Business context and reporting period
This is Southern National Bancorp of Virginia, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2012, filed August 9, 2012. The filing describes Sonabank, a Virginia-chartered community bank operating in Virginia and Maryland. Although the request metadata names Primis Financial Corp., that name does not appear as the registrant in the supplied filing.
On April 27, 2012, Sonabank acquired substantially all deposits and certain assets of HarVest Bank of Maryland through an FDIC-assisted transaction, adding four branches. The filing reports 2011 comparable results as restated following errors in purchase accounting for the 2009 Greater Atlantic acquisition.
Financial performance and condition
Unless otherwise noted, amounts are in millions of dollars; income-statement comparisons are year over year, and balance-sheet comparisons are to December 31, 2011.
| Metric | Q2 / June 30, 2012 | Comparable / prior date |
|---|---|---|
| Net interest income | $7.83 Q2; $15.47 first half | $6.58 Q2; $13.12 first half |
| Net income | $2.22 Q2; $4.06 first half | $1.45 Q2; $2.74 first half |
| Basic and diluted EPS | $0.19 Q2; $0.35 first half | $0.12 Q2; $0.24 first half |
| Net interest margin | 5.07% Q2; 5.32% first half | 4.96% Q2; 5.01% first half |
| Total assets | $711.99 | $611.37 |
| Total loans, net of deferred fees | $546.65 | $491.77 |
| Total deposits | $544.00 | $461.10 |
| Cash and cash equivalents | $27.34 | $5.04 |
| Stockholders’ equity | $103.01 | $99.05 |
Q2 total interest and dividend income was $9.36 million and interest expense was $1.53 million. First-half provision for loan losses was $2.78 million, versus $3.59 million. Noninterest income was $1.67 million in Q2 and $2.54 million for the first half; noninterest expense was $4.96 million and $9.28 million, respectively.
Six-month cash flows were $3.96 million provided by operations, $79.47 million provided by investing activities, and $61.12 million used in financing activities; cash increased $22.31 million. Investing cash flow included $47.26 million of net cash received in the HarVest acquisition.
Deposits included $295.92 million of time deposits. Short-term borrowings and repurchase agreements were $31.03 million, and FHLB advances were $30.25 million. The bank reported $96.9 million of unfunded lines and undisbursed construction-loan funds and no approved loan commitments at quarter-end.
Regulatory capital ratios were well above stated well-capitalized thresholds: Sonabank’s Tier 1 risk-based ratio was 17.08%, total risk-based ratio 18.32%, and leverage ratio 13.57%. Management said the bank remained categorized as well capitalized.
Material changes, commentary, risks and unusual items
- HarVest added $140.5 million of deposits and $59.6 million of loans, and generated a $3.48 million bargain-purchase gain. The acquired loans were not covered by an FDIC loss-share agreement. Management said the branches were integrated and the transaction expanded the bank into an affluent Maryland market.
- Loan growth and reduced funding costs supported higher net interest income. Management reported average loans up $68.1 million in Q2 year over year and Q2 cost of funds down to 1.16% from 1.33%. The first-half NIM benefited from an $805,000 recovery of purchase-accounting discount on two Greater Atlantic loans; Q1 NIM was 5.59%, compared with 5.07% in Q2.
- The HarVest gain and a $657,000 first-quarter gain on SBA loan sales supported noninterest income, but were partly offset by $2.20 million of Q2 OREO losses/impairments and $235,000 of credit-related impairment on a trust preferred security. First-half OREO losses were $2.40 million.
- Noninterest expenses rose year over year, including $349,000 of merger expense and higher audit and consulting fees related to the prior-period restatement and FDIC recovery estimates. Management revised expected recoveries under the Greater Atlantic loss-share agreement; estimated recoveries were $5.5 million at June 30, 2012.
- Asset quality was mixed: non-covered nonperforming assets, excluding HarVest-acquired assets, declined to $17.69 million from $18.19 million at year-end, but nonaccrual loans increased to $5.62 million from $4.54 million. There were no loans 90 days past due and still accruing at June 30. The allowance for loan losses was $6.66 million; management considered it adequate. Two TDRs totaling $196,000 were modified during the first half.
- The filing identifies material estimation risks involving loan-loss allowances, securities impairment, goodwill, the FDIC indemnification asset, OREO and deferred tax assets. It also highlights real-estate and construction-loan concentrations, local economic conditions, funding availability and costs, interest-rate changes, and securities credit/valuation risk. No specific earnings or financial guidance is provided.
- The filing says disclosure controls were effective at quarter-end. It also describes a previously identified material weakness in controls over accounting for non-routine transactions; management reported ongoing remediation, use of a third-party consultant, and testing of controls during the quarter. Management believed the procedures were properly designed and operating effectively based on that testing.
- Management reported no other pending or threatened legal proceedings known to it and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the issuer and corporate history: the supplied filing is for Southern National Bancorp of Virginia, not Primis Financial Corp.
- Review the HarVest acquisition’s ongoing contribution, including integration costs, deposit retention and performance of loans acquired without FDIC loss-share protection.
- Assess credit quality in nonaccrual loans, real-estate and construction exposures, OREO valuations, and the adequacy of the allowance.
- Examine the $5.5 million estimated FDIC recovery, the related indemnification asset, and the effect of revised recovery assumptions and amortization on future earnings.
- Review the trust preferred securities’ substantial unrealized losses and Level 3 valuation assumptions, as well as the impact of further impairment.
- Track remediation of the material weakness and the consequences of the prior purchase-accounting restatement; the filing does not state that the material weakness was formally remediated.
- Evaluate liquidity and funding concentration, including time-deposit repricing/runoff, borrowings, and the $96.9 million in unfunded credit lines and construction funds.