EDGAR 10-K Filing

Company CIK: 1325670
Filing Year: 2022
Filename: 1325670_10-K_2022_0001558370-22-003536.json

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ITEM 1. BUSINESS
Item 1. Business
Overview
On March 31, 2021, Southern National Bancorp of Virginia, Inc. (“Southern National”) changed its name to Primis Financial Corp. (“Primis,” “we,” “us,” “our” or the “Company”) and Sonabank changed its name to Primis Bank. Primis is the bank holding company for Primis Bank (“Primis Bank” or the “Bank”), a Virginia state-chartered bank which commenced operations on April 14, 2005. Primis Bank provides a range of financial services to individuals and small and medium-sized businesses. As of December 31, 2021, Primis had $3.40 billion in total assets, $2.34 billion in total loans, $2.76 billion in total deposits and $411.9 million in total stockholders’ equity. At December 31, 2021, Primis Bank had forty full-service branches in Virginia and Maryland and also provides services to customers through certain online and mobile applications. Thirty-five full-service retail branches are in Virginia and five full-service retail branches are in Maryland. The Company is headquartered in McLean, Virginia and has administrative offices in Warrenton, Virginia and Glen Allen, Virginia. Our deposits are insured, up to applicable limits, by the Federal Deposit Insurance Corporation (the “FDIC”).
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act available free of charge on our website at www.primisbank.com as soon as reasonably practicable after we electronically file such material with the SEC. These reports are also available without charge on the SEC’s website at www.sec.gov.
Strategy
Primis is focused on building a new, innovative, and better banking experience for its consumers and small and medium-sized businesses. The bank intends to grow its business, expand its customer base and improve profitability. This is being achieved through a seven-pronged approach:
1. Ensuring deposit and lending products are competitive, easy to understand and readily accessible;
2. Developing business and cash management services that are robust and easy to use;
3. Supporting lines of business that offer differentiable value to consumers and businesses;
4. Executing intuitive, forward-thinking and pioneering electronic banking services that go beyond merely providing access to finances 24-hours a day, 7-days a week;
5. Maintaining a relationship-oriented and needs-based approach to banking;
6. Providing employees with resources for personal and professional development; and,
7. Providing Primis communities and the people within them purposeful and meaningful Primis financial support and volunteerism.
Critical to executing this approach:
● Executing a New Name and Brand: On January 28, 2021, the Board of Directors of the Company approved changing the Company’s name to Primis Financial Corp., to be effective as of March 31, 2021. On March 31, 2021, the Company’s wholly-owned banking subsidiary, Sonabank, changed its name to Primis Bank, and the Company’s ticker symbol changed from SONA to FRST. The website became www.primisbank.com. Primis is focused on delivering a better return for its shareholders and a better experience for its customers. Changing the Bank’s name and brand, and committing to an image that mirrors this attitude is critical to the Company’s long-term success. Over the last year, the Company focused on building the foundation for a Company with higher expectations for innovation and technology. Primis has a deep commitment to training harder, developing more expertise in all areas of the Bank, and building lasting customer relationships.
● Utilizing the Primis Management Team’s Strength. The experience and market knowledge of the Bank’s management team is one of its greatest strengths and competitive advantages. Since the Company’s board of directors appointed Mr. Dennis J. Zember, Jr. as the new president and chief executive officer, effective February 19, 2020, Mr. Zember has added several members to the executive management team. These additional members all bring strong expertise and years of experience.
● Leveraging the Existing Foundation for Additional Growth. Based on the management team’s depth of experience and certain infrastructure investments, Primis looks to take advantage of certain economies of scale typically enjoyed by larger organizations, thus expanding its operations both organically and through strategic cost-effective branch or bank acquisitions. Primis’ investments in data processing, risk management infrastructure, and the staff and branch network will support a much larger asset base. Primis is committed to controlling additional growth in a manner designed to minimize risk and to maintain strong capital ratios.
● Continuing to Pursue Selective Acquisition Opportunities. Primis has the skillsets and experience necessary to acquire and successfully integrate financial institutions, banks and branches. This, along with its strong capital position, well-positions Primis to take advantage of acquisition opportunities.
● Focusing on the Business Owner. Primis looks to be the primary bank for small- and medium-sized businesses by offering a suite of competitive electronic banking services, robust treasury services and compre-hensive lending options. We believe that Primis’ localized decision-making capabilities, prompt credit decisions, and superior customer service supported by a highly experienced and knowledgeable management team offers Primis a distinct competitive advantage in the marketplace.
● Focusing on Asset Quality and Underwriting. Strong asset quality is of primary importance. Therefore, despite the growth in the Bank’s loan portfolio, Primis has taken measures to ensure it maintains a strong asset quality by upholding its well-defined underwriting standards.
● Building a Stable Core Deposit Base. Primis continues to grow a stable core deposit base of business and retail customers. Primis intends to continue its practice of developing a deposit relationship with each of its loan customers.
BANKING SERVICES
Our principal business is the acquisition of deposits from the general public through our branch offices and deposit intermediaries and the use of these deposits to fund our loan and investment security portfolios. We seek to be a full service bank that provides a wide variety of financial services to our middle market corporate clients as well as to our retail clients. We are an active commercial lender, and also invest funds in mortgage-backed securities, collateralized mortgage obligations, securities issued by agencies of the federal government and obligations of states and political subdivisions.
Lending Activities Overview
Primis offers a wide range of commercial banking services; however, we are focused on making loans secured primarily by commercial real estate and other types of secured and unsecured commercial loans to small and medium-sized businesses in a number of industries, as well as loans to individuals for a variety of purposes, including home equity lines of credit. We are a Small Business Administration (“SBA”) lender with Preferred Lending Partner (“PLP”) status that allows us to offer this program nationwide. We also invest in real estate-related securities, including collateralized mortgage obligations and agency mortgage backed securities. Our principal sources of funds for loans and investing in securities are deposits and, to a lesser extent, borrowings.
The following is a discussion of each of the major types of lending in which we engage. For more information on our lending activities, see “Item 7. Management’s Discussion and Analysis of Financial Condition.”
Commercial Lending
Commercial Business Lending. These loans consist of lines of credit, revolving credit facilities, demand loans, term loans, equipment loans, SBA loans, stand-by letters of credit, and unsecured loans. Commercial business loans are generally secured by business assets, equipment, accounts receivable, inventory and other collateral, such as readily marketable stocks and bonds with adequate margins, cash value in life insurance policies and savings and time deposits at Primis Bank.
Commercial Real Estate Lending. Commercial real estate lending includes loans for permanent financing. Commercial real estate lending typically involves higher loan principal amounts and the repayment of loans is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Owner occupied real estate is evaluated in conjunction with the operations of the business.
Construction Lending. Primis provides construction loans for commercial, multi-family, assisted living and other non-residential properties, and builder/developer lines for established companies in our market footprint. Construction loan borrowers are generally pre-qualified for the permanent loan by us or a third party.
Secured Asset Based Lending (SABL). Primis has developed a proprietary Asset Based Lending software system that allows the Bank to monitor the collateral of its commercial borrowers who have pledged their working assets (accounts receivables and other qualifying assets such as inventory) as collateral. SABL has the ability to track other offsets (liabilities, e.g. other loans the customer has with the Bank) to the line of credit. SABL serves to provide more stringent controls and supervision that this type of lending requires.
SBA Lending. Primis has developed expertise in the federally guaranteed SBA programs. The SBA programs provide economic development programs which finance start-up and expansion of small businesses. We are a nationwide Preferred Lender. As an SBA Preferred Lender, our pre-approved status allows us to quickly respond to customers’ needs. Under the SBA program, we generally originate and fund SBA 7(a) and 504 loans. Benefits to Primis are low LTV commercial loans and government guarantees up to 80%.
Panacea Practice Solutions. Primis, through its Panacea division, provides financing for medical, dental and veterinary businesses. Financing purposes cover a range of needs in this sector to include acquisition, start-up, expansion, real estate purchase and refinance, leasehold, equipment financing, as well as practice buy-ins.
Mortgage Warehouse Lending. Primis provides warehouse lending lines of credit to residential mortgage originators. Program parameters and underwriting guidelines are processed and monitored through our Warehouse Loan System (WLS) to ensure program compliance.
Consumer Lending
Primis offers various types of secured and unsecured consumer loans. We make consumer loans primarily for personal, family or household purposes.
Residential Mortgage. Primis does not currently originate permanent residential mortgage loans. Primis will purchase originated residential mortgages from our Warehouse Line clients, as well as other loan pools. We have no sub-prime loans.
Southern Trust Mortgage. Primis Bank previously had an interest in one mortgage company, Southern Trust Mortgage, LLC (“STM”). Prior to December 31, 2021, Primis Bank owned 43.28% and 100% of STM’s common and preferred stock, respectively. On September 23, 2021, Primis Bank announced that it entered into an agreement with STM, whereby STM agreed to purchase all of the Bank's common membership interests and a portion of the Bank's preferred interests in STM for a combination of $1.6 million in cash and a promissory note for $8.5 million. The transaction closed on December 31, 2021. Upon closing, STM continues to be a borrower of the Bank, but the Bank is no longer a minority owner of STM
and STM is no longer considered an affiliate of the Company. STM has mortgage banking originators in Delaware, Virginia, Maryland, North Carolina and South Carolina and only originated retail mortgages.
Home Equity Lines of Credit. Primis offers credit lines secured by primary residential properties with maximum loan-to-values of 80%. The product provides for a 10 year draw period followed by a 20 year repayment period.
Secured Personal Loans. Primis offers secured personal loans for a variety of purposes including auto, motorcycle, boats, and recreational vehicles. Pledged collateral could also include marketable securities and certificates of deposits.
Premium Life Finance. Primis offers life insurance premium financing. The loan is utilized to pay the annual premiums due on the whole or universal life policy. The loan is fully secured by the cash value of the policy and personal liquid assets of the borrower or guarantor.
Unsecured Personal Loans. Primis offers unsecured personal loans up to $50,000 and overdraft protection loans up to $10,000, based on specified underwriting criteria.
Panacea Consumer Loans. Panacea offers several unsecured consumer loan products to include student loan refinancing and PRN loans. PRN loans may be utilized by graduating doctors to fund costs as they move into their chosen professions. Strict criteria has been established around these products.
Because future loan losses are so closely intertwined with our underwriting policy, we have instituted what management believes is a stringent loan underwriting policy. Our underwriting guidelines are tailored for particular credit types, including lines of credit, revolving credit facilities, demand loans, term loans, equipment loans, real estate loans, SBA loans, stand-by letters of credit and unsecured loans. We have instituted a no exceptions policy for our consumer credit programs.
Deposit Activities Overview
We offer a broad range of deposit products, including checking, NOW, savings, and money market accounts and certificates of deposit, supporting the needs of businesses and individuals. We actively pursue business relationships by utilizing the business contacts of our senior management, other bank officers and our directors, thereby capitalizing on our knowledge of our local market areas.
Commercial deposit products are enhanced by a robust suite of treasury and cash management services, including:
● Investment/sweep accounts
● Wire transfer services
● Employer services/payroll processing services
● Zero balance accounts
● Night depository services
● Depository transfers
● Merchant services (third party)
● ACH originations
● Business debit cards
● Controlled disbursement accounts
● Remote deposit capture
● Mobile and online banking
Other products and services offered by the Bank include: Debit cards, ATM services, notary services, and wire transfer.
Lines of Businesses
Panacea Financial. In November 2020, the Company launched the Panacea Financial division, which focuses on providing unique financial products and services for the medical community. Panacea offers personal, student debt refinance, commercial real estate and practice loans as well as deposit products nationally. In 2021, Panacea announced partnerships with three national and state medical associations. Additionally, Panacea launched its In-Training Medical/Dental School Loan Refinance product which allows physicians and dentists that are in training the opportunity to refinance their student debt at a lower interest rate, while benefiting from affordable monthly payments during training. As of December 31, 2021, Panacea had approximately $50.2 million in outstanding loans, the majority of which were originated in the second half of 2021. The division has successfully built a nationally-recognized brand and finished 2021 with a growing team of industry-leading commercial bankers experienced in providing financial services to the medical community across the United States.
Life Premium Financing. The Company launched a division in the fourth quarter of 2021 focussed on financing life insurance premiums for high net worth individuals across the United States. Within the first 45 days of operation and as of December 31, 2021, the Life Premium Finance Division originated and closed five loans with committed balances totaling $69.4 million and outstanding balances, net of deferred fees, of $12.9 million. Outstanding balances on these loans grow over three to five years so the Company is expecting a sustainable growth rate in the division with each new loan originated.
Digital Banking
In the fourth quarter of 2021, Primis successfully launched its new digital bank platform to friends and family of the Bank. The platform includes an all-new mobile banking application that provides a quick and seamless account opening process all from within the app. Additional build-out of the digital banking application is in testing and the Bank anticipates a full launch to the public in near future.
Also in the fourth quarter of 2021, Primis launched its new V1BE service, the first bank delivery app for on-demand ordering of branch services. V1BE brings in-branch banking services right to the customer’s doorstep, including cash delivery/withdrawals, cash pick-up/deposits, check deposits, change orders, cashier checks, and the instant issue of replacement debit cards. In August 2021, V1BE was piloted in the Richmond market, and as of December 2021, the service expanded into Northern Virginia. With V1BE, Primis is able to support any market and grow customer relationships without the need for a large branch presence.
Funding and Revenue Sources
The principal sources of funds for our lending and investment activities are deposits, repayment of loans, prepayments from mortgage-backed securities, repayments of maturing investment securities, Federal Home Loan Bank (“FHLB”) advances and other borrowed money.
Principal sources of revenue are interest and fees on loans and investment securities as well as fee income derived from the maintenance of deposit accounts and income from bank-owned life insurance policies. Our principal expenses include interest paid on deposits, advances from the FHLB of Atlanta, junior subordinated debt, senior subordinated notes and other borrowings, and operating expenses.
CREDIT ADMINISTRATION
Because future loan losses are so closely intertwined with our underwriting policy, we have instituted what management believes are well-defined loan underwriting criteria and portfolio management practices. Our underwriting guidelines are tailored for particular credit types, including lines of credit, revolving credit facilities, demand loans, term loans, equipment loans, real estate loans, SBA loans, stand-by letters of credit and unsecured loans. We will make extensions of credit based, among other factors, on the potential borrower’s creditworthiness and likelihood of repayment.
For loans less than $2.5 million, we have named Credit Officers, each of whom has a defined lending authority. These individual lending authorities are determined by our Chief Executive Officer and Chief Credit Officer and are based on the individual’s technical ability and experience. Primis also has three Specialty Executive Credit Officers, each with extensive industry specific experience. Designated lending authorities are approved by our board of directors. All credit extensions in excess of 60% of the Bank’s legal lending limit are also reviewed and approved by the Board of Directors. As of December 31, 2021, our legal lending limit was approximately $60.1 million.
Portfolio management is an integral part of sound credit practices. The responsible relationship manager in conjunction with credit administration will service loan credits through their life cycle. Primis has a dedicated Special Assets team that provides oversight on credit collection activities, to include legal negotiations, forbearance agreements, collateral sale, foreclosures and management of other real estate owned (“OREO”). This coordinated approach to credit provides a high quality portfolio. Credit Administration is responsible for monthly reporting to the Board of Directors on asset quality and performance.
COMPETITION
The banking business is highly competitive, and our profitability depends principally on our ability to compete in the market areas in which our banking operations are located. We experience substantial competition in attracting and retaining deposits and in lending funds. The primary factors we encounter in competing for deposits are convenient office locations and rates offered. Direct competition for deposits comes from other commercial bank and thrift institutions, money market mutual funds and corporate and government securities which may offer more attractive rates than insured depository institutions are willing to pay. The primary factors we encounter in competing for loans include, among others, interest rate and loan origination fees and the range of services offered. Competition for origination of loans normally comes from other commercial banks, thrift institutions, mortgage bankers, mortgage brokers, insurance companies and fintech or digital lending companies. We have been able to compete effectively with other financial institutions by:
● emphasizing customer service and technology;
● establishing long-term customer relationships and building customer loyalty; and
● providing products and services designed to address the specific needs of our customers.
HUMAN CAPITAL
At Primis, we are committed to ensuing that our employees reach their personal, professional and financial peaks. We are attracting, developing, retaining and planning for the succession of key talent and executives to achieve our strategic objectives. Primis is continually investing in our workforce to further emphasize diversity and inclusion and to foster our employees' growth and career development. At December 31, 2021, we had 418 employees, nearly all of whom are full-time and of which approximately 75% were female and 25% were minorities.
Employee Feedback. Fostering an inclusive environment requires that all employees are heard. Our Intranet houses the “Employee Voice” which is a vehicle for employees to make suggestions, asks questions or voice an opinion regarding the Company’s practices.
Recruitment. While the majority of our employees reside in Virginia, our recruitment efforts are both local and nationwide. We utilize a wide range of recruitment vehicles ranging from college recruitment sites such as “Handshake” to posting on popular job boards and conducting nationwide profile searches to find qualified candidates. Primis realizes that great people know other great people so we also offer a referral bonus to our employees.
Benefits. Primis offers a comprehensive and competitive benefits package to meet a variety of individual needs. We offer four different medical plans, two of which allow for the employee to make contributions and receive an employer match on a Health Savings Account. In addition to dental insurance, supplemental insurance and a 401k, Primis offers employer paid short-term and long-term disability and life insurance. Our employees also enjoy a cash incentive for participating in our Wellness Program.
Development. All new employees benefit from training to learn how to utilize key Company systems. New employees are also required to complete multiple learning modules that cover important compliance and regulatory requirements in the banking industry. Continuing education and advance training is offered to employees throughout their tenure at Primis. We encourage all employees to obtain job related training by covering the cost of the classes and/or learning materials and tests.
Volunteerism. Primis is committed to the communities we serve and to supporting our employees in their volunteerism. Beginning in 2021, each employee receives eight paid hours to volunteer in their community or charity of choice each year. We maintain a commitment to the prosperity of each community the Company serves, donating to community, civic and philanthropic organizations in 2021. In addition to providing financial products built for the needs of our customers, the Company uses associate volunteerism and corporate philanthropy to build strong community partnerships.
COVID-19. New challenges were presented to the workplace as a result of COVID-19 in 2021. Primis responded with personal protection equipment and guidance on how to mitigate the threat of COVID. Our branches were equipped with plexi-glass barriers and all employees were provided with masks and gloves. The COVID Guide with corresponding Incident Report Form was implemented in 2020.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under federal and state law. This discussion is a summary and is qualified in its entirety by reference to the particular statutory and regulatory provisions described below, and is not intended to be an exhaustive description of the statutes or regulations applicable to Primis or the Bank. The business of Primis and the Bank is subject to extensive regulation and supervision under federal and state law, including oversight by the Board of Governors of the Federal Reserve System (“Federal Reserve”) and the Virginia Bureau of Financial Institutions (“VBFI”), a regulatory division of the Virginia State Corporation Commission.
Changes in laws and regulations may alter the structure, regulation and competitive relationships of financial institutions. In addition, bank regulatory agencies may issue enforcement actions, policy statements, interpretive letters and similar written guidance applicable to us or the Bank. It cannot be predicted whether and in what form new laws and regulations, or interpretations thereof, may be adopted or the extent to which the business of Primis and the Bank may be affected thereby, but they may have a material adverse effect on our business, operations, and earnings.
Violations of laws and regulations, or other unsafe and unsound practices, may result in regulatory agencies imposing fines or penalties, cease and desist orders, or taking other enforcement actions. Under certain circumstances, these agencies may enforce these remedies directly against officers, directors, employees and other parties participating in the affairs of a bank or bank holding company. Under federal and state laws and regulations pertaining to the safety and soundness of insured depository institutions, federal and state banking regulators have the authority to compel or restrict certain actions on our part if they determine that we have insufficient capital or other resources, or are otherwise operating in a manner that may be deemed to be inconsistent with safe and sound banking practices. Under this authority, our bank regulators can require us or our subsidiaries to enter into informal or formal supervisory agreements, including board resolutions, memoranda of understanding, written agreements and consent or cease and desist orders, pursuant to which we would be required to take identified corrective actions to address cited concerns and to refrain from taking certain actions.
If we become subject to and are unable to comply with the terms of any future regulatory actions or directives, supervisory agreements, or orders, then we could become subject to additional, heightened supervisory actions and orders, possibly including consent orders, prompt corrective action restrictions and/or other regulatory actions, including prohibitions on the payment of dividends on our common stock and preferred stock. If our regulators were to take such additional supervisory actions, then we could, among other things, become subject to significant restrictions on our ability to develop any new business, as well as restrictions on our existing business, and we could be required to raise additional capital, dispose of certain assets and liabilities within a prescribed period of time, or both. The terms of any such supervisory action could have a material negative effect on our business, reputation, operating flexibility, financial condition, and the value of our common stock and preferred stock.
Supervision, regulation, and examination of Primis, the Bank, and our respective subsidiaries by the appropriate regulatory agencies, as described herein, are intended primarily for the protection of consumers, bank depositors and the Deposit Insurance Fund (“DIF”) of The Federal Deposit Insurance Corporation (“FDIC”) and the U.S. banking and financial system, rather than holders of our capital stock.
Bank Holding Company Regulation
Primis is subject to extensive supervision and regulation by the Federal Reserve System pursuant to the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). We are required to file with the Federal Reserve periodic reports and such other information as the Federal Reserve may request. Ongoing supervision is provided through regular examinations by the Federal Reserve and other means that allow the regulators to gauge management’s ability to identify, assess and control risk in all areas of operations in a safe and sound manner and to ensure compliance with laws and regulations. In addition to regulation by the Federal Reserve as a bank holding company, Primis is subject to supervision and regulation by the VBFI under the banking and general business corporation laws of the Commonwealth of Virginia.
Activity Limitations. Primis is registered with the Federal Reserve as a bank holding company. Bank holding companies generally are limited to the business of banking, managing or controlling banks, and other activities that the Federal Reserve determines to be closely related to banking, or managing or controlling banks as to be a proper incident thereto. Bank holding companies are prohibited from acquiring or obtaining control of more than five percent (5%) of the outstanding voting interests of any company that engages in activities other than those activities permissible for bank holding companies. Examples of activities that the Federal Reserve has determined to be permissible are making, acquiring, brokering, or servicing loans; leasing personal property; providing certain investment or financial advice; performing certain data processing services; acting as agent or broker in selling credit life insurance and other insurance products in certain locations; and performing certain insurance underwriting activities. The Bank Holding Company Act does not place geographic limits on permissible non-banking activities of bank holding companies. Even with respect to permissible activities, however, the Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity or its control of any subsidiary when the Federal Reserve has reasonable cause to believe that continuation of such activity or control of such subsidiary would pose a serious risk to the financial safety, soundness or stability of any bank subsidiary of that holding company.
Source of Strength Obligations. A bank holding company is required to act as a source of financial and managerial strength to its subsidiary bank. The term “source of financial strength” means the ability of a company, such as us, that directly or indirectly owns or controls an insured depository institution, such as the Bank, to provide financial assistance to such insured depository institution in the event of financial distress. The appropriate federal banking agency for the depository institution (in the case of the Bank, this agency is the Federal Reserve) may require reports from us to assess our ability to serve as a source of strength and to enforce compliance with the source of strength requirements by requiring us to provide financial assistance to the Bank in the event of financial distress. If we were to enter bankruptcy or become subject to the orderly liquidation process established by the Dodd-Frank Act, any commitment by us to a federal bank regulatory agency to maintain the capital of the Bank would be assumed by the bankruptcy trustee or the FDIC, as appropriate, and entitled to a priority of payment. In addition, the FDIC provides that any insured depository institution generally will be liable for any loss incurred by the FDIC in connection with the default of, or any assistance provided by the FDIC to, a commonly controlled insured depository institution. The Bank is an FDIC-insured depository institution and thus subject to these requirements.
Acquisitions. The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve or waiver of such prior approval before it (1) acquires ownership or control of any voting shares of any bank if, after such acquisition, such bank holding company will own or control more than five percent (5%) of the voting shares of such bank, (2) acquires all of the assets of a bank, or (3) merges with any other bank holding company. In reviewing a proposed covered acquisition, among other factors, the Federal Reserve considers (1) the financial and managerial resources of the companies involved, including pro forma capital ratios; (2) the risk to the stability of the United States banking or financial system; (3) the convenience and needs of the communities to be served, including performance under the CRA; and (4) the effectiveness of the companies in combatting money laundering. The Federal Reserve also reviews any indebtedness to be incurred by a bank holding company in connection with a proposed acquisition
to ensure that the bank holding company can service such indebtedness without adversely affecting its ability to serve as a source of strength to its bank subsidiaries. Well capitalized and well managed bank holding companies are permitted to acquire control of banks in any state, subject to federal regulatory approval, without regard to whether such a transaction is prohibited by the laws of any state. However, a bank holding company may not, following an interstate acquisition, control more than 10% of nationwide insured deposits or 30% of deposits within any state in which the acquiring bank operates.
Change in Control. Federal law restricts the amount of voting stock of a bank holding company or a bank that a person (including an entity) may acquire without the prior approval of banking regulators. Under the federal Change in Bank Control Act and the regulations thereunder, a person or group must give advance notice to and obtain approval from the Federal Reserve before acquiring control of any bank holding company, such as Primis. The Change in Bank Control Act creates a rebuttable presumption of control if a person or group acquires the power to vote 10% or more of our outstanding common stock. The overall effect of such laws is to make it more difficult to acquire a bank holding company and a bank by tender offer or similar means than it might be to acquire control of another type of corporation. Consequently, shareholders of the Company may be less likely to benefit from the rapid increases in stock prices that may result from tender offers or similar efforts to acquire control of other companies. Investors should be aware of these requirements when acquiring shares of our stock.
Virginia Law. Certain state corporation laws may have an anti-takeover affect. Virginia law restricts transactions between a Virginia corporation and its affiliates and potential acquirers. The following discussion summarizes the two Virginia statutes that may discourage an attempt to acquire control of Primis.
Virginia Code Sections 13.1-725 - 727.1 govern “Affiliated Transactions.” These provisions, with several exceptions discussed below, require approval by the holders of at least two-thirds of the remaining voting shares of material acquisition transactions between a Virginia corporation and any holder of more than 10% of any class of its outstanding voting shares. Affiliated Transactions include mergers, share exchanges, material dispositions of corporate assets not in the ordinary course of business, any dissolution of the corporation proposed by or on behalf of an interested shareholder, or any reclassification, including a reverse stock split, recapitalization, or merger of the corporation with its subsidiaries which increases the percentage of voting shares owned beneficially by any 10% shareholder by more than 5%.
These provisions were designed to deter certain takeovers of Virginia corporations. In addition, the statute provides that, by affirmative vote of a majority of the voting shares other than shares owned by any 10% shareholder, a corporation can adopt an amendment to its articles of incorporation or bylaws providing that the Affiliated Transactions provisions shall not apply to the corporation. Primis “opted out” of the Affiliated Transactions provisions when it incorporated.
Virginia law also provides that shares acquired in a transaction that would cause the acquiring person’s voting strength to meet or exceed any of the three thresholds (20%, 33.33% or 50%) have no voting rights for those shares exceeding that threshold, unless granted by a majority vote of shares not owned by the acquiring person. This provision empowers an acquiring person to require the Virginia Corporation to hold a special meeting of shareholders to consider the matter within 50 days of the request. Primis also “opted out” of this provision at the time of its incorporation.
Governance and Financial Reporting Obligations. We are required to comply with various corporate governance and financial reporting requirements under the Sarbanes-Oxley Act of 2002, as well as rules and regulations adopted by the SEC, the Public Company Accounting Oversight Board, and NASDAQ. In particular, we are required to include management and independent registered public accounting firm reports on internal controls as part of our Annual Report on Form 10-K in order to comply with Section 404 of the Sarbanes-Oxley Act. We have evaluated our controls, including compliance with the SEC rules on internal controls, and have and expect to continue to spend significant amounts of time and money on compliance with these rules. Our failure to comply with these internal control rules may materially adversely affect our reputation, ability to obtain the necessary certifications to financial statements, and the values of our securities.
Corporate Governance. The Dodd-Frank Act addressed many investor protections, corporate governance, and executive compensation matters that will affect most U.S. publicly traded companies. The Dodd-Frank Act (1) granted shareholders of U.S. publicly traded companies an advisory vote on executive compensation; (2) enhanced independence
requirements for Compensation Committee members; and (3) required companies listed on national securities exchanges to adopt incentive-based compensation claw-back policies for executive officers.
Incentive Compensation. The Dodd-Frank Act required the banking agencies and the SEC to establish joint rules or guidelines for financial institutions with more than $1.0 billion in assets, such as Primis and the Bank, which prohibit incentive compensation arrangements that the agencies determine to encourage inappropriate risks by the institution. The federal banking agencies issued proposed rules in 2011 and previously issued guidance on sound incentive compensation policies. In 2016, the federal banking agencies also proposed rules that would, depending upon the assets of the institution, directly regulate incentive compensation arrangements and would require enhanced oversight and recordkeeping. As of December 31, 2021, these rules have not been implemented. We and Primis Bank have undertaken efforts to ensure that our incentive compensation plans do not encourage inappropriate risks, consistent with three key principles-that incentive compensation arrangements should appropriately balance risk and financial rewards, be compatible with effective controls and risk management, and be supported by strong corporate governance.
Shareholder Say-On-Pay Votes. The Dodd-Frank Act requires public companies to take shareholders’ votes on proposals addressing compensation (known as say-on-pay), the frequency of a say-on-pay vote, and the golden parachutes available to executives in connection with change-in-control transactions. Public companies must give shareholders the opportunity to vote on the compensation at least every three years and the opportunity to vote on frequency at least every six years, indicating whether the say-on-pay vote should be held annually, biennially, or triennially.
Anti-tying rules. A bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with extensions of credit, leases or sales of property, or furnishing of services.
Capital Requirements
Primis and the Bank are each required under federal law to maintain certain minimum capital levels based on ratios of capital to total assets and capital to risk-weighted assets. The required capital ratios are minimums, and the federal banking agencies may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. Risks such as concentration of credit risks and the risk arising from non-traditional activities, as well as the institution’s exposure to a decline in the economic value of its capital due to changes in interest rates, and an institution’s ability to manage those risks are important factors that are to be taken into account in assessing an institution’s overall capital adequacy. The following is a brief description of the relevant provisions of these capital rules and their potential impact on our capital levels.
