-house in the first quarter of 2022.
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FINANCIAL CONDITION
Balance Sheet Overview
Total assets were $4.21 billion as of March 31, 2023 and $3.57 billion as of December 31, 2022. Total cash and cash equivalents were $607.1 million as of March 31, 2023 and $77.9 million as of December 31, 2022. Investment securities decreased from $249.8 million as of December 31, 2022 to $244.6 million as of March 31, 2023. Total loans increased 3%, from $2.95 billion at December 31, 2022 to $3.04 billion at March 31, 2023. Total deposits were $3.67 billion at March 31, 2023, compared to $2.72 billion at December 31, 2022 and total equity was $400.3 million and $394.4 million at March 31, 2023 and December 31, 2022, respectively.
Stockholder’s equity balances increased $2.4 million from December 31, 2022 to March 31, 2023 as a result of a decrease in unrealized mark-to-market adjustments on the Company’s available-for-sale securities portfolio due to marginal increases in market interest rates during the first quarter of 2023. The Company has the intention to hold these securities until maturity or recovery of the value and does not anticipate realizing any losses on the investments.
Total loans were $3.04 billion and $2.95 billion at March 31, 2023 and December 31, 2022, respectively. PPP loans totaled $2.6 million at March 31, 2023 and $4.6 million at December 31, 2022, respectively. Excluding PPP loans, loans outstanding increased $96.9 million, or 3%, since December 31, 2022.
As of March 31, 2023 and December 31, 2022, a majority of our loans were to customers located in Virginia and Maryland. We are not dependent on any single customer or group of customers whose insolvency would have a material adverse effect on our operations.
The composition of our loans held for investment portfolio consisted of the following at March 31, 2023 and December 31, 2022 (in thousands):
Percent
15.1
15.6
18.9
19.7
0.2
5.0
19.9
20.7
4.6
4.8
2.1
2.2
65.8
68.2
17.9
17.7
Paycheck protection program loans
0.1
15.9
13.7
99.8
100.0
The following table sets forth the contractual maturity ranges of our loans held for investment portfolio and the amount of those loans with fixed and floating interest rates in each maturity range as of March 31, 2023 (in thousands):
After 1 Year
After 5 Years
Through 5 Years
Through 15 Years
After 15 Years
One Year
Fixed
Floating
or Less
34,006
122,770
17,621
116,986
2,336
70,342
94,947
32,343
182,392
25,529
55,872
1,393
219,393
59,143
1,982
1,206
78
1,079
1,355
392
97,144
35,342
11,562
807
19,500
49,985
7,825
53,020
74,645
371,901
29,417
8,526
57,132
20,460
19,019
27,708
7,133
9,977
1,182
11,750
5,037
71
36,589
203,478
450,009
94,825
256,348
79,252
728,943
191,067
138,981
90,526
117,783
37,259
2,854
157,294
2,369
210
1,885
270,487
51,117
70,749
2,443
88,566
344,368
813,391
263,725
364,356
82,832
731,802
437,137
3,098
1,353
1,129
400
347,466
814,744
365,485
83,232
731,943
Asset Quality
While the impact of COVID-19 largely subsided in the first quarter of 2023, the residual effect of COVID-19 and its variants, as well as new risks emerging from geopolitical conflict, inflation, bank failures and the threat of a recession continue to cause economic instability and impacts our ability to evaluate our asset quality. Despite this economic uncertainty, our asset quality remained strong during the first quarter of 2023. We will generally place a loan on nonaccrual status when it becomes 90 days past due. Loans will also be placed on nonaccrual status in cases where we are uncertain whether the borrower can satisfy the contractual terms of the loan agreement. Cash payments received while a loan is categorized as nonaccrual will be recorded as a reduction of principal as long as doubt exists as to future collections.
We maintain appraisals on loans secured by real estate, particularly those categorized as nonperforming loans and potential problem loans. In instances where appraisals reflect reduced collateral values, we make an evaluation of the borrower’s overall financial condition to determine the need, if any, for impairment or write-down to their fair values. If foreclosure occurs, we record OREO at the lower of our recorded investment in the loan or fair value less our estimated costs to sell.
Our loan portfolio losses and delinquencies have been primarily limited by our underwriting standards and portfolio management practices. Whether losses and delinquencies in our portfolio will increase significantly depends upon the value of the real estate securing the loans and economic factors, such as the overall economy in our market area, rising interest rates, historically high inflation, global supply chain issues and potential recession.
Total calculated reserves increased by $1.2 million to $35.7 million at the end of March 31, 2023 compared to $34.5 million at December 31, 2022, primarily due to the $94.9 million in loan growth experienced in the first quarter of 2023.
