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FAIR VALUE

9 Months Ended

Sep. 30, 2022

5. 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 and Liabilities Measured on a Recurring Basis:

Investment Securities Available-for-Sale

Where quoted prices are available in an active market, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include highly liquid government bonds and mortgage products. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of investment securities with similar characteristics or discounted cash flow. Level 2 investment securities include U.S. agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, collateralized loan obligations and other securities. In certain cases where there is limited activity or less transparency around inputs to the

valuation, investment securities are classified within Level 3 of the valuation hierarchy. Currently, all of Primis’ available-for-sale debt investment securities are considered to be Level 2 investment securities.

Loans Held for Sale

The fair value of loans held for sale is determined by obtaining prices at which they could be sold in the principal market at the measurement date and are classified within Level 2 of the fair value hierarchy. The fair value is determined on a recurring basis by utilizing quoted prices from dealers in such securities.

Derivative Assets and Liabilities

Interest Rate Lock Commitments (“IRLC”): The Company determines the value of IRLCs by comparing the market price to the price locked in with the customer, adding fees or points to be collected at closing, subtracting commissions to be paid at closing, and subtracting estimated remaining loan origination costs to the bank based on the processing status of the loan. IRLCs are classified within Level 3 of the valuation hierarchy.

Best Efforts Forward Loan Sales Commitments: Best efforts forward loan sales commitments are classified within Level 2 of the valuation hierarchy. Best efforts forward loan sales commitments fix the forward sales price that will be realized upon the sale of mortgage loans into the secondary market. Best efforts forward loan sales commitments are entered into for loans at the time the borrower commitment is made. These best efforts forward loan sales commitments are valued using the committed price to the counterparty against the current market price of the interest rate lock commitment or mortgage loan held for sale.

Mandatory Forward Loan Sales Commitments: Fair values for mandatory forward loan sales commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. Due to the observable inputs used by Primis, best efforts mandatory loan sales commitments are classified within Level 2 of the valuation hierarchy.

To-Be-Announced Mortgage-Backed Securities Trades: Fair values for TBA’s are based on the gain or loss that would occur if the Company were to pair-off transaction at the measurement date and are classified within Level 2 of the valuation hierarchy. TBA’s are recorded at fair value on a recurring basis.

Assets and liabilities 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)		September 30, 2022			(Level 1)			(Level 2)			(Level 3)
Assets:
Available-for-sale securities
Residential government-sponsored mortgage-backed securities		$	106,279		$	—		$	106,279		$	—
Obligations of states and political subdivisions			28,755			—			28,755			—
Corporate securities			14,854			—			14,854			—
Collateralized loan obligations			4,803			—			4,803			—
Residential government-sponsored collateralized mortgage obligations			23,043			—			23,043			—
Government-sponsored agency securities			14,685			—			14,685			—
Agency commercial mortgage-backed securities			40,100			—			40,100			—
SBA pool securities			6,372			—			6,372			—
			238,891			—			238,891			—
Loans held for sale			13,388			—			13,388			—
Derivative assets			1,103			—			1,066			37
Total assets		$	253,382		$	—		$	253,345		$	37

Liabilities:
Derivative liabilities		$	189		$	—		$	176		$	13
Total liabilities		$	189		$	—		$	176		$	13


					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)
Assets:
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 assets		$	271,332		$	—		$	271,332		$	—

The following tables present additional information about the assets measured at fair value on a recurring basis using significant unobservable (Level 3) inputs (in thousands):


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
		2022			2021			2022			2021
Derivative assets:
Interest Rate Lock Commitments
Balance at beginning of the period	$	24		$	—		$	—		$	—
Acquired		—			—			14			—
Gain included in net income		—			—			10			—
Settlements		13			—			13			—
Balance at end of the period	$	37		$	—		$	37		$	—

The following tables present additional information about the liabilities measured at fair value on a recurring basis using significant unobservable (Level 3) inputs (in thousands):


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
		2022			2021			2022			2021
Derivative liabilities:
Interest Rate Lock Commitments
Balance at beginning of the period	$	3		$	—		$	—		$	—
Acquired		—			—			44
Loss included in net income		—			—			(41)			—
Settlements		10			—			10			—
Balance at end of the period	$	13		$	—		$	13		$	—

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.