Primis and the Bank are each subject to the following risk-based capital ratios: a common equity Tier 1 ("CET1") risk-based capital ratio, a Tier 1 risk-based capital ratio, which includes CET1 and additional Tier 1 capital, and a total risk-based capital ratio, which includes Tier 1 and Tier 2 capital. CET1 is primarily comprised of the sum of common stock instruments and related surplus net of treasury stock, plus retained earnings and certain qualifying minority interests, less certain adjustments and deductions, including with respect to goodwill, intangible assets, mortgage servicing assets and deferred tax assets subject to temporary timing differences. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock, tier 1 minority interests and grandfathered trust preferred securities. Tier 2 capital consists of instruments disqualified from Tier 1 capital, including qualifying subordinated debt, other preferred stock and certain hybrid capital instruments, and a limited amount of loan loss reserves up to a maximum of 1.25% of risk-weighted assets, subject to certain eligibility criteria. The capital rules also define the risk-weights assigned to assets and off-balance sheet items to determine the risk-weighted asset components of the risk-based capital rules, including, for example, certain “high volatility” commercial real estate, past due assets, structured securities and equity holdings.
The leverage capital ratio, which serves as a minimum capital standard, is the ratio of Tier 1 capital to quarterly average total consolidated assets net of goodwill, certain other intangible assets, and certain required deduction items. The required minimum leverage ratio for all banks is 4%.
In addition, effective January 1, 2019, the capital rules require a capital conservation buffer of CET1 of 2.5% above each of the minimum capital ratio requirements (CET1, Tier 1, and total risk-based capital), which is designed to absorb losses during periods of economic stress. These buffer requirements must be met for a bank or bank holding company to
be able to pay dividends, engage in share buybacks or make discretionary bonus payments to executive management without restriction.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, requires the federal bank regulatory agencies to take “prompt corrective action” regarding depository institutions that do not meet minimum capital requirements. FDICIA establishes five regulatory capital tiers: “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, and “critically undercapitalized”. A depository institution’s capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. The FDICIA imposes progressively more restrictive restraints on operations, management and capital distributions, depending on the category in which an institution is classified.
To be well-capitalized, the Bank must maintain at least the following capital ratios:
●6.5% CET1 to risk-weighted assets;
●8.0% Tier 1 capital to risk-weighted assets;
●10.0% Total capital to risk-weighted assets; and
●5.0% leverage ratio.
The Federal Reserve has not yet revised the well-capitalized standard for bank holding companies to reflect the higher capital requirements imposed under the current capital rules. For purposes of the Federal Reserve’s Regulation Y, bank holding companies, such as Primis, must maintain a Tier 1 risk-based capital ratio of 6.0% or greater and a total risk-based capital ratio of 10.0% or greater to be well-capitalized. If the Federal Reserve were to apply the same or a similar well-capitalized standard to bank holding companies as that applicable to the Bank, Primis’ capital ratios as of December 31, 2021 would exceed such revised well-capitalized standard. Also, the Federal Reserve may require bank holding companies, including Primis, to maintain capital ratios substantially in excess of mandated minimum levels, depending upon general economic conditions and a bank holding company’s particular condition, risk profile and growth plans.
Failure to be well-capitalized or to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our operations or financial condition. Failure to meet minimum capital requirements could also result in restrictions on Primis’ or the Bank’s ability to pay dividends or otherwise distribute capital or to receive regulatory approval of applications or other restrictions on its growth.
Both Primis and the Bank’s regulatory capital ratios were above the applicable well-capitalized standards and met the capital conservation buffer as of December 31, 2021. Based on current estimates, we believe that Primis and the Bank will continue to exceed all applicable well-capitalized regulatory capital requirements and the capital conservation buffer in 2022.
On October 29, 2019, the federal banking agencies jointly issued a final rule to simplify the regulatory capital requirements for eligible banks and holding companies with less than $10 billion in consolidated assets that opt into the Community Bank Leverage Ratio (“CBLR”) framework. A qualifying community banking organization with total consolidated assets of less than $10 billion that exceeds the CBLR threshold would be exempt from the agencies’ current capital framework, including the risk-based capital requirements and capital conservation buffer described above, and would be deemed well-capitalized under the agencies’ prompt corrective action regulations. Under the final rule, if a qualifying community banking organization elects to use the CBLR framework, it will be considered “well-capitalized” so long as its CBLR is greater than 9%. Primis does not use the CBLR framework.
Payment of Dividends
Primis is a legal entity separate and distinct from the Bank and other subsidiaries. Its primary source of cash, other than securities offerings, is dividends from the Bank. Under the Federal Deposit Insurance Act, no dividends may be paid by an insured bank if the bank is in arrears in the payment of any insurance assessment due to the FDIC. The payment of
dividends by the Bank may also be affected by other regulatory requirements and policies, such as the maintenance of adequate capital. If, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that the bank cease and desist from that practice. The Federal Reserve has formal and informal policies which provide that insured banks should generally pay dividends only out of current operating earnings.
Under a Federal Reserve policy adopted in 2009, the board of directors of a bank holding company must consider certain factors to ensure that its dividend level is prudent relative to maintaining a strong financial position, and is not based on overly optimistic earnings scenarios, such as potential events that could affect its ability to pay, while still maintaining a strong financial position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should consult with the Federal Reserve and eliminate, defer or significantly reduce the bank holding company’s dividends if:
● its net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;
● its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition; or
● it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
Bank Regulation
The operation of the Bank is subject to state and federal statutes applicable to state banks and the regulations of the Federal Reserve, the FDIC and the Consumer Financial Protection Bureau (“CFPB”). The operations of the Bank may also be subject to applicable Office of the Comptroller of the Currency (“OCC”) regulation to the extent state banks are granted parity with national banks. Such statutes and regulations relate to, among other things, required reserves, investments, loans, mergers and consolidations, issuances of securities, payments of dividends, establishment of branches, consumer protection and other aspects of the Bank’s operations. Violations of laws and regulations, or other unsafe and unsound practices, may result in these agencies imposing fines or penalties, cease and desist orders, or taking other enforcement actions. Under certain circumstances, these agencies may enforce these remedies directly against officers, directors, employees and other parties participating in the affairs of a bank or bank holding company.
Safety and Soundness. The Federal Deposit Insurance Act requires the federal prudential bank regulatory agencies, such as the Federal Reserve, to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions relating to: (1) internal controls; (2) information systems and audit systems; (3) loan documentation; (4) credit underwriting; (5) interest rate risk exposure; and (6) asset quality. The agencies also must prescribe standards for asset quality, earnings, and stock valuation, as well as standards for compensation, fees and benefits. The federal banking agencies have adopted regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement these required standards. These guidelines set forth the safety and soundness standards used to identify and address problems at insured depository institutions before capital becomes impaired. Under the regulations, if a regulator determines that a bank fails to meet any standards prescribed by the guidelines, the regulator may require the bank to submit an acceptable plan to achieve compliance, consistent with deadlines for the submission and review of such safety and soundness compliance plans.
Examinations. The Bank is subject to regulation, reporting, and periodic examinations by the Federal Reserve and the VBFI. These regulatory authorities routinely examine the Bank’s reserves, loan and investment quality, consumer compliance, management policies, procedures and practices and other aspects of operations. The Federal Reserve has adopted the Federal Financial Institutions Examination Council’s (“FFIEC”) rating system and assigns each financial institution a confidential composite rating based on an evaluation and rating of six essential components of an institution’s financial condition and operations, including Capital Adequacy, Asset Quality, Management, Earnings, Liquidity and Sensitivity to Market Risk, as well as the quality of risk management practices.
Consumer Protection. The Dodd-Frank Act established the CFPB, an independent regulatory authority housed within the Federal Reserve having centralized authority, including examination and enforcement authority, for consumer
protection in the banking industry. The CFPB has rule writing, examination, and enforcement authority with regard to the Bank’s (and Primis’) compliance with a wide array of consumer financial protection laws, including the Truth in Lending Act, the Real Estate Settlement Procedures Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the S.A.F.E. Mortgage Licensing Act, the Fair Credit Reporting Act (except Sections 615(e) and 628), the Fair Debt Collection Practices Act, and the Gramm-Leach-Bliley Act (sections 502 through 509 relating to privacy), among others. The CFPB has broad authority to enforce a prohibition on unfair, deceptive, or abusive acts and practices. Authority to supervise and examine Primis and the Bank for compliance with federal consumer laws remains largely with the Federal Reserve. However, the CFPB may participate in examinations on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulators. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the CFPB, and state attorneys general are permitted to enforce consumer protection rules adopted by the CFPB against certain institutions.
Deposit Insurance Assessments. The Deposit Insurance Fund (“DIF”) of the FDIC insures the deposits of the Bank generally up to a maximum of $250,000 per depositor, per insured bank, for each account ownership category. The FDIC charges insured depository institutions quarterly premiums to maintain the DIF. Deposit insurance assessments are based on average total consolidated assets minus its average tangible equity, and take into account certain risk-based financial ratios and other factors. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by a bank’s federal regulatory agency. In addition, the Federal Deposit Insurance Act provides that, in the event of the liquidation or other resolution of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution, including those of the parent bank holding company.
Insider Transactions. The Federal Reserve has adopted regulations that restrict preferential loans and loan amounts to “affiliates” and “insiders” of banks, require banks to keep information on loans to major shareholders and executive officers and bar certain director and officer interlocks between financial institutions.
Reserves. The Bank is subject to Federal Reserve regulations that require the Bank to maintain reserves against transaction accounts (primarily checking accounts). These reserve requirements are subject to annual adjustment by the Federal Reserve. Effective March 26, 2020, reserve requirement ratios were reduced to zero percent.
Anti-Money Laundering. A continued focus of governmental policy relating to financial institutions in recent years has been combating money laundering and terrorist financing. The USA PATRIOT Act broadened the application of anti-money laundering regulations to apply to additional types of financial institutions such as broker-dealers, investment advisors and insurance companies, and strengthened the ability of the U.S. Government to help prevent, detect and prosecute international money laundering and the financing of terrorism. The principal provisions of Title III of the USA PATRIOT Act require that regulated financial institutions, including state member banks: (i) establish an anti-money laundering program that includes training and audit components; (ii) comply with regulations regarding the verification of the identity of any person seeking to open an account; (iii) take additional required precautions with non-U.S. owned accounts; and (iv) perform certain verification and certification of money laundering risk for their foreign correspondent banking relationships. Failure of a financial institution to comply with the USA PATRIOT Act’s requirements could have serious legal and reputational consequences for the institution. Primis Bank has augmented its systems and procedures to meet the requirements of these regulations and will continue to revise and update its policies, procedures and controls to reflect changes required by law.
FinCEN has adopted rules that require financial institutions to obtain beneficial ownership information with respect to legal entities with which such institutions conduct business, subject to certain exclusions and exemptions. Bank regulators are focusing their examinations on anti-money laundering compliance, and we continue to monitor and augment, where necessary, our anti-money laundering compliance programs.
Bank regulators routinely examine institutions for compliance with these anti-money laundering obligations and have been active in imposing “cease and desist” and other regulatory orders and money penalty sanctions against institutions found to be in violation of these requirements. On January 1, 2021, Congress passed federal legislation that made sweeping changes to federal anti-money laundering laws, including changes that will be implemented in subsequent years.
Economic Sanctions. The Office of Foreign Assets Control (“OFAC”) is responsible for helping to ensure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and acts of Congress. OFAC publishes, and routinely updates, lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, including the Specially Designated Nationals and Blocked Persons List. If we find a name on any transaction, account or wire transfer that is on an OFAC list, we must undertake certain specified activities, which could include blocking or freezing the account or transaction requested, and we must notify the appropriate authorities.
Concentrations in Lending. During 2006, the federal bank regulatory agencies released guidance on “Concentrations in Commercial Real Estate Lending” (the “Guidance”) and advised financial institutions of the risks posed by CRE lending concentrations. The Guidance requires that appropriate processes be in place to identify, monitor and control risks associated with real estate lending concentrations. Higher allowances for credit losses and capital levels may also be required. The Guidance is triggered when CRE loan concentrations exceed either:
● Total reported loans for construction, land development, and other land of 100% or more of a bank’s total risk based capital; or
● Total reported loans secured by multifamily and nonfarm nonresidential properties and loans for construction, land development, and other land of 300% or more of a bank’s total risk based capital.
The Guidance also applies when a bank has a sharp increase in CRE loans or has significant concentrations of CRE secured by a particular property type. The Guidance also applies when a bank has a sharp increase in CRE loans or has significant concentrations of CRE secured by a particular property type.
Community Reinvestment Act. The Bank is subject to the provisions of the CRA, which imposes a continuing and affirmative obligation, consistent with their safe and sound operation, to help meet the credit needs of entire communities where the bank accepts deposits, including low- and moderate-income neighborhoods. The Federal Reserve’s assessment of the Bank’s CRA record is made available to the public. Further, a less than satisfactory CRA rating will slow, if not preclude, expansion of banking activities and prevent a company from becoming or remaining a financial holding company. Federal CRA regulations require, among other things, that evidence of discrimination against applicants on a prohibited basis, and illegal or abusive lending practices be considered in the CRA evaluation. On September 21, 2020, the Federal Reserve issued an advanced notice of proposed rulemaking that would modernize and substantially revise the regulations implementing the CRA. The Bank has a rating of “Satisfactory” in its most recent CRA evaluation.
Consumer Regulation. Activities of the Bank are subject to a variety of statutes and regulations designed to protect consumers. These laws and regulations include, among numerous other things, provisions that:
● limit the interest and other charges collected or contracted for by the Bank, including rules respecting the terms of credit cards and of debit card overdrafts;
● govern the Bank’s disclosures of credit terms to consumer borrowers;
● require the Bank to provide information to enable the public and public officials to determine whether it is fulfilling its obligation to help meet the housing needs of the community it serves;
● prohibit the Bank from discriminating on the basis of race, creed or other prohibited factors when it makes decisions to extend credit;
● govern the manner in which the Bank may collect consumer debts; and
● prohibit unfair, deceptive or abusive acts or practices in the provision of consumer financial products and services.
Mortgage Rules. Pursuant to rules adopted by the CFPB, banks that make residential mortgage loans are required to make a good faith determination that a borrower has the ability to repay a mortgage loan prior to extending such credit,
require that certain mortgage loans contain escrow payments, obtain new appraisals under certain circumstances, comply with integrated mortgage disclosure rules, and follow specific rules regarding the compensation of loan originators and the servicing of residential mortgage loans.
Transactions with affiliates. There are various restrictions that limit the ability of the Bank to finance, pay dividends or otherwise supply funds to Primis or other affiliates. In addition, banks are subject to certain restrictions under Section 23A and B of the Federal Reserve Act on certain transactions, including any extension of credit to its bank holding company or any of its other affiliates, on investments in the securities thereof, and on the taking of such securities as collateral for loans to any borrower.
Privacy and Cybersecurity. The Bank is subject to federal and state banking regulations that limit its ability to disclose non-public information about consumers to non-affiliated third parties. These limitations require us to periodically disclose our privacy policies to consumers and allow consumers to prevent disclosure of certain personal information to a non-affiliated third party under certain circumstances. Consumers also have the option to direct banks and other financial institutions not to share information about transactions and experiences with affiliated companies for the purpose of marketing products or services. Banking institutions are required to implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer records and information. These security and privacy policies and procedures for the protection of confidential and personal information are in effect across our lines of business. Furthermore, the federal banking regulators regularly issue guidance regarding cybersecurity intended to enhance cyber risk management. A financial institution is expected to implement multiple lines of defense against cyber-attacks and ensure that their risk management procedures address the risk posed by potential cyber threats. A financial institution is further expected to maintain procedures to effectively respond to a cyber-attack and resume operations following any such attack. Primis has adopted and implemented policies and procedures to comply with these privacy, information security, and cybersecurity requirements. On November 18, 2021, the federal banking agencies issued a new rule effective in 2022 that requires banks to notify their regulators within 36 hours of a “computer-security incident” that rises to the level of a “notification incident.”
Audit Reports. Insured institutions with total assets of $500 million or more must submit annual audit reports prepared by independent auditors to federal and state regulators. In some instances, the audit report of the institution’s holding company can be used to satisfy this requirement. Independent auditors must receive examination reports, supervisory agreements and reports of enforcement actions. For insured institutions with total assets of $1.0 billion or more, financial statements prepared in accordance with U.S. GAAP, management’s certifications concerning responsibility for the financial statements, internal controls and compliance with legal requirements designated by the FDIC, and an attestation by the independent auditor regarding the statements of management relating to the internal controls must be submitted. For insured institutions with total assets of more than $3.0 billion, independent auditors may be required to review quarterly financial statements. The FDICIA requires that institutions with total assets of $1.0 billion or more have independent audit committees, consisting of outside directors only. The committees of insured institutions with total assets of $3.0 billion or more must include members with experience in banking or financial management, must have access to outside counsel, and must not include representatives of large customers.
The foregoing is only a brief summary of certain statutes, rules, and regulations that may affect Primis and the Bank. Numerous other statutes and regulations also will have an impact on the operations of Primis and the Bank. Supervision, regulation and examination of banks by the regulatory agencies are intended primarily for the protection of depositors, not shareholders.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
An investment in our common stock involves risks. The following is a description of the material risks and uncertainties that Primis Financial Corp. believes affect its business and should be considered before making an investment in our common stock. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us and our business. If any of the risks described in this Annual Report on Form 10-K were to actually occur, our financial condition, results of operations and cash flows could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly and you could lose part or all of your investment. This Form 10-K also contains forward-looking statements that may not be realized as a result of certain factors, including, but not limited to, the risks described herein and in our other public filings with the SEC. Please refer to the section in this Form 10-K entitled “Special Cautionary Notice Regarding Forward-Looking Statements” for additional information regarding forward-looking statements.
Strategic Risks
Our business strategy includes strategic growth, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.
We intend to continue pursuing a growth strategy for our business. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by growing companies such as the continuing need for infrastructure and personnel, the time and costs inherent in integrating a series of different operations and the ongoing expense of acquiring and staffing new banks or branches. We may not be able to expand our presence in our existing markets or successfully enter new markets and any expansion could adversely affect our results of operations. Failure to manage our growth effectively could have a material adverse effect on our business, future prospects, financial condition or results of operations, and could adversely affect our ability to successfully implement our business strategy. Our ability to grow successfully will depend on a variety of factors, including the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market areas and our ability to manage our growth.
Although there can be no assurance of success or the availability of branch or financial services acquisitions in the future, we may seek to supplement our internal growth through attractive acquisitions. We cannot predict the number, size or timing of acquisitions, or whether any such acquisition will occur at all. Our acquisition efforts have traditionally focused on targeted entities in markets in which we currently operate and markets in which we believe we can compete effectively. However, as consolidation of the financial services industry continues, the competition for suitable acquisition candidates may increase and, as the number of appropriate targets decreases, the prices for potential acquisitions could increase which could reduce our potential returns, and reduce the attractiveness of these opportunities to us. We may compete with other financial services companies for acquisition opportunities, and many of these competitors have greater financial resources than we do and may be able to pay more for an acquisition than we are able or willing to pay.
We must respond to rapid technological changes and these changes may be more difficult or expensive than anticipated.
If competitors introduce new products and services embodying new technologies, or if new industry standards and practices emerge, our existing product and service offerings, technology and systems may become obsolete. Further, if we fail to adopt or develop new technologies or to adapt our products and services to emerging industry standards, we may lose current and future customers, which could have a material adverse effect on our business, financial condition and results of operations. The financial services industry is changing rapidly and in order to remain competitive, we must continue to enhance and improve the functionality and features of our products, services and technologies. These changes may be more difficult or expensive than we anticipate.
New lines of business, products or services and technological advancements may subject us to additional risks.
From time to time, we implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services we invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology driven products and services or be successful in marketing these products and services to our customers. In addition, our implementation of certain new technologies, such as those related to artificial intelligence, automation and algorithms, in our business processes may have unintended consequences due to their limitations or our failure to use them effectively. In addition, cloud technologies are also critical to the operation of our systems, and our reliance on cloud technologies is growing. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on our business, financial condition and results of operations.
Furthermore, any new line of business, new product or service and/or new technology could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business, new products or services and/or new technologies could have a material adverse effect on our business, financial condition and results of operations.
We may not be able to successfully integrate our acquisitions or to realize the anticipated benefits of them.
A successful integration of each acquired business with ours will depend substantially on our ability to successfully consolidate operations, corporate cultures, systems and procedures and to eliminate redundancies and costs. While we have substantial experience in successfully integrating institutions we have acquired, we may encounter difficulties during integration, such as:
● the loss of key employees;
● the disruption of operations and businesses;
● loan and deposit attrition, customer loss and revenue loss;
● possible inconsistencies in standards, control procedures and policies;
● unexpected issues with expected branch closures; and/or
● unexpected issues with costs, operations, personnel, technology and credit;
all of which could divert resources from regular banking operations. Additionally, general market and economic conditions or governmental actions affecting the financial industry generally may inhibit our successful merger integrations.
Further, we acquire businesses with the expectation that these mergers will result in various benefits including, among other things, benefits relating to enhanced revenues, a strengthened market position for the combined company, cross selling opportunities, technology, cost savings and operating efficiencies. Achieving the anticipated benefits of these mergers is subject to a number of uncertainties, including whether we integrate these institutions in an efficient and effective manner, and general competitive factors in the marketplace. Failure to achieve these anticipated benefits could result in a reduction in the price of our shares as well as in increased costs, decreases in the amount of expected revenues and diversion of management's time and energy and could materially and adversely affect our business, financial condition and operating results.
Operational Risks
We rely on third-party vendors to provide key components of our business infrastructure.
Third-party vendors provide key components of our business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, Internet connections and network access. We have selected these third-party vendors carefully and have conducted the due diligence consistent with regulatory guidance and best practices. While we have ongoing programs to review third-party vendors and assess risk, we do not control their actions. Any problems caused by these third parties, including those resulting from disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, cyber-attacks and security breaches at a vendor, failure of a vendor to provide services for any reason or poor performance of services, could adversely affect our ability to deliver products and services to our customers and otherwise conduct our business. Financial or operational difficulties of a third-party vendor could also hurt our operations if those difficulties interfere with the vendor’s ability to serve us. Furthermore, our vendors could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints. Replacing these third-party vendors could also create significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to our business operations.
We face significant cyber and data security risk that could result in the disclosure of confidential information, adversely affect our business or reputation and expose us to significant liabilities.
As a financial institution, we are under threat of loss due to hacking and cyber-attacks. This risk has increased in recent years, and continues to increase, as we continue to expand customer capabilities to utilize internet and other remote channels to transact business. Two of the most significant cyber-attack risks that we face are e-fraud and loss of sensitive customer data. Loss from e-fraud occurs when cybercriminals breach and extract funds directly from customer or our accounts. The attempts to breach sensitive customer data, such as account numbers and social security numbers, are less frequent but would present significant reputational, legal and/or regulatory costs to us if successful. Our risk and exposure to these matters remains heightened because of the evolving nature and complexity of these threats from cybercriminals and hackers, our plans to continue to provide internet banking and mobile banking channels, and our plans to develop additional remote connectivity solutions to serve our customers. While we have not experienced any material losses relating to cyber-attacks or other information security breaches since 2017, we have been subject of hacking and cyber-attack and there can be no assurance that we will not suffer additional losses in the future.
In response to the COVID-19 pandemic, we have modified our business practices with a portion of our employees working remotely from their homes to have our operations uninterrupted as much as possible. Technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk. These cyber risks include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers.
The occurrence of any cyber-attack or information security breach could result in material adverse consequences to us including damage to our reputation and the loss of customers. We also could face litigation or additional regulatory scrutiny. Litigation or regulatory actions in turn could lead to significant liability or other sanctions, including fines and penalties or reimbursement of customers adversely affected by security breach. Even if we do not suffer any material adverse consequences as a result of other future events, successful attacks or systems failures at the Bank or at other financial institutions could lead to a general loss of customer confidence in financial institutions including the Bank.
Our ability to mitigate the adverse consequences of occurrences is in part dependent on the quality of our information security procedures and contracts and our ability to anticipate the timing and nature of any such event that occurs. In recent years, we have incurred significant expense towards improving the reliability of our systems and their security from attack. Nonetheless, there remains the risk that we may be materially harmed by cyber-attacks and information security breaches in the future. Methods used to attack information systems change frequently (with generally increasing sophistication), often are not recognized until launched against a target, may be supported by foreign governments or other well-financed entities, and may originate from less regulated and remote areas around the world. As a result, we may be unable to address these methods in advance of attacks, including by implementing adequate preventive measures. If such an attack or breach does occur, we might not be able to fix it timely or adequately. To the extent that such an attack or breach relates to products or services provided by others, we seek to engage in due diligence and monitoring to limit the risk. In addition, as the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could also result in additional costs.
We are dependent on key personnel and the loss of one or more of those key personnel could impair our relationship with our customers and adversely affect our business.
Many community banks attract customers based on the personal relationships that the banks’ officers and customers establish with each other and the confidence that the customers have in the officers. We significantly depend on the continued service and performance of our key management personnel. We also believe our management team’s depth and breadth of experience in the banking industry is integral to executing our business plan. The loss of the services of members of our senior management team or other key employees or the inability to attract additional qualified personnel as needed could have a material adverse effect on our business.
Credit Risks
We are subject to risks related to our concentration of construction and land development and commercial real estate loans.
As of December 31, 2021, we had $121.4 million of construction and land development loans, or 5.2% of our loan portfolio. Construction and land development loans are subject to risks during the construction phase that are not present in standard residential real estate and commercial real estate loans. These risks include:
● the viability of the contractor;
● the contractor’s ability to successfully complete the project, to meet deadlines and time schedules and to stay within cost estimates, especially in the event of supply disruptions and labor shortages; and
● concentrations of such loans with a single contractor and its affiliates.
Real estate construction and land development loans may involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan and also present risks of default in the event of declines in property values or volatility in the real estate market during the construction phase. Our practice, in the majority of instances, is to secure the personal guaranty of individuals in support of our real estate construction and land development loans which provides us with an additional source of repayment. As of December 31, 2021, we did not have any nonperforming construction and land development loans and had $266 thousand of assets that have been foreclosed. If one or more of our larger borrowers were to default on their construction and land development loans, and we did not have alternative sources of repayment through personal guarantees or other sources, or if any of the aforementioned risks were to occur, we could incur significant losses.
As of December 31, 2021, we had $1.15 billion of commercial real estate loans outstanding, or 49.1% of our loan portfolio, including multi-family residential loans and loans secured by farmland. Commercial real estate lending typically involves higher loan principal amounts and the repayment is dependent, in large part, on sufficient income from the properties securing the loan to cover operating expenses and debt service.
A significant amount of our loans are secured by real estate and any declines in real estate values in our primary markets could be detrimental to our financial condition and results of operations.
Real estate lending (including commercial, construction, land development, and residential loans) is a large portion of our loan portfolio, constituting $1.89 billion, or approximately 80.8% of our total loan portfolio, as of December 31, 2021. Although residential and commercial real estate values are currently strong in our market area, such values may not remain elevated. If loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then we may not be able to realize the full value of the collateral that we anticipated at the time of originating the loan, which could require us to increase our provision for credit losses and adversely affect our financial condition and results of operations.
As of December 31, 2021, $621.4 million, or approximately 26.6% of our total loans, were secured by single-family residential real estate. This includes $547.6 million in residential 1-4 family loans and $73.8 million in home equity lines of credit. If housing prices in our market areas do not remain strong or deteriorate, we may experience an increase in nonperforming loans, provision for credit losses and charge-offs.
If the value of real estate in our market areas were to decline materially, a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on our asset quality, capital structure and profitability.
As of December 31, 2021, 49.1% of our loan portfolio was comprised of loans secured by commercial real estate, including multi-family residential loans and loans secured by farmland. In the majority of these loans, real estate was the primary collateral component. In some cases we take real estate as security for a loan even when it is not the primary component of collateral. The real estate collateral that provides the primary or an alternate source of repayment in the event of default may deteriorate in value during the term of the loan as a result of changes in economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax and other laws and acts of nature. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected. We are subject to increased lending risks in the form of loan defaults as a result of the high concentration of real estate lending in our loan portfolio. A weak real estate market in our primary market areas could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing the loans and the value of real estate owned by us. If real estate values decline, it is also more likely that we would be required to increase our allowance for credit losses, which could adversely affect our financial condition and results of operations.
If our nonperforming assets increase, our earnings will suffer.
At December 31, 2021, our nonperforming assets (which consist of nonaccrual loans, loans past due 90 days and accruing and OREO) totaled $16.5 million, or 0.70% of total loans and OREO, which is a decrease of $1.1 million, or 6.1%, compared with non-covered nonperforming assets (which consist of non-covered nonaccrual loans, loans past due 90 days and accruing and OREO), which totaled $17.5 million, or 0.72% of total non-covered loans and OREO at December 31, 2020. At December 31, 2019, our non-covered nonperforming assets were $15.1 million, or 0.69% of total non-covered loans and OREO.
Economic and market conditions are unstable, and although our nonperforming assets as a percentage of total loans and OREO has improved, we may incur losses if there is an increase in nonperforming assets in the future. Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or OREO, thereby adversely affecting our net interest income, and increasing loan administration costs. When we take collateral in foreclosures and similar proceedings, we are required to mark the related loan to the then fair value of the collateral, which may ultimately result in a loss. We must reserve for probable losses, which is established through a current period charge to the provision for credit losses as well as from time to time, as appropriate, a write down of the value of properties in our OREO portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to our OREO. Further, the resolution of nonperforming assets requires the active involvement of management, which can distract
them from more profitable activity. Finally, an increase in the level of nonperforming assets increases our regulatory risk profile. There can be no assurance that we will not experience future increases in nonperforming assets.
If our allowance for credit losses is not adequate to cover actual loan losses, our earnings will decrease.
As a lender, we are exposed to the risk that our borrowers may not repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to ensure repayment. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of the borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. 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. If our assumptions prove to be incorrect or if we experience significant loan losses, our current allowance may not be sufficient to cover actual loan losses and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. A material addition to the allowance for credit losses could cause our earnings to decrease. Due to the relatively unseasoned nature of our loan portfolio, we may experience an increase in delinquencies and losses as these loans continue to mature.
In addition, federal regulators periodically review our allowance for credit losses and may require us to increase our provision for credit losses or recognize further charge-offs, based on judgments different than those of our management. Any significant increase in our allowance for credit losses or charge-offs required by these regulatory agencies could have a material adverse effect on our results of operations and financial condition.
We are subject to credit quality risks and our credit policies may not be sufficient to avoid losses.
We are subject to the risk of losses resulting from the failure of borrowers, guarantors and related parties to pay interest and principal amounts on their loans. Although we maintain credit policies and credit underwriting, monitoring and collection procedures, these policies and procedures may not prevent losses, particularly during periods in which the local, regional or national economy suffers a general decline. If borrowers fail to repay their loans, our financial condition and results of operations would be adversely affected.
Interest rates on our outstanding financial instruments might be subject to change based on developments related to LIBOR, which could adversely affect our revenue, expense, and the value of our financial instruments.
