Primis Financial Corp. quarterly report, Q3 FY2020

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Business context and reporting period

This is Southern National Bancorp of Virginia, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2020; the filing identifies Sonabank as its bank subsidiary and reports 42 branches in Virginia and Maryland. The request metadata names Primis Financial Corp., but that name does not appear as the registrant in the supplied filing text; verify the company identity and any subsequent name change. Unless stated otherwise, amounts below are in U.S. dollars.

Financial performance and position

  • Third-quarter earnings: Net income was $9.6 million, up 8.2% from $8.9 million a year earlier. Diluted EPS was $0.39 versus $0.36. Net interest income rose to $23.0 million from $21.0 million; net interest margin was 3.18% versus 3.37% (3.25% excluding PPP effects, according to management).
  • Nine-month earnings: Net income was $14.3 million, down 40.8% from $24.2 million; diluted EPS was $0.59 versus $0.99. Net interest income increased to $66.0 million from $62.9 million, while net interest margin declined to 3.27% from 3.40%.
  • Revenue drivers: Third-quarter noninterest income rose to $6.3 million from $3.0 million, chiefly on higher mortgage-affiliate equity income ($3.8 million versus $0.6 million). Nine-month noninterest income was $17.5 million versus $9.2 million. Deposit and other fees were lower.
  • Credit costs and expenses: Loan-loss provision was $2.0 million in Q3 and $16.3 million for the nine months, compared with $0.15 million and $0.35 million, respectively, in 2019. Noninterest expense rose 21.0% in Q3 to $15.3 million and 14.9% year to date to $49.2 million.
  • Cash flow: For the nine months, operating cash flow was $10.3 million versus $27.5 million in 2019; investing cash flow was an outflow of $302.2 million, largely reflecting loan growth; financing cash flow was an inflow of $409.3 million. Cash and equivalents ended at $149.3 million, up from $31.9 million at year-end 2019.
  • Balance sheet and liquidity: Total assets were $3.15 billion, up from $2.72 billion at December 31, 2019. Deposits were $2.22 billion versus $2.12 billion; stockholders’ equity was $389.0 million versus $377.2 million. Cash and equivalents were $149.3 million. The company reported $283.9 million of PPPLF borrowings at quarter-end and said it repaid all PPPLF advances in October, retaining the ability to pledge PPP loans again if needed.
  • Loans and credit quality: Total loans were $2.52 billion, including $348.0 million of PPP loans; excluding PPP, loans decreased $10.4 million, or 0.47%, from year-end. The allowance for loan losses was $25.8 million, or 1.04% of loans, versus $10.3 million, or 0.47%, at year-end. Reported nonperforming assets were $20.7 million; nonaccrual loans were $15.3 million, including $4.1 million covered by SBA guarantees. Management reported $436.6 million of loans subject to COVID-related deferrals at September 30 and $80.7 million of modified loans or modification requests as of October 30.
  • Debt and capital: Quarter-end borrowings included $283.9 million PPPLF, $100.0 million FHLB advances, $16.2 million repurchase agreements, $105.7 million senior subordinated notes, and $9.7 million junior subordinated debt. The company issued $60.0 million of subordinated notes in August. Sonabank’s September 30 regulatory ratios were 15.05% common equity Tier 1, 16.23% total risk-based capital, and 12.26% leverage; each exceeded the stated well-capitalized threshold.

Material changes versus prior comparable periods

  • Q3 net income improved modestly year over year, supported by lower deposit costs and substantially higher mortgage-affiliate earnings, partly offset by higher provision and operating expenses.
  • Nine-month net income fell sharply, mainly because of the $16.0 million increase in COVID-related qualitative loan-loss provisions and a first-half management restructuring charge of $5.6 million pretax ($4.4 million after tax). Higher mortgage-affiliate income and lower funding costs partly offset these effects.
  • Loan growth was driven by PPP originations; excluding PPP, balances contracted slightly. The allowance rose materially, while reported nonaccrual loans and criticized/classified balances increased from year-end.
  • Deposits increased, and cash rose substantially amid PPP-related funding. The company also added subordinated debt in August.

Outlook, commentary, risks and unusual items

  • The filing gives no quantitative earnings or margin guidance. Management said it anticipated minimal additional loan deferrals in Q4 2020; PPP forgiveness was expected to begin in Q4 and continue into 2021.
  • Management cautioned that COVID-19 effects remain difficult to predict and could worsen credit quality, borrower repayment capacity, fee income, liquidity, funding costs, capital ratios, and asset values. Hotel demand had been materially reduced, although management observed improving hotel occupancy and room revenue in Q3. Hotel loans totaled $265.5 million, or 10.5% of loans.
  • PPP loans were 1% interest and SBA-guaranteed, but the filing warns that any shortfall in guarantee coverage could require additional credit-loss expense. It also identifies litigation, regulatory scrutiny, and reputational risks associated with PPP processing.
  • Management performed a third-quarter goodwill impairment assessment after identifying a COVID-related triggering event; it found no impairment but planned continued monitoring. Investment securities with fair value of about $17.7 million were considered temporarily impaired; management attributed declines to rates and market illiquidity, not credit quality.
  • The company deferred CECL adoption under the CARES Act, with adoption expected by the earlier of termination of the national emergency or December 31, 2020. Estimated initial allowance increase was approximately $9.0 million.
  • Management reported effective disclosure controls and no material change in internal control over financial reporting. It said ordinary-course legal matters were not expected to have a material adverse effect and no significant proceedings were pending or known to be threatened.

Important facts for investors to verify

  1. Confirm the relationship between the metadata’s Primis Financial Corp. and the filing’s registrant, Southern National Bancorp of Virginia, Inc. (ticker SONA).
  2. Track performance excluding PPP effects and unusually strong mortgage-affiliate income, and assess whether those sources are sustainable.
  3. Review subsequent loan performance, deferral outcomes, nonaccrual trends, allowance adequacy, and exposure to hotels and other COVID-affected borrowers.
  4. Confirm the post-quarter repayment of PPPLF advances, ongoing liquidity and deposit trends, and the cost and terms of subordinated debt.
  5. Monitor PPP forgiveness, guarantee coverage, and any related litigation or regulatory developments; also verify CECL adoption timing and impact.