Business context and reporting period
Primis Financial Corp. is identified in the request metadata; the filing itself is for Southern National Bancorp of Virginia, Inc. and its banking subsidiary, Sonabank. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018. Sonabank operated 45 branches in Virginia and Maryland and served individuals and small and medium-sized businesses. Comparisons with 2017 are affected by the June 2017 acquisition of Eastern Virginia Bankshares (EVBS).
Key financial metrics
Amounts below are in U.S. dollars; balance-sheet and income-statement amounts are rounded to millions unless stated otherwise.
| Metric | Q3 2018 / September 30, 2018 | Comparable / change |
|---|---|---|
| Net income | $8.9 million; diluted EPS $0.36 | Q3 2017: $4.4 million; diluted EPS $0.18 |
| Net interest income | $22.6 million | Q3 2017: $23.9 million |
| Net interest margin | 3.63% | Q3 2017: 4.02% |
| Total assets | $2.70 billion | December 31, 2017: $2.61 billion |
| Total loans | $2.16 billion | December 31, 2017: $2.06 billion |
| Total deposits | $2.02 billion | December 31, 2017: $1.87 billion |
| Stockholders’ equity | $340.8 million | December 31, 2017: $322.8 million |
| Cash and cash equivalents | $34.5 million | December 31, 2017: $25.5 million |
- For the first nine months of 2018, net income was $26.0 million, diluted EPS was $1.07, net interest income was $68.3 million, and net interest margin was 3.75%. The comparable 2017 figures were $3.6 million, $0.21, $44.9 million, and 3.88%, respectively.
- Q3 interest expense increased to $7.5 million from $5.0 million a year earlier, as deposit and borrowing costs rose. Average interest-bearing deposit cost was 1.19%, versus 0.82%.
- Q3 provision for loan losses was $1.1 million, compared with $5.3 million; nine-month provision was $3.7 million, versus $6.9 million. Nine-month net charge-offs were $1.6 million, compared with $6.2 million.
- Nine-month cash flows: operating activities provided $31.8 million; investing activities used $86.4 million; financing activities provided $63.6 million. Cash increased $9.0 million.
- At quarter-end, short-term FHLB advances were $242.1 million, repurchase agreements were $19.4 million, and long-term junior and senior subordinated debt totaled $56.7 million. The filing reports $356.0 million of unfunded commitments.
- Sonabank’s regulatory capital ratios were 13.23% common equity Tier 1, 13.23% Tier 1 risk-based, 13.78% total risk-based, and 10.75% leverage; the bank was reported well-capitalized.
Material changes versus prior periods
- Q3 net income more than doubled year over year, but net interest income declined and margin compressed, reflecting higher funding costs and lower acquired-loan discount accretion.
- Nine-month growth in income and many expenses reflects the EVBS acquisition and is not directly comparable with 2017, which included EVBS only from June 23. The 2017 nine-month results also included $9.1 million of merger expenses, versus none in 2018.
- Loans grew 4.8% from year-end, which management attributed primarily to organic growth; deposits increased $159.2 million. Time deposits rose to $906.0 million from $699.1 million.
- Nonperforming assets excluding SBA-guaranteed loans declined to 0.27% of total non-covered assets from 0.77% at year-end. OREO fell to $5.6 million from $7.6 million. A $9.9 million nonaccrual loan was paid off; $732,000 of interest was recognized in Q3.
- Accumulated other comprehensive loss widened to $4.2 million from $1.2 million, chiefly reflecting unrealized securities losses. Management attributed securities fair-value declines to interest rates and market illiquidity, not credit quality, and reported no other-than-temporary impairment charges.
Outlook, risks, and unusual items
- 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 earnings or revenue guidance was provided.
- Q3 earnings included $1.1 million of acquired-loan discount accretion and $668,000 of recoveries on legacy EVBS loans and securities. Nine-month results also benefited from $2.4 million of those recoveries, $3.2 million of acquired-loan discount accretion, the $732,000 loan payoff interest, and a lower effective tax rate following the 2017 Tax Cuts and Jobs Act.
- Interest-rate sensitivity modeling showed estimated economic value of equity down 13.02% under a 100-basis-point rate decrease and 28.79% under a 200-basis-point decrease. The filing says these downside scenarios exceeded policy guidelines. Modeled net interest income increased modestly in the same falling-rate scenarios; management cautioned that these models depend on assumptions and are not precise forecasts.
- Key stated risks include real-estate and construction lending concentrations, credit quality and allowance estimates, deposit competition and funding costs, investment-security impairment, interest-rate movements, acquisition integration and goodwill, regulatory changes, and liquidity. The company had $357.3 million in unfunded lines and undisbursed construction funds at quarter-end.
- The filing reported no significant pending or threatened legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls.
- Accounting matters: the company adopted revenue-recognition guidance in 2018 without a material change to recognition practices; it expected to adopt lease accounting on January 1, 2019 and was assessing the impact. It was also assessing the expected-credit-loss standard, effective for it in 2020.
Important facts for investors to verify
- Confirm the issuer and corporate-name mapping: the supplied metadata names Primis Financial Corp., while the filing’s registrant is Southern National Bancorp of Virginia, Inc.
- Review the effect of rising deposit and borrowing costs on margin, and whether management’s expense outlook and merger-synergy expectations were achieved.
- Assess sustainability of earnings excluding acquired-loan accretion, legacy recoveries, the loan payoff interest, and the lower tax rate.
- Track credit quality, real-estate exposure, allowance adequacy, and the status of the $356 million of commitments and other off-balance-sheet exposures.
- Evaluate securities unrealized losses and the modeled decline in economic value of equity in falling-rate scenarios.
- Resolve the filing’s inconsistent merger date references: the notes state June 23, 2017, while the MD&A overview says September 23, 2017.