On July 27, 2017, the FCA, which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. On November 30, 2020, a joint announcement by the Board of Governors of the Federal Reserve, the FDIC, and the OCC was released and included a statement that the administrator of LIBOR has announced it will consult on its intention to cease the publication of the one week and two month USD LIBOR settings immediately following the LIBOR publication on December 31, 2021, and the remaining USD LIBOR settings immediately following the LIBOR publications on June 30, 2023. In the U.S., the Alternative Reference Rates Committee has proposed SOFR as the preferred alternative to LIBOR. SOFR is a broad measure of the cost of borrowing cash in the overnight U.S. treasury repurchase market. At this time, various iterations of the SOFR index are being used within the market, as are other indices such as the Bloomberg Short-Term Bank Yield index and the American Financial Exchange's AMERIBOR index. It is unclear as to the degree to which the market will adopt such non-LIBOR indices or how the industry may transition various products to an accepted alternative to LIBOR.
The uncertainty regarding the future of LIBOR as well as the transition from LIBOR to another benchmark rate or rates is complex and could have a range of adverse effects on our business, financial condition and results of operations. In particular, any such transition could:
● adversely affect the interest rates paid or received on, and the revenue and expense associated with, and the value of floating rate obligations, loans, deposits and other financial instruments tied to LIBOR rates, or other securities or financial arrangements given LIBOR’s role in determining market interest rates globally;
● prompt inquiries or other actions from regulators in respect of our preparation and readiness for the replacement of LIBOR with an alternative reference rate;
● result in disputes, litigation or other actions with counterparties regarding the interpretation and enforceability of certain fallback language, or the absence of such language, in LIBOR-based instruments, including securities and loans;
● result in customer uncertainty and disputes around how variable rates should be calculated in light of the foregoing, thereby damaging our reputation and resulting in a loss of customers and additional costs to us; and
● require the transition to or development of appropriate systems and analytics to effectively transition risk management processes from LIBOR-based products to those based on an applicable alternative pricing benchmark.
The manner and impact of this transition, as well as the effect of these developments on our funding costs, loan, and investment and trading securities portfolios, asset liability management and business are uncertain.
Market Risks
Our profitability depends significantly on local economic conditions in the areas where our operations and loans are concentrated, and our geographic concentration makes us vulnerable to local weather catastrophes, public health issues, and other external events, which could adversely affect our results of operations and financial condition.
We operate in a mixed market environment with influences from both rural and urban areas. Our profitability depends on the general economic conditions in our market areas of Northern Virginia, Maryland, Washington, D.C., Charlottesville, Northern Neck, Middle Peninsula, Richmond, Hampton Roads and the surrounding areas. Unlike larger banks that are more geographically diversified, we provide banking and financial services to clients primarily in these market areas. As of December 31, 2021, substantially all of our commercial real estate, real estate construction and residential real estate loans were made to borrowers in our market area. The local economic conditions in this area have a significant impact on our commercial, real estate and construction and consumer loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. In addition, if the population or income growth in these market areas slows, stops or declines, income levels, deposits and housing starts could be adversely affected and could result in the curtailment of our expansion, growth and profitability. Political conditions could also impact our earnings.
Our business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance.
The majority of our assets and liabilities are monetary in nature and subject us to significant risk from changes in interest rates. Fluctuations in interest rates are not predictable or controllable. Like most financial institutions, changes in interest rates can impact our net interest income as well as the valuation of our assets and liabilities, which is the difference between interest earned from interest-earning assets, such as loans and investment securities, and interest paid on interest-bearing liabilities, such as deposits and borrowings. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” will negatively impact our earnings. Many factors impact interest rates, including governmental monetary policies, inflation, recession, changes in unemployment, the money supply, and international disorder and instability in domestic and foreign financial markets.
Based on our analysis of the interest rate sensitivity of our assets, an increase in the general level of interest rates may negatively affect the market value of the portfolio equity, but will positively affect our net interest income since most of our assets have floating rates of interest that adjust fairly quickly to changes in market rates of interest. Additionally, an increase in interest rates may, among other things, reduce the demand for loans and our ability to originate loans. A decrease in the general level of interest rates may affect us through, among other things, increased prepayments on our loan and mortgage-backed securities portfolios and increased competition for deposits. Accordingly, changes in the level of market interest rates affect our net yield on interest-earning assets, loan origination volume, loan and mortgage-backed securities portfolios, and our overall results. Although our asset liability management strategy is designed to control our risk from changes in market interest rates, it may not be able to prevent changes in interest rates from having a material adverse effect on our results of operations and financial condition.
Declines in asset values may result in impairment charges and adversely affect the value of our investment securities, financial performance and capital.
We maintain an investment securities portfolio that includes, but is not limited to, collateralized mortgage obligations, agency mortgage-backed securities and pooled trust preferred securities. The market value of investment securities may be affected by factors other than the underlying performance of the issuer or composition of the bonds themselves, such as ratings downgrades, adverse changes in the business climate and a lack of liquidity for resales of certain investment securities. At each reporting period, we evaluate investment securities and other assets for impairment indicators. We may be required to record additional impairment charges if our investment securities suffer a decline in value that is considered other-than-temporary. During the years ended December 31, 2021, 2020 and 2019, we incurred no other-than-temporary impairment charges related to credit losses or sales of securities. If in future periods we determine that a significant impairment has occurred, we would be required to charge against earnings the credit-related portion of the other-than-temporary impairment, which could have a material adverse effect on our results of operations in the periods in which the write-offs occur.
Our stock price can be volatile.
Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:
● actual or anticipated variations in quarterly results of operations;
● recommendations by securities analysts;
● operating and stock price performance of other companies that investors deem comparable to us;
● news reports relating to trends, concerns and other issues in the financial services industry;
● perceptions in the marketplace regarding us and/or our competitors;
● new technology used, or services offered, by competitors;
● significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors;
● failure to integrate acquisitions or realize anticipated benefits from acquisitions;
● changes in valuations of Goodwill and other Intangible Assets;
● changes in government regulations; and
● geopolitical conditions such as acts or threats of terrorism, military conflicts or pandemics.
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results.
The trading volume in our common stock is less than that of other larger financial services companies.
Although our common stock is listed for trading on the NASDAQ Global Market, the trading volume is low, and you are not assured liquidity with respect to transactions in our common stock. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall.
Inflation could negatively impact our business, our profitability and our stock price.
Prolonged periods of inflation may impact our profitability by negatively impacting our fixed costs and expenses, including increasing funding costs and expense related to talent acquisition and retention, and negatively impacting the demand for our products and services. Additionally, inflation may lead to a decrease in consumer and client’s purchasing power and negatively affect the need or demand for our products and services. If significant inflation continues, our business could be negatively affected by, among other things, increased default rates leading to credit losses which could
decrease our appetite for new credit extensions. These inflationary pressures could result in missed earnings and budgetary projections causing our stock price to suffer.
Changes in the policies of monetary authorities and other government action could adversely affect our profitability.
Interest rates and our financial performance are affected by credit policies of monetary authorities, particularly the Federal Reserve. The instruments of monetary policy employed by the Federal Reserve include open market transactions in U.S. government securities, changes in the discount rate or the federal funds rate on bank borrowings and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets, we cannot predict the potential impact of future changes in interest rates, deposit levels, and loan demand on our business and earnings. Furthermore, the actions of the U.S. government and other governments may result in currency fluctuations, exchange controls, market disruption, material decreases in the values of certain of our financial assets and other adverse effects.
The Federal Reserve reduced rates to near zero in March 2020 in response to economic disruption that occurred at the outset of the COVID-19 pandemic, which has continued into 2022. The prolonged period of low interest rates has and is expected to continue to cause downward pressure on our net interest margin, including reduced yield on our variable rate loans and on new loans, and realized yields on investments securities. Further rate changes are dependent on the Federal Reserve’s assessment of economic data as it becomes available. We expect the Federal Reserve to raise rates more than once in the next twelve months. Historically, when the Federal Reserve Board increases the Fed Funds rate, overall interest rates have also risen, which may negatively impact the U.S. economy, and could have a negative impact on our business by reducing the amount of money our customers borrow or by adversely affecting their ability to repay outstanding loan balances that may increase due to adjustments in their variable rates. In addition, in a rising interest rate environment we may have to offer more attractive interest rates to depositors to compete for deposits, or pursue other sources of liquidity, such as wholesale funds. Further, when interest-bearing liabilities reprice or mature more quickly than interest-earning assets, an increase in interest rates generally would tend to result in a decrease in net interest income.
Changes in monetary policy, including changes in interest rates, could influence (i) the amount of interest we receive on loans and securities, (ii) the amount of interest we pay on deposits and borrowings, (iii) our ability to originate loans and obtain deposits, (iv) the fair value of our assets and liabilities, and (v) the reinvestment risk associated with changes in the duration of our mortgage-backed securities portfolio.
Liquidity Risks
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition, results of operations and cash flows.
Liquidity is essential to our business. Our ability to implement our business strategy will depend on our ability to obtain funding for loan originations, working capital, possible acquisitions and other general corporate purposes. An inability to raise funds through deposits, borrowings, securities sold under agreements to repurchase, the sale of loans and other sources could have a substantial negative effect on our liquidity. We anticipate that our retail and commercial deposits will be sufficient to meet our funding needs in the foreseeable future. We may rely on deposits obtained through intermediaries, FHLB advances, and other wholesale funding sources to obtain the funds necessary to implement our growth strategy.
Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general, including a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry. To the extent we are not successful in obtaining such funding, we will be unable to implement our strategy as planned which could have a material adverse effect on our financial condition, results of operations and cash flows.
Capital Adequacy Risks
Future growth or operating results may require us to raise additional capital, but that capital may not be available, be available on unfavorable terms or may be dilutive.
Primis Bank is required by the FRB to maintain adequate levels of capital to support our operations. In the event that our future operating results erode capital, if the Bank is required to maintain capital in excess of well-capitalized standards, or if we elect to expand through loan growth or acquisitions, we may be required to raise additional capital. Our ability to raise capital will depend on conditions in the capital markets, which are outside our control, and on our financial performance. Accordingly, we cannot be assured of our ability to raise capital on favorable terms when needed, or at all. If we cannot raise additional capital when needed, we will be subject to increased regulatory supervision and the imposition of restrictions on our growth and business. These outcomes could negatively impact our ability to operate or further expand our operations through acquisitions or the establishment of additional branches and may result in increases in operating expenses and reductions in revenues that could have a material adverse effect on our financial condition and results of operations. In addition, in order to raise additional capital, we may need to issue shares of our common stock that would dilute the book value of our common stock and reduce our current shareholders’ percentage ownership interest to the extent they do not participate in future offerings.
We may issue a new series of preferred stock or debt securities, which would be senior to our common stock and may cause the market price of our common stock to decline.
We have issued $27.0 million in aggregate principal amount of 5.875% Fixed-to-Floating Rate Subordinated Notes due January 31, 2027 and $60.0 million of fixed-to-floating rate Subordinated Notes due 2030. In the future, we may increase our capital resources by making additional offerings of debt or equity securities, which may include senior or additional subordinated notes, classes of preferred shares and/or common shares. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Preferred shares and debt, if issued, have a preference on liquidating distributions or a preference on dividend or interest payments that could limit our ability to make a distribution to the holders of our common stock. Future issuances and sales of parity preferred stock, or the perception that such issuances and sales could occur, may also cause prevailing market price for our common stock to decline and may adversely affect our ability to raise additional capital in the financial markets at times and prices favorable to us. Further issuances of our common stock could be dilutive to holders of our common stock.
We currently intend to pay dividends on our common stock; however, our future ability to pay dividends is subject to restrictions.
We declared the first cash dividend on our common stock in February 2012, and each quarter thereafter through 2021. There are a number of restrictions on our ability to pay dividends. It is the policy of the FRB that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries.
Our principal source of funds to pay dividends on our common stock is cash dividends that we receive from the Bank. The payment of dividends by the Bank to us is subject to certain restrictions imposed by federal banking laws, regulations and authorities. The federal banking statutes prohibit federally insured banks from making any capital distributions (including a dividend payment) if, after making the distribution, the institution would be "under capitalized" as defined by statute. In addition, the relevant federal regulatory agencies have authority to prohibit an insured bank from engaging in an unsafe or unsound practice, as determined by the agency, in conducting an activity. The payment of dividends could be deemed to constitute such an unsafe or unsound practice, depending on the financial condition of the Bank. Regulatory authorities could impose administratively stricter limitations on the ability of the Bank to pay dividends to us if such limits were deemed appropriate to preserve certain capital adequacy requirements.
Regulatory Risks
We are heavily regulated by federal and state agencies; changes in laws and regulations or failures to comply with such laws and regulations may adversely affect our operations and our financial results.
We and the Bank are subject to extensive regulation, supervision and examination by federal and state banking authorities. Any change in applicable regulations or federal or state legislation could have a substantial impact on us and the Bank, and our respective operations. Additional legislation and regulations may be enacted or adopted in the future that could significantly affect our powers, authority and operations or the powers, authority and operations of the Bank, which could have a material adverse effect on our financial condition and results of operations.
Further, bank regulatory authorities have the authority to bring enforcement actions against banks and their holding companies for unsafe or unsound practices in the conduct of their businesses or for violations of any law, rule or regulation, any condition imposed in writing by the appropriate bank regulatory agency or any written agreement with the agency. Possible enforcement actions against us could include the issuance of a cease-and-desist order that could be judicially enforced, the imposition of civil monetary penalties, the issuance of directives to increase capital or enter into a strategic transaction, whether by merger or otherwise, with a third party, the appointment of a conservator or receiver, the termination of insurance on deposits, the issuance of removal and prohibition orders against institution-affiliated parties, and the enforcement of such actions through injunctions or restraining orders. The exercise of this regulatory discretion and power may have a negative impact on us.
As a regulated entity, Primis and the Bank must maintain certain required levels of regulatory capital that may limit our operations and potential growth.
As further described above under Supervision and Regulation-Capital Requirements, Primis and the Bank each are subject to various regulatory capital requirements administered by the FRB.
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 the Bank’s and our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet commitments as calculated under these regulations.
As of December 31, 2021, Primis and the Bank exceeded the amounts required to be well capitalized with respect to all four required capital ratios. As of December 31, 2021, Primis’ leverage, CET1 risk-based capital, Tier 1 risk-based capital and Total risk-based capital ratios were 9.41%, 13.09%, 13.52% and 18.52%, respectively. As of December 31, 2021, the Bank’s leverage, CET1 risk-based capital, Tier 1 risk-based capital and Total risk-based capital ratios were 11.14%, 16.18%, 16.18% and 17.43%, respectively.
Many factors affect the calculation of Primis and the Bank’s risk-based assets and its ability to maintain the level of capital required to achieve acceptable capital ratios. For example, changes in risk weightings of assets relative to capital and other factors may combine to increase the amount of risk-weighted assets in the Tier 1 risk-based capital ratio and the Total risk-based capital ratio. Any increases in its risk-weighted assets will require a corresponding increase in its capital to maintain the applicable ratios. In addition, recognized loan losses in excess of amounts reserved for such losses, loan impairments, impairment losses on investment securities and other factors will decrease the Bank’s capital, thereby reducing the level of the applicable ratios.
Primis and the Bank’s failure to remain well capitalized for bank regulatory purposes could affect customer confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on our capital stock, our ability to make acquisitions, and on our business, results of operations and financial condition. Under FRB rules, if the Bank ceases to be a well-capitalized institution for bank regulatory purposes, the interest rates that it pays on deposits and its ability to accept, renew or rollover brokered deposits may be restricted. As of December 31, 2021, we did not have any brokered certificates of deposits.
Financial Reporting Risks
Failure to maintain an effective system of disclosure controls and procedures could have a material adverse effect on our business, results of operations and financial condition and could impact the price of our common stock.
Failure to maintain an effective internal control environment could result in us not being able to accurately report our financial results, prevent or detect fraud, or provide timely and reliable financial information pursuant to our reporting obligations, which could have a material adverse effect on our business, financial condition, and results of operations. Further, it could cause our investors to lose confidence in the financial information we report, which could affect the trading price of our common stock.
Management regularly reviews and updates our disclosure controls and procedures, including our internal control over financial reporting. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
Risks Related to the COVID-19 Pandemic
Our business, financial condition, liquidity and results of operations have been, and will likely continue to be, adversely affected by the COVID-19 pandemic.
The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity and results of operations. The extent to which the COVID-19 pandemic will continue to negatively affect our business, financial condition, liquidity and results of operations will depend on future developments, which are highly uncertain and cannot be predicted and many of which are outside of our control, including the scope and duration of the pandemic, the emergence of new variants, the direct and indirect impact of the pandemic on our employees, customers, clients, counterparties and service providers, as well as other market participants, and actions taken, or that may yet be taken, or inaction, by governmental authorities and other third parties in response to the pandemic. Should the pandemic continue for a more extended period or worsen, we may face additional circumstances such as significant draws on credit lines should customers seek to increase liquidity. Furthermore, should the pandemic continue, we may experience increased rates of employee illness or unavailability, and may experience challenges recruiting new employees.
Any disruption to our ability to deliver financial products or services to, or interact with, our clients and customers could result in losses or increased operational costs, regulatory fines, penalties and other sanctions, or harm our reputation. We are also subject to litigation and reputational risk arising from our response to the COVID-19 pandemic. The length of the pandemic and the efficacy of the measures being put in place to address it are unknown as efforts to combat the virus have been complicated by viral variants and uneven access to, and acceptance and effectiveness of, vaccines globally. To the extent the pandemic adversely affects our business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described in this report.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
Primis Financial Corp. does not have any unresolved staff comments from the SEC to report for the year ended December 31, 2021.

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ITEM 2. PROPERTIES
Item 2. Properties
Primis Financial Corp.’s principal office is located at 6830 Old Dominion Drive, McLean, Virginia. The Company has administrative offices in Warrenton and Glen Allen, Virginia. Including these main locations, our bank owns 32 properties and leases 20 properties, all of which are used as branch locations or for housing operational units in Maryland and Virginia. At December 31, 2021, Primis Bank had forty full-service branches in Virginia and Maryland and provides services to customers through certain online and mobile applications. Thirty-five full-service retail branches are in Virginia (Ashland, Burgess, Callao, Central Garage, Charlottesville, Chester, Clifton Forge, Colonial Heights, Courtland, Fairfax, Front Royal, Gloucester, Gloucester Point, Hampton, Hartfield, Heathsville, Kilmarnock, Leesburg, McLean, Mechanicsville (2), Middleburg, Midlothian, New Market, Newport News, Quinton, Reston, Richmond, Surry, Tappahannock (2), Urbanna, Warrenton, Waverly, and Williamsburg) and five full-service retail branches are in Maryland (Bethesda, Brandywine, Owings, Rockville, and Upper Marlboro).
Primis believes its facilities are in good operating condition, are suitable and adequate for its operational needs and are adequately insured.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. 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 December 31, 2021.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Market Prices
Primis’ common stock is traded on the Nasdaq Global Market under the symbol “FRST”. There were 24,575,835 shares of our common stock outstanding at the close of business on March 4, 2022, which were held by 1,238 shareholders of record. As of that date, the closing price of our common stock on the NASDAQ Global Market was $14.23.
Recent Sales of Unregistered Securities
None.
Securities Authorized for Issuance under Equity Compensation Plans
As of December 31, 2021, Primis had outstanding stock options granted under the 2010 Stock Awards and Incentive Plan (the “2010 Plan”) and the 2017 Equity Compensation Plan (the “2017 Plan”), which were approved by its shareholders. The following table provides information as of December 31, 2021 regarding Primis’ equity compensation plans under which our equity securities are authorized for issuance:
Number of securities
remaining available for
future issuance under
Number of securities
Weighted average
equity compensation plans
to be issued upon exercise
exercise price of
(excluding securities reflected
of outstanding options
outstanding options
in column A)
Plan category
A
B
C
Equity compensation plans approved by security holders
283,800
$
10.98
453,395
Equity compensation plans not approved by security holders
-
-
-
Total
283,800
$
10.98
453,395
Issuer Purchases of Equity Securities
None.
Dividends
We declared the first cash dividend on our common stock in February 2012, and each quarter thereafter through 2021. There are a number of restrictions on our ability to pay dividends. It is the policy of the FRB that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries. Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to Primis or by Primis to shareholders. The Company’s ability to pay dividends to stockholders is largely dependent upon the dividends it receives from the Bank, and the Bank is subject to regulatory limitations on the amount of cash dividends it may pay.
Performance Graph
The following chart compares the cumulative total shareholder return on Primis common stock during the five years ended December 31, 2021, with the cumulative total return of the Russell 2000 Index and the NASDAQ Bank Index for the same period. Dividend reinvestment has been assumed. This comparison assumes $100 invested on December 31, 2016 in Primis common stock, the Russell 2000 Index and the NASDAQ Bank Index. The historical stock price performance for Primis common stock shown on the graph below is not necessarily indicative of future stock performance.
Primis Financial Corp.
100.00
100.02
84.11
106.50
81.87
104.49
Russell 2000 Index
100.00
114.65
102.02
128.06
153.62
176.39
NASDAQ Bank Index
100.00
118.39
83.60
137.18
87.20
137.31

---

ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7 of our Annual Report on Form 10-K generally discusses year-to-year comparisons between the years ended December 31, 2021 and 2020. Discussions of comparisons between 2020 and 2019 are not included in this Form10-K but can be found in “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form10-K for the year ended December 31, 2020.
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.
Impact of COVID-19 Pandemic
The COVID-19 pandemic and related restrictive measures taken by governments, businesses and individuals have caused and continue to cause unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve. As the restrictive measures eased during the latter part of 2020 and continued to ease during 2021, the U.S. economy has begun to improve, and with the availability and distribution of COVID-19 vaccines, we anticipate continued improvements in commercial and consumer activity and the U.S. economy.
While positive trends existed in 2021, we recognized that our business and consumer customers were continuing to experience varying degrees of financial distress, though to a lesser degree. Commercial activity has improved in our market area, but has not returned to the levels existing prior to the outbreak of the COVID-19 pandemic, which may result in our customers’ inability to meet their loan obligations to us. In addition, the economic pressures and uncertainties related to the COVID-19 pandemic, including the emergence and spread of variants, have resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. Labor shortages and supply chain interruptions continue to present obstacles to economic recovery and have contributed to inflationary conditions. These conditions have and are expected to continue to result in overall economic and financial market instability and affect businesses’ profitability and individuals’ purchasing power, all of which could also result in our customers’ inability to make scheduled loan payments. Our borrowing base includes customers in industries such as hotels, restaurants, retail and commercial real estate, which have been significantly impacted by the COVID-19 pandemic. We recognize that these industries may take longer to recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result of the COVID-19 pandemic. We continue to monitor these customers closely.
We have taken deliberate actions to meet our goal of ensuring that we have the balance sheet strength to serve our clients and communities, including by seeking to increase our liquidity and manage our assets and liabilities in order to maintain a strong capital position; however, future economic conditions are subject to significant uncertainty. Uncertainties associated with the COVID-19 pandemic include the duration of the COVID-19 outbreak and any related variants, the effectiveness and acceptance of COVID-19 vaccines, the impact to our customers, employees and vendors and the impact to the economy as a whole. COVID-19 had a significant adverse impact on our business, financial position and operating results and while uncertainty still exists, we believe we are well-positioned to operate effectively through the present economic environment.
Our branch locations are currently open and operating during normal business hours. We continue to take additional precautions within our branch locations, including enhanced cleaning procedures, to ensure the safety of our customers and our employees.
CRITICAL ACCOUNTING POLICIES
We follow accounting and reporting policies that conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.
We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements.
Accounting policies related to the allowance for credit losses on financial instruments including loans and off-balance-sheet credit exposures are considered to be critical as these policies involve considerable subjective judgment and estimation by management. As discussed in Note 1 - Organization and significant accounting policies, our policies related to allowances for credit losses changed on January 1, 2020 in connection with the adoption of a new accounting standard update as codified in Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) Financial Instruments - Credit Losses. In the case of loans, the allowance for credit losses 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.
In the case of off-balance-sheet credit exposures, the allowance for credit losses is a liability account, calculated in accordance with ASC 326. The allowance is reported as a component of other liabilities in our consolidated balance sheets. Adjustments to the allowance are reported in our income statement as a component of other expenses.
The amount of each allowance account represents management's best estimate of current expected credit losses on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. See the section captioned “Allowance for Credit Losses” elsewhere in this discussion as well as Note 1 - Organization and significant accounting policies and Note 3 - Loans in the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data elsewhere in this report for further details of the risk factors considered by management in estimating the necessary level of the allowance for credit losses.
OVERVIEW
On March 31, 2021, Southern National Bancorp of Virginia, Inc. (“Southern National”) changed its name to Primis Financial Corp. (“Primis,” “we,” “us,” “our” or the “Company”) and Sonabank changed its name to Primis Bank. Primis is the bank holding company for Primis Bank (“Primis Bank” or the “Bank”), a Virginia state-chartered bank which commenced operations on April 14, 2005. Primis Bank provides a range of financial services to individuals and small and medium sized businesses.
At December 31, 2021, Primis Bank had forty full-service branches in Virginia and Maryland and provides services to customers through certain online and mobile applications. Thirty-five full-service retail branches are in Virginia (Ashland, Burgess, Callao, Central Garage, Charlottesville, Chester, Clifton Forge, Colonial Heights, Courtland, Fairfax, Front Royal, Gloucester, Gloucester Point, Hampton, Hartfield, Heathsville, Kilmarnock, Leesburg, McLean, Mechanicsville (2), Middleburg, Midlothian, New Market, Newport News, Quinton, Reston, Richmond, Surry, Tappahannock (2), Urbanna, Warrenton, Waverly, and Williamsburg) and five full-service retail branches are in Maryland (Bethesda,
Brandywine, Owings, Rockville, and Upper Marlboro). The Company has administrative offices in Warrenton and Glen Allen, Virginia.
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.
FINANCIAL HIGHLIGHTS
● Net income for the year ended December 31, 2021 totaled $31.2 million, or $1.28 per basic and $1.27 per diluted share, compared to $23.3 million, or $0.96 per basic and diluted share for the year ended December 31, 2020.
● Total assets as of December 31, 2021 were $3.40 billion, an increase of 10.2% compared to December 31, 2020.
● Total loans, excluding Paycheck Protection Program (PPP) balances as of December 31, 2021, were $2.26 billion, an increase of $137.2 million, or 6.2%, from December 31, 2020.
● Total deposits were $2.76 billion at December 31, 2021, an increase of 13.6% compared to December 31, 2020.
● Non-time deposits increased to $2.40 billion at December 31, 2021, an increase of $460.0 million over the past year.
● Non-interest bearing demand deposits increased to $530.3 million or 19.2% of total deposits while time deposits decreased to 13.0% of total deposits at December 31, 2021.
● Cost of deposits declined to 0.48% for the year ended December 31, 2021 compared to 0.92% for the year ended December 31, 2020.
● Return on average assets from continuing operations totaled 0.93% for the year ended December 31, 2021, compared to 0.78% for the year ended December 31, 2020.
● Recovery of credit losses were $5.8 million for the year ended December 31, 2021 compared to provision for credit losses of $19.5 million for the year ended December 31, 2020.
● Allowance for credit losses to total loans (excluding PPP balances) were 1.29% at December 31, 2021 compared to 1.71% at December 31, 2020.
● Book value per share of $16.76 at December 31, 2021, representing an increase of $0.73 from December 31, 2020 after $0.40 in dividends paid over the last twelve months.
RESULTS OF OPERATIONS
Net Income
Net income from continuing operations for the year ended December 31, 2021 was $31.0 million, or $1.27 basic and $1.26 diluted earnings per share, compared to $14.9 million, or $0.61 basic and diluted earnings per share, for the year ended December 31, 2020. The 108.4% increase in the net income during the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily driven by recoveries for credit losses in 2021 compared to provision for credit losses in 2020 as loans on deferral and the economic impact of COVID-19 declined dramatically in 2021. The increase in net income was offset by a decrease in recoveries related to acquired charged-off loans and investment securities in the current year.
Net income from discontinued operation for the year ended December 31, 2021 was $0.23 million, or $0.01 basic and diluted earnings per share, compared to net income from discontinued operation of $8.4 million, or $0.35 basic and diluted earnings per share, for the year ended December 31, 2020. The decline in net income from discontinued operation is
primarily driven by the pre-tax charge of approximately $2.9 million related to the closing of the STM transaction in 2021, as discussed in Note 1 - Organization and significant accounting policies.
Net Interest Income
Our operating results depend primarily on our net interest income, which is the difference between interest and dividend income on interest-earning assets such as loans and investments, and interest expense on interest-bearing liabilities such as deposits and borrowings.
Net interest income was $94.2 million for the year ended December 31, 2021, compared to $91.6 million for the year ended December 31, 2020. Primis’ net interest margin for the year ended December 31, 2021 was 3.01%, compared to 3.35% for the year ended December 31, 2020. Net interest margin was impacted heavily by the origination of PPP loans. Net PPP fee income recognized was $11.7 million for the year ended December 31, 2021 versus $6.2 million for the year ended December 31, 2020. Net interest margin excluding the effects of PPP loans was 2.79% for the year ended December 31, 2021, comparted to 3.33% for the year ended December 31, 2020. Net interest margin, excluding the effects of PPP loans, continues to be negatively impacted by high cash balances at the Bank. Total income on interest-earning assets was $113.2 million and $117.8 million for the years ended December 31, 2021 and 2020, respectively. The yield on average interest-earning assets was 3.62% and 4.31% for the years ended December 31, 2021 and 2020, respectively. The decrease was primarily driven by market conditions. The cost of average interest-bearing deposits decreased 53 basis points to 0.60% for the year ended December 31, 2021, compared to 1.13% cost on average interest-bearing deposits for the year ended December 31, 2020. Interest and fees on loans totaled $107.0 million and $111.6 million for the years ended December 31, 2021 and 2020, respectively. The accretion of the discount on loans acquired in the acquisitions contributed $2.0 million to net interest income during the year ended December 31, 2021, compared to $4.3 million during the year ended December 31, 2020. The decrease in accretion was due to slowdown in the volume of acquired loan prepayments and payoffs. Average loans during the year ended December 31, 2021 were $2.34 billion compared to $2.40 billion during the year ended December 31, 2020.
