Primis Financial Corp. (filing registrant: Southern National Bancorp of Virginia, Inc.) — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; filed August 8, 2016. The supplied filing identifies Southern National Bancorp of Virginia, Inc. (SNBV), not Primis Financial Corp. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and reporting period
SNBV was the holding company for Sonabank, a community bank operating branches in Virginia and Maryland and serving individuals and small and medium-sized businesses. Results are unaudited interim results and are not necessarily indicative of full-year performance.
Financial results and position
- Revenue and earnings: Q2 net interest income was $10.2 million, up 12.7% from $9.0 million a year earlier; net income was $2.8 million, up from $2.5 million. Diluted EPS was $0.23 versus $0.20. For the first half, net interest income was $19.9 million versus $18.0 million, net income was $5.4 million versus $4.5 million, and diluted EPS was $0.43 versus $0.36.
- Interest margin: Net interest margin was 4.06% in Q2, unchanged year over year. First-half margin was 4.06%, down from 4.18% in 2015. Acquired-loan discount accretion contributed $0.5 million in Q2 and $1.0 million in the first half, both lower than the comparable 2015 periods.
- Other income and expenses: Q2 noninterest income was $1.0 million versus $1.8 million, largely reflecting the absence of a $0.5 million securities-sale gain recorded in Q2 2015 and lower mortgage-affiliate income. Q2 noninterest expense was essentially flat at $5.6 million. First-half noninterest expense rose to $11.6 million from $11.4 million; management reported an efficiency ratio of 54.05%, improved from 56.91%.
- Credit costs: Q2 provision for loan losses was $1.4 million versus $1.5 million; first-half provision was about $2.0 million, similar to 2015. First-half charge-offs were $2.1 million versus $1.6 million. Management attributed elevated Q2 charge-offs mainly to one borrower and said remaining exposure was supported by receivables and real estate collateral.
- Assets, loans, deposits, and equity: At June 30, total assets were $1.121 billion, up from $1.036 billion at year-end 2015. Net loans were $897.9 million versus $821.0 million; deposits were $902.8 million versus $825.3 million. Stockholders’ equity was $123.0 million versus $119.6 million.
- Funding and liquidity: Cash and cash equivalents were $41.7 million versus $30.3 million at year-end. Short-term FHLB advances were $77.5 million and long-term advances were $10.0 million; repurchase-agreement balances were nil, versus $10.4 million at year-end. The company discontinued offering repurchase accounts during Q2 and moved those customer balances into $10.7 million of cash management accounts. First-half operating cash flow was $5.4 million, investing cash flow was negative $72.8 million, and financing cash flow was positive $78.7 million.
- Capital: At June 30, SNBV’s common equity tier 1, tier 1 risk-based, total risk-based, and leverage ratios were 12.57%, 12.57%, 13.50%, and 10.52%, respectively. Sonabank was also reported well-capitalized, with ratios of 12.43%, 12.43%, 13.37%, and 10.41%.
Material changes versus comparable periods
- Growth in average loans and earning assets supported higher net interest income and earnings. Average Q2 loans increased to $888.1 million from $751.1 million; first-half average loans rose to $865.6 million from $732.4 million.
- Deposit costs increased: first-half interest expense on deposits rose to $3.8 million from $2.9 million, and the average cost of interest-bearing deposits increased to 0.99% from 0.84%. Time deposits increased $59.5 million from year-end.
- Non-covered nonperforming assets declined to $11.7 million from $14.3 million at year-end. Non-covered nonaccrual loans were $2.3 million, including $1.7 million of SBA-guaranteed amounts; non-covered OREO was $9.4 million. The reported nonperforming-asset ratio excluding SBA-guaranteed loans improved to 0.92% from 1.07%.
- Commercial real estate lending expanded: non-owner-occupied commercial real estate loans increased to $306.7 million from $256.5 million at year-end. Total loans remained heavily concentrated in real estate.
- First-half available-for-sale securities had a $0.5 million net unrealized loss; accumulated other comprehensive loss increased to $0.9 million from $0.6 million at year-end. Management reported no other-than-temporary impairment charges in the periods presented.
Outlook, risks, contingencies, and unusual items
- Guidance: The filing provides no specific earnings or financial guidance. Management said it expects normal funding sources to meet outstanding commitments and described ongoing monitoring of credit and liquidity.
- Credit and concentration risks: Management identified real-estate collateral values, commercial real estate and construction lending, borrower repayment capacity, and allowance estimates as material risks. The allowance was 0.96% of non-covered loans, down from 1.06% at year-end; management considered it adequate but said it would continue monitoring conditions.
- Investment and rate risks: The portfolio included pooled trust preferred securities, including securities with substantial unrealized losses and low current ratings. Management considered approximately $12.9 million of securities temporarily impaired, not other-than-temporarily impaired, citing interest-rate and market-liquidity factors and no intent or expected requirement to sell before recovery. Modelled economic value of equity fell 18.03% under an immediate 400-basis-point rate increase; the modelled net interest income increased 4.00% in that scenario. Management cautioned that models rely on assumptions and are not precise forecasts.
- Commitments and contingencies: Unfunded lines of credit and undisbursed construction-loan funds totaled $115.6 million; approved loan commitments were $7.3 million; letters of credit were $5.7 million. The single-family FDIC loss-share agreement from the Greater Atlantic acquisition runs through December 2019; the non-single-family agreement expired in December 2014.
- Other items: No loans were newly modified as troubled debt restructurings in Q2 or the first half. Management reported no pending or known threatened legal proceedings, no material changes to previously disclosed risk factors, effective disclosure controls, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the identity and corporate-history relationship between the filing’s registrant, Southern National Bancorp of Virginia, Inc., and the requested company, Primis Financial Corp.; the supplied filing is in SNBV’s name.
- Review subsequent credit performance of the large non-owner-occupied commercial real estate portfolio, the borrower behind the Q2 charge-offs, and the remaining collateral support.
- Assess deposit growth and pricing, reliance on FHLB advances, and the ability to fund commitments without pressuring margins or liquidity.
- Review the valuation, credit performance, and impairment assumptions for pooled trust preferred and other securities, along with the remaining FDIC loss-share coverage.
- Compare actual results with management’s interest-rate and liquidity models; the filing states model outputs depend on assumptions and are not forecasts.