Business context and reporting period
Southern National Bancorp of Virginia, Inc. (Sonabank; Nasdaq: SONA), the company later known as Primis Financial Corp., filed this unaudited Form 10-Q for the quarter ended March 31, 2020. Sonabank operated 45 branches in Virginia and Maryland and served individuals and small and medium-sized businesses. Dollar amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Q1 2020 | Q1 2019 or prior date |
|---|---|---|
| Interest and dividend income | $28.5 | $30.3 |
| Net interest income | $20.5 | $21.0 |
| Net interest margin | 3.32% | 3.41% |
| Provision for loan losses | $3.45 | $0.20 |
| Noninterest income | $2.82 | $3.06 |
| Noninterest expense | $19.85 | $16.29 |
| Net income | $0.027; EPS $0.00 | $6.02; EPS $0.25 |
| Net cash from operating activities | $10.3 | $11.7 |
Total assets were $2.76 billion at March 31, up from $2.72 billion at December 31, 2019. Total loans were $2.21 billion, versus $2.19 billion; deposits were $2.08 billion, versus $2.12 billion; and stockholders’ equity was $378.8 million, versus $377.2 million. The allowance for loan losses rose to $12.7 million from $10.3 million, or 0.58% of loans from 0.47%.
Cash and cash equivalents increased to $55.9 million from $31.9 million. First-quarter investing cash use was $18.6 million, including net loan growth and securities purchases; financing provided $32.2 million, including an $83.8 million net increase in short-term borrowings, partly offset by a $49.4 million deposit decline. FHLB advances were $205.1 million at quarter-end, up from $121.6 million. Senior subordinated notes were $47.0 million and junior subordinated debt was $9.6 million. Sonabank’s March 31 regulatory capital ratios included 14.44% common equity Tier 1 and 15.04% total risk-based capital, above stated well-capitalized thresholds.
Material changes versus the prior comparable period
- Net income fell by about $6.0 million year over year. Management attributed the decline in part to $5.6 million of pretax executive-management restructuring expense and a $3.45 million loan-loss provision, including a $3.1 million increase from COVID-19-related qualitative-factor adjustments. The filing also cites a $378,000 after-tax occupancy charge related to the planned closure of three underperforming branches.
- Net interest income decreased $0.4 million and margin declined 9 basis points. Lower interest expense partly offset reduced interest income and asset yields.
- Noninterest expense increased $3.6 million, principally reflecting restructuring-related compensation and higher professional fees. Q1 2019 expense included a nonrecurring loss and related legal costs that did not recur, making the year-over-year comparison less direct.
- Net charge-offs were $1.0 million, compared with $0.6 million a year earlier. Nonperforming assets were $14.8 million, versus $15.1 million at December 31, 2019; nonaccrual loans were $8.9 million at March 31.
Outlook, risks and unusual items
- Management said the duration and severity of COVID-19 effects were highly uncertain and did not provide numerical earnings guidance. It warned of potential pressure on borrower repayment, fee and interest income, asset quality, collateral values, capital and liquidity, and funding costs. The company waived certain customer fees and offered borrower payment accommodations.
- As of April 30, 2020, loans modified or with modification requests totaled $548.1 million; the filing also reports $547.1 million of loans subject to deferrals in a loan-aging note. Management anticipated further accommodation requests. Verify the definitions and reconciliations of these figures.
- By April 30, the company had secured SBA funding for 250 Paycheck Protection Program loans totaling $52.5 million; a further 1,726 loans totaling $202.7 million had been approved pending funding. PPP loans carried a 1% rate and two-year term; management expected most to be forgiven and stated they were understood to be fully government-guaranteed.
- The company deferred CECL adoption under the CARES Act until the earlier of the end of the national emergency or December 31, 2020. It estimated initial adoption would increase the allowance by approximately $11.3 million; actual timing and impact remained subject to the applicable relief provisions.
- Management identified a COVID-19 goodwill impairment triggering event but concluded a qualitative assessment did not indicate impairment. No impairment charge was recorded; further deterioration could prompt additional testing.
- Hotel loans totaled $279.7 million. The filing reported historical year-end 2019 hotel-portfolio debt coverage of approximately 147% and weighted-average loan-to-value of approximately 68%; COVID-19 posed heightened hospitality-sector credit risk.
- Certificates of deposit totaling $540.8 million were scheduled to mature during 2020, and unfunded lines and undisbursed construction loans totaled $341.0 million. Management said it expected to meet funding needs through normal sources but noted potential reliance on more costly or volatile funding if deposits were withdrawn.
- Management reported no material operational or internal-control challenges identified to date and concluded disclosure controls were effective. It reported no pending or threatened legal proceedings considered a significant risk.
Important facts for investors to verify
- How COVID-19 affected subsequent delinquencies, criticized loans, deferrals, charge-offs and the allowance, particularly in hospitality and commercial real estate.
- The final volume, funding, repayment performance and guarantee treatment of PPP loans, and the reconciliation of the two reported loan-accommodation totals.
- The timing and actual capital and earnings effects of CECL adoption, including whether the estimated $11.3 million allowance increase changes.
- Deposit retention and refinancing of 2020 certificate maturities, use and cost of FHLB or other borrowings, and liquidity available for commitments.
- The recurring earnings impact after management restructuring, planned branch closures, elevated professional fees and the unusually low Q1 profit.