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 Year Ended
December 31, 2021
December 31, 2020
December 31, 2019
Interest
Interest
Interest
Average
Income/
Yield/
Average
Income/
Yield/
Average
Income/
Yield/
Balance
Expense
Rate
Balance
Expense
Rate
Balance
Expense
Rate
(Dollar amounts in thousands)
Assets
Interest-earning assets:
Loans, net of deferred fees (1) (2)
$
2,342,802
$
107,021
4.57
%
$
2,400,896
$
111,647
4.65
%
$
2,159,681
$
112,181
5.19
%
Investment securities
224,505
4,440
1.98
%
217,932
4,730
2.17
%
241,800
6,224
2.57
%
Other earning assets
560,994
1,782
0.32
%
114,275
1,402
1.23
%
66,582
2,119
3.18
%
Total earning assets
3,128,301
113,243
3.62
%
2,733,103
117,779
4.31
%
2,468,063
120,524
4.88
%
Allowance for credit losses
(33,088)
(20,638)
(11,852)
Investments in mortgage company - held for sale
11,974
12,168
4,281
Total non-earning assets
261,791
261,505
259,983
Total assets
$
3,368,978
$
2,986,138
$
2,720,475
Liabilities and stockholders' equity
Interest-bearing liabilities:
NOW and other demand accounts
$
860,482
$
4,010
0.47
%
$
481,470
$
3,505
0.73
%
$
360,254
$
2,989
0.83
%
Money market accounts
726,059
4,246
0.58
%
508,260
4,188
0.82
%
439,097
7,745
1.76
%
Savings accounts
208,202
0.30
%
167,567
0.29
%
145,855
0.32
%
Time deposits
405,670
4,238
1.04
%
645,123
12,149
1.88
%
868,420
19,407
2.23
%
Total interest-bearing deposits
2,200,413
13,112
0.60
%
1,802,420
20,332
1.13
%
1,813,626
30,602
1.69
%
Borrowings
218,955
5,928
2.71
%
358,087
5,807
1.62
%
188,647
6,322
3.35
%
Total interest-bearing liabilities
2,419,368
19,040
0.79
%
2,160,507
26,139
1.21
%
2,002,273
36,924
1.84
%
Noninterest-bearing liabilities:
Demand deposits
522,683
416,249
332,924
Other liabilities
22,358
24,693
22,115
Total liabilities
2,964,409
2,601,449
2,357,312
Stockholders' equity
404,569
384,689
363,163
Total liabilities and stockholders' equity
$
3,368,978
$
2,986,138
$
2,720,475
Net interest income
$
94,203
$
91,640
$
83,600
Interest rate spread
2.97
%
3.10
%
3.04
%
Net interest margin
3.01
%
3.35
%
3.39
%
(1) Includes loan fees in both interest income and the calculation of the yield on loans.
(2) Calculations include non-accruing loans in average loan amounts outstanding.
The following table summarizes changes in net interest income attributable to changes in the volume of interest-earning assets and interest-bearing liabilities compared to changes in interest rates. The change in interest, due to both rate and volume, has been proportionately allocated between rate and volume.
Year Ended
Year Ended
December 31, 2021 vs. 2020
December 31, 2020 vs. 2019
Increase (Decrease)
Increase (Decrease)
Due to Change in:
Due to Change in:
Net
Net
Volume
Rate
Change
Volume
Rate
Change
(in thousands)
Interest-earning assets:
Loans, net of deferred fees
$
(2,725)
$
(1,901)
$
(4,626)
$
(6,602)
$
6,068
$
(534)
Investment securities
(395)
(290)
(468)
(1,026)
(1,494)
Other earning assets
(91)
(4,950)
4,233
(717)
Total interest-earning assets
(2,149)
(2,387)
(4,536)
(12,020)
9,275
(2,745)
Interest-bearing liabilities:
NOW and other demand accounts
(438)
(293)
Money market accounts
(94)
1,493
(5,049)
(3,556)
Savings accounts
(33)
Time deposits
(3,591)
(4,320)
(7,911)
(4,515)
(2,743)
(7,258)
Total interest-bearing deposits
(2,385)
(4,835)
(7,220)
(2,152)
(8,118)
(10,270)
Borrowings
(193)
(1,217)
(515)
Total interest-bearing liabilities
(2,578)
(4,521)
(7,099)
(3,369)
(7,416)
(10,785)
Change in net interest income
$
$
2,134
$
2,563
$
(8,651)
$
16,691
$
8,040
Provision for Credit Losses
The provision for credit losses is a current charge to earnings made in order to adjust the allowance for credit losses to an appropriate level for inherent probable losses in the loan portfolio based on an evaluation of the loan portfolio, current economic conditions, changes in the nature and volume of lending, historical loan experience and other known internal and external factors affecting loan collectability. Our allowance for credit losses is calculated by segmenting the loan portfolio by loan type and applying risk factors to each segment. The risk factors are determined by considering historical loss data, peer data, as well as applying management’s judgment.
In 2020, the Company elected to defer the adoption of ASC Topic 326, Financial Instruments-Credit Losses, under the CARES Act. At December 31, 2020, ASC Topic 326 became effective for the Company and the Company recorded a gross cumulative effect adjustment of $8.3 million as of January 1, 2020. Prior periods, including December 31, 2019 and interim periods ending September 30, 2020 and prior, were not restated to reflect the adoption of ASC Topic 326. The recovery for credit losses for the year ended December 31, 2021 was $5.8 million, primarily as a result of an improving economic outlook. The provision for credit losses for the year ended December 31, 2020 was $19.5 million and the provision for loan losses for the year ended December 31, 2019 was $0.35 million. We had charge-offs totaling $2.5 million during 2021, $2.3 million during 2020 and $3.3 million during 2019. There were recoveries totaling $1.1 million during 2021, $0.69 million during 2020 and $0.91 million during 2019.
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 tables present the major categories of noninterest income for the years ended December 31, 2021 and 2020 (in thousands):
For the Year Ended
December 31,
(dollars in thousands)
Change
Account maintenance and deposit service fees
$
7,309
$
6,520
$
Income from bank-owned life insurance
1,687
1,559
Gain on debt extinguishment
-
Loss on sales of investment securities
-
(620)
Recoveries related to acquired charged-off loans and investment securities
6,500
(5,664)
Other
Total noninterest income
$
11,135
$
14,662
$
(3,527)
Noninterest income decreased 24.1% to $11.1 million for the year ended December 31, 2021, compared to $14.7 million for the year ended December 31, 2020. Noninterest income no longer includes equity in earnings (loss) related to Southern Trust Mortgage which is now included in discontinued operation. The decrease in noninterest income was driven by a $5.7 million decrease in recoveries related to acquired charged-off loans and investment securities, primarily attributable to a recovery related to a previously charged-off acquired loan of approximately $2.0 million during 2020. This decrease was partially offset by a $0.79 million increase in account maintenance and deposit service fees primarily in account service charges and non-sufficient funds fee, $0.62 million loss on sales of investments securities in the prior year and $0.57 million gain on debt extinguishment in 2021.
Noninterest Expense
The following tables present the major categories of noninterest expense for the years ended December 31, 2021 and 2020 (in thousands):
For the Year Ended
December 31,
(dollars in thousands)
Change
Salaries and benefits
$
36,741
$
36,675
$
Occupancy expenses
5,956
6,142
(186)
Furniture and equipment expenses
3,622
2,725
Amortization of core deposit intangible
1,364
1,364
-
Virginia franchise tax expense
2,899
2,457
Data processing expense
3,850
3,178
Telephone and communication expense
1,790
1,497
Net (gain) loss on other real estate owned
(873)
Professional fees
5,467
4,726
Other operating expenses
9,624
8,016
1,608
Total noninterest expenses
$
71,400
$
67,740
$
3,660
Noninterest expenses were $71.4 million during the year ended December 31, 2021, compared to $67.7 million during the year ended December 31, 2020. The 5.4% increase in noninterest expenses was primarily due to an increase in other operating expenses in 2021. Other operating expenses increased in 2021 compared to 2020, largely driven by a $0.24 million increase in the reserve for unfunded commitments and a $0.49 million increase in marketing and advertising expenses related to general promotional activities as well as marketing related to the new V1BE service. Occupancy and furniture and equipment expenses increased $0.71 million during the year ended December 31, 2021 compared to year ended December 31, 2020. Professional fees increased $0.74 million in 2021 compared to 2020 due to increased consulting fees and legal expenses largely related to the STM transaction and from increased recruiter fees for management and Life Premium hires. The increase in noninterest expense during the year ended December 31, 2021 was also attributable to a
$0.67 million increase in data processing expense. Virginia franchise tax expense increased $0.44 million in 2021 compared to 2020.
FINANCIAL CONDITION
Balance Sheet Overview
Total assets were $3.40 billion and $3.09 billion as of December 31, 2021 and 2020, respectively. Total loans decreased 4.1%, from $2.44 billion at December 31, 2020 to $2.34 billion at December 31, 2021. Excluding PPP loans, loans outstanding increased $137.2 million, or 6.5%, since December 31, 2020. Total deposits were $2.76 billion and $2.43 billion at December 31, 2021 and 2020, respectively, and total equity was $411.9 million and $390.6 million at December 31, 2021 and 2020, respectively.
Loans
Total loans were $2.34 billion and $2.44 billion at December 31, 2021 and 2020, respectively. PPP loan originations totaled $77.0 million and $319.4 million at December 31, 2021 and 2020, respectively. Excluding PPP loans, loans outstanding increased $137.2 million, or 6.5%, since December 31, 2020.
At December 31, 2021, the Company had no loans on deferral compared to $122.0 million of loans on deferral, or 5.75% of total loans excluding PPP loans, at December 31, 2020.
As of December 31, 2021 and 2020, substantially all of our loans were to customers located in Virginia and Maryland. We are not dependent on any single customer or group of customers whose insolvency would have a material adverse effect on operations.
The following table summarizes the composition of our loans, net of unearned income, at December 31 for the years indicated (in thousands):
Amount
Percent
Amount
Percent
Loans secured by real estate:
Commercial real estate - owner occupied
$
387,703
16.6
%
$
434,816
17.8
%
Commercial real estate - non-owner occupied
588,000
25.1
%
599,578
24.6
%
Secured by farmland
8,612
0.4
%
11,687
0.5
%
Construction and land development
121,444
5.2
%
103,401
4.2
%
Residential 1-4 family
547,560
23.4
%
557,953
22.9
%
Multi- family residential
164,071
7.0
%
107,130
4.4
%
Home equity lines of credit
73,846
3.2
%
91,748
3.8
%
Total real estate loans
1,891,236
80.8
%
1,906,313
78.1
%
Commercial loans
301,980
12.9
%
187,797
7.7
%
Paycheck protection program loans
77,319
3.3
%
314,982
12.9
%
Consumer loans
60,996
2.6
%
22,496
0.9
%
Total Non-PCD loans
2,331,531
99.6
%
2,431,588
99.6
%
PCD loans
8,455
0.4
%
8,908
0.4
%
Total loans
$
2,339,986
100.0
%
$
2,440,496
100.0
%
The following table sets forth the contractual maturity ranges of our loan portfolio and the amount of those loans with fixed and floating interest rates in each maturity range as of December 31, 2021 (in thousands):
After 1 Year
After 5 Years
Through 5 Years
Through 15 Years
After 15 Years
One Year
Fixed
Floating
Fixed
Floating
Fixed
Floating
or Less
Rate
Rate
Rate
Rate
Rate
Rate
Total
Loans secured by real estate:
Commercial real estate - owner occupied
$
38,879
$
90,110
$
11,568
$
61,737
$
98,359
$
1,501
$
85,549
$
387,703
Commercial real estate - non-owner occupied
24,088
226,431
6,128
47,630
42,809
-
240,914
588,000
Secured by farmland
2,890
1,835
-
1,622
-
1,548
8,612
Construction and land development
58,671
33,904
20,908
4,220
2,997
121,444
Residential 1-4 family
19,566
48,157
5,957
24,947
52,967
81,804
314,162
547,560
Multi- family residential
17,739
58,715
16,441
7,347
19,395
-
44,434
164,071
Home equity lines of credit
9,225
3,881
16,632
-
11,022
-
33,086
73,846
Total real estate loans
171,058
463,033
77,634
142,418
230,394
84,009
722,690
1,891,236
Commercial loans
175,438
32,145
13,156
45,762
29,290
2,217
3,972
301,980
Paycheck protection program loans
13,742
63,577
-
-
-
-
-
77,319
Consumer loans
9,592
18,709
9,393
19,478
1,471
2,347
60,996
Total Non-PCD loans
369,830
577,464
100,183
207,658
261,155
88,573
726,668
2,331,531
PCD loans
5,895
-
-
1,617
8,455
Total loans
$
375,725
$
577,845
$
100,183
$
207,658
$
262,772
$
88,987
$
726,816
$
2,339,986
Asset Quality; Past Due Loans and Nonperforming Assets
Asset quality remained solid during 2021. The outbreak of COVID-19 and resulting economic instability has had and will likely continue to have an impact on our asset quality. While COVID-19 cases are no longer at their peak and vaccinations have stemmed the outbreak, the residual effect of COVID-19 and the different variants continue to cause economic instability and uncertainty in evaluating the impact on our asset quality. We will generally place a loan on nonaccrual status when it becomes 90 days past due. Loans will also be placed on nonaccrual status in cases where we are uncertain whether the borrower can satisfy the contractual terms of the loan agreement. Cash payments received while a
loan is categorized as nonaccrual will be recorded as a reduction of principal as long as doubt exists as to future collections. We defer COVID-impacted loans to the end of the deferral date and track delinquency from the end of that new deferral date. During the third and fourth quarters of 2020 and 2021, the Company saw deferred loans return to traditional loan terms.
We maintain appraisals on loans secured by real estate, particularly those categorized as nonperforming loans and potential problem loans. In instances where appraisals reflect reduced collateral values, we make an evaluation of the borrower’s overall financial condition to determine the need, if any, for impairment or write-down to their fair values. If foreclosure occurs, we record OREO at the lower of our recorded investment in the loan or fair value less our estimated costs to sell.
Our loss and delinquency experience on our loan portfolio has been limited by a number of factors, including our underwriting standards and the relatively short period of time since the loans were originated. Whether losses and delinquencies in our portfolio will increase significantly depends upon the value of the real estate securing the loans and economic factors, such as the overall economy in our market area, including as a result of the impact of COVID-19.
The following table presents a comparison of nonperforming assets as of December 31, for the years indicated (in thousands):
December 31,
December 31,
Nonaccrual loans
$
15,029
$
14,462
Loans past due 90 days and accruing interest
-
Total nonperforming loans
15,312
14,462
Other real estate owned
1,163
3,078
Total nonperforming assets
$
16,475
$
17,540
Troubled debt restructurings
$
3,401
$
SBA guaranteed amounts included in nonperforming loans
$
1,388
$
3,076
Allowance for credit losses to total loans
1.24
%
1.52
%
Allowance for credit losses to nonaccrual loans
193.66
%
251.32
%
Allowance for credit losses to nonperforming loans
190.09
%
251.32
%
Nonaccrual to total loans
0.64
%
0.59
%
Nonperforming assets excluding SBA guaranteed loans to total assets
0.44
%
0.47
%
Not included in the table above are $122.0 million of loans that were subject to COVID-related deferrals at December 31, 2020.
OREO at December 31, 2021 was $1.2 million, compared to $3.1 million at December 31, 2020. The decrease was primarily driven by sale of properties and write-downs on OREO during 2021.
Nonaccrual loans were $15.0 million (excluding $1.1 million of loans fully covered by SBA guarantees) at December 31, 2021, compared to $14.5 million (excluding $3.1 million of loans fully covered by SBA guarantees) at December 31, 2020, an increase of 3.9%. The ratio of nonperforming assets (excluding the SBA guaranteed loans) to total assets was 0.44% and 0.47% at December 31, 2021 and 2020, respectively.
At December 31, 2021, our total substandard loans totaled $40.4 million. Included in the total substandard loans were SBA guarantees of $1.0 million. Special mention loans totaled $31.1 million at December 31, 2021.
As of December 31, 2021, there were ten TDR loans in the amount of $3.4 million. There have been no defaults of TDRs modified during the past twelve months.
We identify potential problem loans based on loan portfolio credit quality. We define our potential problem loans as our substandard loans less total nonperforming loans noted above. At December 31, 2021, our potential problem loans totaled $25.1 million.
Allowance for Credit Losses
We are very focused on the asset quality of our loan portfolio, both before and after a loan is made. We have established underwriting standards that we believe are effective in maintaining high credit quality in our loan portfolio. We have experienced loan officers who take personal responsibility for the loans they originate, a skilled underwriting team and highly qualified credit officers that review each loan application carefully. We have designed a credit matrix, which requires dual authority to approve any credit over $2.5 million. We have three specialty Executive Credit Officers with extensive industry experience in mortgage, medical practice and life premium credit financing with authority up to $6.0 million and joint authority with the Chief Credit Officer up to $10.0 million. All credit exposures over $10.0 million are reviewed and approved by Executive Loan Committee consisting of all named Credit Officers with concurrence from the President/Chief Executive Officer on any credit in excess of $25.0 million. Loans in excess of 60% of the Bank’s legal lending limit are approved by the full Board of Directors or two outside directors.
Our allowance for credit losses is established through charges to earnings in the form of a provision for credit losses. Management evaluates the allowance at least quarterly. In addition, on a quarterly basis our board of directors reviews our loan portfolio, evaluates credit quality, reviews the loan loss provision and the allowance for credit losses and makes changes as may be required. In evaluating the allowance, management and the board of directors consider the growth, composition and industry diversification of the loan portfolio, historical loan loss experience, current delinquency levels and all other known factors affecting loan collectability.
The allowance for credit losses is based on the CECL methodology and represents management’s estimate of an amount appropriate to provide for expected credit losses in the loan portfolio in the normal course of business. This estimate is based on historical credit loss information adjusted for current conditions and reasonable and supportable forecasts applied to various loan types that compose our portfolio, including the effects of known factors such as the economic environment within our market area will have on net losses. The allowance is also subject to regulatory examinations and determination by the regulatory agencies as to the appropriate level of the allowance.
Loan Review
Our loan review program is administrated by the Chief Risk Officer who reports the results directly to the Audit Committee of the Board of Directors. In 2021, internal loan review performed loan reviews on loans and commitments totaling 28.3% of this loan portfolio outstanding as of December 31, 2020. An independent third party consultant performed loan reviews on 74.6% of this portfolio. In 2021, excluding 5 loans totaling $66.1 million reviewed by both internal and external loan review, loan reviews totaling $1.21 billion were performed representing 97.6% of the specified portfolio of loans.
Primis Bank’s 2022 Loan Review Program was approved by the Audit Committee on January 27, 2022. The Program’s goal is to have an overall review penetration rate of at least 50% of the Commercial Loan Portfolio outstanding as of December 31, 2021. The overall lower penetration rate in 2022 as compared to previous years was intended to allow for the Program to incorporate a robust risk-based approach review of the Bank’s Loan Portfolio that will include process, targeted portfolio and full-scope loan reviews. The Program’s review goal remains well within regulatory standards and industry best practices. In accordance with Credit Policy, the Bank’s Loan Review Program will utilize and incorporate both internal and 3rd party external resources in a complementary fashion to achieve the objectives of the Program.
The following table sets forth the allowance for credit losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated (in thousands):
As of December 31,
Percent of
Percent of
Allowance
Loans by
Allowance
Loans by
for Credit
Category to
for Loan
Category to
Losses
Total Loans
Losses
Total Loans
Commercial real estate - owner occupied
$
4,562
16.6
%
$
6,699
17.8
%
Commercial real estate - non-owner occupied
9,028
25.1
%
11,426
24.6
%
Secured by farmland
0.4
%
0.5
%
Construction and land development
5.2
%
1,815
4.2
%
Residential 1-4 family
3,588
23.4
%
9,579
22.9
%
Multi- family residential
3,280
7.0
%
1,412
4.4
%
Home equity lines of credit
3.2
%
3.8
%
Commercial loans
4,088
12.9
%
1,498
7.7
%
Paycheck Protection Program loans
-
3.3
%
-
12.9
%
Consumer loans
2.6
%
0.9
%
PCD loans
2,281
0.4
%
2,394
0.4
%
Total
29,105
100.0
%
36,345
100.0
%
Allowance for acquired loans
-
-
Total allocated allowance
29,105
36,345
Unallocated allowance
-
-
Total
$
29,105
$
36,345
The following table presents an analysis of the allowance for credit losses for the periods indicated (in thousands):
For the Years Ended December 31,
Balance, beginning of period
$
36,345
$
10,261
Provision charged to operations:
Adoption of ASC 326
-
8,292
Total provisions (recovery)
(5,801)
19,450
Recoveries credited to allowance:
Commercial real estate - owner occupied
-
Commercial real estate - non-owner occupied
-
Residential 1-4 family
Home equity lines of credit
Commercial loans
1,005
Consumer loans
Total recoveries
1,057
Loans charged off:
Commercial real estate - owner occupied
Residential 1-4 family
Home equity lines of credit
-
Commercial loans
1,706
1,734
Consumer loans
Total loans charged-off
2,496
2,343
Net charge-offs
1,439
1,658
Balance, end of period
$
29,105
$
36,345
Net charge-offs to average loans, net of unearned income
0.06
%
0.07
%
We believe that the allowance for credit losses at December 31, 2021 is sufficient to absorb probable incurred credit losses in our loan portfolio based on our assessment of all known factors affecting the collectability of our loan portfolio.
Our assessment involves uncertainty and judgment; therefore, the adequacy of the allowance for credit losses cannot be determined with precision and may be subject to change in future periods. In addition, bank regulatory authorities, as part of their periodic examination, may require additional charges to the provision for credit losses in future periods if the results of their reviews warrant additions to the allowance for credit losses.
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.
Our investment securities portfolio is managed by our Treasurer, who has significant experience in this area, with the concurrence of our Asset/Liability Committee. In addition to our Treasurer (who is the chairman of the Asset/Liability Committee) and our Controller, this committee is comprised of outside directors and other senior officers of the Bank, including but not limited to our chief executive officer and our chief financial officer. Investment management is performed in accordance with our investment policy, which is approved annually by the Board of Directors. Our investment policy authorizes us to invest in:
● Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”) and the Federal Home Loan Mortgage Corporation (“FHLMC”) residential mortgage-backed securities (“MBS”) and commercial mortgage backed securities (“CMBS”)
● Collateralized mortgage obligations
● U.S. Treasury securities
● SBA guaranteed loan pools
● Agency securities
● Obligations of states and political subdivisions
● Corporate debt securities, with rated securities at investment grade
● Collateralized Loan Obligations (“CLOs”)
MBS are securities that have been developed by pooling a number of real estate mortgages and which are principally issued by agency/government-sponsored entities (“GSEs”) such as the GNMA, FNMA and FHLMC. These securities are deemed to have high credit ratings, and minimum regular monthly cash flows of principal and interest are guaranteed by the issuing agencies.
Collateralized mortgage obligations (“CMOs”) are bonds that are backed by pools of mortgages. The pools can be GNMA, FNMA or FHLMC pools or they can be private-label pools. The CMOs are designed so that the mortgage collateral will generate a cash flow sufficient to provide for the timely repayment of the bonds. The mortgage collateral pool can be structured to accommodate various desired bond repayment schedules, provided that the collateral cash flow is adequate to meet scheduled bond payments. This is accomplished by dividing the bonds into classes to which payments on the underlying mortgage pools are allocated. The bond’s cash flow, for example, can be dedicated to one class of bondholders at a time, thereby increasing call protection to bondholders. In private-label CMOs, losses on underlying mortgages are directed to the most junior of all classes and then to the classes above in order of increasing seniority, which means that the senior classes have enough credit protection to be given the highest credit rating by the rating agencies.
Obligations of states and political subdivisions (municipal securities) are purchased with consideration of the current tax position of the Bank. Both taxable and tax-exempt municipal bonds may be purchased, but only after careful assessment of the market risk of the security. Appropriate credit evaluation must be performed prior to purchasing municipal bonds.
Primis’ corporate bonds consist of senior and/or subordinated notes issued by banks. Bank subordinated debt, if rated, must be of investment grade and non-rated bonds are permissible if the credit-worthiness of the issuer has been properly analyzed.
CLOs are actively managed securitization vehicles formed for the purpose of acquiring and managing a diversified portfolio of senior secured corporate bank loans, otherwise known as “broadly syndicated loans. The loan portfolio is transferred to bankruptcy-remote special-purpose vehicle, which finances the acquisition through the issuance of various classes of debt and equity securities with varying levels of senior claim on the underlying loan portfolio. CLOs must be rated AA or better at the time of purchase.
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 totaling $22.9 million were in the held-to-maturity portfolio at December 31, 2021, compared to $40.7 million at December 31, 2020. Investment securities totaling $271.3 million were in the available-for-sale portfolio at December 31, 2021, compared to $153.2 million at December 31, 2020. During 2021 and 2020, $160.5 million and $38.9 million, respectively, of available-for-sale investment securities were purchased. No held-to-maturity investments were purchased in 2021. During 2020, $15.2 million of held-to-maturity investment securities were purchased. No investment securities were sold during 2021. During 2020, $1.9 million and $1.7 million, respectively, of available-for-sale investment securities and held-to-maturity investment securities were sold. Realized losses on sales of investment securities of $0.62 million were recorded for the year ended December 31, 2020.
Investment securities in our portfolio as of December 31, 2021 were as follows:
● agency commercial mortgage-backed securities in the amount of $136.2 million;
● corporate bonds in the amount of $13.7 million;
● collateralized loan obligations of $5.0 million;
● residential government-sponsored collateralized mortgage obligations in the amount of $20.3 million;
● callable agency securities in the amount of $22.5 million;
● commercial mortgage-backed securities in the amount of $52.7 million;
● SBA loan pool securities in the amount of $8.8 million; and
● municipal bonds in the amount of $35.0 million (fair value of $31.2 million) with a taxable equivalent yield of 2.68%
For additional information regarding investment securities refer to “Item 8. Financial Statements and Supplementary Data, Note 2-Investment Securities.”
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).
December 31,
Available-for-sale investment securities:
Residential government-sponsored mortgage-backed securities
$
122,610
$
37,060
Obligations of states and political subdivisions
31,231
24,042
Corporate securities
13,685
15,079
Collateralized loan obligations
5,010
-
Residential government-sponsored collateralized mortgage obligations
19,807
29,416
Government-sponsored agency securities
17,488
6,075
Agency commercial mortgage-backed securities
52,667
30,190
SBA pool securities
8,834
11,371
Total
$
271,332
$
153,233
Held-to-maturity investment securities:
Residential government-sponsored mortgage-backed securities
$
13,616
$
25,037
Obligations of states and political subdivisions
3,805
9,594
Trust preferred securities
-
-
Residential government-sponsored collateralized mortgage obligations
1,090
Government-sponsored agency securities
5,000
5,000
Total
$
22,940
$
40,721
The following table sets forth the amortized cost, fair value, and weighted average yield of our investment securities by contractual maturity at December 31, 2021. Weighted average yield is calculated as the tax-equivalent yield on a pro rata basis for each security based on its relative amortized cost. Yields on tax-exempt securities have been computed on a tax-equivalent basis. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands).
Investment Securities Available-for-Sale
Weighted
Amortized
Average
Cost
Fair Value
Yield
Obligations of states and political subdivisions
Due less than one year
$
$
3.18
%
Due after one year through five years
2,314
2,415
2.37
%
Due after five years through ten years
7,960
8,250
2.70
%
Due after ten years
19,667
19,777
2.03
%
30,728
31,231
2.26
%
Collateralized loan obligations
Due after ten years
5,026
5,010
1.20
%
Corporate securities
Due after five years through ten years
11,000
11,560
4.67
%
Due after ten years
2,000
2,125
4.50
%
13,000
13,685
4.64
%
Government-sponsored agency securities
Due after one year through five years
1,500
1,532
2.00
%
Due after five years through ten years
6,832
6,783
1.32
%
Due after ten years
9,339
9,173
1.94
%
17,671
17,488
1.70
%
Residential government-sponsored mortgage-backed securities
Due after one year through five years
6,189
6,388
2.47
%
Due after five years through ten years
16,009
16,009
1.37
%
Due after ten years
100,308
100,213
1.70
%
122,506
122,610
1.71
%
Residential government-sponsored collateralized mortgage obligations
Due after five years through ten years
5,199
5,298
2.17
%
Due after ten years
14,472
14,509
1.62
%
19,671
19,807
1.76
%
Agency commercial mortgage-backed securities
Due less than one year
7,697
7,792
2.12
%
Due after one year through five years
13,634
14,024
2.34
%
Due after five years through ten years
23,243
23,058
1.49
%
Due after ten years
7,878
7,793
1.46
%
52,452
52,667
1.80
%
SBA pool securities
Due after one year through five years
2.70
%
Due after five years through ten years
3,132
3,159
2.39
%
Due after ten years
5,609
5,547
2.23
%
8,870
8,834
2.30
%
$
269,924
$
271,332
1.94
%
Investment Securities Held-to-Maturity
Weighted
Amortized
Average
Cost
Fair Value
Yield
Obligations of states and political subdivisions
Due less than one year
$
$
2.51
%
Due after one year through five years
1,545
1,588
2.79
%
Due after five years through ten years
1,518
1,562
2.63
%
Due after ten years
6.70
%
3,805
3,898
3.04
%
Government-sponsored agency securities
Due after ten years
5,000
5,023
3.32
%
5,000
5,023
3.32
%
Residential government-sponsored mortgage-backed securities
Due after five years through ten years
1,852
1,916
2.25
%
Due after ten years
11,764
11,995
1.58
%
13,616
13,911
1.67
%
Residential government-sponsored collateralized mortgage obligations
Due after ten years
1.69
%
1.69
%
$
22,940
$
23,364
2.26
%
Deposits and Other Borrowings
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 13.6% to $2.76 billion at December 31, 2021 from $2.43 billion at December 31, 2020. Noninterest-bearing demand deposits increased from $440.7 million as of December 31, 2021 to $530.3 million as of December 31, 2021. Time deposits decreased from $490.0 million to $360.6 million and savings accounts increased from $183.8 million to $222.9 million over the same period.
The following table sets forth the average balance and average rate paid on each of the deposit categories for the years ended December 31, 2021 and 2020:
Average
Average
Average
Average
Balance
Rate
Balance
Rate
(in thousands)
Noninterest-bearing demand deposits
$
522,683
$
416,249
Interest-bearing deposits:
Savings accounts
208,202
0.30
%
167,567
0.29
%
Money market accounts
726,059
0.58
%
508,260
0.82
%
NOW and other demand accounts
860,482
0.47
%
481,470
0.73
%
Time deposits
405,670
1.04
%
645,123
1.88
%
Total interest-bearing deposits
2,200,413
0.60
%
1,802,420
1.13
%
Total deposits
$
2,723,096
$
2,218,669
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.
The following table sets forth the maturities of certificates of deposit of $100 thousand and over as of December 31, 2021 (in thousands):
Within
3 to 6
6 to 12
Over 12
3 Months
Months
Months
Months
Total
$
43,726
$
55,276
$
91,324
$
47,618
$
237,944
We use borrowed funds to support our liquidity needs and to temporarily satisfy our funding needs from increased loan demand and for other shorter term purposes. We are a member of the FHLB and are authorized to obtain advances from the FHLB from time to time as needed. The FHLB has a credit program for members with different maturities and interest rates, which may be fixed or variable. We are required to collateralize our borrowings from the FHLB with our FHLB stock and other collateral acceptable to the FHLB. At December 31, 2021 and 2020, total FHLB borrowings were $100.0 million. At December 31, 2021, we had $763.2 million of unused and available FHLB lines of credit.
Other borrowings can consist of FHLB convertible advances, FHLB overnight advances, other 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 December 31, 2021 and 2020 was $10.0 million and $16.1 million, respectively.