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The following table presents a comparison of nonperforming assets as of March 31, 2023 and December 31, 2022 (in thousands):
Nonaccrual loans
Loans past due 90 days and accruing interest
3,361
Total nonperforming assets
35,022
38,845
SBA guaranteed amounts included in nonperforming loans
2,206
3,969
Allowance for credit losses to total loans
1.17
Allowance for credit losses to nonaccrual loans
106.98
97.35
Allowance for credit losses to nonperforming loans
102.01
88.93
Nonaccrual to total loans
1.10
1.20
Nonperforming assets excluding SBA guaranteed loans to total assets
0.78
0.98
Nonaccrual loans were $33.4 million (excluding $0.6 million of loans fully covered by SBA guarantees) at March 31, 2023, compared to $35.5 million (excluding $0.6 million of loans fully covered by SBA guarantees) at December 31, 2022, a decrease of 6%. A substantial portion of the Bank’s nonperforming assets are comprised of two relationships with a combined balance of approximately $27.0 million. A large residential property with a balance of approximately $8.0 million included in that total, continues to make sporadic payments and is current as of March 31, 2023. The other relationship, primarily consisting of assisted living facilities, is currently in the middle of a receiver-managed marketing process.
At March 31, 2023, our total substandard loans were $39.5 million. Included in the total substandard loans were SBA guarantees of $0.8 million. Special mention loans totaled $28.3 million at March 31, 2023. At December 31, 2022, our total substandard loans was $41.0 million. Included in the total substandard loans were SBA guarantees of $0.8 million. Special mention loans totaled $32.3 million at December 31, 2022.
For the quarter ended March 31, 2023, one loan from our residential 1-4 family loan portfolio on an amortized cost basis of $0.9 million, was modified to a borrower experiencing financial difficulty. This modification allowed a six month deferral of principal and interest of $0.1 million for the three months ended March 31, 2023, with contractual payments expected to resume in August of this year. This loan, which has had no payment delinquencies since origination, represents only 0.15% of total loans in the secured by first liens pool.
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Investment Securities
Our investment securities portfolio provides us with required liquidity and investment securities to pledge as collateral to secure public deposits, certain other deposits, advances from the FHLB of Atlanta, and repurchase agreements.
We classify our investment securities as either held-to-maturity or available-for-sale. Debt investment securities that Primis has the positive intent and ability to hold to maturity are classified as held-to-maturity and carried at amortized cost. Investment securities classified as available-for-sale are those debt securities that may be sold in response to changes in interest rates, liquidity needs or other similar factors. Investment securities available-for-sale are carried at fair value, with unrealized gains or losses net of deferred taxes, included in accumulated other comprehensive income (loss) in stockholders’ equity.
Investment securities, available-for-sale and held-to-maturity, totaled $244.6 million at March 31, 2023, a decrease of 2% from $249.8 million at December 31, 2022.
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 an immaterial amount of credit impairment charges related to credit losses on our held-to-maturity investment securities during the three months ended March 31, 2023 and no credit losses during the three months ended March 31, 2022.
Deposits
The market for deposits is competitive. We offer a line of traditional deposit products that currently include noninterest-bearing and interest-bearing checking (or NOW accounts), commercial checking, money market accounts, savings accounts and certificates of deposit. We compete for deposits through our banking branches with competitive pricing, advertising and online banking. We use deposits as a principal source of funding for our lending, purchasing of investment securities and for other business purposes.
Total deposits increased 35% to $3.67 billion at March 31, 2023 from $2.72 billion at December 31, 2022. The increase in deposits from year-end was primarily driven by the substantial growth in the Bank’s new digital deposit platform in the first quarter of 2023. The majority of the growth was in savings accounts with the remainder largely in NOW accounts. Savings accounts increased 295% from $245.7 million as of December 31, 2022 to $971.4 million at March 31, 2023.
NOW accounts increased 35% from $617.7 million at December 31, 2022 to $835.3 million at March 31, 2023. Our deposits are diversified in type and by underlying customer and lack significant concentrations to any type of customer (i.e. commercial, consumer, government) or industry.
Uninsured deposits are defined as the portion of deposit accounts in U.S. offices that exceed the FDIC insurance limit and amounts in any other uninsured investment or deposit account that are classified as deposits and are not subject to any federal or state deposit insurance regimes. Total uninsured deposits as calculated per regulatory guidance were $1.1 billion, or 31% of total deposits at March 31, 2023. Included in this amount are affiliate balances and collateralized deposits of public entities and state and local government agencies; adjusting for these categories, our uninsured and uncollateralized deposits are approximately 26% of our total deposits at March 31, 2023.
The variety of deposit accounts we offer allows us to be competitive in obtaining funds and in responding to the threat of disintermediation (the flow of funds away from depository institutions such as banking institutions into direct investment vehicles such as government and corporate securities). Our ability to attract and maintain deposits, and the effect of such retention on our cost of funds, has been, and will continue to be, significantly affected by the general economy and market rates of interest.
