Filing summary
Entity and period: The supplied filing is Southern National Bancorp of Virginia, Inc.’s Form 10-K for the fiscal year ended December 31, 2017, not a filing under the name Primis Financial Corp. The company’s bank subsidiary was Sonabank. The year included the June 23, 2017 acquisition of Eastern Virginia Bankshares, Inc. (EVBS), so year-over-year comparisons reflect a substantially larger combined company for only part of 2017.
Financial performance and condition
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets at year-end | $2.61 billion | $1.14 billion |
| Loans, net of deferred fees, at year-end | $2.06 billion | $930.4 million |
| Deposits at year-end | $1.87 billion | $913.0 million |
| Stockholders’ equity at year-end | $322.8 million | $126.3 million |
| Net interest income | $67.9 million | $40.3 million |
| Net interest margin | 3.87% | 3.99% |
| Provision for loan losses | $8.6 million | $4.9 million |
| Noninterest income | $5.4 million | $2.8 million |
| Noninterest expense | $49.1 million | $22.8 million |
| Net income | $2.4 million | $10.3 million |
| Diluted earnings per share | $0.13 | $0.83 |
| Cash from operating activities | $24.6 million | $18.0 million |
- Net income fell about 76% despite higher net interest income, primarily reflecting a $7.2 million provisional tax charge from remeasuring deferred tax assets after the federal corporate tax rate reduction, higher credit costs, and $9.4 million of EVBS merger expenses.
- Net interest income rose mainly with the acquired loan base. Net interest margin declined 12 basis points; the yield on earning assets fell 8 basis points while the cost of interest-bearing liabilities increased.
- Operating cash flow was $24.6 million; investing activities used $62.0 million and financing activities provided $15.5 million. Cash and cash equivalents ended at $25.5 million, down from $47.4 million.
- Year-end short-term FHLB advances were $335.6 million and repurchase agreements were $15.5 million. The company also reported $9.5 million of junior subordinated debt and $47.1 million of senior subordinated notes. It reported $314.2 million of unused FHLB borrowing capacity.
- At Sonabank, regulatory capital ratios were 12.79% CET1, 12.79% Tier 1 risk-based, 13.26% total risk-based, and 10.26% leverage; the filing states the bank exceeded well-capitalized thresholds.
Material changes and notable items
- EVBS added approximately $1.37 billion of assets and $1.15 billion of deposits. The acquisition was funded with about $198.9 million of SNBV common stock consideration; 11.6 million shares were issued. Reported goodwill increased by $90.1 million to $100.6 million.
- Loan growth was primarily acquisition-driven. Real-estate-secured loans represented 85.8% of the loan portfolio at year-end, including $198.0 million of construction and land-development loans.
- Credit costs and charge-offs increased: net charge-offs were $7.8 million versus $4.7 million in 2016. Management attributed most of the increase to $7.1 million in charge-offs tied to one long-time government-contractor borrower experiencing cash-flow problems.
- Non-covered nonperforming assets were $24.5 million, or 1.20% of non-covered loans and OREO, compared with $12.4 million, or 1.36%, in 2016. Nonaccrual loans were $16.9 million; this included a $10.0 million construction-related loan. OREO was $7.6 million.
- Brokered deposits totaled approximately $126.8 million, including $109.8 million of brokered CDs and $17.0 million of brokered money-market deposits. CDs totaling $402.1 million were scheduled to mature in 2018.
- July 2017 phishing-related fraudulent wire transactions caused an approximately $172,000 loss and exposed personal information of some customers. The company reported implementing control enhancements and described the incident as isolated.
Outlook, risks and contingencies
- Management expected earnings to benefit beginning in 2018 from the 21% federal corporate tax rate and anticipated salary and benefits expense to normalize after merger-related staffing reductions. It expected only nominal EVBS merger expenses going forward. These are management expectations, not quantified earnings guidance.
- Management cited ongoing risks from integration of EVBS, real-estate and construction lending concentrations, borrower credit quality, funding needs and reliance on wholesale and intermediary deposits, interest-rate sensitivity, securities valuation, regulatory change, and cyber and third-party service-provider exposures.
- The company expected adoption of the CECL credit-loss standard, effective for it in fiscal 2020, could materially increase the allowance; the size of the impact was not yet determined. The FDIC loss-sharing agreement covering certain acquired single-family loans expires in December 2019; the related indemnification asset had a $1.4 million carrying value but an estimated fair value of $309,000.
- There were $361.7 million of unfunded lines and undisbursed construction-loan funds, plus $15.2 million of letters of credit. Management said it expected normal funding sources to meet commitments. No material pending or threatened legal proceedings were reported.
- The financial-statement and internal-control auditors issued unqualified opinions. However, EVBS was excluded from management’s and the auditor’s internal-control assessment; EVBS represented 46.6% of year-end assets and 41.7% of 2017 consolidated revenue.
Important facts for investors to verify
- Confirm the issuer identity and ticker: this source is Southern National Bancorp of Virginia, Inc. (Nasdaq: SONA), not a filing labeled Primis Financial Corp.
- Separate acquisition-driven balance-sheet and revenue growth from organic growth, and assess the final EVBS purchase-accounting adjustments, integration costs, and expected savings.
- Review the borrower behind the $7.1 million charge-off, the $10.0 million nonaccrual construction loan, and subsequent credit quality, charge-offs, and allowance adequacy.
- Assess funding and liquidity exposure, including brokered deposits, 2018 CD maturities, short-term FHLB advances, and unfunded commitments.
- Check the effect of the tax-rate remeasurement and confirm whether the expected post-2017 tax benefit and expense normalization materialized.
- Monitor integration of EVBS internal controls, remediation of the phishing incident, and the eventual CECL impact.