Other borrowings consist of the following (in thousands):
December 31,
FHLB convertible advances maturing 3/1/2030
$
100,000
$
100,000
Total FHLB advances
100,000
100,000
Securities sold under agreements to repurchase
9,962
16,065
Total
$
109,962
$
116,065
Weighted average interest rate at year end
3.55
%
3.35
%
For the periods ended December 31, 2021 and 2020:
Average outstanding balance
$
114,580
$
118,099
Average interest rate during the year
0.39
%
0.89
%
Maximum month-end outstanding balance
$
116,445
$
273,893
Junior Subordinated Debt and Senior Subordinated Notes
In 2017, the Company assumed $10.3 million of trust preferred securities that were issued on September 17, 2003 and placed through a trust in a pooled underwriting totaling approximately $650 million. The trust issuer invested the total proceeds from the sale of the trust preferred securities in Floating Rate Junior Subordinated Deferrable Interest Debentures. At December 31, 2021 and 2020, there was $10.3 million outstanding, net of approximately $600 thousand of debt issuance costs. These securities pay cumulative cash distributions quarterly at a variable rate per annum, reset quarterly, equal to the three-month LIBOR plus 2.95%. As of December 31, 2021 and 2020, the interest rate was 3.17% and 3.18%, respectively. The dividends paid to holders of these securities, which are recorded as interest expense, are deductible for income tax purposes.
The trust preferred securities may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. At December 31, 2021, all of the trust preferred securities qualified as Tier 1 capital.
On January 20, 2017, Primis completed the sale of $27.0 million of its fixed-to-floating rate senior Subordinated Notes due 2027. These notes initially beared interest at 5.875% per annum until January 31, 2022; interest is currently payable at an annual floating rate equal to three-month LIBOR plus a spread of 3.95% until maturity or early redemption. At December 31, 2021, all of these notes qualified as Tier 2 capital.
In 2017, the Company assumed a Senior Subordinated Note Purchase Agreement, dated April 22, 2015, entered into with certain institutional accredited investors, pursuant to which $20.0 million in aggregate principal amount of its 6.50% Fixed-to-Floating Rate Subordinated Notes due 2025 was sold to the investors. On February 1, 2021, the Company redeemed all of these notes.
On August 25, 2020, Primis completed the sale of $60.0 million of its fixed-to-floating rate Subordinated Notes due 2030. These notes will bear interest at an initial rate of 5.40% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2021. From and including September 1, 2025 to, but excluding the maturity date or the date of earlier redemption (the “floating rate period”), the interest rate will reset quarterly to an annual interest rate equal to the Benchmark rate, which is expected to be three-month Term SOFR, plus 531 basis points, for each quarterly interest period during the floating rate period, payable quarterly in arrears on March 1, June 1, September 1, and December 1 of each year, commencing on December 1, 2025. Notwithstanding the foregoing, in the event that the Benchmark rate is less than zero, the Benchmark rate shall be deemed to be zero. At December 31, 2021, all of these notes qualified as Tier 2 capital.
Interest Rate Sensitivity and 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 December 31, 2021 and 2020. All changes are within our Asset/Liability Risk Management Policy guidelines.
Sensitivity of Economic Value of Equity
As of December 31, 2021
Economic Value of
Economic Value of Equity
Equity as a % of
Change in Interest Rates
$ Change
% Change
Total
Equity
in Basis Points (Rate Shock)
Amount
From Base
From Base
Assets
Book Value
(dollar amounts in thousands)
Up 400
$
419,520
$
10,937
2.68
%
12.31
%
101.85
%
Up 300
419,238
10,655
2.61
%
12.30
%
101.79
%
Up 200
417,156
8,573
2.10
%
12.24
%
101.28
%
Up 100
418,107
9,524
2.33
%
12.27
%
101.51
%
Base
408,583
-
-
%
11.99
%
99.20
%
Down 100
341,573
(67,010)
(16.40)
%
10.02
%
82.93
%
Sensitivity of Economic Value of Equity
As of December 31, 2020
Economic Value of
Economic Value of Equity
Equity as a % of
Change in Interest Rates
$ Change
% Change
Total
Equity
in Basis Points (Rate Shock)
Amount
From Base
From Base
Assets
Book Value
(dollar amounts in thousands)
Up 400
$
339,057
$
5,568
1.67
%
10.98
%
86.81
%
Up 300
341,652
8,163
2.45
%
11.06
%
87.48
%
Up 200
342,561
9,072
2.72
%
11.09
%
87.71
%
Up 100
343,842
10,353
3.10
%
11.13
%
88.04
%
Base
333,489
-
-
%
10.80
%
85.39
%
Down 100
282,586
(50,903)
(15.26)
%
9.15
%
72.36
%
Our interest rate sensitivity is also monitored by management through the use of a model that generates estimates of the change in the net interest income (“NII”) over a range of interest rate scenarios. NII depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. In this regard, the model assumes that the composition of our interest sensitive assets and liabilities existing at December 31, 2021 and 2020 remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. All changes are within our ALM Policy guidelines at December 31, 2021 and 2020.
Sensitivity of Net Interest Income
As of December 31, 2021
Adjusted Net Interest Income
Change in Interest Rates
$ Change
in Basis Points (Rate Shock)
Amount
From Base
(dollar amounts in thousands)
Up 400
$
88,531
$
2,341
Up 300
87,863
1,673
Up 200
87,127
Up 100
86,713
Base
86,190
-
Down 100
82,670
(3,520)
Sensitivity of Net Interest Income
As of December 31, 2020
Adjusted Net Interest Income
Change in Interest Rates
$ Change
in Basis Points (Rate Shock)
Amount
From Base
(dollar amounts in thousands)
Up 400
$
78,988
$
(4,760)
Up 300
80,341
(3,407)
Up 200
81,604
(2,144)
Up 100
83,039
(709)
Base
83,748
-
Down 100
82,667
(1,081)
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.
Liquidity and Funds Management
The objective of our liquidity management is to ensure the ability to meet our financial obligations. These obligations include the payment of deposits on demand or at maturity, the repayment of borrowings at maturity and the ability to fund commitments and other new business opportunities. We obtain funding from a variety of sources, including customer deposit accounts, customer certificates of deposit and payments on our loans and investments. If our level of core deposits are not sufficient to fully fund our lending activities, we have access to funding from additional sources, including borrowing from the Federal Home Loan Bank of Atlanta, institutional certificates of deposit and the sale of available-for-sale investment securities. In addition, we maintain federal funds lines of credit with two correspondent banks and utilize securities sold under agreements to repurchase and reverse repurchase agreement borrowings from approved securities dealers. For additional information about borrowings and anticipated principal repayments refer to the discussion about Contractual Obligations below and “Item 8. Financial Statements and Supplementary Data, Note 9 - Securities Sold Under Agreements To Repurchase And Other Short-Term Borrowings and Note 10 - Junior Subordinated Debt and Senior Subordinated Notes.”
We prepare a cash flow forecast on a 30, 60 and 90 day basis along with a one and a two year basis. The projections incorporate expected cash flows on loans, investment securities, and deposits based on data used to prepare our interest rate risk analyses.
At December 31, 2021, we had $411.0 million of unfunded lines of credit and undisbursed construction loan funds. The amount of certificate of deposit accounts maturing in less than one year was $285.2 million as of December 31, 2021. Management anticipates that funding requirements for these commitments can be met from the normal sources of funds.
As of December 31, 2021, 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 December 31, 2021, Primis has no material commitments or long-term debt for capital expenditures.
Capital Resources
Capital management consists of providing equity to support both current and future operations. Primis Financial Corp. and its subsidiary bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (“PCA”), we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. At December 31, 2021 and 2020, the most recent regulatory notifications categorized the Bank as well capitalized under regulatory framework for PCA.
Quantitative measures established by regulation to ensure capital adequacy require Primis to maintain minimum amounts and ratios of Total and Tier I capital (as defined in the regulations) to average assets (as defined). Management believes, as of December 31, 2021, that Primis meets all capital adequacy requirements to which it is subject.
See “Item 1. Business, Supervision and Regulation-Capital Requirements.”
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
Capital
To Be
Actual Ratio at
Adequacy
Categorized as
December 31,
December 31,
Purposes
Well Capitalized (1)
Primis Financial Corp.
Leverage ratio
4.00
%
n/a
9.41
%
9.69
%
Common equity tier 1 capital ratio
4.50
%
n/a
13.09
%
13.05
%
Tier 1 risk-based capital ratio
6.00
%
n/a
13.52
%
13.52
%
Total risk-based capital ratio
8.00
%
n/a
18.52
%
19.58
%
Primis Bank
Leverage ratio
4.00
%
5.00
%
11.14
%
11.25
%
Common equity tier 1 capital ratio
7.00
%
6.50
%
16.18
%
15.83
%
Tier 1 risk-based capital ratio
8.50
%
8.00
%
16.18
%
15.83
%
Total risk-based capital ratio
10.50
%
10.00
%
17.43
%
17.09
%
(1) Prompt corrective action provisions are not applicable at the bank holding company level.
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 9.43% at December 31, 2021, which exceeded the 2.50% minimum requirement below which the regulators may impose limits on distributions.
Primis Bank’s capital position is consistent with being well- capitalized under the regulatory framework for prompt corrective action.
Impact of Inflation and Changing Prices
The financial statements and related financial data presented in this Annual Report on Form 10-K concerning Primis Financial Corp. have been prepared in accordance with U.S. GAAP, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, changes in interest rates have a more significant impact on our performance than do the effects of changes in the general rate of inflation and changes in prices. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Many factors impact interest rates, including the FRB, inflation, recession, changes in unemployment, the money supply, and international disorder and instability in domestic and foreign financial markets. Like most financial institutions, changes in interest rates can impact our net interest income which is the difference between interest earned from interest-earning assets, such as loans and investment securities, and interest paid on interest-bearing liabilities, such as deposits and borrowings, as well as the valuation of our assets and liabilities.
Our interest rate risk management is the responsibility of the Bank’s Asset/Liability Management Committee (the “Asset/Liability Committee”). The Asset/Liability Committee has established policies and limits for management to monitor, measure and coordinate our sources, uses and pricing of funds. The Asset/Liability Committee makes reports to the board of directors on a quarterly basis.
Seasonality and Cycles
We do not consider our commercial banking business to be seasonal.
Off-Balance Sheet Arrangements
Primis is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and guarantees of credit card accounts. These instruments involve elements of credit and funding risk in excess of the amount recognized in the consolidated balance sheet. Letters of credit are written conditional commitments issued by Primis to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. We had letters of credit outstanding totaling $13.1 million and $15.9 million as of December 31, 2021 and 2020, respectively.
Our exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit is based on the contractual amount of these instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Unless noted otherwise, we do not require collateral or other security to support financial instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments are made predominately for adjustable rate loans, and generally have fixed
expiration dates of up to three months or other termination clauses and usually require payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis.
At December 31, 2021 and 2020, we had unfunded lines of credit and undisbursed construction loan funds totaling $411.0 million and $355.3 million, respectively. Virtually all of our unfunded lines of credit and undisbursed construction loan funds are variable rate.
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, as if such commitments were funded.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
This information is incorporated herein by reference from “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors
Primis Financial Corp.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Primis Financial Corp. (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, based on our audits and the report of the other auditors, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We did not audit the financial statements of Southern Trust Mortgage, LLC (“STM”) as of and for the year ended December 31, 2020. STM, an affiliate of the Company as of December 31, 2020, was accounted for as an equity method investment. The Company’s financial statements for the year ended December 31, 2020 reported an equity gain from mortgage affiliate totaling $10.8 million, or approximately 36% of the Company’s income before income taxes. STM’s financial statements were audited by other auditors whose report was furnished to us, and our opinion, insofar as it relates to the amounts included for STM as of and for the year ended December 31, 2020, is based solely on the report of the other auditors.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2022 expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 1 to the financial statements, the Company changed its method of accounting for credit losses effective January 1, 2020 due to the adoption of Accounting Standards Codification (ASC) Topic 326, Financial Instruments - Credit Losses.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses
As described in Notes 1 and 3 to the financial statements, the Company’s allowance for credit losses was $29.1 million at December 31, 2021.
The Company’s allowance for credit losses (“ACL”) is measured on a collective basis when similar risk characteristics exist, and by individually evaluating loans that do not share similar risk characteristics. The Company measures the ACL using a combination of probability of default (PD), probability of attrition (PA), loss given default (LGD), and exposure at default (EAD), calculated based on the application of historical loss experience, and adjusted for a reasonable and supportable forecast. Estimates are qualitatively adjusted for risk factors that are not considered within the quantitative modeling process. Estimating an appropriate allowance requires management to make numerous assumptions about losses that will occur over the remaining contractual life of loans recorded as of the balance sheet date. The most significant judgments in the ACL as of December 31, 2021 include the determination of a reasonable and supportable forecast and the impact of qualitative factors.
We identified the ACL as a critical audit matter. The principal considerations for our determination of the ACL as a critical audit matter included the high degree of judgment and subjectivity relating to management’s determination of reasonable and supportable forecasts and the identification and measurement of the qualitative factors. In turn, auditing management’s judgments regarding credit loss estimates and assumptions, specifically the determination of reasonable and supportable forecasts and qualitative factors involved a high degree of subjectivity and an increased extent of audit effort.
The primary procedures we performed to address this critical audit matter included:
● We tested the design and operating effectiveness of controls relating to management’s determination of the ACL, including controls relating to the:
o Completeness and accuracy of inputs into the model used to determine the ACL.
o Performance of an independent model validation and appropriate responses to any findings.
o The determination of a reasonable and supportable forecast.
o The determination of qualitative factors.
● We evaluated management’s application of and changes to qualitative adjustments, including testing the accuracy of the supporting calculations, evaluating whether the qualitative factors appropriately addressed risks that were not fully accounted for in the quantitative ACL component of the methodology, and evaluating the appropriateness and level of the qualitative factor adjustments.
● We evaluated management’s determination of a reasonable and supportable forecast, including testing the application of the forecast in quantitative ACL calculation. We also utilized our internal valuation specialists to assist us in testing the application of the forecast to the ACL calculation.
● We evaluated the mathematical accuracy of the ACL, including the mathematical application of the qualitative adjustments on the loan segments.
● We assessed the overall trends in credit quality, including adjustments for the qualitative factors by comparing the overall ACL to those recorded by the Company’s peer institutions.
● We involved our internal valuation specialists to assist in evaluating the appropriateness of model inputs and assumptions and testing the design of the model calculation through a re-performance of the discounted cash flow.
/s/ Dixon Hughes Goodman LLP
We have served as the Company's auditor since 2013.
Greenville, North Carolina
March 14, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors
Primis Financial Corp.
Opinion on Internal Control Over Financial Reporting
We have audited Primis Financial Corp.’s (the “Company”) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of December 31, 2021 and 2020, and for each of the three years in the period ended December 31, 2021, and our report dated March 14, 2022, expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Dixon Hughes Goodman LLP
Greenville, North Carolina
March 14, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Southern Trust Mortgage, LLC
Virginia Beach, Virginia
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Southern Trust Mortgage, LLC (the Company) as of December 31, 2020 and 2019, and the related statements of operations, changes in membersʹ equity, and cash flows for the years then ended, and the related notes (collectively, referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgements. We determined that there are no critical audit matters.
/s/ Richey, May & Co., LLP.
We have served as Southern Trust Mortgage, LLC’s auditor since 2014.
Englewood, Colorado
March 12, 2021
PRIMIS FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
December 31,
December 31,
ASSETS
Cash and cash equivalents:
Cash and due from financial institutions
$
8,380
$
8,585
Interest-bearing deposits in other financial institutions
521,787
187,600
Total cash and cash equivalents
530,167
196,185
Securities available-for-sale, at fair value
271,332
153,233
Securities held-to-maturity, at amortized cost (fair value of $23,364 and $41,832, respectively)
22,940
40,721
Total loans
2,339,986
2,440,496
Less allowance for credit losses
(29,105)
(36,345)
Net loans
2,310,881
2,404,151
Stock in Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB)
15,521
16,927
Investments in mortgage company - held for sale
-
12,952
Preferred investment in mortgage company
3,005
3,005
Bank premises and equipment, net
30,410
30,306
Operating lease right-of-use assets
5,866
7,511
Goodwill
101,954
101,954
Core deposit intangibles, net
4,462
5,826
Bank-owned life insurance
66,724
65,409
Other real estate owned
1,163
3,078
Deferred tax assets, net
9,571
14,646
Accrued interest receivable
11,882
19,998
Other assets
21,475
12,771
Total assets
$
3,407,353
$
3,088,673
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits
$
530,282
$
440,674
Interest-bearing deposits:
NOW accounts
849,738
714,752
Money market accounts
799,759
603,318
Savings accounts
222,862
183,814
Time deposits
360,575
490,048
Total interest-bearing deposits
2,232,934
1,991,932
Total deposits
2,763,216
2,432,606
Securities sold under agreements to repurchase - short term
9,962
16,065
FHLB advances
100,000
100,000
Junior subordinated debt - long term
9,731
9,682
Senior subordinated notes - long term
85,297
105,647
Operating lease liabilities
6,498
8,238
Other liabilities
20,768
25,881
Total liabilities
2,995,472
2,698,119
Commitments and contingencies (See Note 14)
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 5,000,000 shares; no shares issued and outstanding
-
-
Common stock, $0.01 par value. Authorized 45,000,000 shares; 24,574,619 and 24,368,612 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively
Additional paid in capital
311,127
308,870
Retained earnings
99,397
77,956
Accumulated other comprehensive income
1,112
3,485
Total stockholders' equity
411,881
390,554
Total liabilities and stockholders' equity
$
3,407,353
$
3,088,673
See accompanying notes to consolidated financial statements.
PRIMIS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(dollars in thousands, except per share amounts)
For the Years Ended December 31,
Interest and dividend income:
Interest and fees on loans
$
107,021
$
111,647
$
112,181
Interest and dividends on taxable securities
3,977
4,244
5,639
Interest and dividends on tax exempt securities
Interest and dividends on other earning assets
1,782
1,402
2,119
Total interest and dividend income
113,243
117,779
120,524
Interest expense:
Interest on deposits
13,112
20,332
30,602
Interest on FRB borrowings
-
-
Interest on repurchase agreements
Interest on junior subordinated debt
Interest on senior subordinated notes
5,127
3,909
2,847
Interest on other borrowings
2,799
Total interest expense
19,040
26,139
36,924
Net interest income
94,203
91,640
83,600
Provision for (recovery of) credit losses
(5,801)
19,450
Net interest income after (recovery of) provision for credit losses
100,004
72,190
83,250
Noninterest income:
Account maintenance and deposit service fees
7,309
6,520
7,159
Income from bank-owned life insurance
1,687
1,559
1,699
Gain on debt extinguishment
-
-
Realized losses on sales of investment securities
-
(620)
-
Recoveries related to acquired charged-off loans and investment securities
6,500
1,537
Other
1,000
Total noninterest income
11,135
14,662
11,395
Noninterest expenses:
Salaries and benefits
36,741
36,675
26,261
Occupancy expenses
5,956
6,142
6,204
Furniture and equipment expenses
3,622
2,725
2,719
Amortization of core deposit intangible
1,364
1,364
1,418
Virginia franchise tax expense
2,899
2,457
2,251
Data processing expense
3,850
3,178
2,381
Telephone and communication expense
1,790
1,497
1,615
Net (gain) loss on other real estate owned
(38)
Professional fees
5,467
4,726
3,612
Other operating expenses
9,624
8,016
10,169
Total noninterest expenses
71,400
67,740
56,592
Income from continuing operations before income taxes
39,739
19,112
38,053
Income tax expense
8,721
4,228
5,892
Income from continuing operations
31,018
14,884
32,161
Income from discontinued operation before income taxes
10,789
1,191
Income tax expense
2,386
Income from discontinued operation
8,403
1,006
Net income
$
31,248
$
23,287
$
33,167
Other comprehensive income:
Unrealized gain (loss) on available-for-sale securities
$
(3,193)
$
2,789
$
4,256
Reclassification of loss on sales of investment securities
-
-
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale
Net unrealized gain (loss)
(3,042)
3,421
4,269
Tax effect
(669)
Other comprehensive income (loss)
(2,373)
2,702
3,372
Comprehensive income
$
28,875
$
25,989
$
36,539
Earnings per share from continuing operations, basic
$
1.27
$
0.61
$
1.34
Earnings per share from discontinued operation, basic
$
0.01
$
0.35
$
0.04
Earnings per share from continuing operations, diluted
$
1.26
$
0.61
$
1.32
Earnings per share from discontinued operation, diluted
$
0.01
$
0.35
$
0.04
See accompanying notes to consolidated financial statements.
PRIMIS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
(dollars in thousands, except per share amounts)
For the Year Ended December 31, 2021
Accumulated
Additional
Other
Common
Paid in
Retained
Comprehensive
Stock
Capital
Earnings
Income (Loss)
Total
Balance - December 31, 2018
$
$
305,654
$
44,985
$
(2,589)
$
348,290
Net income
-
-
33,167
-
33,167
Changes in other comprehensive income on investment securities (net of tax expense, $897)
-
-
-
3,372
3,372
Dividends on common stock ($0.36 per share)
-
-
(8,690)
-
(8,690)
Stock Option exercises
-
-
Stock-based compensation expense
-
-
-
Balance - December 31, 2019
$
$
306,755
$
69,462
$
$
377,241
Impact of adoption of ASU 2016-13
-
-
(5,056)
-
(5,056)
Adjusted beginning balance
306,755
64,406
372,185
Net income
-
-
23,287
-
23,287
Changes in other comprehensive income on investment securities (net of tax expense, $719)
-
-
-
2,702
2,702
Dividends on common stock ($0.40 per share)
-
-
(9,737)
-
(9,737)
Stock Option exercises
-
-
Vesting of restricted stock
(1)
-
-
-
Repurchase of restricted stock
-
(135)
-
-
(135)
Stock-based compensation expense
-
1,543
-
-
1,543
Balance - December 31, 2020
$
$
308,870
$
77,956
$
3,485
$
390,554
Net income
-
-
31,248
-
31,248
Changes in other comprehensive loss on investment securities (net of tax benefit $669)
-
-
-
(2,373)
(2,373)
Dividends on common stock ($0.40 per share)
-
-
(9,807)
-
(9,807)
Stock Option exercises
1,524
-
-
1,526
Repurchase of restricted stock
-
(14)
-
-
(14)
Stock-based compensation expense
-
-
-
Balance - December 31, 2021
$
$
311,127
$
99,397
$
1,112
$
411,881
See accompanying notes to consolidated financial statements.
PRIMIS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the Year Ended December 31,
Operating activities:
Net income from continuing operations
$
31,018
$
14,884
$
32,161
Adjustments to reconcile net income from continuing operations to net cash and cash equivalents provided by operating activities:
Depreciation and amortization
5,627
5,285
5,632
Amortization of operating lease right-of-use assets
2,413
2,909
2,546
Accretion of loan discount
(1,989)
(4,346)
(3,859)
Amortization of FDIC indemnification asset
-
-
Provision (recovery) for credit losses
(5,801)
19,450
Earnings on bank-owned life insurance
(1,681)
(1,559)
(1,565)
Stock-based compensation expense
1,543
Loss on sales of investment securities
-
-
Gain on bank-owned life insurance death benefit
(6)
-
(134)
(Gain) loss on other real estate owned
(38)
Gain on debt extinguishment
(573)
-
-
Provision (benefit) for deferred income taxes
6,054
(1,411)
1,477
Net decrease (increase) in other assets
(588)
(11,942)
(2,203)
Net increase (decrease) in other liabilities
(7,620)
2,707
1,558
Net cash and cash equivalents provided by operating activities from continuing operations
27,688
29,100
37,006
Investing activities:
Proceeds from sales of held-to-maturity investment securities
-
1,660
-
Proceeds from sales of available-for-sale investment securities
-
1,910
-
Purchases of held-to-maturity investment securities
-
(15,197)
(15,260)
Purchases of available-for-sale investment securities
(160,531)
(38,938)
(45,135)
Proceeds from paydowns, maturities and calls of available-for-sale investment securities
37,878
50,068
26,283
Proceeds from paydowns, maturities and calls of held-to-maturity investment securities
17,652
44,738
35,006
Net decrease of FRB and FHLB stock
1,406
1,690
Net (increase) decrease in loans
109,375
(251,000)
(7,059)
Proceeds from bank-owned life insurance death benefit
-
Proceeds from sales of other real estate owned, net of improvements
2,014
2,663
Purchases of bank premises and equipment
(2,456)
(1,082)
(1,101)
Net cash and cash equivalents provided by (used in) investing activities from continuing operations
5,709
(204,273)
(5,018)
Financing activities:
Net increase in deposits
330,610
307,888
27,129
Cash dividends paid on common stock
(9,807)
(9,737)
(8,690)
Proceeds from exercised stock options
1,526
Repurchase of restricted stock
(14)
(135)
-
Issuance of subordinated notes, net of cost
-
58,600
-
Extinguishment of subordinated debt
(20,000)
-
-
Net decrease in other borrowings
(6,103)
(18,458)
(47,538)
Net cash and cash equivalents provided by (used in) financing activities from continuing operations
296,212
338,867
(28,429)
Net change in cash and cash equivalents from continuing operations
329,609
163,694
3,559
Cash flows provided by (used in) discontinued operation:
Net cash and cash equivalents used in operating activities
(373)
(2,593)
(242)
Net cash and cash equivalents provided by investing activities
4,746
3,156
-
Net change in cash and cash equivalents from discontinued operation
4,373
(242)
Net change in cash and cash equivalents
333,982
164,257
3,317
Cash and cash equivalents at beginning of period
196,185
31,928
28,611
Cash and cash equivalents at end of period
$
530,167
$
196,185
$
31,928
Supplemental disclosure of cash flow information
Cash payments for:
Interest
$
20,234
$
27,988
$
36,002
Income taxes
6,151
7,693
4,897
Supplemental schedule of noncash investing and financing activities:
Transfer from loans to other real estate owned
1,323
Notes receivable from discontinued operation, included in loans
8,500
-
-
See accompanying notes to consolidated financial statements.
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
On March 31, 2021, the Company changed its name from Southern National Bancorp of Virginia, Inc. (“Southern National”) to Primis Financial Corp. (“Primis,” “we,” “us,” “our” or the “Company”) and Sonabank changed its name to Primis Bank. Primis is the bank holding company for Primis Bank (“Primis Bank” or the “Bank”), a Virginia state-chartered bank which commenced operations on April 14, 2005. Primis Bank provides a range of financial services to individuals and small and medium sized businesses.
At December 31, 2021, Primis Bank had forty full-service branches in Virginia and Maryland and also provides services to customers through certain online and mobile applications. Thirty-five full-service retail branches are in Virginia and five full-service retail branches are in Maryland. The Company has administrative offices in Warrenton and Glen Allen, Virginia.
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 and EVB Statutory Trust I (the “Trust”). Significant inter-company accounts and transactions have been eliminated in consolidation. Primis consolidates subsidiaries in which it holds, directly or indirectly, more than 50 percent of the voting rights or where it exercises control. Entities where Primis holds 20 to 50 percent of the voting rights, or has the ability to exercise significant influence, or both, are accounted for under the equity method. Primis owns the Trust which is an unconsolidated subsidiary and the junior subordinated debt owed to the Trust is reported as a liability of Primis.
In addition, Primis Bank has an interest in one mortgage company, Southern Trust Mortgage, LLC (“STM”). Prior to December 31, 2021, Primis Bank owned 43.28% and 100% of STM’s common and preferred stock, respectively, and STM was considered an unconsolidated affiliate of the Company. On September 23, 2021, Primis Bank announced that it entered into an agreement with STM, whereby STM agreed to purchase all of the Bank's common membership interests and a portion of the Bank's preferred interests in STM for a combination of $1.6 million in cash and a promissory note for $8.5 million. The transaction closed on December 31, 2021. Upon closing, STM continues to be a borrower of the Bank, but the Bank is no longer a minority owner of STM and STM is no longer considered an affiliate of the Company. The Company still holds 100% of STM’s preferred stock at December 31, 2021 but no longer has a position on STM’s board of directors and STM no longer represents a reportable operating segment of the Company.
Discontinued Operation
As discussed above the Company disposed of all of its common stock ownership and a portion of its preferred stock ownership in STM on December 31, 2021. The common stock investment was accounted for using the equity method of accounting and efffective July 1, 2021, in accordance with the terms of the agreement, the Company no longer accrued earnings related to its common membership interests in STM; however, the Company maintain significant influence over STM until closing of the transaction. The preferrd stock investment is considered a non-marketable equity security that does not have a readily determinable fair value and is carried at cost, less impairment.
The historical investments in STM that were disposed of on December 31, 2021 have been classified as held for sale on the consolidated balance sheet as of December 31, 2020 and totaled $13.0 million and consisted of $12.7 million in equity method investment and $300 thousand in preferred stock. The consolidated statements of income and comprehensive income have been adjusted to reflect the equity in earnings and income tax expense associated with the equity method investment as a discontinued operation, included in that amount for 2021 is a pre-tax impairment charge of approximately $2.9 million related to the transaction. Pre-tax equity in earnings for the years ended December 31, 2021, 2020 and 2019 were $294 thousand, after impairment, $10.8 million, and $1.2 million, respectively.
For the years ended December 31, 2020 and 2019, STM was considered a reportable segment. As of December 31, 2020 and 2019, total mortgage loans held for sale by STM were $143.4 million and $100.2 million, respectively. STM’s warehouse lines of credit were $136.1 million and $92.1 million as of December 31, 2020 and 2019, respectively and total members’ equity was $26.4 million and $11.1 million as of December 31, 2020 and 2019. For the years ended December 31, 2020 and 2019, STM’s net income was $22.2 million and $2.7 million, respectively. The primary source of revenue for STM was gains on sale of mortgage loans held for sale, net of direct costs. For the years ended December 31, 2020 and 2019, gains on sale of mortgage loans held for sale, net of direct costs were $107.1 million and $45.7 million, respectively. STM’s salaries, commissions and benefits were $84.1 million and $39.0 million for the years ended December 31, 2020 and 2019, respectively.
Operating Segments
Operating segments are defined as components of a company about which separate financial information is available that is evaluated regularly by the chief financial officer and chief accounting officer in deciding how to allocate resources and in assessing performance. Discrete financial information is not available other than on a company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.
Reclassifications
In certain instances, due to the discontinued operation, amounts reported in prior years’ consolidated financial statements have been reclassified to conform to the current financial statement presentation.
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.
Investment Securities
Securities Available-for-Sale and Held-to Maturity
Debt securities that Primis has the positive intent and ability to hold to maturity are classified as held-to-maturity and carried at amortized cost.
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. 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.
Premiums and discounts are generally amortized using the interest method with a constant effective yield without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Premiums on callable securities are amortized to their earliest call date. Gains and losses on the sale of investment securities are recorded on the settlement date and are determined using the specific identification method.
