Primis Financial Corp. (issuer named in filing: Southern National Bancorp of Virginia, Inc.) — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The filing is for Southern National Bancorp of Virginia, Inc. (SNBV), the predecessor name associated with Primis; figures below reflect the issuer as identified in the filing. Dollar amounts are in millions unless stated otherwise.
Business context
SNBV operated Sonabank, serving individuals and small and medium-sized businesses through 45 branches in Virginia and Maryland. The June 2017 Eastern Virginia Bankshares (EVBS) merger substantially increased the company’s scale, so year-over-year comparisons reflect a larger business for most of 2018.
Financial performance and position
- Q2 earnings: Net income was $8.9 million, or $0.37 per diluted share, versus a $2.8 million loss, or $0.21 loss per share, in Q2 2017. For the first half, net income was $17.1 million ($0.71 per diluted share), versus a $0.8 million loss in 2017.
- Net interest income and margin: Q2 net interest income was $23.2 million, compared with $11.2 million; net interest margin was 3.79%, up from 3.72%. First-half net interest income was $45.7 million versus $21.1 million, and margin was 3.80% versus 3.72%.
- Noninterest income and expense: Q2 noninterest income was $2.6 million versus $0.9 million; expense was $13.6 million versus $14.8 million. First-half noninterest income was $5.6 million versus $0.8 million, while expense was $27.2 million versus $20.9 million. The 2017 expense comparisons include $8.6 million of Q2 merger costs ($8.9 million for the first half); no merger expense was reported in 2018.
- Cash flow: For the first half, operating activities generated $20.1 million; investing activities used $90.4 million; financing activities provided $97.1 million. Cash and cash equivalents increased $26.7 million to $52.2 million.
- Balance sheet and funding: Assets were $2.73 billion, up from $2.61 billion at year-end 2017. Loans were $2.155 billion, up 4.49%, and deposits were $1.981 billion, up from $1.865 billion. Stockholders’ equity was $334.5 million, versus $322.8 million. Borrowings included $316.2 million of short-term FHLB advances, $20.3 million of repurchase agreements, $47.1 million of senior subordinated notes, and $9.6 million of junior subordinated debt.
- Credit quality: The allowance for loan losses was $11.0 million, or 0.52% of non-covered loans, versus $9.4 million, or 0.46%, at year-end. Non-covered nonperforming assets were $10.5 million, down from $24.5 million; the ratio excluding SBA-guaranteed loans was 0.25%, versus 0.77%. A $9.9 million nonaccrual loan was repaid in Q2, generating $732,000 of recognized interest.
- Capital: At June 30, Sonabank’s CET1 ratio was 13.07%, total risk-based capital ratio 13.60%, and leverage ratio 10.43%. The filing states the bank remained well capitalized.
Material changes and notable items
- Growth in average loans and deposits, and much of the increase in reported revenue and expenses, reflects the EVBS acquisition. SNBV also reported organic first-half loan growth of $92.6 million.
- Q2 earnings benefited from $1.2 million of acquired-loan discount accretion, the $732,000 interest recognition on the repaid nonaccrual loan, and $250,000 of other income from recoveries. First-half results included $2.5 million of acquired-loan accretion and $1.7 million of recoveries on legacy EVBS assets.
- The 2018 effective tax rate benefited from the Tax Cuts and Jobs Act; management cited a reduction from 34% to 21%.
- Available-for-sale securities had $4.5 million of gross unrealized losses at June 30, versus $1.8 million at year-end; held-to-maturity securities had $4.0 million of unrecognized losses, versus $1.7 million. Management attributed declines mainly to interest rates and market illiquidity, and said it did not intend, and was not expected to be required, to sell the securities before recovery. No other-than-temporary impairment charge was recorded.
- The company purchased $12.0 million of bank-owned life insurance during Q2. First-half common dividends were $0.16 per share.
Outlook, risks and contingencies
- Management said it would continue pursuing EVBS merger cost savings and revenue opportunities while growing the balance sheet prudently. It expected noninterest expense to remain level or perform slightly better during the remainder of 2018; no specific earnings or revenue guidance was provided.
- Liquidity sources include deposits, loan and investment cash flows, FHLB advances, correspondent-bank lines and repurchase agreements. Unfunded credit lines and undisbursed construction funds totaled $326.8 million; management expected normal funding sources to meet these commitments.
- Interest-rate modeling showed estimated net interest income down 4.14% under a 200-basis-point rate decline at June 30, while economic value of equity was down 21.36%. The filing notes that the modeled 200-basis-point-down EVE scenario was outside policy guidelines and cautions that model assumptions limit predictive precision.
- Key disclosed risks include real-estate and commercial-loan concentrations, borrower and collateral deterioration, deposit competition and funding costs, interest-rate changes, investment-security credit or valuation declines, acquisition integration and goodwill impairment, regulatory changes, and uncertainty in loan-loss estimates and deferred tax assets.
- Management reported no significant pending or threatened legal proceedings and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Confirm the issuer identity and corporate-name continuity: this filing is captioned Southern National Bancorp of Virginia, Inc., not Primis Financial Corp.
- Assess how much earnings depend on acquired-loan accretion, loan payoff interest, legacy-asset recoveries and the lower tax rate, and whether these items recur.
- Review loan growth, real-estate concentration, allowance adequacy, nonperforming assets and the effect of SBA guarantees on reported credit-quality measures.
- Monitor deposit mix and pricing, FHLB and other borrowing reliance, liquidity against $326.8 million of unfunded commitments, and capital ratios.
- Track unrealized securities losses and sensitivity to interest rates, as well as execution of management’s merger-synergy and expense outlook.