Business context and reporting period
Southern National Bancorp of Virginia, Inc., the bank holding company for Sonabank, filed this Form 10-K for the fiscal year ended December 31, 2020. The company announced that it would change its name to Primis Financial Corp. and the bank to Primis Bank, effective March 31, 2021; the ticker was expected to change from SONA to FRST.
The company operated 42 branches in Virginia and Maryland and served individuals and small and midsize businesses. Lending was concentrated in real estate and commercial credit. It also held a 48.9% common-equity interest in mortgage affiliate Southern Trust Mortgage (STM).
Financial performance and condition
| Metric | FY / year-end 2020 | Comparable 2019 |
|---|---|---|
| Total assets | $3.09 billion | $2.72 billion |
| Total loans | $2.44 billion | $2.19 billion |
| Total deposits | $2.43 billion | $2.12 billion |
| Stockholders’ equity | $390.6 million | $377.2 million |
| Net interest income | $91.6 million | $83.6 million |
| Net income | $23.3 million | $33.2 million |
| Diluted EPS | $0.96 | $1.36 |
| Net interest margin | 3.35% | 3.39% |
| Return on average assets / equity | 0.78% / 6.04% | 1.22% / 9.13% |
- Net income fell 29.8%. Net interest income rose as average earning assets increased and funding costs declined, but provision expense, higher operating costs and lower asset yields weighed on results.
- Interest income was $117.8 million versus $120.5 million; interest expense declined to $26.1 million from $36.9 million. Average earning-asset yield fell to 4.31% from 4.88%; cost of funds declined to 1.01% from 1.58%.
- Provision for credit losses was $19.45 million, versus $350,000 in 2019. Net charge-offs were $1.66 million, or 0.07% of average loans.
- Noninterest income more than doubled to $25.5 million, including $10.8 million of STM equity earnings and $6.5 million in recoveries related to acquired charged-off loans and securities. STM earnings represented about 36% of pretax income.
- Noninterest expense increased 19.7% to $67.7 million. Salaries and benefits rose to $36.7 million, including $5.6 million of pretax executive-management restructuring costs and costs associated with added staff and Panacea Financial.
- Operating cash flow was $29.7 million; investing activities used $204.3 million and financing activities provided $338.9 million. Cash and cash equivalents ended the year at $196.2 million, up from $31.9 million.
- Deposits grew 14.5%. Noninterest-bearing demand deposits increased to $440.7 million from $339.2 million, while time deposits declined to $490.0 million from $783.0 million. Demand deposits, NOW and money-market balances together reached 72.3% of deposits, versus 56.3% a year earlier.
- Year-end borrowings included $100.0 million of FHLB advances, $16.1 million in repurchase agreements, $9.7 million of junior subordinated debt and $105.6 million of senior subordinated notes. The company reported $689.1 million of additional available FHLB borrowing capacity.
- Sonabank’s year-end regulatory capital ratios were 15.83% CET1, 15.83% Tier 1, 17.09% total risk-based capital and 11.25% leverage; each exceeded applicable well-capitalized standards.
Material changes versus the prior comparable period
- Loan balances increased 11.6%, primarily because of $319.4 million in Paycheck Protection Program (PPP) loans. Excluding PPP, loans declined $65.0 million, or 3.0%.
- The allowance for credit losses increased to $36.3 million. The company adopted CECL in 2020; adoption reduced retained earnings by $5.1 million after tax and increased the allowance by $8.3 million at adoption. The filing reports the year-end allowance ratio as 1.49% in selected data and 1.52% in a separate asset-quality table.
- Nonperforming assets increased to $17.5 million from $15.1 million; nonaccrual loans increased to $14.5 million from $8.9 million. OREO declined to $3.1 million from $6.2 million.
- STM’s equity earnings rose from $1.2 million to $10.8 million, reflecting higher mortgage refinance activity, margins and production. The company purchased $80.6 million of loans from STM during 2020, down from $152.2 million in 2019.
- In August 2020, the company issued $60.0 million of 5.40% fixed-to-floating subordinated notes due 2030. It redeemed $20.0 million of 6.50% subordinated notes due 2025 on February 1, 2021.
- The company sold all pooled trust preferred investment securities in 2020 and recorded $620,000 in realized securities-sale losses.
Outlook, commentary, risks and unusual items
- COVID-19 remained a key uncertainty. At year-end, 44 loans totaling $122.0 million were in COVID-related deferment; about 59% of deferred balances were hotel loans, and 27.1% of the hotel portfolio was deferred. Management anticipated minimal additional deferrals in 2021, but noted asset quality could worsen if disruption persisted.
- The company had originated 4,269 PPP loans totaling $319.4 million. PPP loans earn 1% and are SBA-guaranteed; management expected most to be forgiven and reported that forgiveness began in the fourth quarter of 2020.
- Management said it believed capital was adequate for an extended recession and expected the company and bank to continue exceeding well-capitalized requirements in 2021. It provided no specific earnings or financial-ratio guidance.
- Funding markets remained open, but management cautioned that volatile or higher wholesale funding costs and deposit withdrawals could pressure liquidity and net interest margin. The company relies in part on wholesale funding and intermediary deposits.
- Credit exposure is concentrated in real estate: real-estate loans were about 78% of total loans, and commercial real estate represented 47.2%. COVID-related stress, local economic conditions, collateral values and concentration in hotels are important risks.
- Interest-rate modeling showed estimated economic value of equity down 15.26% under a 100-basis-point rate decline at year-end 2020; this scenario was outside the company’s policy guidelines. Modeled net interest income sensitivities were within policy guidelines. Management cautioned that these models depend on assumptions and are not precise forecasts.
- Other risks include cyber and third-party-vendor disruptions, competition for deposits and loans, regulatory requirements, and execution of new initiatives. Panacea Financial, a national-focused division serving the medical community, launched in November 2020.
- The company recorded no goodwill impairment despite performing an additional assessment after a COVID-related triggering event. Goodwill was $101.9 million. The auditor issued unqualified opinions on the financial statements and internal controls; STM’s audit was performed by another auditor.
Important facts for investors to verify
- Whether COVID-related loan deferrals, especially hotel exposures, resume scheduled payments and how nonaccrual loans and criticized credits develop.
- The drivers and repeatability of the unusually strong STM earnings and acquired-loan and securities recoveries, and STM’s contribution to consolidated pretax income.
- How the CECL allowance estimate evolves, including the difference between the filing’s stated year-end allowance ratios of 1.49% and 1.52%.
- Whether deposit growth is sustainable and how reliance on wholesale funding, FHLB advances and the new subordinated debt affects funding costs, margins and debt service.
- Progress on PPP forgiveness, the effect of PPP runoff on reported loan growth, and whether non-PPP lending returns to growth.
- Execution costs and results of the Primis rebranding, Panacea Financial launch and announced South Riding branch closure.