Primis purchases amortizing investment securities. The actual principal reduction on these assets varies from the expected contractual principal reduction due to principal prepayments resulting from the borrowers’ election to refinance the underlying mortgage based on market and other conditions. The purchased premiums and discounts associated with these assets are amortized or accreted to interest income over the estimated life of the related assets. The estimated life is calculated by projecting future prepayments and the resulting principal cash flows until maturity. Prepayment rate projections utilize actual prepayment speed experience and available market information on like-kind instruments. The
prepayment rates form the basis for income recognition of premiums and discounts on the related assets. Changes in prepayment estimates may cause the earnings recognized on these assets to vary over the term that the assets are held, creating volatility in the net interest margin. Prepayment rate assumptions are monitored and updated monthly to reflect actual activity and the most recent market projections.
Non-marketable Equity Securities
Primis’ investment in STM’s preferred stock and fintech investments are considered to be non-marketable equity securities that do not have a readily determinable fair value. Equity securities with no recurring market value data available are reviewed periodically and any observable market value change are adjusting through net income. Primis evaluates these non-marketable equity securities for impairment and recoverability of the recorded investment by considering positive and negative evidence, including the profitability and asset quality, dividend payment history and recent redemption experience. Impairment is assessed at each reporting period and if identified, is recognized in noninterest income.
Other investments include stock acquired for regulatory purposes. The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. The Bank is also required to own FRB stock with a par value equal to 6% of capital and FHLB stock of 4.25% of borrowings outstanding. FHLB and FRB stock are carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Loans
Primis purchases mortgage loans from mortgage loans originators. Primis also provides commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by loans secured by real estate throughout its market area. The ability of Primis’ debtors to honor their contracts is in varying degrees dependent upon the real estate market conditions and general economic conditions in this area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances, purchased premiums and discounts and any deferred loan fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method without anticipating prepayments.
Commercial real estate consists of borrowings secured by owner occupied and non-owner occupied commercial real estate. Repayment of these loans is dependent upon rental income or the subsequent sale of the property for loans secured by non-owner occupied commercial real estate and by cash flows from business operations for owner occupied commercial real estate. Loans for which the source of repayment is rental income are primarily impacted by local economic conditions which dictate occupancy rates and the amount of rent charged. Commercial real estate loans that are dependent on cash flows from operations can also be adversely affected by current market conditions for their product or service.
Construction and land development primarily consist of borrowings to purchase and develop raw land into residential and non-residential properties. Construction loans are extended to individuals as well as corporations for the construction of an individual or multiple properties and are secured by raw land and the subsequent improvements. Repayment of the loans to real estate developers is dependent upon the sale or lease of properties to third parties in a timely fashion upon completion. Should there be delays in construction or a downturn in the market for those properties, there may be significant erosion in value which may be absorbed by Primis.
Commercial loans consist of borrowings for commercial purposes to individuals, corporations, partnerships, sole proprietorships, and other business enterprises. Commercial loans are generally secured by business assets such as equipment, accounts receivable, inventory, or any other asset excluding real estate and generally made to finance capital expenditures or operations. Primis’ risk exposure is related to deterioration in the value of collateral securing the loan
should foreclosure become necessary. Generally, business assets used or produced in operations do not maintain their value upon foreclosure which may require Primis to write-down the value significantly to sell.
Residential real estate loans consist of loans to individuals for the purchase of primary residences with repayment primarily through wage or other income sources of the individual borrower. Primis’ loss exposure to these loans is dependent on local market conditions for residential properties as loan amounts are determined, in part, by the fair value of the property at origination.
STM is a regional mortgage banking company headquartered in Virginia Beach, Virginia that has mortgage banking originators in Delaware, Virginia, Maryland, North Carolina and South Carolina. STM only originated retail mortgage products.
Other consumer loans are comprised of loans to individuals both unsecured and secured and home equity loans secured by real estate (closed and open-end), with repayment dependent on individual wages and other income. The risk of loss on consumer loans is elevated as the collateral securing these loans, if any, rapidly depreciate in value or may be worthless and/or difficult to locate if repossession is necessary. Losses in this portfolio are generally relatively low, however, due to the small individual loan size and the balance outstanding as a percentage of Primis’ entire portfolio.
The accrual of interest on all loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal and interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual status or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Most of Primis’ business activity is with customers located within Virginia and Maryland. Therefore, our exposure to credit risk is significantly affected by changes in the economy in those areas. We are not dependent on any single customer or group of customers whose insolvency would have a material adverse effect on operations.
Primis has purchased, primarily through acquisitions, individual loans and groups of loans, some of which have shown evidence of credit deterioration since origination. These purchased loans are recorded at fair value such that there is no carryover of the seller’s allowance for credit losses. We adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, on January 1, 2020 which requires the Bank to record purchased financial assets with credit deterioration (PCD assets), defined as a more-than-insignificant deterioration in credit quality since origination or issuance, at the purchase price plus the allowance for credit losses expected at the time of acquisition. Under this method, there is no credit loss expense affecting net income on acquisition of PCD assets. Changes in estimates of expected credit losses after acquisition are recognized as credit loss expense (or reversal of credit loss expense) in subsequent periods as they arise. Any non-credit discount or premium resulting from acquiring a pool of purchased financial assets with credit deterioration shall be allocated to each individual asset. At the acquisition date, the initial allowance for credit losses determined on a collective basis shall be allocated to individual assets to appropriately allocate any non-credit discount or premium. The non-credit discount or premium, after the adjustment for the allowance for credit losses, shall be accreted to interest income using the interest method based on the effective interest rate determined after the adjustment for credit losses at the adoption date.
A purchased financial asset that does not qualify as a PCD asset is accounted for similar to an originated financial asset. Generally, this means that an entity recognizes the allowance for credit losses for non-PCD assets through net income at the time of acquisition. In addition, both the credit discount and non-credit discount or premium resulting from acquiring a pool of purchased financial assets that do not qualify as PCD assets shall be allocated to each individual asset. This combined discount or premium shall be accreted to interest income using the effective yield method.
Allowance for Credit Losses (“ACL”)
Allowance For Credit Losses - Held-to-Maturity Securities
The allowance for credit losses on held-to-maturity securities is a contra-asset valuation account, calculated in accordance with ASC 326 that is deducted from the amortized cost basis of held-to-maturity securities to present management's best estimate of the net amount expected to be collected. Held-to-maturity securities are charged-off against the allowance when deemed uncollectible by management. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. 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. Management has made the accounting policy election to exclude accrued interest receivable on held-to-maturity securities from the estimate of credit losses. Further information regarding our policies and methodology used to estimate the allowance for credit losses on held-to-maturity securities is presented in Note 2 - Investment Securities.
Allowance For Credit Losses - Available-for-Sale Securities
For available-for-sale securities in an unrealized loss position, we first assess whether (i) we intend to sell or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. Management has made the accounting policy election to exclude accrued interest receivable on available-for-sale securities from the estimate of credit losses. Available-for-sale securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met.
Allowance for Credit Losses - Loans
The allowance for credit losses on loans is a contra-asset valuation account, calculated in accordance with ASC 326, which is deducted from the amortized cost basis of loans to present management's best estimate of the net amount expected to be collected. Loans are charged-off against the allowance when deemed uncollectible by management. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. Management has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses. Further information regarding our policies and methodology used to estimate the allowance for credit losses on loans is presented in Note 3 - Loans and Allowance.
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. The allowance is reported as a component of other liabilities in our consolidated balance sheets. Adjustments to the allowance are reported in our income statement as a component of other expenses. Further information regarding our policies and methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures is presented in Note 14 - Financial Instruments with Off-Balance-Sheet Risks.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from Primis, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and Primis does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Bank Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives of 30 years. Leasehold improvements are amortized on the straight-line method over the shorter of the estimated useful lives of the improvements or the terms of the related leases including lease renewals only when the Company is reasonably assured of the aggregate term of the lease. Furniture, fixtures, equipment and software are depreciated using the straight-line method with useful lives ranging from 3 to 10 years.
Operating Leases
The Company leases certain properties and equipment under operating leases. The Company recognizes a liability to make lease payments, the operating lease liability, and an asset representing the right to use the underlying asset during the lease term, the right-of-use asset. In recognizing lease right-of-use assets and related right-of-use 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. The operating lease liability is measured at the present value of the remaining lease payments, discounted at the Company’s incremental borrowing rate at inception. The right-of-use asset is measured at the amount of the operating lease liability adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term, any unamortized initial direct costs, and any impairment of the right-of-use-asset. Lease expense consists of a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis, variable lease payments not included in the operating lease liability, and any impairment of the right-of-use asset. Lease renewal options are generally not included in the calculation of the operating lease liabilities, unless they are not reasonably certain to be exercised. The Company does not recognize short-term leases on the balance sheet.
Goodwill and Intangible Assets
Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but evaluated for impairment on an annual basis or more frequently if events or circumstances warrant. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet and is subject to an impairment analysis when there are triggering events.
Other intangible assets consist of core deposit intangible assets arising from whole-bank and branch acquisitions and are amortized over their estimated useful lives, which range from 6 to 15 years.
Stock-Based Compensation
Compensation cost is recognized for stock options issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes option-pricing model is utilized to estimate the fair value of stock options. Compensation cost for grants of restricted shares is accounted for based on the closing price of Primis’ common stock on the date the restricted shares are awarded. Compensation cost for stock options and restricted shares is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized
on a straight-line basis over the requisite service period for the entire award. Compensation cost for performance Units is measured based on the grant date fair value of the units, adjusted for the Company’s best estimate of the outcome of vesting conditions at the end of the performance period.
Bank-Owned Life Insurance
Primis has purchased, and acquired through acquisitions, life insurance policies on certain former and current key executives. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Other Real Estate Owned (“OREO”)
Real estate acquired through or instead of foreclosure is held for sale and initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a direct charge-off is recorded through expense. Operating costs after acquisition are expensed as incurred.
Cloud Computing Arrangements
Primis engaged Finxact to define, design, and develop a new cloud-based banking core. The multiple phases of the cloud computing arrangements are assessed and reviewed as the software is placed into production. Total costs paid is capitalized upon initial launch and production rollout and classified in other assets in our consolidated balance sheet. Depreciation/amortization is set up based on the estimated life of the core infrastructure as it relates to obsolescence, technology, competition, and the nature of changes in software. Operating costs such as monthly licensing, usage, and storage are expensed as incurred in data processing expense on our consolidated statements of income and comprehensive income. As of December 31, 2021, the Company had gross cloud computing arrangements totaling $5.8 million and accumulated amortization of $0.1 million.
Impairment of Long-Lived Assets
Premises and equipment, core deposit intangible assets, right of use assets, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Retirement Plans
Employee 401(k) plan expense is the amount of matching contributions. Supplemental retirement plan expense allocates the benefits over years of service.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the consolidated financial statements.
Dividend Restriction
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to Primis or by Primis to shareholders.
Advertising Costs
Advertising costs are expensed as incurred.
Income Taxes
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. We have no unrecognized tax benefits and do not anticipate any increase in unrecognized tax benefits during the next twelve months. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is our policy to record such accruals in our income tax accounts; no such accruals exist as of December 31, 2021 and 2020.
Restrictions on Cash
No regulatory reserve or clearing requirements with the FRB were needed at December 31, 2021 and 2020.
Consolidated Statements of Cash Flows
For purposes of reporting cash flows, Primis defines cash and cash equivalents as cash due from financial institutions, interest-bearing deposits and federal funds sold in other financial institutions with maturities less than 90 days.
Earnings Per Share (“EPS”)
Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted EPS reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to net income that would result from the assumed issuance. Potential common shares that may be issued by Primis relate solely to outstanding stock options and restricted stock units and are determined using the treasury stock method. Performance awards cannot be dilutive until the Company’s best estimate of the outcome of vesting conditions become probable.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive (loss) income. Other comprehensive (loss) income includes unrealized gains and losses on investment securities available-for-sale which are also recognized as a separate component of equity.
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, Primis has entered into commitments to extend credit and standby letters of credit. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay.
Fair Value Measurements
In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon observable market-based parameters. Valuation assumptions may be made to ensure that financial instruments are recorded at fair value. These assumptions may reflect assumptions that market participants would use in pricing an asset or liability, among other things, as well as unobservable parameters. Any such valuation assumptions are applied consistently over time.
Recent Accounting Pronouncements
New Accounting Standards Adopted:
In December 2019, Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This ASU simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. This ASU also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods. Early adoption was permitted. The Company adopted ASU 2019-12 in the first quarter of 2021 and it did not have a material impact on the Company’s consolidated financial statements.
In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. ASU 2020-04 is effective upon issuance and can be applied through December 31, 2022. The Company adopted ASU 2020-04 in the first quarter of 2021 and it did not have a material impact on the Company’s consolidated financial statements.
In October 2020, FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs. This ASU clarifies the accounting for the amortization of purchase premiums for callable debt securities with multiple call dates. ASU 2020-08 is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods. Early adoption was not permitted. The Company adopted ASU 2020-08 in the first quarter of 2021 and it did not have a material impact on the Company’s consolidated financial statements.
In October 2020, FASB issued ASU 2020-10, Codification Improvements. This ASU clarifies various topics in the Codification, including the addition of existing disclosure requirements to the relevant disclosure sections. ASU 2020-10 is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods. Early adoption is permitted. The Company adopted ASU 2020-10 in the first quarter of 2021 and it did not have a material impact on the Company’s consolidated financial statements and disclosures.
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
December 31, 2021
Residential government-sponsored mortgage-backed securities
$
122,506
$
$
(636)
$
122,610
Obligations of states and political subdivisions
30,728
(252)
31,231
Corporate securities
13,000
-
13,685
Collateralized loan obligations
5,026
-
(16)
5,010
Residential government-sponsored collateralized mortgage obligations
19,671
(161)
19,807
Government-sponsored agency securities
17,671
(215)
17,488
Agency commercial mortgage-backed securities
52,452
(298)
52,667
SBA pool securities
8,870
(84)
8,834
Total
$
269,924
$
3,070
$
(1,662)
$
271,332
Amortized
Gross Unrealized
Fair
Cost
Gains
Losses
Value
December 31, 2020
Residential government-sponsored mortgage-backed securities
$
35,442
$
1,618
$
-
$
37,060
Obligations of states and political subdivisions
22,966
1,076
-
24,042
Corporate securities
15,000
(2)
15,079
Residential government-sponsored collateralized mortgage obligations
28,680
(1)
29,416
Government-sponsored agency securities
5,985
-
6,075
Agency commercial mortgage-backed securities
29,118
1,087
(15)
30,190
SBA pool securities
11,441
(150)
11,371
Total
$
148,632
$
4,769
$
(168)
$
153,233
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):
Amortized
Gross Unrecognized
Allowance for
Fair
Cost
Gains
Losses
Credit Losses
Value
December 31, 2021
Residential government-sponsored mortgage-backed securities
$
13,616
$
$
(1)
$
-
$
13,911
Obligations of states and political subdivisions
3,805
-
-
3,898
Residential government-sponsored collateralized mortgage obligations
-
-
Government-sponsored agency securities
5,000
-
-
5,023
Total
$
22,940
$
$
(1)
$
-
$
23,364
Amortized
Gross Unrecognized
Allowance for
Fair
Cost
Gains
Losses
Credit Losses
Value
December 31, 2020
Residential government-sponsored mortgage-backed securities
$
25,037
$
$
(2)
$
-
$
25,764
Obligations of states and political subdivisions
9,594
-
(1)
9,776
Residential government-sponsored collateralized mortgage obligations
1,090
-
-
1,129
Government-sponsored agency securities
5,000
-
-
5,163
Total
$
40,721
$
1,114
$
(2)
$
(1)
$
41,832
During 2021 and 2020, $160.5 million and $38.9 million, respectively, of available-for-sale investment securities were purchased. No held-to-maturity investments were purchased in 2021. During 2020, $15.2 million of held-to-maturity investment securities were purchased. No investment securities were sold during 2021. During 2020, $1.9 million and $1.7 million, respectively, of available-for-sale investment securities and held-to-maturity investment securities were sold. Realized losses on sales of investment securities of $620 thousand were recorded for the year ended December 31, 2020.
The fair value and carrying amount of available-for-sale and held-to-maturity investment securities as of December 31, 2021, by contractual maturity were as follows (in thousands). Investment securities not due at a single maturity date are shown separately.
Available-for-Sale
Held-to-Maturity
Amortized
Amortized
Cost
Fair Value
Cost
Fair Value
Due within one year
$
$
$
$
Due in one to five years
3,814
3,946
1,545
1,587
Due in five to ten years
25,792
26,593
1,518
1,562
Due after ten years
36,032
36,086
5,336
5,359
Residential government-sponsored mortgage-backed securities
122,506
122,610
13,616
13,911
Residential government-sponsored collateralized mortgage obligations
19,671
19,807
Agency commercial mortgage-backed securities
52,452
52,667
-
-
SBA pool securities
8,870
8,834
-
-
Total
$
269,924
$
271,332
$
22,940
$
23,364
Investment securities with a carrying amount of approximately $180.7 million and $125.3 million at December 31, 2021 and 2020, respectively, were pledged to secure public deposits, certain other deposits, a line of credit for advances from the FHLB of Atlanta, and repurchase agreements.
Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to U.S. Treasury and residential mortgage-backed securities issued by the U.S. government, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued by States and political subdivisions and other held-to-maturity securities, management considers (i) issuer bond ratings, (ii) historical loss rates for given bond ratings, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities and (iv) internal forecasts. As of December 31, 2021, Primis did not have any allowance for credit losses on held-to-maturity securities.
The following tables present information regarding investment securities available-for-sale and held-to-maturity in a continuous unrealized loss position as of December 31, 2021 and 2020 by duration of time in a loss position (in thousands):
Less than 12 months
12 Months or More
Total
December 31, 2021
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Available-for-Sale
value
Losses
value
Losses
value
Losses
Residential government-sponsored mortgage-backed securities
$
84,123
$
(636)
$
-
$
-
$
84,123
$
(636)
Obligations of states and political subdivisions
14,472
(252)
-
-
14,472
(252)
Collateralized loan obligations
5,010
(16)
-
-
5,010
(16)
Residential government-sponsored collateralized mortgage obligations
5,589
(161)
-
-
5,589
(161)
Government-sponsored agency securities
15,956
(215)
-
-
15,956
(215)
Agency commercial mortgage-backed securities
20,786
(194)
2,027
(104)
22,813
(298)
SBA pool securities
-
-
4,544
(84)
4,544
(84)
Total
$
145,936
$
(1,474)
$
6,571
$
(188)
$
152,507
$
(1,662)
Less than 12 months
12 Months or More
Total
December 31, 2021
Fair
Unrecognized
Fair
Unrecognized
Fair
Unrecognized
Held-to-Maturity
value
Losses
value
Losses
value
Losses
Residential government-sponsored mortgage-backed securities
$
-
$
-
$
$
(1)
$
$
(1)
Total
$
-
$
-
$
$
(1)
$
$
(1)
Less than 12 months
12 Months or More
Total
December 31, 2020
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Available-for-Sale
value
Losses
value
Losses
value
Losses
Corporate securities
$
$
(2)
$
-
$
-
$
$
(2)
Residential government-sponsored collateralized mortgage obligations
(1)
-
-
(1)
Agency commercial mortgage-backed securities
2,170
(15)
-
-
2,170
(15)
SBA pool securities
-
-
8,119
(150)
8,119
(150)
Total
$
4,122
$
(18)
$
8,119
$
(150)
$
12,241
$
(168)
Less than 12 months
12 Months or More
Total
December 31, 2020
Fair
Unrecognized
Fair
Unrecognized
Fair
Unrecognized
Held-to-Maturity
value
Losses
value
Losses
value
Losses
Residential government-sponsored mortgage-backed securities
$
$
(1)
$
$
(1)
$
$
(2)
Total
$
$
(1)
$
$
(1)
$
$
(2)
Changes in accumulated other comprehensive income (loss) by component for the years ended December 31, 2021, 2020 and 2019 are shown in the tables below. All amounts are net of tax (in thousands).
Unrealized Holding
Gains on
Held-to-Maturity
For the year ended December 31, 2021
Available-for-Sale
Securities
Total
Beginning balance
$
3,636
$
(151)
$
3,485
Current period other comprehensive income (loss)
(2,524)
(2,373)
Ending balance
$
1,112
$
-
$
1,112
Unrealized Holding
Gains on
Held-to-Maturity
For the year ended December 31, 2020
Available-for-Sale
Securities
Total
Beginning balance
$
$
(160)
$
Current period other comprehensive income
2,693
2,702
Ending balance
$
3,636
$
(151)
$
3,485
Unrealized Holding
Gains (Losses) on
Held-to-Maturity
For the year ended December 31, 2019
Available-for-Sale
Securities
Total
Beginning balance
$
(2,419)
$
(170)
$
(2,589)
Current period other comprehensive income
3,362
3,372
Ending balance
$
$
(160)
$
3. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The following table summarizes the composition of our loan portfolio as of December 31, 2021 and 2020 (in thousands):
December 31, 2021
December 31, 2020
Loans secured by real estate:
Commercial real estate - owner occupied
$
387,703
$
434,816
Commercial real estate - non-owner occupied
588,000
599,578
Secured by farmland
8,612
11,687
Construction and land development
121,444
103,401
Residential 1-4 family
547,560
557,953
Multi-family residential
164,071
107,130
Home equity lines of credit
73,846
91,748
Total real estate loans
1,891,236
1,906,313
Commercial loans
301,980
187,797
Paycheck Protection Program loans
77,319
314,982
Consumer loans
60,996
22,496
Total Non-PCD loans
2,331,531
2,431,588
PCD loans
8,455
8,908
Total loans
$
2,339,986
$
2,440,496
The accounting policy related to the allowance for credit losses is considered a critical policy given the level of estimation, judgment, and uncertainty in the levels of the allowance required to account for the inherent probable losses in the loan portfolio and the material effect such estimation, judgment, and uncertainty can have on the consolidated financial results.
Accrued Interest Receivable
Accrued interest receivable on loans totaled $10.8 million and $19.0 million at December 31, 2021 and 2020, respectively and is included in accrued interest receivable in the consolidated balance sheets.
COVID-19 Loan Deferments
The Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus was published by banking regulators in April 2020 to clarify expectations around loan modifications and the determination of TDRs for borrowers experiencing COVID-19-related financial difficulty. Primis applied this regulatory guidance during its troubled debt restructurings (“TDR”) identification process for short-term loan forbearance agreements as a result of COVID-19 and in most cases is not recording these as TDRs, except as disclosed below.
Certain borrowers were unable to meet their contractual payment obligations because of the adverse economic effects of COVID-19. To help mitigate these effects, loan customers could apply for a deferral of payments, or portions thereof, for up to six months. After six months, customers could apply for an additional deferral in 90 days increments, and a small proportion of our customers requested such an additional deferral. In the absence of other intervening factors, such short-term modifications made on a good faith basis were not categorized as TDR, nor were loans granted payment deferrals related to COVID-19 reported as past due or placed on non-accrual status (provided the loans were not past due or on non-accrual status prior to the deferral). We implemented deferral arrangements for TDRs in accordance with the Coronavirus Aid, Relief and Economic Security (“CARES” Act) and bank regulatory guidance. At December 31, 2021, there were no loans in COVID-19 related deferment. At December 31, 2020, there were 44 loans in COVID-19 related deferment with an aggregate outstanding balance of $122.0 million, all of which were current as of December 31, 2020.
Accretion
The accretable discount on the acquired loans totaled $4.3 million and $6.2 million at December 31, 2021 and 2020, respectively. Accretion associated with the acquired loans held for investment of $2.0 million, $4.3 million and $3.9 million was recognized during the twelve months ended December 31, 2021, 2020 and 2019, respectively.
Non-Accrual and Past Due Loans
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, we consider the borrower’s debt service capacity through the analysis of current financial information, if available, and/or current information with regards to our collateral position. Regulatory provisions would typically require the placement of a loan on non-accrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on non-accrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.
The following tables present the aging of the recorded investment in past due loans by class of loans as of December 31, 2021 and 2020 (in thousands):
30 - 59
60 - 89
Days
Days
Days
Total
Loans Not
Total
December 31, 2021
Past Due
Past Due
or More
Past Due
Past Due
Loans
Commercial real estate - owner occupied
$
$
$
-
$
$
387,163
$
387,703
Commercial real estate - non-owner occupied
-
-
-
-
588,000
588,000
Secured by farmland
-
-
7,821
8,612
Construction and land development
4,575
4,910
116,534
121,444
Residential 1-4 family
9,384
9,775
537,785
547,560
Multi- family residential
-
-
-
-
164,071
164,071
Home equity lines of credit
-
73,344
73,846
Commercial loans
-
1,246
1,633
300,347
301,980
Paycheck Protection Program loans
4,954
8,559
13,796
63,523
77,319
Consumer loans
60,671
60,996
Total Non-PCD loans
16,438
9,420
6,414
32,272
2,299,259
2,331,531
PCD loans
1,717
-
-
1,717
6,738
8,455
Total
$
18,155
$
9,420
$
6,414
$
33,989
$
2,305,997
$
2,339,986
30 - 59
60 - 89
Days
Days
Days
Total
Loans Not
Total
December 31, 2020
Past Due
Past Due
or More
Past Due
Past Due
Loans (1)
Commercial real estate - owner occupied
$
-
$
-
$
2,641
$
2,641
$
432,175
$
434,816
Commercial real estate - non-owner occupied
-
-
-
-
599,578
599,578
Secured by farmland
-
-
1,098
1,098
10,589
11,687
Construction and land development
-
103,339
103,401
Residential 1-4 family
1,235
1,512
3,096
554,857
557,953
Multi- family residential
-
-
-
-
107,130
107,130
Home equity lines of credit
90,876
91,748
Commercial loans
2,104
2,201
185,596
187,797
Paycheck Protection Program loans
-
-
-
-
314,982
314,982
Consumer loans
22,276
22,496
Total Non-PCD loans
1,839
7,887
10,190
2,421,398
2,431,588
PCD loans
-
-
1,853
1,853
7,055
8,908
Total
$
1,839
$
$
9,740
$
12,043
$
2,428,453
$
2,440,496
(1) Includes $122.0 million of loans that were subject to deferrals at December 31, 2020.
The amortized cost, by class, of loans and leases on nonaccrual status at December 31, 2021 and 2020, were as follows (in thousands):
Total
Days
Loans Not
Nonaccrual
December 31, 2021
or More
Past Due
Loans (1)
Commercial real estate - owner occupied
$
-
$
$
Secured by farmland
-
Construction and land development
4,575
4,609
Residential 1-4 family
Multi- family residential
-
4,301
4,301
Home equity lines of credit
Commercial loans
1,246
1,722
Consumer loans
Total Non-PCD loans
6,131
7,169
13,300
PCD loans
-
1,729
1,729
Total
$
6,131
$
8,898
$
15,029
Total
Days
Loans Not
Nonaccrual
December 31, 2020
or More
Past Due
Loans (1)
Commercial real estate - owner occupied
$
2,641
$
-
$
2,641
Secured by farmland
1,098
-
1,098
Residential 1-4 family
1,512
1,525
Multi- family residential
-
4,481
4,481
Home equity lines of credit
-
Commercial loans
2,104
2,332
Consumer loans
-
Total Non-PCD loans
7,887
4,722
12,609
PCD loans
1,853
-
1,853
Total
$
9,740
$
4,722
$
14,462
(1) Nonaccrual loans include SBA guaranteed amounts totaling $1.1 million and $3.1 million at December 31, 2021 and 2020, respectively.
We had $283 thousand of PPP loans greater than 90 days past due and still accruing at December 31, 2021 and did not have any loans and leases greater than 90 days past due and still accruing at December 31, 2020.
The following table presents non-accrual loans as of December 31, 2021 and 2020, segregated by class of loans (in thousands):
December 31, 2021
December 31, 2020
Non-Accrual With
Non-Accrual With
Total
No Credit
Total
No Credit
Non-Accrual (1)
Loss Allowance (2)
Non-Accrual (1)
Loss Allowance (2)
Commercial real estate - owner occupied
$
$
$
2,641
$
2,641
Secured by farmland
1,098
1,098
Construction and land development
4,609
4,609
-
-
Residential 1-4 family
1,525
Multi- family residential
4,301
4,301
4,481
4,481
Home equity lines of credit
Commercial loans
1,722
2,332
Consumer loans
Total non-PCD loans
13,300
12,315
12,609
9,498
PCD loans
1,729
-
1,853
-
Total non-accrual loans
$
15,029
$
12,315
$
14,462
$
9,498
(1) Nonaccrual loans include SBA guaranteed amounts totaling $1.1 million and $3.1 million at December 31, 2021 and 2020, respectively.
(2) Nonaccrual loans with no credit loss allowance include SBA guaranteed amounts totaling $1.1 million and $1.7 million at December 31, 2021 and 2020, respectively.
The following table presents non-accrual loans as of December 31, 2021 by class and year of origination (in thousands):
Revolving
Loans
Revolving
Converted
Prior
Loans
To Term
Total
Commercial real estate - owner occupied
$
-
$
-
$
$
-
$
-
$
$
-
$
-
$
Secured by farmland
-
-
-
-
-
Construction and land development
-
-
4,575
-
-
-
-
4,609
Residential 1-4 family
-
-
-
-
-
-
Multi- family residential
-
-
-
-
-
4,301
-
-
4,301
Home equity lines of credit
-
-
-
-
-
-
Commercial loans
-
-
-
1,163
-
1,722
Consumer loans
-
-
-
-
-
Total non-PCD non-accruals
-
5,075
5,269
1,692
13,300
PCD loans
-
-
-
-
1,717
-
-
1,729
Total non-accrual loans (1)
$
-
$
$
5,075
$
$
2,406
$
5,281
$
1,692
$
$
15,029
(1) Nonaccrual loans include SBA guaranteed amounts totaling $1.1 million and $3.1 million at December 31, 2021 and 2020, respectively.
Interest received on non-accrual loans was $523 thousand and $469 thousand for the years ended December 31, 2021 and 2020, respectively.
Troubled Debt Restructurings
A modification is classified as a TDR if both of the following exist: (1) the borrower is experiencing financial difficulty and (2) the Bank has granted a concession to the borrower. The Bank determines that a borrower may be experiencing financial difficulty if the borrower is currently delinquent on any of its debt, or if the Bank is concerned that the borrower may not be able to perform in accordance with the current terms of the loan agreement in the foreseeable future. Many aspects of the borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty, particularly as it relates to commercial borrowers due to the complex nature of the loan structure, business/industry risk and borrower/guarantor structures. Concessions may include the reduction of an interest rate at a rate lower than current market rates for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, or principal forgiveness. When evaluating whether a concession has been granted, the Bank also considers whether the borrower has provided additional collateral or guarantors and whether such additions adequately compensate the Bank for the restructured terms, or if the revised terms are consistent with those currently being offered to new loan customers. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty and whether a concession has been granted is subjective in nature and management’s judgment is required when determining whether a modification is a TDR.