Collateral-dependent loans are measured at fair value on a non-recurring basis and are evaluated individually. These collateral-dependent loans are deemed to be at fair value if there is an associated allowance for credit losses or if a charge-off has been recorded in the previous 12 months. Collateral values are determined using appraisals or other third-party value estimates of the subject property discounted based on estimated selling costs, generally between 5% and 10%, and immaterial adjustments for other external factors that may impact the marketability of the collateral. The weighted average discount for estimated selling costs applied was 6%.

Assets Held for Sale

Assets held for sale are valued based on third-party appraisals less estimated disposal costs. Primis considers third party appraisals, as well as independent fair value assessments from realtors or persons involved in selling bank premises, furniture and equipment, in determining the fair value of particular properties. Accordingly, the valuation of assets held for sale is subject to significant external and internal judgment. Primis periodically reviews premises, furniture and equipment held for sale to determine if the fair value of the property, less disposal costs, has declined below its recorded book value and records any adjustments accordingly.

Other Real Estate Owned (“OREO”)

OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or evaluation less cost to sell. In some cases appraised value is net of costs to sell. Selling costs have been in the range from 5% to 10% of collateral valuation at September 30, 2022 and December 31, 2021. Fair value is classified as Level 3 in the fair value hierarchy. OREO is further evaluated quarterly for any additional impairment. At September 30, 2022 and December 31, 2021, the total amount of OREO was $1.0 million and $1.2 million, respectively.

Assets measured at fair value on a non-recurring basis are summarized below:


					Fair Value Measurements Using
								Significant
					Quoted Prices in			Other			Significant
					Active Markets for			Observable			Unobservable
		Total at			Identical Assets			Inputs			Inputs
(dollars in thousands)		September 30, 2022			(Level 1)			(Level 2)			(Level 3)
Collateral dependent loans		$	45,742		$	—		$	—		$	45,742
Assets held for sale			3,127			—			—			3,127
Other real estate owned:
Construction and land development			266			—			—			266
Residential 1-4 family			775			—			—			775


					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			266			—			—			266
Residential 1-4 family			897			—			—			897

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:


				September 30, 2022						December 31, 2021
		Fair Value		Carrying			Fair			Carrying			Fair
		Hierarchy Level		Amount			Value			Amount			Value
Financial assets:
Cash and cash equivalents		Level 1		$	97,738		$	97,738		$	530,167		$	530,167
Securities available-for-sale		Level 2			238,891			238,891			271,332			271,332
Securities held-to-maturity		Level 2			14,391			13,085			22,940			23,364
Stock in Federal Reserve Bank and Federal Home Loan Bank		Level 2			16,689			16,689			15,521			15,521
Net loans		Level 3			2,705,130			2,589,870			2,310,881			2,278,456
Loans held for sale		Level 2			13,388			13,388			—			—
Accrued interest receivable		Level 2			10,258			10,258			13,643			13,643
Derivative assets		Level 2 and 3			1,103			1,103			—			—
Financial liabilities:
Demand deposits and NOW accounts		Level 2		$	1,325,058		$	1,325,058		$	1,380,020		$	1,380,020
Money market and savings accounts		Level 2			1,020,270			1,020,270			1,022,621			1,022,621
Time deposits		Level 3			362,992			358,763			360,575			362,902
Securities sold under agreements to repurchase		Level 1			9,886			9,886			9,962			9,962
FHLB advances		Level 1			125,000			125,000			100,000			100,000
Junior subordinated debt		Level 2			9,769			9,076			9,731			10,367
Senior subordinated notes		Level 2			85,472			84,022			85,297			91,141
Accrued interest payable		Level 2			1,369			1,369			1,864			1,864
Derivative liabilities		Level 2 and 3			189			189			—			—

Carrying amount is the estimated fair value for cash and cash equivalents (including federal funds sold), accrued interest receivable and payable, demand deposits, savings accounts, money market accounts and FHLB advances and securities sold under agreements to repurchase.

Fair value of long-term debt is based on current rates for similar financing. Carrying amount of Federal Reserve Bank and FHLB stock is a reasonable estimate of fair value as these securities are not readily marketable and are based on the ultimate recoverability of the par value. The fair value of off-balance-sheet items is not considered material. Fair value of net loans, time deposits, junior subordinated debt, and senior subordinated notes are measured using the exit-price notion.

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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