For our deposit agreements with certain customers, we hold the collateral in a segregated custodial account. We are required to maintain adequate collateral levels. In the event the collateral fair value falls below stipulated levels, we will pledge additional securities. We closely monitor collateral levels to ensure adequate levels are maintained, while mitigating the potential risk of over-collateralization.
Liquidity and Funds Management
The objective of our liquidity management is to ensure the ability to meet our financial obligations. These obligations include the payment of deposits on demand or at maturity, the repayment of borrowings at maturity and the ability to fund commitments and other new business opportunities. We obtain funding from a variety of sources, including customer deposit accounts, customer certificates of deposit and payments on our loans and investments. If our level of core deposits are not sufficient to fully fund our lending activities, we have access to funding from additional sources, including but not limited to borrowing from the Federal Home Loan Bank of Atlanta and institutional certificates of deposits. In addition, we maintain federal funds lines of credit with two correspondent banks, totaling $65 million, and utilize securities sold under agreements to repurchase (“repo”) and reverse repurchase agreement borrowings from approved securities dealers, as needed.
We prepare a cash flow forecast on a 30, 60 and 90 day basis along with a one and two year basis. These projections incorporate expected cash flows on loans, investment securities, and deposits based on data used to prepare our interest rate risk analyses.
At March 31, 2023, we had substantial liquidity on the balance sheet with cash and equivalents of $607 million versus $78 million at December 31, 2022 largely due to the growth in digital platform deposits described above.
The balance in repo accounts at March 31, 2023 and December 31, 2022 was $4.3 million and $6.5 million, respectively.
43
The Bank also utilizes institutional and brokered certificates of deposit to supplement customer funding. At March 31, 2023, we had $100.0 million of brokered deposits outstanding. We had remaining brokered CD capacity under internal policy of approximately $321.0 million.
At March 31, 2023, we had $526.3 million of unfunded lines of credit and undisbursed construction loan funds, not all of which will ultimately be drawn. The amount of certificate of deposit accounts maturing in less than one year was $380.3 million as of March 31, 2023, including $100.0 million of brokered CDs. Management anticipates that funding requirements for these commitments can be met in the normal course.
As noted above, our uninsured and otherwise uncollateralized deposits were approximately 26% of total deposits, or $946.0 million. The combined availability under our various liquidity sources along with cash and equivalents on the balance sheet represented approximately 180% of uninsured and uncollateralized deposits at March 31, 2023.
As of March 31, 2023, Primis was not aware of any known trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity. As of March 31, 2023, Primis has no material commitments for capital expenditures.
Capital Resources
Capital management consists of providing equity to support both current and future operations. Primis Financial Corp. and its subsidiary bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (“PCA”), we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. At March 31, 2023 and December 31, 2022, the most recent regulatory notifications categorized the Bank as well capitalized under regulatory framework for PCA.
Quantitative measures established by regulation to ensure capital adequacy require Primis to maintain minimum amounts and ratios of Total and Tier I capital (as defined in the regulations) to average assets (as defined). Management believes, as of March 31, 2023, 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
8.59
9.68
Common equity tier 1 capital ratio
4.50
10.04
10.30
Tier 1 risk-based capital ratio
10.36
10.63
Total risk-based capital ratio
8.00
14.20
14.57
44
5.00
10.21
11.39
7.00
6.50
12.38
12.64
8.50
10.50
10.00
13.58
13.84
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 5.58% at March 31, 2023, which exceeded the 2.50% minimum requirement below which the regulators may impose limits on distributions.
Primis Bank’s capital position is consistent with being well- capitalized under the regulatory framework for PCA.
CRITICAL ACCOUNTING POLICIES
The critical accounting policies are discussed in MD&A in our Annual Report on Form 10-K for the year ended December 31, 2022. Significant accounting policies and changes in accounting principles and effects of new accounting pronouncements are discussed in “Note 1. Organization and Significant Accounting Policies” in Form 10-K for the year ended December 31, 2022. Disclosures regarding the effects of new accounting pronouncements are included in “Note 1. Accounting Policies” in this Form 10-Q. There have been no changes to the significant accounting policies during 2023.
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, 2023 and December 31, 2022. All changes are within our Asset/Liability Risk Management Policy guidelines.