Although each occurrence is unique to the borrower and is evaluated separately, for all portfolio segments, TDRs are typically modified through reduction in interest rates, reductions in payments, changing the payment terms from principal and interest to interest only, and/or extensions in term maturity.
For the year ended December 31, 2021, there were ten TDR loans outstanding in the amount of $3.4 million primarily due to the economic impact of COVID-19. There have been no defaults of TDRs modified during the past twelve months.
Credit Quality Indicators
Through its system of internal controls, Primis evaluates and segments loan portfolio credit quality using regulatory definitions for Special Mention, Substandard and Doubtful. Special Mention loans are considered to be criticized. Substandard and Doubtful loans are considered to be classified.
Special Mention loans are loans that have a potential weakness that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position.
Substandard loans may be inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Primis had no loans classified Doubtful at December 31, 2021 or 2020.
In monitoring credit quality trends in the context of assessing the appropriate level of the allowance for credit losses on loans, we monitor portfolio credit quality by the weighted-average risk grade of each class of loan.
The following table presents weighted-average risk grades for all loans, by class and year of origination/renewal as of December 31, 2021 (in thousands):
Revolving
Loans
Revolving
Converted
Prior
Loans
To Term
Total
Commercial real estate - owner occupied
Pass
$
58,596
$
18,411
$
35,498
$
28,163
$
45,013
$
187,461
$
3,010
$
6,937
$
383,089
Special Mention
-
-
-
-
1,184
-
-
1,324
Substandard
-
-
-
-
2,815
-
-
3,290
Doubtful
-
-
-
-
-
-
-
-
$
58,596
$
18,411
$
35,973
$
28,163
$
45,153
$
191,460
$
3,010
$
6,937
$
387,703
Weighted average risk grade
3.43
3.42
3.47
3.43
3.55
3.53
3.29
3.96
3.51
Commercial real estate - nonowner occupied
Pass
$
107,572
$
55,956
19,816
$
76,076
$
58,883
$
235,676
$
3,668
$
-
$
557,647
Special Mention
-
-
-
-
-
12,097
-
-
12,097
Substandard
-
-
-
-
-
17,655
-
18,256
Doubtful
-
-
-
-
-
-
-
-
-
$
107,572
$
55,956
$
19,816
$
76,076
$
58,883
$
265,428
$
3,668
$
$
588,000
Weighted average risk grade
3.05
3.47
3.83
3.45
3.81
3.81
2.94
6.00
3.59
Secured by farmland
Pass
$
$
$
-
$
-
$
$
3,734
$
1,955
$
-
$
6,520
Special Mention
-
-
-
-
-
-
1,256
Substandard
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
$
$
$
$
-
$
1,978
$
4,138
$
2,086
$
-
$
8,612
Weighted average risk grade
3.17
4.00
6.00
N/A
5.04
3.61
4.09
N/A
4.05
Construction and land development
Pass
$
57,320
$
14,003
$
13,360
$
7,061
$
8,414
$
15,664
$
$
$
116,835
Special Mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
4,575
-
-
-
-
4,609
Doubtful
-
-
-
-
-
-
-
-
-
$
57,320
$
14,003
$
17,935
$
7,061
$
8,414
$
15,698
$
$
$
121,444
Weighted average risk grade
3.15
3.56
4.48
3.26
3.91
3.54
3.31
4.00
3.50
Residential 1-4 family
Pass
$
165,106
$
54,037
$
81,905
$
49,694
$
43,173
$
138,711
$
1,845
$
3,484
$
537,955
Special Mention
-
-
8,514
-
-
-
-
-
8,514
Substandard
-
-
-
-
-
-
1,091
Doubtful
-
-
-
-
-
-
-
-
-
$
165,106
$
54,037
$
90,419
$
49,694
$
43,173
$
139,506
$
1,845
$
3,780
$
547,560
Weighted average risk grade
3.04
3.06
3.24
3.13
3.07
3.26
3.98
3.30
3.15
Multi- family residential
Pass
$
37,030
$
18,866
$
7,228
$
6,328
$
36,574
$
42,310
$
5,031
$
-
$
153,367
Special Mention
-
-
-
-
-
5,326
-
-
5,326
Substandard
-
-
-
-
-
5,076
-
5,378
Doubtful
-
-
-
-
-
-
-
-
-
$
37,030
$
18,866
$
7,228
$
6,328
$
36,574
$
52,712
$
5,031
$
$
164,071
Weighted average risk grade
3.40
3.90
3.00
3.59
3.00
3.00
3.92
4.00
6.00
3.55
Home equity lines of credit
Pass
$
$
$
$
$
$
4,337
$
67,157
$
$
73,146
Special Mention
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
4,337
$
67,831
$
$
73,846
Weighted average risk grade
3.00
3.00
3.00
3.00
3.77
3.79
3.09
4.31
3.14
Commercial loans
Pass
$
95,085
$
10,415
$
11,923
$
10,648
$
10,522
$
18,284
$
134,302
$
5,338
$
296,517
Special Mention
-
-
-
-
-
-
-
Substandard
-
-
1,508
-
1,938
1,163
-
4,618
Doubtful
-
-
-
-
-
-
-
-
-
$
95,085
$
10,424
$
11,923
$
12,156
$
10,522
$
20,222
$
136,310
$
5,338
$
301,980
Weighted average risk grade
3.43
3.36
3.79
3.77
2.95
3.96
3.43
3.95
3.48
Paycheck Protection Program loans
Pass
$
56,087
$
21,232
$
-
$
-
$
-
$
-
$
-
$
-
$
77,319
Special Mention
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
$
56,087
$
21,232
$
-
$
-
$
-
$
-
$
-
$
-
$
77,319
Weighted average risk grade
2.00
2.00
N/A
N/A
N/A
N/A
N/A
N/A
2.00
Revolving
Loans
Revolving
Converted
Prior
Loans
To Term
Total
Consumer loans
Pass
$
48,107
$
2,351
$
1,002
$
$
$
5,766
$
2,519
$
-
$
60,896
Special Mention
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
$
48,107
$
2,351
$
1,002
$
$
$
5,850
$
2,519
$
-
$
60,996
Weighted average risk grade
3.55
3.99
3.99
4.02
4.07
4.01
4.00
N/A
3.65
PCD
Pass
$
-
$
-
$
-
$
-
$
-
$
5,145
$
$
-
$
5,175
Special Mention
-
-
-
-
-
1,391
-
-
1,391
Substandard
-
-
-
-
1,717
-
-
1,889
Doubtful
-
-
-
-
-
-
-
-
-
$
-
$
-
$
-
$
-
$
1,717
$
6,708
$
$
-
$
8,455
Weighted average risk grade
N/A
N/A
N/A
N/A
6.00
4.08
3.00
N/A
4.47
Total
$
625,938
$
195,405
$
184,395
$
180,634
$
207,085
$
706,059
$
223,312
$
17,158
$
2,339,986
Weighted average risk grade
3.12
3.24
3.50
3.38
3.45
3.64
3.35
3.92
3.39
Revolving loans that converted to term during 2021 were as follows (in thousands):
For the year ended December 31, 2021
Commercial real estate - owner occupied
$
Commercial real estate - non-owner occupied
Residential 1-4 family
1,706
Multi- family residential
Commercial loans
Total loans
$
3,468
The amount of foreclosed residential real estate property held at December 31, 2021 and 2020 was $0.9 million and $1.0 million, respectively. The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was zero and $1.4 million at December 31, 2021 and 2020, respectively.
Allowance For Credit Losses - Loans
The allowance for credit losses on loans is a contra-asset valuation account, calculated in accordance with ASC 326 that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. The amount of the allowance represents management's best estimate of current expected credit losses on loans considering available information, from internal and external sources, relevant to assessing collectability over the loans' contractual terms, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless (i) management has a reasonable expectation that a TDR will be executed with an individual borrower or (ii) such extension or renewal options are not unconditionally cancellable by us and, in such cases, the borrower is likely to meet applicable conditions and likely to request extension or renewal. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. The allowance for credit losses is measured on a collective basis for portfolios of loans when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Expected credit losses for collateral dependent loans, including loans where the borrower is experiencing financial difficulty but foreclosure is not probable, are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
Credit loss expense related to loans reflects the totality of actions taken on all loans for a particular period including any necessary increases or decreases in the allowance related to changes in credit loss expectations associated with specific loans or pools of loans. Portions of the allowance may be allocated for specific credits; however, the entire allowance is
available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.
In calculating the allowance for credit losses, most loans are segmented into pools based upon similar characteristics and risk profiles. Common characteristics and risk profiles include the type/purpose of loan, underlying collateral, geographical similarity and historical/expected credit loss patterns. In developing these loan pools for the purposes of modeling expected credit losses, we also analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic conditions and scenarios as well as other portfolio stress factors. For allowance modeling purposes, our loan pools include (i) commercial real estate - owner occupied, (ii) commercial real estate - non-owner occupied, (iii) construction and land development, (iv) commercial, (v) agricultural loans, (vi) residential 1-4 family and (vii) consumer loans. We periodically reassess each pool to ensure the loans within the pool continue to share similar characteristics and risk profiles and to determine whether further segmentation is necessary.
For each loan pool, we measure expected credit losses over the life of each loan utilizing a combination of inputs: (i) probability of default (“PD”), which is the likelihood that the loan will stop performing/default, (ii) probability of attrition (“PA”), which is the likelihood that a loan will pay-off prior to maturity, (iii) loss given default (“LGD”), which is the expected loss rate for loans in default and (iv) exposure at default (“EAD”), which is the estimated outstanding principal balance of the loans upon default, including the expected funding of unfunded commitments outstanding as of the measurement date. Inputs are pool-specific, though not necessarily solely reliant on internally-sourced data. Internal data is supplemented by, but not replaced by, peer data when required, primarily to determine the PD input. The various pool-specific inputs may be adjusted for current macroeconomic assumptions, as further discussed below, and other factors such as differences in underwriting standards, portfolio mix, or when historical asset terms do not reflect the contractual terms of the financial assets being evaluated as of the measurement date. Each time we measure expected credit losses, we assess the relevancy of historical information and consider any necessary adjustments to address any differences in current asset-specific characteristics.
Significant macroeconomic variables utilized in our allowance models include, among other things, (i) VA Gross Domestic Product, (ii) VA House Price Index, and (iii) VA unemployment rates. The macroeconomic variables utilized as inputs in forecast modeling were subjected to a variety of analysis procedures and were selected primarily based on statistical relevancy and correlation to historical credit losses, where historical credit losses may be fully internally-sourced or supplemented with peer data.
PDs were estimated by analyzing the relationship between the historical performance of each loan pool and historical economic trends over a complete economic cycle. Historical performance data is either fully internally-sourced or supplemented with peer data where necessary. PDs are adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period. We have determined that we are reasonably able to forecast the macroeconomic variables used in our forecast modeling processes with an acceptable degree of confidence for a total of four quarters. This forecast period is followed by an additional eight quarter reversion process whereby the forecasted macroeconomic variables are reverted to their historical mean on a straight-line basis. By reverting these economic inputs to their historical mean and considering loan/borrower specific attributes, our allowance models are intended to yield a measurement of expected credit losses that reflects average historical loss rates (which may be supplemented by peer data) for periods subsequent to the initial twelve-quarters consisting of the forecast and reversion periods. The LGD is linked to PD based on benchmark historical loss averages for each loan pool. LGD is dynamic with PD; as PD increases, so will LGD, and vice versa. In this context, “benchmark” refers to the use of third-party data, and “historical loss averages” refers to the fraction of defaulted balance that tends to be lost. By nature of its connection to PD, LGD is by extension adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over the four-quarter forecast period and eight-quarter reversion process, which management considers to be both reasonable and supportable. This same forecast/reversion period is used for all macroeconomic variables used in all of our economic forecast models. PA and EAD are estimated using either a Discounted Cash Flow or Remaining Life model, both of which use various timing inputs to estimate the loan balance that remains at various future points in time, and thus also at the time of a default event.
Management qualitatively adjusts allowance model results for risk factors that are not considered within our quantitative modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. Qualitative factor (“Q-Factor”) adjustments are driven by key risk indicators that management tracks on a pool-by-pool basis. The risk factors are large relationship concentrations, borrower debt service coverage exceptions, loan-to-value exceptions, and excessive growth in the loan pool. The framework established by management calculates suggested Q-Factor adjustments each period as these key risk indicators exceed certain thresholds. Management also has the ability to modify the suggested amounts based on management’s understanding of changes in the pool. In fourth quarter of 2021, management modified suggested qualitative reserves for seven loan pools related to loan growth and concentration components that were triggered by either the introduction of a new business line, reclassification of loans by loan pool or accounting system, isolated and identifiable projects driving growth and qualitative factors already recognized in another measure.
In some cases, management may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by our internal appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice. The fair value of collateral supporting collateral dependent construction loans is based on an “as is” valuation.
The following tables present details of the allowance for credit losses on loans segregated by loan portfolio segment as of December 31, 2021 and 2020, calculated in accordance with the CECL methodology described above (in thousands).
Commercial
Commercial
Home
Real Estate
Real Estate
Construction
Equity
Paycheck
Owner
Non-owner
Secured by
and Land
1-4 Family
Multi-Family
Lines Of
Commercial
Protection
Consumer
PCD
December 31, 2021
Occupied
Occupied
Farmland
Development
Residential
Residential
Credit
Loans
Program
Loans
Loans
Total
Modeled expected credit losses
$
4,281
$
8,020
$
$
$
3,012
$
1,885
$
$
2,154
$
-
$
$
-
$
20,960
Q-factor and other qualitative adjustments
1,008
1,395
1,276
-
-
-
5,205
Specific allocations
-
-
-
-
-
-
-
-
2,281
2,940
Total
$
4,562
$
9,028
$
$
$
3,588
$
3,280
$
$
4,088
$
-
$
$
2,281
$
29,105
Commercial
Commercial
Home
Real Estate
Real Estate
Construction
Equity
Paycheck
Owner
Non-owner
Secured by
and Land
1-4 Family
Multi-Family
Lines Of
Commercial
Protection
Consumer
PCD
December 31, 2020
Occupied
Occupied
Farmland
Development
Residential
Residential
Credit
Loans
Program
Loans
Loans
Total
Modeled expected credit losses
$
2,565
$
3,959
$
$
1,297
$
4,579
$
$
$
$
-
$
$
-
$
14,491
Q-factor and other qualitative adjustments
4,134
7,467
4,963
-
-
19,367
Specific allocations
-
-
-
-
-
-
2,394
2,487
Total
$
6,699
$
11,426
$
$
1,815
$
9,579
$
1,412
$
$
1,498
$
-
$
$
2,394
$
36,345
As part of management’s ongoing review process and as an annual requirement, during the third quarter of 2021, the Company refreshed and recalibrated the historical loss rates, forecast assumptions, and qualitative factor framework of the CECL model. Updated peer groups were also determined in collaboration with the Company’s CECL consultant. Management included banks in Virginia, Maryland, North Carolina, and Pennsylvania that were between $2.0 billion and $10.0 billion in asset size. Additionally, in this peer group the Company included the historical loss experience of Eastern Virginia Bank, which was acquired in 2017. The peer group population was further narrowed using statistical analysis with a focus on total loans, percent of charge-offs, portfolio yields, and percent of charge-offs during recession. Generally,
the updated loss drivers displayed higher default expectations as compared to the prior models. This is a direct result of the peers included in the analysis yielding higher predicted probability of defaults under the new model applied in the third quarter 2021. Additionally, qualitative factors related to COVID-19 uncertainty were eliminated. COVID-19 related factors contributed 62% or $11.0 million to the first quarter of 2021 and 27% or $3.5 million to the second quarter of 2021 total qualitative reserves.
No allowance for credit losses has been recognized for PPP loans as such loans are fully guaranteed by the SBA.
Activity in the allowance for credit losses by class of loan for the years ended December 31, 2021 and 2020 is summarized below (in thousands):
Commercial
Commercial
Real Estate
Real Estate
Construction
Home Equity
Owner
Non-owner
Secured by
and Land
1-4 Family
Multi-Family
Lines Of
Commercial
Consumer
PCD
December 31, 2021
Occupied
Occupied
Farmland
Development
Residential
Residential
Credit
Loans
Loans
Loans
Unallocated
Total
Allowance for credit losses:
Beginning balance
$
6,699
$
11,426
$
$
1,815
$
9,579
$
1,412
$
$
1,498
$
$
2,394
$
-
$
36,345
Provision (recovery)
(1,961)
(2,398)
(48)
(817)
(5,533)
1,868
(466)
3,291
(113)
-
(5,801)
Charge offs
(176)
-
-
-
(469)
-
-
(1,706)
(145)
-
-
(2,496)
Recoveries
-
-
-
-
-
1,005
-
-
1,057
Ending balance
$
4,562
$
9,028
$
$
$
3,588
$
3,280
$
$
4,088
$
$
2,281
$
-
$
29,105
December 31, 2020
Allowance for credit losses:
Beginning balance
$
$
1,596
$
$
$
1,049
$
$
$
5,418
$
$
-
$
$
10,261
Adoption of ASC 326
1,704
2,497
4,185
(217)
(3,246)
2,272
(174)
8,292
Balance
2,514
4,093
1,357
5,234
-
2,172
2,272
-
18,553
Provision (recovery)
4,232
7,198
(102)
4,291
1,084
-
19,450
Charge offs
(52)
-
-
-
(308)
-
(125)
(1,734)
(124)
-
-
(2,343)
Recoveries
-
-
-
-
-
Ending balance
$
6,699
$
11,426
$
$
1,815
$
9,579
$
1,412
$
$
1,498
$
$
2,394
$
-
$
36,345
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 December 31, 2021 and 2020 (in thousands):
December 31, 2021
December 31, 2020
Loan
Specific
Loan
Specific
Balance (1)
Allocations
Balance (1)
Allocations
Commercial real estate - owner occupied
$
3,291
$
-
$
23,397
$
-
Commercial real estate - non-owner occupied
18,256
-
7,467
-
Secured by farmland
-
1,069
-
Construction and land development
4,575
-
Residential 1-4 family
-
1,918
Multi- family residential
5,378
-
-
-
Home equity lines of credit
-
-
-
Commercial loans
3,688
5,515
Consumer loans
Total non-PCD loans
36,417
39,941
PCD loans
8,455
2,281
8,908
2,394
Total loans
$
44,872
$
2,940
$
48,849
$
2,487
(1) Includes SBA guarantees of $681 thousand and $2.5 million as of December 31, 2021 and 2020, respectively.
4. FAIR VALUE
ASC 820 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability
The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:
Assets Measured on a Recurring Basis:
Investment Securities Available-for-sale
Where quoted prices are available in an active market, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include highly liquid government bonds and mortgage products. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of investment securities with similar characteristics or discounted cash flow. Level 2 investment securities include U.S. agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, collateralized loan obligations and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy. Currently, a majority of Primis’
available-for-sale debt investment securities are considered to be Level 2 investment securities, except for a few corporate securities that are classified as Level 3 investment securities.
Assets measured at fair value on a recurring basis are summarized below:
Fair Value Measurements Using
Significant
Quoted Prices in
Other
Significant
Active Markets for
Observable
Unobservable
Total at
Identical Assets
Inputs
Inputs
(dollars in thousands)
December 31, 2021
(Level 1)
(Level 2)
(Level 3)
Available-for-sale securities
Residential government-sponsored mortgage-backed securities
$
122,610
$
-
$
122,610
$
-
Obligations of states and political subdivisions
31,231
-
31,231
-
Corporate securities
13,685
-
13,685
-
Collateralized loan obligations
5,010
-
5,010
-
Residential government-sponsored collateralized mortgage obligations
19,807
-
19,807
-
Government-sponsored agency securities
17,488
-
17,488
-
Agency commercial mortgage-backed securities
52,667
-
52,667
-
SBA pool securities
8,834
-
8,834
-
Total
$
271,332
$
-
$
271,332
$
-
Fair Value Measurements Using
Significant
Quoted Prices in
Other
Significant
Active Markets for
Observable
Unobservable
Total at
Identical Assets
Inputs
Inputs
(dollars in thousands)
December 31, 2020
(Level 1)
(Level 2)
(Level 3)
Available-for-sale securities
Residential government-sponsored mortgage-backed securities
$
37,060
$
-
$
37,060
$
-
Obligations of states and political subdivisions
24,042
-
24,042
-
Corporate securities
15,079
-
14,079
1,000
Residential government-sponsored collateralized mortgage obligations
29,416
-
29,416
-
Government-sponsored agency securities
6,075
-
6,075
-
Agency commercial mortgage-backed securities
30,190
-
30,190
-
SBA pool securities
11,371
-
11,371
-
Total
$
153,233
$
-
$
152,233
$
1,000
At December 31, 2020, the Company had $1.0 million of corporate securities that were classified as Level 3. During 2021, these securities matured and the balance at December 31, 2021 was zero. No corporate securities that are classified as Level 3 above were purchased or sold during 2020.
Assets and Liabilities Measured on a Non-recurring Basis:
Loans
We may be required to measure certain financial assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of lower of amortized cost or fair value accounting or write-downs of individual assets due to impairment.
Following the adoption of ASC 326, the population of loans measured at fair value on a non-recurring basis has greatly diminished and is limited to collateral-dependent loans evaluated individually. These collateral-dependent loans are deemed to be at fair value if there is an associated allowance for credit losses or if a charge-off has been recorded in the previous 12 months. Collateral values are determined using appraisals or other third-party value estimates of the subject property discounted based on estimated selling costs, generally between 5% and 10%, and immaterial adjustments for
other external factors that may impact the marketability of the collateral. The weighted average discount for estimated selling costs applied was 6%.
Other Real Estate Owned
OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or evaluation less cost to sell. In some cases appraised value is net of costs to sell. Selling costs have been in the range from 5% to 10% of collateral valuation at December 31, 2021 and 2020. Fair value is classified as Level 3 in the fair value hierarchy. OREO is further evaluated quarterly for any additional impairment. At December 31, 2021 and 2020, the total amount of OREO was $1.2 million and $3.1 million, respectively.
Assets measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements Using
Significant
Quoted Prices in
Other
Significant
Active Markets for
Observable
Unobservable
Total at
Identical Assets
Inputs
Inputs
(dollars in thousands)
December 31, 2021
(Level 1)
(Level 2)
(Level 3)
Collateral dependent loans
$
44,331
$
-
$
-
$
44,331
Other real estate owned:
Construction and land development
-
-
Residential 1-4 family
-
-
Fair Value Measurements Using
Significant
Quoted Prices in
Other
Significant
Active Markets for
Observable
Unobservable
Total at
Identical Assets
Inputs
Inputs
(dollars in thousands)
December 31, 2020
(Level 1)
(Level 2)
(Level 3)
Collateral dependent loans
$
47,001
$
-
$
-
$
47,001
Other real estate owned:
Commercial real estate - non-owner occupied
-
-
Construction and land development
1,221
-
-
1,221
Residential 1-4 family
-
-
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:
December 31, 2021
December 31, 2020
Fair Value
Carrying
Fair
Carrying
Fair
Hierarchy Level
Amount
Value
Amount
Value
Financial assets:
Cash and cash equivalents
Level 1
$
530,167
$
530,167
$
196,185
$
196,185
Securities available-for-sale
Level 2 & Level 3
271,332
271,332
153,233
153,233
Securities held-to-maturity
Level 2
22,940
23,364
40,721
41,832
Stock in Federal Reserve Bank and Federal Home Loan Bank
Level 2
15,521
15,521
16,927
16,927
Investments in mortgage company - held for sale
Level 2
-
-
12,952
12,952
Preferred investment in mortgage company
Level 2
3,005
3,005
3,005
3,005
Net loans
Level 3
2,310,881
2,278,456
2,404,151
2,435,612
Accrued interest receivable
Level 2
11,882
11,882
19,998
19,998
Financial liabilities:
Demand deposits and NOW accounts
Level 2
$
1,380,020
$
1,380,020
$
1,155,426
$
1,155,426
Money market and savings accounts
Level 2
1,022,621
1,022,621
787,132
787,132
Time deposits
Level 3
360,575
362,902
490,048
495,022
Securities sold under agreements to repurchase
Level 1
9,962
9,962
16,065
16,065
FHLB advances
Level 1
100,000
100,000
100,000
100,000
Junior subordinated debt
Level 2
9,731
10,367
9,682
8,863
Senior subordinated notes
Level 2
85,297
91,141
105,647
109,276
Accrued interest payable
Level 2
1,864
1,864
3,057
3,057
Carrying amount is the estimated fair value for cash and cash equivalents (including federal funds sold), accrued interest receivable and payable, demand deposits, savings accounts, money market accounts and FHLB advances and securities sold under agreements to repurchase.
Fair value of long-term debt is based on current rates for similar financing. The carrying amount of Federal Reserve Bank and FHLB stock is a reasonable estimate of fair value as these securities are not readily marketable and are based on the ultimate recoverability of the par value. 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. BANK PREMISES AND EQUIPMENT
Bank premises and equipment as of December 31, 2021 and 2020 were as follows (in thousands):
Land
$
8,139
$
8,139
Land improvements
1,558
1,558
Building and improvements
23,792
23,164
Leasehold improvements
3,001
3,001
Furniture, fixtures, equipment and software
12,182
8,962
Construction in progress
1,441
48,684
46,265
Less accumulated depreciation and amortization
18,274
15,959
Bank premises and equipment, net
$
30,410
$
30,306
Depreciation and amortization expense related to bank premises and equipment for 2021, 2020 and 2019 was $2.4 million, $2.0 million and $2.3 million, respectively.
6. 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 December 31, 2021 and 2020, the Company had operating lease liabilities totaling $6.5 million and $8.2 million, respectively, and right-of-use assets totaling $5.9 million and $7.5 million, respectively, related to these leases. Operating lease liabilities and right-of-use assets are reflected in our consolidated balance sheets. We do not currently have any financing leases. For the year ended December 31, 2021 and 2020, our net operating lease cost was $2.4 million and $2.9 million, respectively, and was reflected in occupancy expenses on our income statements.
The following table presents supplemental cash flow and other information related to our operating leases:
For the Year Ended
(in thousands except for percent and period data)
December 31, 2021
December 31, 2020
Other information:
Weighted-average remaining lease term - operating leases, in years
4.4
4.8
Weighted-average discount rate - operating leases
2.5
%
2.5
%
The following table summarizes the maturity of remaining lease liabilities:
As of
(dollars in thousands)
December 31, 2021
Lease payments due:
$
2,424
1,700
Thereafter
1,080
Total lease payments
6,931
Less: imputed interest
(433)
Lease liabilities
$
6,498
As of December 31, 2021 and 2020, the Company did not have any operating leases that have not yet commenced that will create additional lease liabilities and right-of-use assets for the Company.
7. GOODWILL AND INTANGIBLE ASSETS
Goodwill
Primis has recorded $101.9 million of goodwill at December 31, 2021 and 2020. Goodwill is primarily related to the acquisition of other banks.
Goodwill is evaluated for impairment on an annual basis or more frequently if events or circumstances warrant. Our annual assessment occurs during the third calendar quarter. For the 2021 assessment, we performed a qualitative assessment to determine if it was more likely than not that the fair value of our single reporting unit is less than its carrying amount. We concluded that the fair value of our single reporting unit exceeded its carrying amount and that it was not necessary to perform the quantitative impairment test pursuant to ASC 350-20. Our qualitative assessment considered many factors including, but not limited to, our actual and projected operating performance and profitability, as well as consideration of recent bank merger and acquisition transaction metrics. No impairment was indicated in 2021, 2020 or 2019.
Intangible Assets
Intangible assets were as follows at year end (in thousands):
December 31, 2021
Gross Carrying
Accumulated
Net Carrying
Value
Amortization
Value
Amortizable core deposit intangibles
$
17,503
$
(13,041)
$
4,462
December 31, 2020
Gross Carrying
Accumulated
Net Carrying
Value
Amortization
Value
Amortizable core deposit intangibles
$
17,503
$
(11,677)
$
5,826
Estimated amortization expense of intangibles for the years ended December 31 were as follows (in thousands):
$
1,325
1,269
1,266
Total
$
4,462
8. DEPOSITS
The aggregate amount of time deposits in denominations of $250 thousand or more at December 31, 2021 and 2020 was $128.0 million and $165.7 million, respectively.
At December 31, 2021, the scheduled maturities of time deposits are as follows (in thousands):
$
285,223
52,475
14,060
4,317
4,500
Total
$
360,575
The following table sets forth the maturities of certificates of deposit of $250 thousand and over as of December 31, 2021 (in thousands):
Within
3 to 6
6 to 12
Over 12
3 Months
Months
Months
Months
Total
$
20,968
$
28,249
$
51,850
$
26,893
$
127,960
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.
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
Other borrowings can consist of FHLB convertible advances, FHLB of Atlanta overnight advances, FHLB advances maturing within one year, federal funds purchased and securities sold under agreements to repurchase (“repo”) that mature within one year, which are secured transactions with customers. The balance in repo accounts at December 31, 2021 and 2020 was $10.0 million and $16.0 million, respectively.
At December 31, 2021 and 2020, we have pledged callable agency securities, residential government-sponsored mortgage-backed securities and collateralized mortgage obligations with a carrying value of $21.7 million and $31.1 million, respectively, to customers who require collateral for overnight repurchase agreements and deposits.
Other borrowings consist of the following (in thousands):
December 31,
FHLB collateral advances maturing 3/1/2030
$
100,000
$
100,000
Securities sold under agreements to repurchase
9,962
16,065
Total
$
109,962
$
116,065
Weighted average interest rate at year end
3.55
%
3.55
%
Our FHLB convertible advances of $100.0 million was called on March 1, 2022.
Each FHLB advance is payable at its maturity date, with a prepayment penalty for fixed rate advances paid off earlier than maturity. Residential 1-4 family mortgage loans in the amount of approximately $382.7 million and $390.7 million were pledged as collateral for FHLB advances as of December 31, 2021 and 2020, respectively. HELOCs in the amount of approximately $28.3 million and $37.2 million were pledged as collateral for FHLB advances at December 31, 2021 and 2020, respectively. Commercial mortgage loans in the amount of approximately $155.4 million and $189.0 million were pledged as collateral for FHLB advances as of December 31, 2021 and 2020, respectively. Investment securities in the amount of $3.5 million and $6.4 million were pledged as collateral for FHLB advances at December 31, 2021 and 2020, respectively. At December 31, 2021, Primis Bank had available collateral to borrow an additional $763.2 million from the FHLB.
10. JUNIOR SUBORDINATED DEBT AND SENIOR SUBORDINATED NOTES
In 2017, the Company assumed $10.3 million of trust preferred securities that were issued on September 17, 2003 and placed through a trust in a pooled underwriting totaling approximately $650 million. The trust issuer invested the total proceeds from the sale of the trust preferred securities in Floating Rate Junior Subordinated Deferrable Interest Debentures. At December 31, 2021 and 2020, there was $10.3 million outstanding, net of approximately $600 thousand of debt issuance costs. These securities pay cumulative cash distributions quarterly at a variable rate per annum, reset quarterly, equal to the three-month LIBOR plus 2.95%. As of December 31, 2021 and 2020, the interest rate was 3.17% and 3.18%, respectively. The dividends paid to holders of these securities, which are recorded as interest expense, are deductible for income tax purposes.
