Business context and reporting period
Southern National Bancorp of Virginia, Inc. (SNBV; Nasdaq: SONA), parent of Sonabank, filed this unaudited Form 10-Q for the quarter ended June 30, 2020. The company operated 42 full-service branches in Virginia and Maryland. Although the request identifies Primis Financial Corp., the filing cover names Southern National Bancorp of Virginia; the filing itself does not explain that naming difference.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $22.5 million | $21.0 million | $43.0 million | $41.9 million |
| Provision for loan losses | $10.9 million | $0 | $14.3 million | $0.2 million |
| Noninterest income | $8.4 million | $3.2 million | $11.2 million | $6.3 million |
| Noninterest expense | $14.1 million | $13.9 million | $33.9 million | $30.2 million |
| Net income | $4.7 million | $9.3 million | $4.7 million | $15.3 million |
| Diluted EPS | $0.19 | $0.38 | $0.19 | $0.63 |
| Net interest margin | 3.33% | 3.40% | 3.32% | 3.41% |
Q2 net income fell 49.5%; first-half net income fell 69.1%. Management attributed the decline principally to pandemic-related credit provisioning and, for the first half, a $5.6 million pretax executive-management restructuring charge ($4.4 million after tax). Mortgage-affiliate earnings and recoveries on acquired loans and securities partly offset those effects. Mortgage-affiliate equity income was $4.2 million in Q2, up from $0.6 million, reflecting refinancing volume and higher margins; reported recoveries included an approximately $2.0 million recovery on a previously charged-off acquired loan.
Q2 net interest margin would have been 3.50% excluding the effect of PPP loans, versus 3.40% a year earlier, according to management. The company reported that fee income had declined as it waived certain customer fees, and warned that COVID-related payment deferrals could later require reversal of accrued interest and fees.
Financial position, cash flow, and credit
- At June 30, 2020, assets were $3.07 billion, up from $2.72 billion at year-end 2019. Total loans were $2.51 billion, including $335.6 million of PPP loans. Excluding PPP, loans were down $10.2 million, or 0.46%, from year-end.
- Deposits were $2.15 billion versus $2.12 billion at year-end. Cash and cash equivalents were $82.6 million, compared with $31.9 million. First-half operating cash flow was $11.8 million; investing activities used $299.0 million, principally reflecting loan growth, while financing activities provided $337.9 million, including $333.6 million of PPPLF borrowings.
- The allowance for loan losses was $23.6 million, up from $10.3 million at year-end; allowance-to-loans was 0.94% versus 0.47%. The company recorded $14.3 million of first-half provision, including $10.9 million in Q2, following COVID-related qualitative-factor adjustments.
- Nonperforming assets totaled $20.9 million, including $14.9 million of nonaccrual loans and $6.0 million of other real estate owned. Nonaccrual loans included $3.5 million covered by SBA guarantees. The filing reports nonperforming assets excluding SBA-guaranteed loans at 0.47% of total assets.
- Loans were concentrated in real estate. Hotel loans totaled $288.4 million, or 11.5% of loans; approximately 76% had a COVID-related deferral as of June 30. Total loans subject to deferrals were $708.8 million at June 30 and $713.0 million, including modification requests, as of July 31.
- Sonabank’s June 30 regulatory ratios were 14.81% common equity tier 1, 14.81% Tier 1 risk-based capital, 15.91% total risk-based capital, and 11.62% leverage, all above the filing’s well-capitalized thresholds.
- Borrowings included $333.6 million under the PPPLF, $100.0 million of FHLB advances, $16.4 million of repurchase agreements, and $56.7 million of subordinated debt. The PPPLF was available through September 30, 2020. Management said it had multiple liquidity sources, while noting that prolonged funding-cost increases or deposit withdrawals could pressure liquidity and net interest margin.
Material changes, outlook, and risks
- PPP originations drove most reported loan growth: 4,203 loans totaling $346.0 million had been originated by July 31. PPP loans bear 1% interest and are SBA-guaranteed; the company expected most to be forgiven. Management anticipated minimal additional borrower deferrals in Q3, but provided no earnings or full-year financial guidance.
- Management said asset quality could worsen if the pandemic’s effects persist. COVID-19 risks include borrower distress, particularly in hospitality, declining collateral values, reduced fee and interest income, and potentially higher credit losses. The duration and financial impact were described as uncertain.
- The company deferred CECL adoption under the CARES Act until the earlier of the end of the national emergency or December 31, 2020. It estimated initial adoption could increase the allowance by approximately $9.3 million.
- Management’s interim qualitative goodwill assessments found no impairment necessary. A future deterioration in performance or share price could prompt further testing and a noncash impairment charge.
- Interest-rate simulations showed a 9.58% decline in economic value of equity under a 100-basis-point rate decrease as of June 30; this scenario was outside company policy limits. Modeled net interest income was nearly unchanged in that scenario. The filing cautions that these simulations depend on assumptions and are not precise forecasts.
- 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 that no significant proceedings were pending or known to be threatened.
Important facts for investors to verify
- Confirm the issuer’s identity and relationship to Primis Financial Corp.; this filing’s cover identifies SNBV and ticker SONA.
- Track subsequent credit performance, allowance levels, nonaccrual loans, hotel exposure, and the outcomes of the approximately $713 million in modified or modification-request loans reported at July 31.
- Verify PPP loan forgiveness, SBA guarantee coverage, associated funding repayment, and any related litigation or regulatory developments.
- Assess whether mortgage-affiliate gains and acquired-loan recoveries are repeatable, and separate these from recurring operating performance and the restructuring charge.
- Monitor deposit trends, PPPLF availability and repayment, other borrowing costs, and the effect of interest rates on margin and economic value of equity.
- Check the eventual CECL adoption impact and any subsequent goodwill or other asset impairment assessments.