Business context and reporting period
Southern National Bancorp of Virginia, Inc. (NASDAQ: SONA), the former name of the company identified in the request as Primis Financial Corp., filed this unaudited Form 10-Q for the quarter ended March 31, 2019. Its subsidiary Sonabank provided banking services to individuals and small and midsize businesses through 45 branches in Virginia and Maryland. Unless otherwise noted, amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net income; diluted EPS | $6.0 million; $0.25 | Q1 2018: $8.3 million; $0.34 |
| Net interest income | $21.0 million; net interest margin 3.41% | Q1 2018: $22.5 million; 3.82%. Q4 2018 margin: 3.66% |
| Interest income / interest expense | $30.3 million / $9.4 million | Q1 2018: $28.0 million / $5.5 million |
| Provision for loan losses | $0.2 million | Q1 2018: $1.6 million |
| Noninterest income / expense | $3.1 million / $16.3 million | Q1 2018: $3.1 million / $13.6 million |
| Total assets | $2.704 billion | December 31, 2018: $2.701 billion |
| Total loans; allowance for loan losses | $2.157 billion; $11.9 million | December 31, 2018: $2.179 billion; $12.3 million |
| Total deposits | $2.111 billion | December 31, 2018: $2.098 billion |
| Cash and cash equivalents | $31.8 million | December 31, 2018: $28.6 million |
| Stockholders’ equity | $352.7 million | December 31, 2018: $348.3 million |
| Short-term borrowings | $149.3 million: $135.6 million FHLB advances and $13.6 million repurchase agreements | December 31, 2018: $182.1 million |
For Q1 2019, operating activities provided $11.7 million of cash and investing activities provided $12.9 million; financing activities used $21.4 million. Cash and cash equivalents increased $3.2 million. The company paid $2.2 million in common dividends, or $0.09 per share.
At March 31, 2019, Southern National reported a 9.69% holding-company leverage ratio and a 15.07% total risk-based capital ratio. Sonabank reported an 11.17% leverage ratio, 13.88% common equity Tier 1 ratio, and 14.44% total risk-based capital ratio; it was categorized as well capitalized.
Material changes versus comparable periods
- Net income declined 27% year over year, and diluted EPS fell from $0.34 to $0.25.
- Net interest income fell $1.5 million despite higher interest income, as interest expense rose $3.8 million. Deposit interest expense more than doubled to $7.5 million; the average interest-bearing deposit rate increased to 1.66% from 0.87%.
- Average earning-asset yield improved to 4.94% from 4.75%, but the higher funding cost compressed net interest margin to 3.41% from 3.82%.
- Noninterest expense increased $2.7 million, primarily reflecting a $3.2 million nonrecurring other loss and $0.5 million of related legal expense. Salaries and benefits declined by $1.0 million, which management attributed to reduced staffing.
- Loans decreased $21.6 million from year-end. Management cited $50.0 million of unanticipated large loan payoffs, partly offset by $29.4 million of first-quarter loan growth. It also reported reclassifying $33.9 million of commercial loans into real-estate-secured loans after review of collateral and reporting codes.
- Deposits grew $13.5 million, while short-term borrowings declined $32.8 million. Available-for-sale securities increased to $156.2 million from $143.4 million, including $15.3 million of purchases.
Management commentary, risks and unusual items
- Management said loan demand remained strong and asset quality remained high. The allowance was 0.56% of non-covered loans; nonperforming assets excluding SBA-guaranteed loans were 0.26% of non-covered assets, compared with 0.28% at year-end.
- Reported non-covered nonperforming assets were $12.5 million, including $7.4 million of nonaccrual loans and $5.0 million of other real estate owned. The filing also states in its narrative that non-covered nonaccrual loans excluding SBA-guaranteed balances were $1.9 million; this does not clearly reconcile with the table, which shows $4.8 million of SBA guarantees included in nonaccrual loans.
- Management considered approximately $192 million of securities with fair values below carrying value temporarily impaired, attributing the declines to interest rates and market illiquidity rather than credit quality. No other-than-temporary impairment charges were recorded in the quarter.
- The bank had $338.2 million of unfunded credit lines and undisbursed construction loan funds and $19.2 million of outstanding letters of credit. Management expected normal funding sources to meet commitments. The filing notes historically core deposits have not fully funded lending activity and describes reliance on other funding sources, including FHLB facilities.
- Interest-rate modeling estimated that a 200-basis-point rate decrease would reduce economic value of equity by 19.74%; modeled net interest income was nearly unchanged under that shock. Management cautioned that these models rely on assumptions and are not precise forecasts.
- The company adopted lease accounting guidance in Q1, recognizing $8.3 million of right-of-use assets and $9.3 million of lease liabilities. It was evaluating the effect of the expected 2020 adoption of the current expected credit loss (CECL) standard.
- No formal earnings or financial guidance was provided. Management stated that interim results are not necessarily indicative of full-year results. It identified credit quality, real-estate and commercial-loan concentration, deposit competition and funding costs, liquidity, securities impairment, interest-rate exposure, and execution of growth or acquisitions among relevant risks.
- Management 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. It reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the historical registrant and corporate-name relationship: this 2019 filing is for Southern National Bancorp of Virginia, Inc. (SONA), not under the current Primis Financial Corp. name.
- Review the $3.2 million nonrecurring loss and related $0.5 million legal expense, including their nature, cash impact, and whether further costs or similar items are possible.
- Reconcile the nonaccrual-loan disclosures: the table reports $7.4 million, including $4.8 million of SBA-guaranteed balances, while the narrative gives $1.9 million excluding SBA guarantees.
- Assess whether deposit repricing and competition continue to pressure net interest margin, and whether loan growth can offset large payoffs and funding costs.
- Evaluate credit concentration and reserve adequacy, including real-estate exposure, criticized and classified loans, charge-offs, and the upcoming end of the single-family FDIC loss-share agreement in December 2019.
- Monitor securities with unrealized losses, especially pooled trust preferred holdings, and the assumptions supporting management’s no-impairment conclusion.
- Consider liquidity and interest-rate sensitivity alongside unfunded commitments, short-term borrowings, and the modeled decline in economic value of equity in falling-rate scenarios.