Primis Financial Corp. quarterly report, Q1 FY2017

Business context and reporting period

Southern National Bancorp of Virginia, Inc., parent of Sonabank, filed this unaudited Form 10-Q for the quarter ended March 31, 2017. The company provides banking services to individuals and small and medium-sized businesses in Virginia and Maryland. The supplied filing names Southern National Bancorp of Virginia, Inc.—not Primis Financial Corp.—as the registrant.

Financial performance and position

Amounts below are in millions of dollars unless otherwise noted.

• Net interest income increased modestly year over year as average loans rose to $957.5 million from $843.2 million. The reported net interest margin fell 31 basis points; management attributed 12 basis points of the Q1 2017 margin to interest expense on newly issued subordinated notes.
• Investing cash use was $48.411 million, largely reflecting net loan growth; financing provided $29.925 million. Cash declined by $11.973 million during the quarter.
• At quarter-end, short-term FHLB advances were $116.0 million and subordinated notes were $26.075 million net of issuance costs. The company completed a $27 million notes offering in January.
• Sonabank’s regulatory capital ratios exceeded the filing’s stated “well-capitalized” thresholds. Its total risk-based capital ratio was 15.58%, common equity tier 1 ratio 14.66%, and leverage ratio 12.22%.

Material changes versus comparable periods

• Net income declined $0.511 million year over year, while diluted EPS declined from $0.21 to $0.16.
• Mortgage affiliate STM contributed a $0.479 million equity loss, versus $0.080 million of income in Q1 2016. This drove the change in noninterest income.
• Noninterest expense was nearly flat, including $0.323 million of EVBS merger expenses. Lower salaries and benefits, partly associated with a reduction in full-time equivalent employees from 182 to 162, offset some costs.
• Net loans increased $43.8 million from year-end, while deposits fell $16.8 million. Time deposits decreased $28.6 million; demand deposits and NOW accounts increased $13.4 million.
• Non-covered nonperforming assets declined to $11.928 million from $12.412 million. Management reported improved overall portfolio risk characteristics; charge-offs nevertheless increased to $0.512 million from $0.367 million in Q1 2016.

Outlook, risks, contingencies and unusual items

• EVBS merger: Management said the merger was proceeding as expected, with regulatory approvals received and shareholder approval still required. It anticipated a late-Q2 or early-Q3 2017 closing and September system conversion. These are forward-looking expectations, not assurances.
• STM: Management attributed the affiliate’s quarterly loss to investments in a delivery system, new branches, and loan-officer onboarding, and expected STM to return to profitability in Q2 2017.
• Credit and real estate: The loan portfolio is concentrated in real estate lending. Management said the allowance was adequate but continued monitoring economic and other factors affecting borrowers, collateral, and future losses. Non-covered nonaccrual loans were $3.663 million, including $2.060 million of SBA-guaranteed amounts; reported nonperforming-asset ratios exclude SBA-guaranteed loans.
• Interest-rate risk: The company reported that its economic-value-of-equity results for 100- and 200-basis-point rate declines were outside its asset-liability policy guidelines at March 31, 2017. Its model estimated a 17.71% EVE decline under a 200-basis-point decrease. Management cautioned that modeling assumptions limit predictive precision.
• Securities: The filing reported $64.7 million of temporarily impaired securities and $2.331 million of gross unrecognized losses on held-to-maturity securities. Management attributed declines to interest rates and market illiquidity, not credit quality, and reported no OTTI charges in Q1 2017.
• Funding commitments: Unfunded lines and undisbursed construction funds totaled $127.4 million; approved loan commitments were $13.3 million. Management expected to meet funding needs through normal funding sources. The company noted that core deposits historically had not fully funded lending activity.
• The filing reports no pending or threatened legal proceedings known to management and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
• No specific full-year earnings or financial guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results.

Important facts for investors to verify

1. Confirm the issuer identity and corporate lineage: the supplied filing is for Southern National Bancorp of Virginia, Inc., not a registrant named Primis Financial Corp.
2. Track EVBS shareholder approval, closing timing, integration costs, and realization of expected merger benefits.
3. Assess whether STM’s expected return to profitability occurred and whether its losses or funding needs persist.
4. Monitor deposit mix and funding costs, reliance on FHLB advances, and the effect of the subordinated notes’ floating-rate period beginning in 2022.
5. Review loan growth and real-estate concentrations alongside charge-offs, nonaccruals, allowance adequacy, and collateral values.
6. Evaluate securities credit exposure and the effect of interest-rate movements on fair values, economic value of equity, and net interest margin.