Sensitivity of Economic Value of Equity
As of March 31, 2023
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
345,671
(26,491)
(7.12)
10.14
83.92
Up 300
351,887
(20,275)
(5.45)
10.33
85.43
Up 200
357,100
(15,062)
(4.05)
10.48
86.70
Up 100
371,689
(473)
(0.13)
10.91
90.24
Base
372,162
10.92
90.36
Down 100
356,560
(15,602)
(4.19)
10.46
86.57
Down 200
322,713
(49,449)
(13.29)
9.47
78.35
As of December 31, 2022
481,135
(63,410)
(11.64)
14.12
116.81
496,136
(48,409)
(8.89)
14.56
120.46
510,807
(33,738)
(6.20)
14.99
124.02
534,163
(10,382)
(1.91)
15.68
129.69
544,545
15.98
132.21
539,297
(5,248)
(0.96)
15.83
130.94
Our interest rate sensitivity is also monitored by management through the use of a model that generates estimates of the change in the net interest income (“NII”) over a range of interest rate scenarios. NII depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. In this regard, the model assumes that the composition of our interest sensitive assets and liabilities existing at March 31, 2023 and December 31, 2022 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, 2023 and December 31, 2022.
Sensitivity of Net Interest Income
Adjusted Net Interest Income
99,957
(10,338)
102,031
(8,264)
104,100
(6,195)
107,705
(2,590)
110,295
111,317
1,022
110,329
108,514
(12,447)
111,127
(9,834)
113,730
(7,231)
117,811
(3,150)
120,961
122,070
1,109
120,687
(274)
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in EVE and NII sensitivity requires the making of certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. Accordingly, although the EVE tables and NII tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net worth and NII. Sensitivity of EVE and NII are modeled using different assumptions and approaches.
ITEM 4 – CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this quarterly report on Form 10-Q, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d -15(e) under the Securities Exchange Act of 1934) utilizing the framework established in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that these controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control over Financial Reporting. As a result of the acquisition of Primis Mortgage, the Company is continuously working to integrate Primis Mortgage into its internal control over financial reporting process. Except for the changes in connection with this integration of Primis Mortgage, there were no changes in our internal controls over financial reporting that occurred during the three months ended March 31, 2023 that materially affected, or are reasonably likely to materially affect, our internal controls 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, 2023.
ITEM 1A – RISK FACTORS
There were no changes to the risk factors that were previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, except for the addition of the item below.
Recent negative developments in the banking industry could adversely affect our current and projected business operations and our financial condition and results of operations.
The recent bank failures and related negative media attention have generated significant market trading volatility among publicly traded bank holding companies and, in particular, regional, as well as community banks like the Company. These developments have negatively impacted customer confidence in regional and community banks, which could prompt customers to maintain their deposits with larger financial institutions. Further, competition for deposits has increased in recent periods, and the cost of funding has similarly increased, putting pressure on our net interest margin. If we were required to sell a portion of our securities portfolio to address liquidity needs, we may incur losses, including as a result of the negative impact of rising interest rates on the value of our securities portfolio, which could negatively affect our earnings and our capital. If we were required to raise additional capital in the current environment, any such capital raise may be on unfavorable terms, thereby negatively impacting book value and profitability. While we have taken actions to improve our funding, there is no guarantee that such actions will be successful or sufficient in the event of sudden liquidity needs.
We also anticipate increased regulatory scrutiny – in the course of routine examinations and otherwise – and new regulations directed towards banks of similar size to Primis Bank, designed to address the recent negative developments in the banking industry, all of which may increase our costs of doing business and reduce our profitability. Among other things, there may be an increased focus by both regulators and investors on deposit composition, the level of uninsured deposits, losses embedded in the held-to-maturity portion of our securities portfolio, contingent liquidity, CRE composition and concentration, capital position and our general oversight and internal control structures regarding the foregoing. As a result, Primis Bank could face increased scrutiny or be viewed as higher risk by regulators and the investor community.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
ITEM 4 – MINE SAFETY DISCLOSURES
ITEM 5 – OTHER INFORMATION
ITEM 6 - EXHIBITS
(a) Exhibits.
Exhibit No.
Description
3.1
Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to Primis Financial Corp.’s (formerly Southern National’s) Registration Statement on Form S-1 (Registration No. 333-136285) filed August 4, 2006)
3.2
Certificate of Amendment to the Articles of Incorporation dated January 31, 2005 (incorporated herein by reference to Exhibit 3.2 to Primis Financial Corp.’s (formerly Southern National’s) Registration Statement on Form S-1 (Registration No. 333-136285) filed on August 4, 2006)
3.3
Certificate of Amendment to the Articles of Incorporation dated April 13, 2006 (incorporated herein by reference to Exhibit 3.3 to Primis Financial Corp.’s (formerly Southern National’s) Registration Statement on Form S-1 (Registration No. 333-136285) filed on August 4, 2006)
3.4
Articles of Amendment to the Articles of Incorporation dated March 31, 2021 (incorporated herein by reference to Exhibit 3.1 to Primis Financial Corp.’s Current Report on Form 8-K filed on March 31, 2021)
3.5
Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.2 to Primis Financial Corp.’s Current Report on Form 8-K filed on March 31, 2021)
31.1*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following materials from Primis Financial Corp. Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, 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, 2023
/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