Primis Financial Corp. (filing registrant: Southern National Bancorp of Virginia, Inc.) — Q2 2015 Form 10-Q
Business and period. The filing covers the quarter and six months ended June 30, 2015. The company was a Virginia bank holding company operating Sonabank, with branches in Virginia and Maryland. It provided banking services to individuals and small and midsize businesses. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $9.0 | $7.9 | $18.0 | $15.4 |
| Provision for loan losses | $1.5 | $0.2 | $2.0 | $1.4 |
| Noninterest income | $1.8 | $0.7 | $2.2 | $1.3 |
| Noninterest expense | $5.6 | $5.6 | $11.4 | $10.2 |
| Net income | $2.5 | $1.8 | $4.5 | $3.4 |
| Diluted EPS | $0.20 | $0.15 | $0.36 | $0.29 |
- Q2 net interest margin was 4.06%, down from 4.71%; first-half margin was 4.18%, also down from 4.71%. Management attributed the decline to lower acquired-loan discount accretion spread across a larger loan portfolio, a larger residential mortgage portfolio, and higher deposit funding costs.
- First-half operating cash flow was $5.3 million, investing cash outflow was $57.8 million, and financing cash inflow was $88.7 million. Cash and cash equivalents ended June at $74.5 million, up from $38.3 million at year-end 2014.
- At June 30, total assets were $1.012 billion; total loans were $760.0 million, net loans $752.0 million, and deposits $817.0 million. Stockholders’ equity was $119.1 million.
- Borrowings comprised $45.0 million of repurchase agreements and other short-term borrowings and $25.0 million of FHLB advances. The filing reports cash and cash equivalents of $74.5 million; it does not provide a single stated liquidity ratio.
- Regulatory capital ratios remained above well-capitalized thresholds: the company reported common equity Tier 1 and Tier 1 risk-based ratios of 13.92%, total risk-based capital of 14.95%, and leverage of 11.38%. Sonabank was reported as well capitalized.
Material changes versus comparable periods
- Net income rose 39% in Q2 and 31% in the first half, supported by higher net interest income and noninterest income. Loan interest income and average loan balances increased substantially.
- Revenue comparisons include unusual items: Q2 and first-half 2015 noninterest income included a $520,000 gain from securities sales; mortgage-affiliate income was $793,000 in Q2. The affiliate was acquired in May 2014, so the prior-year Q2 included less than a full quarter of income.
- Loan-loss provision increased sharply in Q2 to $1.5 million from $194,000, following charge-offs and write-downs tied to a troubled commercial borrower. The company reported $1.3 million of Q2 net charge-offs and $1.6 million for the first half.
- Loans increased by $56.6 million and deposits by $74.6 million from December 31, 2014. Time deposits rose $74.5 million; net loans grew particularly in commercial real estate and residential lending.
- First-half noninterest expense rose $1.2 million, including higher compensation, FDIC assessment, and OREO losses; this was partly offset by no merger expenses in 2015. The efficiency ratio improved to 56.91% from 62.90%.
- Stockholders’ equity increased from $114.0 million to $119.1 million, reflecting retained earnings and improved accumulated other comprehensive loss, partly offset by $2.0 million in dividends and share repurchases. The company repurchased 31,011 shares for approximately $366,000.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance was provided. Management said it expected to fund $120.6 million of unfunded lines and construction commitments and $10.8 million of approved loan commitments through normal funding sources.
- Management said the allowance was adequate, while noting continued monitoring of credit conditions. Non-covered nonperforming assets excluding SBA-guaranteed loans were 1.40% of non-covered assets, versus 1.60% at year-end. OREO was $13.6 million; four properties with a combined book value of $2.8 million were under contract, but closings were uncertain.
- A commercial borrower was liquidated through a court-appointed receiver. The bank sold two factories, took back two parcels of land, liquidated inventory and receivables, and auctioned equipment; it wrote off unguaranteed loan balances and continued pursuing personal guarantees.
- The bank transferred previously impaired trust preferred securities and a non-government-sponsored CMO from held-to-maturity to available-for-sale and sold five trust preferred securities and the CMO, recording a $520,000 gain. It retained trust preferred holdings with material unrealized losses and downgraded ratings; management described these securities as subject to impairment and valuation risk.
- Key stated risks include real-estate and commercial-loan concentration, borrower repayment and collateral values, allowance estimates, deposit competition and funding costs, interest-rate changes, securities impairment, regulatory changes, and execution risks in growth or acquisitions. The filing’s interest-rate model showed estimated net interest income increasing 4.2% under a +400-basis-point shock and decreasing 0.03% under a −200-basis-point shock; management cautioned that model assumptions limit predictive value.
- There were no material changes to previously disclosed risk factors, no pending or threatened legal proceedings reported, and management concluded disclosure controls were effective with no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the entity and reporting context: the supplied filing is for Southern National Bancorp of Virginia, Inc., not a registrant named Primis Financial Corp.
- Review the drivers and sustainability of margin pressure, deposit pricing, loan growth, and the rise in time deposits and wholesale funding.
- Assess credit quality and allowance adequacy, including the commercial borrower resolution, charge-offs, OREO, and the status of the four properties under contract.
- Examine the valuation, credit ratings, and potential impairment exposure of trust preferred securities and the effects of the HTM-to-AFS transfers and related sale.
- Reconcile cash generation with loan growth and funding needs, and monitor capital ratios, commitments, repurchases, and dividends.