The trust preferred securities may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. At December 31, 2021, all of the trust preferred securities qualified as Tier 1 capital.
On January 20, 2017, Primis completed the sale of $27.0 million of its fixed-to-floating rate senior Subordinated Notes due 2027. These notes initially beared interest at 5.875% per annum until January 31, 2022; interest is currently payable at an annual floating rate equal to three-month LIBOR plus a spread of 3.95% until maturity or early redemption. At December 31, 2021, all of these notes qualified as Tier 2 capital.
In 2017, the Company assumed a Senior Subordinated Note Purchase Agreement, dated April 22, 2015, entered into with certain institutional accredited investors, pursuant to which $20.0 million in aggregate principal amount of its 6.50% Fixed-to-Floating Rate Subordinated Notes due 2025 was sold to the investors. On February 1, 2021, the Company redeemed all of these notes.
On August 25, 2020, Primis completed the sale of $60.0 million of its fixed-to-floating rate Subordinated Notes due 2030. These notes will bear interest at an initial rate of 5.40% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2021. From and including September 1, 2025 to, but excluding the maturity date or the date of earlier redemption (the “floating rate period”), the interest rate will reset quarterly to an annual interest rate equal to the Benchmark rate, which is expected to be three-month Term Secured Overnight Financing Rate, plus 531 basis points, for each quarterly interest period during the floating rate period, payable quarterly in arrears
on March 1, June 1, September 1, and December 1 of each year, commencing on December 1, 2025. Notwithstanding the foregoing, in the event that the Benchmark rate is less than zero, the Benchmark rate shall be deemed to be zero. At December 31, 2021, all of these notes qualified as Tier 2 capital.
At December 31, 2021 and 2020, the remaining unamortized debt issuance costs related to the senior Subordinated Notes totaled $1.7 million and $1.9 million, respectively.
11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. Net deferred tax assets at December 31, 2021 and 2020 consist primarily of the following (in thousands):
Deferred tax assets:
Allowance for credit losses
$
6,522
$
8,028
Unearned loan fees and other
1,581
2,583
Other real estate owned write-downs
Lease liability
1,407
1,779
Federal AMT credit carryforward
-
1,137
Federal low income housing credit carryforward
Deferred compensation
1,684
1,734
Depreciation
-
Other
1,012
Total deferred tax assets
12,989
17,558
Deferred tax liabilities:
Right-of-use assets
1,315
1,576
Net unrealized gain on investment securities available-for-sale
Purchase accounting
Depreciation
-
Total deferred tax liabilities
3,418
2,912
Net deferred tax assets
$
9,571
$
14,646
No valuation allowance was deemed necessary on deferred tax assets in 2021 or 2020. Management believes that the realization of the deferred tax assets is more likely than not based on the expectation that Primis will generate the necessary taxable income in future periods.
We have no unrecognized tax benefits and do not anticipate any increase in unrecognized tax benefits during the next twelve months. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is our policy to record such accruals in our income tax accounts; no such accruals existed as of December 31, 2021, 2020 or 2019. Primis and its subsidiaries file a consolidated U.S. federal income tax return, and Primis files a Virginia state income tax return. Primis Bank files a Maryland and an Arkansas state income tax return. These returns are subject to examination by taxing authorities for all years after 2017.
The provision for income taxes consists of the following for the years ended December 31, 2021, 2020 and 2019 (in thousands):
Current tax expense
Federal
$
2,504
$
5,319
$
4,197
State
Total current tax expense
2,667
5,639
4,415
Deferred tax expense (benefit)
Federal
5,937
(1,294)
1,406
State
(117)
Total deferred tax expense (benefit)
6,054
(1,411)
1,477
Total income tax expense from continuing operations
8,721
4,228
5,892
Total income tax expense from discontinued operation
2,386
Total income tax expense
$
8,785
$
6,614
$
6,077
The income tax expense differed from the amount of income tax determined by applying the U.S. Federal income tax rate of 21% to pretax income for the years ended December 31, 2021, 2020 and 2019 due to the following (in thousands):
Computed expected tax expense at statutory rate
$
8,345
$
4,022
$
7,991
Increase (decrease) in tax expense resulting from:
Remeasurement of deferred tax assets and liabilities
(31)
(1,659)
Low income housing tax credits, net of amortization
(255)
Income from bank-owned life insurance
(354)
(327)
(357)
State taxes, net
Other, net
(69)
Total income tax expense from continuing operations
8,721
4,228
5,892
Total income tax expense from discontinued operation
2,386
Total income tax expense
$
8,785
$
6,614
$
6,077
During 2021, the Company remeasured the beginning of year allowance for credit losses deferred tax asset by $0.4 million, net, to reflect an adjustment in the 2020 adoption of ASU 2016-13. During 2019, the Company completed its formal assessment of the Section 382 limitation and rebooked $1.2 million deferred tax asset stemming from a $5.5 million acquired net operating loss carryforward that was written off in the fourth quarter of 2018. Additionally, the Company remeasured the depreciation deferred tax liability by $0.6 million, net, to reflect a 2018 adjustment to the assets held for sale not previously included.
12. EMPLOYEE BENEFITS
Primis has a 401(k) plan that allows employees to make pre-tax contributions for retirement. The 401(k) plan provides for discretionary matching contributions by Primis. Expense for 2021, 2020 and 2019 was $995 thousand, $795 thousand and $704 thousand, respectively.
The Bank maintains a deferred compensation plan in the form of Supplemental Executive Retirement Plan (“SERP”) for four (4) former executives. Under the plan, the Bank pays each participant, or their beneficiary, compensation deferred plus accrued interest for a period of 15 to 17 years after their retirement or age 62 depending on the terms and conditions of each plan. A liability is accrued for the obligations under these plans.
The expense incurred for the deferred compensation plans in 2021, 2020 and 2019 was $361 thousand, $1.3 million and $1.2 million, respectively. The deferred compensation plan liability was $7.8 million and $8.0 million as of December 31, 2021 and 2020, respectively.
13. STOCK-BASED COMPENSATION
At the June 21, 2017 Annual Meeting of Stockholders of Primis (formerly Southern National), the 2017 Equity Compensation Plan (the “2017 Plan”) was approved as recommended by the Board of Directors. The 2017 Plan replaced the 2010 Plan and has a maximum number of 750,000 shares reserved for issuance. The purpose of the 2017 Plan is to promote the success of the Company by providing greater incentives to employees, non-employee directors, consultants and advisors to associate their personal interests with the long-term financial success of the Company, including its subsidiaries, and with growth in stockholder value, consistent with the Company’s risk management practices.
A summary of stock option activity for 2021 follows:
Weighted
Weighted
Average
Aggregate
Average
Remaining
Intrinsic
Exercise
Contractual
Value
Shares
Price
Term
(in thousands)
Options outstanding, beginning of period
450,800
$
10.50
3.8
$
Forfeited
(1,500)
11.99
Expired
(6,500)
11.14
Exercised
(159,000)
9.60
Options outstanding, end of period
283,800
$
10.98
2.2
$
1,153
Exercisable at end of period
283,800
$
10.98
2.2
$
1,153
Stock-based compensation expense associated with stock options was zero, $188 thousand and $62 thousand for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, we do not have any unrecognized compensation expense associated with the stock options.
A summary of time vested restricted stock awards for 2021 follows:
Weighted
Weighted
Average
Average
Grant-Date
Remaining
Fair Value
Contractual
Shares
Per Share
Term
Unvested restricted stock outstanding, beginning of period
96,300
$
14.17
3.8
Granted
55,250
14.96
Vested
(46,300)
15.05
Forfeited
(7,200)
12.11
Unvested restricted stock outstanding, end of period
98,050
$
14.58
3.3
Stock-based compensation expense for time vested restricted stock awards totaled $747 thousand, $1.4 million and $370 thousand for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, unrecognized compensation expense associated with restricted stock awards was $1.1 million, which is expected to be recognized over a weighted average period of 3.3 years.
A summary of performance-based restricted stock units (the “Units”) for 2021 follows:
Weighted
Weighted
Average
Average
Grant-Date
Remaining
Fair Value
Contractual
Shares
Per Share
Term
Unvested Units outstanding, beginning of period
-
$
-
-
Granted
59,335
15.00
Vested
-
-
Forfeited
-
-
Unvested Units outstanding, end of period
59,335
$
15.00
4.0
During 2021, the Company issued 59,335 non-transferrable Units convertible, on a one-on-one basis, into shares of stock to eligible employees, granted pursuant to and subject to the provisions of the 2017 Plan.
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.
At December 31, 2021, there were 59,335 of these Units unvested and outstanding. The Company did not recognize any stock-based compensation expense associated with these Units for the year ended December 31, 2021 because it is not probable that these Units will vest. The grant date fair value of these Units was $15.00 per Unit. The potential unrecognized compensation expense associated with these Units is $1.3 million at December 31, 2021.
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Financial Instruments with off-balance sheet risk
Primis is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and guarantees of credit card accounts. These instruments involve elements of credit and funding risk in excess of the amount recognized in the consolidated balance sheet. Letters of credit are written conditional commitments issued by Primis to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. We had letters of credit outstanding totaling $13.1 million and $15.9 million as of December 31, 2021 and 2020, respectively.
Our exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit is based on the contractual amount of these instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Unless noted otherwise, we do not require collateral or other security to support financial instruments with credit risk.
Allowance For Credit Losses - Off-Balance-Sheet Credit Exposures
The allowance for credit losses on off-balance-sheet credit exposures is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if we have the unconditional right to cancel the obligation. Off-balance-sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit detailed above. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment or other off-balance-sheet exposure. The likelihood and expected amount of funding are based on historical
utilization rates. The amount of the allowance represents management's best estimate of expected credit losses on commitments expected to be funded over the contractual life of the commitment. Estimating credit losses on amounts expected to be funded uses the same methodology as described for loans in Note 3 - Loans and Allowance, as if such commitments were funded.
The following table details activity in the allowance for credit losses on off-balance-sheet credit exposures:
Balance as of January 1
$
$
-
Impact of adopting ASU 2016-13
-
Credit loss expense
Balance as of December 31
$
$
Commitments
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments are made predominately for adjustable rate loans, and generally have fixed expiration dates of up to three months or other termination clauses and usually require payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis.
At December 31, 2021 and 2020, we had unfunded lines of credit and undisbursed construction loan funds totaling $411.0 million and $355.3 million, respectively. Virtually all of our unfunded lines of credit and undisbursed construction loan funds are variable rate.
Primis also had commitments on the subscription agreements entered into for the investments in non-marketable equity securities of $3.5 million at December 31, 2021.
15. EARNINGS PER SHARE
The following is a reconciliation of the denominators of the basic and diluted EPS computations for 2021, 2020 and 2019 (amounts in thousands, except per share data):
Weighted
Average
Income
Shares
Per Share
(Numerator)
(Denominator)
Amount
For the year ended December 31, 2021
Basic EPS from continuing operations
$
31,018
24,438
$
1.27
Effect of dilutive stock options and unvested restricted stock
-
(0.01)
Diluted EPS from continuing operations
$
31,018
24,601
$
1.26
Basic EPS from discontinued operation
$
24,438
$
0.01
Effect of dilutive stock options and unvested restricted stock
-
-
Diluted EPS from discontinued operation
$
24,601
$
0.01
For the year ended December 31, 2020
Basic EPS from continuing operations
$
14,884
24,239
$
0.61
Effect of dilutive stock options and unvested restricted stock
-
-
Diluted EPS from continuing operations
$
14,884
24,363
$
0.61
Basic EPS from discontinued operation
$
8,403
24,239
$
0.35
Effect of dilutive stock options and unvested restricted stock
-
-
Diluted EPS from discontinued operation
$
8,403
24,363
$
0.35
For the year ended December 31, 2019
Basic EPS from continuing operations
$
32,161
24,050
$
1.34
Effect of dilutive stock options and unvested restricted stock
-
(0.02)
Diluted EPS from continuing operations
$
32,161
24,325
$
1.32
Basic EPS from discontinued operation
$
1,006
24,050
$
0.04
Effect of dilutive stock options and unvested restricted stock
-
-
Diluted EPS from discontinued operation
$
1,006
24,325
$
0.04
The Company did not have any anti-dilutive options as of December 31, 2021 and 2019 and had 226,300 anti-dilutive options as of December 31, 2020.
16. REGULATORY MATTERS
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 December 31, 2021 and 2020, the most recent regulatory notifications categorized the Bank as well capitalized under regulatory framework for PCA.
Quantitative measures established by regulation to ensure capital adequacy require Primis to maintain minimum amounts and ratios of Total and Tier I capital (as defined in the regulations) to average assets (as defined). Management believes, as of December 31, 2021, that Primis meets all capital adequacy requirements to which it is subject.
The following table provides a comparison of the leverage and risk-weighted capital ratios of Primis Financial Corp. and Primis Bank at the periods indicated to the minimum and well-capitalized required regulatory standards:
Required
For Capital
To Be Categorized as
Actual
Adequacy Purposes
Well Capitalized (1)
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2021
Primis Financial Corp.
Leverage ratio
$
314,353
9.41
%
$
133,664
4.00
%
n/a
n/a
Common equity tier 1 capital ratio
304,353
13.09
%
104,598
4.50
%
n/a
n/a
Tier 1 risk-based capital ratio
314,353
13.52
%
139,464
6.00
%
n/a
n/a
Total risk-based capital ratio
430,421
18.52
%
185,952
8.00
%
n/a
n/a
Primis Bank
Leverage ratio
$
372,076
11.14
%
$
137,890
4.00
%
$
114,973
5.00
%
Common equity tier 1 capital ratio
372,076
16.18
%
103,476
4.50
%
149,465
6.50
%
Tier 1 risk-based capital ratio
372,076
16.18
%
137,968
6.00
%
183,957
8.00
%
Total risk-based capital ratio
400,836
17.43
%
183,957
8.00
%
229,947
10.00
%
December 31, 2020
Primis Bank
Leverage ratio
$
334,540
11.25
%
$
124,046
4.00
%
$
105,642
5.00
%
Common equity tier 1 capital ratio
334,540
15.83
%
95,078
4.50
%
137,334
6.50
%
Tier 1 risk-based capital ratio
334,540
15.83
%
126,770
6.00
%
169,027
8.00
%
Total risk-based capital ratio
361,073
17.09
%
169,027
8.00
%
211,284
10.00
%
(1) Prompt corrective action provisions are not applicable at the bank holding company level.
Primis Financial Corp. and Primis Bank are required to meet minimum capital requirements set forth by regulatory authorities. Bank regulatory agencies have approved regulatory capital guidelines (“Basel III”) aimed at strengthening existing capital requirements for banking organizations. The Basel III Capital Rules require Primis Financial Corp. and Primis Bank to maintain (i) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer”, (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer, (iii) a minimum ratio of Total capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer and (iv) a minimum leverage ratio of 4.0%. Failure to meet minimum capital requirements may result in certain actions by regulators which could have a direct material effect on the consolidated financial statements.
Primis Financial Corp. and Primis Bank remain well-capitalized under Basel III capital requirements. Primis Bank had capital conservation buffer of 9.43% at December 31, 2021, which exceeded the 2.50% minimum requirement below which the regulators may impose limits on distributions. Primis Financial Corp. was not subject to various regulatory capital requirements administered by the federal banking agencies in 2020 as Primis did not meet the asset-sized threshold requirement in 2020.
Primis Bank’s capital position is consistent with being well-capitalized under the regulatory framework for prompt corrective action.
17. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information of Primis Financial Corp. follows (in thousands):
CONDENSED BALANCE SHEETS
DECEMBER 31,
ASSETS
Cash
$
23,517
$
59,318
Investment in subsidiary
479,855
446,116
Preferred investment in mortgage company
3,064
-
Investments in non-marketable equity securities
-
Other assets
2,681
2,060
Total assets
$
509,547
$
507,494
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Junior subordinated debt - long term
$
9,731
$
9,682
Senior subordinated notes - long term
85,297
105,647
Other liabilities
2,638
1,611
Total liabilities
97,666
116,940
Stockholders' equity:
Common stock
Additional paid in capital
311,127
308,870
Retained earnings
99,397
77,956
Accumulated other comprehensive income
1,112
3,485
Total stockholders' equity
411,881
390,554
Total liabilities and stockholders' equity
$
509,547
$
507,494
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
Income:
Cash dividends received from bank subsidiary
$
-
$
2,500
$
13,300
Gain on debt extinguishment
-
-
Total income
2,500
13,300
Expenses:
Interest on junior subordinated debt
Interest on senior subordinated notes
5,127
3,909
2,847
Other operating expenses
1,236
Total expenses
6,718
5,176
4,162
Income (loss) before income tax benefit and equity in undistributed net income of subsidiaries
(6,145)
(2,676)
9,138
Income tax benefit
(1,280)
(1,084)
(862)
Equity in undistributed net income of subsidiaries
36,113
24,879
23,167
Net income
$
31,248
$
23,287
$
33,167
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
Operating activities:
Net income
$
31,248
$
23,287
$
33,167
Adjustments to reconcile net income to net cash and cash equivalents (used in) provided by operating activities:
Equity in undistributed net income of subsidiaries
(36,113)
(27,379)
(36,467)
Gain on debt extinguishment
(573)
-
-
Other, net
1,426
8,766
(666)
Net cash and cash equivalents provided by (used in) in operating activities
(4,012)
4,674
(3,966)
Investing activities:
Increase in preferred investment in mortgage company
(3,064)
-
-
Increase in non-marketable equity securities investments
(430)
-
-
Dividend from subsidiaries
-
2,500
13,300
Net cash and cash equivalents provided by (used in) investing activities
(3,494)
2,500
13,300
Financing activities:
Issuance of subordinated notes, net of cost
-
58,600
-
Extinguishment of subordinated debt
(20,000)
-
-
Proceeds from exercised stock options
1,526
Repurchase of restricted stock
(14)
-
-
Cash dividends paid on common stock
(9,807)
(9,737)
(8,690)
Net cash and cash equivalents provided by (used in) financing activities
(28,295)
49,437
(8,020)
Net change in cash and cash equivalents
(35,801)
56,611
1,314
Cash and cash equivalents at beginning of period
59,318
2,707
1,393
Cash and cash equivalents at end of period
$
23,517
$
59,318
$
2,707
18. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following is a summary of the accumulated other comprehensive income (loss) balances, net of tax (in thousands):
Balance at
Current Period
Balance at
December 31, 2020
Change
December 31, 2021
Unrealized gain (loss) on investment securities available-for-sale
$
3,485
$
(2,373)
$
1,112
Total
$
3,485
$
(2,373)
$
1,112
19. RELATED PARTY TRANSACTIONS
Prior to December 31, 2021, STM was a related party of the Company. The Company continues to have a financial relationship with STM but STM is no longer a related party. The following table summarizes the changes in the loan amount outstanding with STM during the periods indicated, during which STM was considered a related party (in thousands):
Balance at January 1,
$
30,771
$
26,760
Principal advances
373,151
441,044
Principal paid
(366,443)
(437,033)
Transfers (out) of related party status
(37,479)
-
Balance at December 31,
$
-
$
30,771
We purchased loans in an aggregate amount of $30.8 million and $80.6 million during 2021 and 2020, respectively, from STM.
During the year, officers, directors, principal shareholders, and their affiliates (related parties) were customers of and had transactions with the Company. Loan activity to related parties is as follows (in thousands):
Balance at January 1,
$
22,709
Principal advances
21,021
Principal paid
(5,250)
Transfers in (out) of related party status
2,115
Balance at December 31,
$
40,595
Primis has also entered into deposit transactions with its related parties including STM. The aggregate amount of these deposit accounts were $22.4 million (not including STM) and $25.2 million (including STM) as of December 31, 2021 and 2020, respectively.
20. LOW INCOME HOUSING TAX CREDITS
The general purpose of housing equity funds is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, deliver Federal Low Income Housing Credits to investors, allocate tax losses and other possible tax benefits to investors, and to preserve and protect project assets. The investments in these funds were recorded as other assets on the consolidated balance sheets and were carried at $4.2 million and $5.1 million at December 31, 2021 and 2020, respectively. These investments and related tax benefits have expected terms through 2034, with the majority maturing by 2027. Tax credits, net of amortization recognized related to these investments during the years ended December 31, 2021 and 2020 were $(39) thousand and $(225) thousand, respectively. Total projected tax credits to be received for 2021 are $446 thousand, which is based on the most recent quarterly estimates received from the funds. Additional capital calls expected for the funds totaled $0.4 million and $2.9 million at December 31, 2021 and 2020, respectively, and are accrued for in other liabilities on the consolidated balance sheets.
21. SUBSEQUENT EVENT
On January 27, 2022, Primis’ board of directors approved the plan of branch closings and consolidation. The Company anticipates seven branch consolidations and three branch closings throughout 2022. The Company cannot estimate the potential financial impact of the plan of branch closings and consolidation.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this Annual Report on Form 10-K, 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 Annual Report on Form 10-K.
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) Management’s Report on Internal Control Over Financial Reporting. Management of Primis Financial Corp. is responsible for establishing and maintaining adequate internal control over financial reporting for Primis Financial Corp. (“we” and “our”), as that term is defined in Exchange Act Rules 13a-15(f). Primis Financial Corp. conducted an evaluation of the effectiveness of our internal control over Primis’ financial reporting as of December 31, 2021 based on the framework in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, we concluded that our internal control over financial reporting is effective as of December 31, 2021.
Dixon Hughes Goodman LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and has issued a report on the effectiveness of our internal control over financial reporting, which report is included in "Part II - Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
(c) Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information under the captions "Election of Directors,” "Continuing Directors and Executive Officers," "Corporate Governance - Committees of the Board of Directors- Audit Committee,” "Corporate Governance - Director Nominations Process" and "Corporate Governance - Code of Ethics" in Primis Financial Corp.’s definitive Proxy Statement for its 2022 Annual Meeting of Shareholders, to be filed with the SEC within 120 days after December 31, 2021 pursuant to Regulation 14A under the Exchange Act (the "2022 Proxy Statement"), is incorporated herein by reference in response to this item.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information under the captions "Executive Compensation and Other Matters," "Director Compensation" and "Compensation Committee Report on Executive Compensation" in the 2022 Proxy Statement is incorporated herein by reference in response to this item.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information under the caption "Beneficial Ownership of Common Stock by Management of the Company and Principal Stockholders" in the 2022 Proxy Statement is incorporated herein by reference in response to this item.
The information required by this Item concerning securities authorized for issuance under equity compensation plans is incorporated herein by reference to Part II, Item 5 of this Annual Report on Form 10-K.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships, Related Transactions and Director Independence
The information under the captions "Corporate Governance - Director Independence" and "Certain Relationships and Related Party Transactions" in the 2022 Proxy Statement is incorporated herein by reference in response to this item.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
The Independent Registered Public Accounting Firm is Dixon Hughes Goodman LLP (PCAOB Firm ID No. 57) located in Greenville, North Carolina. The information under the caption "Fees and Services of Independent Registered Public Accounting Firm" in the 2022 Proxy Statement is incorporated herein by reference in response to this item.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this report:
(a)(1) Financial Statements
The following consolidated financial statements and reports of independent registered public accounting firm are in Part II, Item 8:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2021 and 2020
Consolidated Statements of Income and Comprehensive Income - Years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Changes in Stockholders’ Equity - Years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows -Years ended December 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All schedules are omitted since they are not required, are not applicable, or the required information is shown in the consolidated financial statements or notes thereto.
(a)(3) Exhibits
The following are filed or furnished, as noted below, as part of this Annual Report on Form 10-K and this list includes the Exhibit Index.
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 on 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
Certificate 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)
Exhibit No.
Description
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)
4.1
Specimen Stock Certificate of Southern National (incorporated herein by reference to Exhibit 4.1 to Primis Financial Corp.’s (formerly Southern National’s) Registration Statement on Form S-1 (Registration No. 333-136285))
4.2
Form of Warrant Agreement (incorporated herein by reference to Exhibit 4.2 to Primis Financial Corp.’s (formerly Southern National’s) Registration Statement on Form S-1 (Registration No. 333-136285))
4.3
Form of Amendment to Warrant Agreement (incorporated herein by reference to Exhibit 4.3 to Primis Financial Corp.’s (formerly Southern National’s) Registration Statement on Form S-1 (Registration No. 333-136285))
4.4
Form of 5.875% Fixed-to-Floating Rate Subordinated Notes due January 31, 2027 (incorporated herein by reference to Exhibit 10.1 to Primis Financial Corp.’s (formerly Southern National’s) Current Report on Form 8-K filed on January 24, 2017)
4.5*
Description of Registrant’s Securities
Certain instruments relating to long-term debt as to which the total amount of securities authorized there under does not exceed 10% of the total assets of Primis Financial Corp. (formerly Southern National Bancorp of Virginia, Inc.) have been omitted in accordance with Item 601(b)(4)(iii) of Regulation S-K. The registrant will furnish a copy of any such instrument to the Securities and Exchange Commission upon its request.
4.6
Subordinated Indenture, dated as of August 25, 2020, between Primis Financial Corp. (formerly Southern National Bancorp of Virginia, Inc.) and Wilmington Trust, National Association (incorporated herein by reference to Exhibit 4.1 to Primis Financial Corp.’s (formerly Southern National’s) Current Report on Form 8-K filed on August 25, 2020)
4.7
First Supplemental Indenture, dated as of August 25, 2020, between Primis Financial Corp. (formerly Southern National Bancorp of Virginia, Inc.) and Wilmington Trust, National Association (incorporated herein by reference to Exhibit 4.2 to Primis Financial Corp.’s (formerly Southern National’s) Current Report on Form 8-K filed on August 25, 2020)
4.8
Form of 5.40% Fixed-to-Floating Rate Subordinated Notes due 2030 (included in Exhibit 4.7)
10.1+
Form of Primis Financial Corp. (formerly Southern National Bancorp of Virginia, Inc.) Incentive Stock Option Agreement (incorporated herein by reference to Exhibit 10.3 to Primis Financial Corp.’s (formerly Southern National’s) Registration Statement on Form S-1/A filed on October 29, 2009 (Registration No. 333-162467))
10.2+
Primis Financial Corp. (formerly Southern National Bancorp of Virginia, Inc.) 2010 Stock Awards and Incentive Plan (incorporated herein by reference to Exhibit 4.2 to Primis Financial Corp.’s (formerly Southern National’s) Registration Statement on Form S-8 (Registration No. 333-166511))
10.3+
Primis Financial Corp. (formerly Southern National Bancorp of Virginia, Inc.) 2017 Equity Compensation Plan (incorporated herein by reference to Appendix A of Primis Financial Corp.’s (formerly Southern National’s) Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on May 11, 2017)
Exhibit No.
Description
10.4+
Form of Primis Financial Corp. (formerly Southern National Bancorp of Virginia, Inc.) Incentive Stock Option Agreement (incorporated herein by reference to Exhibit 4.3 to Primis Financial Corp.’s (formerly Southern National’s) Registration Statement on Form S-8 (Registration No. 333-166511))
10.5+
Primis Financial Corp. (formerly Southern National Bancorp of Virginia, Inc.) Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.9 to Primis Financial Corp.’s (formerly Southern National’s) Current Report on Form 8-K filed on June 26, 2017)
10.6+
Primis Financial Corp. (formerly Southern National Bancorp of Virginia, Inc.) Executive Severance Plan (incorporated herein by reference to Exhibit 10.10 to Primis Financial Corp.’s (formerly Southern National’s) Current Report on Form 8-K filed on June 26, 2017)
10.7+
Form of Subordinated Note Purchase Agreement, dated January 20, 2017 (incorporated herein by reference to Exhibit 10.1 to Primis Financial Corp.’s (formerly Southern National’s) Current Report on Form 8-K filed on January 24, 2017)
10.8+
Employment Agreement, dated as of February 28, 2019, by and between George C. Sheflett and Primis Financial Corp. (formerly Southern National Bancorp of Virginia, Inc.) (incorporated herein by reference to Exhibit 10.1 to Primis Financial Corp.’s (formerly Southern National’s) Quarterly Report on Form 10-Q filed on May 9, 2019)
10.9+
Employment Agreement, dated as of February 20, 2020, by and between Dennis J. Zember, Jr. and Primis Financial Corp. (formerly Southern National Bancorp of Virginia, Inc.) (incorporated herein by reference to Exhibit 10.2 to Primis Financial Corp.’s (formerly Southern National’s) Quarterly Report on Form 10-Q filed on May 8, 2020)
10.10+
Executive Employment Agreement, dated as of April 29, 2020, by and between Stephen B. Weber and Primis Financial Corp. (formerly Southern National) (incorporated herein by reference to Exhibit 10.1 to Primis Financial Corp.’s Quarterly Report on Form 10-Q filed on May 10, 2021)
10.11+
Change in Control Severance Agreement, dated as of June 1, 2020, by and between Mike Tyler and Primis Financial Corp. (formerly Southern National) (incorporated herein by reference to Exhibit 10.2 to Primis Financial Corp.’s Quarterly Report on Form 10-Q filed on May 10, 2021)
10.12+
Executive Employment Agreement, dated as of January 10, 2021, by and between Matthew Switzer and Primis Financial Corp. (formerly Southern National) (incorporated herein by reference to Exhibit 10.3 to Primis Financial Corp.’s Quarterly Report on Form 10-Q filed on May 10, 2021)
10.13+*
Executive Employment Agreement, dated as of June 16, 2021, by and between Tyler Stafford and Primis Financial Corp.
10.14+*
Executive Employment Agreement, dated as of September 13, 2021, by and between Ann-Stanton C. Gore and Primis Financial Corp.
21.0*
Subsidiaries of the Registrant
23.1*
Consent of Dixon Hughes Goodman LLP
23.2*
Consent of Richey, May & Co., LLP
31.1*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002
Exhibit No.
Description
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
99.1**
Financial Statements of Southern Trust Mortgage, LLC as of and for the year ended December 31, 2021 (unaudited) and Financial Statements of Southern Trust Mortgage, LLC as of and for the years ended December 31, 2020 and 2019 together with Report of Independent Registered Public Accounting Firm thereon as of and for the years ended December 31, 2020 and 2019; a former mortgage affiliate of the Company.
The following materials from Primis Financial Corp.’s Annual Report on Form 10-K for the year ended December 31, 2021, formatted in Extensible Business Reporting Language (Inline XBRL), filed herewith: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income and Comprehensive Income, (iii) Consolidated Statements of Changes in Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.
The cover page from Primis Financial Corp’s Annual Report on Form 10-K for the year ended December 31, 2021, formatted in Inline XBRL.
+ Management contract or compensatory plan or arrangement
* Filed herewith
** Furnished herewith