Business context and reporting period
Southern National Bancorp of Virginia, Inc. (SNBV) filed this unaudited Form 10-Q for the quarter ended June 30, 2017. The filing identifies SNBV as the registrant; it does not use the name Primis Financial Corp., so investors should verify the issuer and corporate-name history. SNBV completed its stock merger with Eastern Virginia Bankshares, Inc. (EVBS) on June 23, 2017, adding EVB and substantially expanding the bank’s Virginia and Maryland operations. Comparisons with prior periods are affected by the acquisition and are not like-for-like.
Financial performance and position
Amounts below are in millions except per-share data and ratios.
| Metric | Q2 2017 / June 30, 2017 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $11.2 | $10.2 in Q2 2016 |
| Net interest margin | 3.72% | 4.06% in Q2 2016 |
| Provision for loan losses | $1.1 | $1.4 in Q2 2016 |
| Noninterest income | $0.9 | $1.0 in Q2 2016 |
| Noninterest expense | $14.8, including $8.6 of merger expenses | $5.6 in Q2 2016 |
| Net income (loss) | $(2.8); diluted EPS $(0.21) | $2.8; diluted EPS $0.23 in Q2 2016 |
| Six-month net income (loss) | $(0.8); diluted EPS $(0.06) | $5.4; diluted EPS $0.43 in first half 2016 |
| Operating cash flow | $0.4 for first half | $5.4 for first half 2016 |
| Cash and cash equivalents | $44.6 | $47.4 at Dec. 31, 2016 |
| Total assets | $2,630.8 | $1,142.4 at Dec. 31, 2016 |
| Total loans, net of deferred fees | $2,033.2 | $930.4 at Dec. 31, 2016 |
| Total deposits | $2,020.2 | $913.0 at Dec. 31, 2016 |
| Stockholders’ equity | $323.3 | $126.3 at Dec. 31, 2016 |
EVBS added approximately $1.04 billion of loans and $1.15 billion of deposits. The acquisition was funded primarily with SNBV stock; consideration was approximately $198.9 million, including $88.7 million of recorded goodwill. The acquisition-date purchase accounting remains preliminary.
At June 30, short-term FHLB advances were $201.5 million, repurchase agreements were $8.1 million, junior subordinated debt was $9.5 million, and senior subordinated notes were $47.2 million. SNBV’s total risk-based capital ratio was 13.44% and its leverage ratio was 18.23%; Sonabank’s corresponding ratios were 12.94% and 21.84%. The bank was categorized as well capitalized.
Material changes versus prior periods
- Q2 and first-half losses replaced prior-year profits, principally because of merger expenses of $8.6 million and $8.9 million, respectively.
- Net interest income increased year over year, supported by higher average loan balances, while net interest margin fell 34 basis points to 3.72%. Management attributed 15 basis points of Q2 margin reduction to interest on subordinated notes; the first-half impact was 14 basis points.
- First-half noninterest income declined to $0.8 million from $1.5 million, mainly because mortgage-affiliate results shifted from $0.6 million income to a $0.4 million loss. Q2 included a $0.3 million securities-sale gain.
- The allowance for loan losses rose to $9.2 million from $8.6 million, while its ratio to non-covered loans fell to 0.46% from 0.95%, largely because acquired EVBS loans were recorded at fair value. Nonperforming assets excluding SBA-guaranteed amounts were 0.37% of non-covered assets, versus 0.92% at year-end; the acquired performing loans increased the denominator.
Outlook, commentary, risks and unusual items
- No quantified earnings or financial guidance was provided. Management expected additional legal and transition expenses during the remainder of 2017, while anticipating further cost savings and efficiencies from the merger; those expected savings were not reflected in the pro forma figures.
- The core processing system conversion was reported on schedule for mid-September 2017. Management said it was working to streamline the combined institution.
- Unaudited pro forma results assuming the merger occurred January 1, 2016 showed first-half 2017 net income of $12.2 million versus $11.5 million in first-half 2016, excluding the actual merger expenses. These figures are illustrative, not forecasts.
- Liquidity sources include deposits, loan and securities cash flows, FHLB borrowing capacity and other funding. Unfunded lines and undisbursed construction commitments totaled $375.5 million, versus $135.8 million at year-end; management expected normal funding sources to meet them.
- Interest-rate modeling showed economic value of equity declining 10.66% under a 100-basis-point rate decrease and 26.56% under a 200-basis-point decrease at June 30. Both scenarios were outside the company’s asset-liability policy guidelines. Net-interest-income scenarios were within guidelines. Management cautioned that the models rely on assumptions and are not precise forecasts.
- Key risks include merger integration and realization of anticipated savings, credit and real-estate concentration, interest-rate exposure, deposit competition and funding availability, securities valuation and impairment, goodwill impairment, and the estimates underlying the loan-loss allowance. Management reported no material change to previously disclosed risk factors and no pending or threatened legal proceedings known to it.
Important facts investors should verify
- Confirm the relationship between the requested Primis Financial Corp. name and the SNBV registrant named in this 2017 filing.
- Track merger integration costs, system-conversion completion, and whether anticipated cost savings are realized.
- Assess sustainable earnings and margin trends apart from merger expenses, acquisition accounting accretion, and securities-sale gains.
- Review acquired-loan credit quality, allowance adequacy, real-estate exposures, and nonperforming assets, including the effect of acquired balances on ratios.
- Monitor liquidity and funding needs, the $375.5 million of unfunded commitments, subordinated debt costs, and exposure to falling rates.
- Follow final purchase-accounting valuations and the recoverability of $88.7 million of acquisition goodwill.