Business context and reporting period
The filing is Southern National Bancorp of Virginia, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The request metadata names Primis Financial Corp.; the filing itself identifies Southern National Bancorp of Virginia, Inc. (SNBV) as the registrant. SNBV completed its acquisition of Eastern Virginia Bankshares, Inc. (EVBS) and its bank subsidiary on June 23, 2017. Accordingly, year-over-year comparisons are affected by the acquired business being included only after closing.
SNBV operates Sonabank, providing banking services to individuals and small and medium-sized businesses in Virginia and Maryland. At quarter-end it reported 37 Virginia and seven Maryland branches. The EVBS core data-system conversion was completed in September 2017.
Financial performance and condition
Unless otherwise noted, dollar amounts are in millions. The filing’s financial statements are in thousands.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $23.9 | $10.4 | $44.9 | $30.3 |
| Provision for loan losses | $5.3 | $2.1 | $6.9 | $4.1 |
| Noninterest income | $2.3 | $1.2 | $3.1 | $2.7 |
| Noninterest expense | $14.4 | $5.4 | $35.3 | $17.0 |
| Net income | $4.4 | $2.8 | $3.6 | $8.1 |
| Diluted earnings per share | $0.18 | $0.22 | $0.21 | $0.65 |
- Margins: Q3 net interest margin was 4.02%, versus 4.04% a year earlier; for the first nine months it was 3.88%, versus 4.05%. Q3 average earning-asset yield was 4.86% and cost of funds was 0.88%.
- Balance sheet at September 30: Assets were $2.597 billion, net loans $2.026 billion, deposits $1.904 billion, and stockholders’ equity $326.0 million. At December 31, 2016, assets were $1.142 billion, net loans $921.8 million, deposits $913.0 million, and equity $126.3 million.
- Cash flow, nine months: Operating activities provided $12.4 million; investing activities used $30.0 million; financing activities used $6.5 million. Cash and cash equivalents decreased $24.1 million to $23.3 million.
- Funding and debt: Quarter-end liabilities included $272.1 million of short-term FHLB advances, $16.4 million of repurchase agreements, $9.5 million of junior subordinated debt, and $47.1 million of senior subordinated notes. SNBV issued $27 million of subordinated notes in January 2017; the filing also reports debt assumed in the EVBS merger.
- Capital: Sonabank’s common equity Tier 1, Tier 1 risk-based, total risk-based, and leverage ratios were 12.76%, 12.76%, 13.22%, and 10.37%, respectively. The filing states the bank was categorized as well capitalized.
Material changes versus comparable periods
- The EVBS acquisition drove much of the year-over-year increase in assets, loans, deposits, securities, income, and operating expenses. SNBV issued approximately 11.56 million shares as consideration, valued at $198.9 million; acquisition goodwill was $86.5 million and was not tax-deductible. Purchase accounting valuations remained preliminary and could be refined for up to one year after closing.
- Q3 net income rose year over year, but nine-month net income declined, reflecting $9.1 million of merger expenses in the first nine months and increased credit costs. Merger expenses were $168,000 in Q3 2017; none were reported in the 2016 comparison periods.
- Q3 provision expense included $5.3 million of charge-offs on two loans tied to one long-time government-contractor borrower experiencing cash-flow problems. Nine-month net charge-offs were $6.2 million, versus $4.0 million in 2016.
- Reported Q3 noninterest income increased, mainly from deposit-service fees and EVBS-related recoveries; however, the mortgage affiliate recorded a loss of $83,000, compared with $749,000 of income in Q3 2016.
- Non-covered nonaccrual loans were $13.0 million at quarter-end, compared with $3.8 million at year-end 2016; the filing reports $11.3 million excluding SBA-guaranteed amounts. Non-covered nonperforming assets were $21.0 million. The allowance was $9.3 million, or 0.46% of non-covered loans; allowance coverage of nonperforming loans was 71.23%.
Outlook, commentary, risks and unusual items
- Management planned to focus on merger cost savings and revenue opportunities, while growing the balance sheet conservatively. It expected additional legal and transition expenses through the remainder of 2017, anticipated salaries and benefits to fall in Q4 as remaining merger-related staff reductions occurred, and expected those costs to begin normalizing in the first half of 2018. Further savings and efficiencies were expected but were not reflected in the pro forma figures.
- Management said the allowance was adequate but would continue monitoring credit trends. A $10.0 million nonaccrual commercial construction loan was secured by properties appraised at approximately $14 million. Management was closely monitoring the government-contractor borrower associated with the Q3 charge-offs.
- In July 2017, a phishing-related internal email compromise led to fraudulent wire losses of approximately $172,000 and access to personal information of some customers. The bank reported containment and control enhancements, believed the event was isolated, and said it did not believe its technology systems were compromised. The filing warns of potential future losses, litigation, regulatory scrutiny, customer attrition, and reputational harm.
- Interest-rate sensitivity modeling showed estimated economic value of equity declining 30.53% under a 200-basis-point rate decrease at September 30, 2017; this scenario was outside the company’s asset-liability risk policy guidelines. Modeled net interest income increased modestly in both rising- and falling-rate scenarios, but management cautioned that the models depend on assumptions and are not precise forecasts.
- Other identified risks include real-estate and commercial-loan concentration, construction and land-development exposure, credit-loss estimate uncertainty, investment-security impairment, goodwill impairment, deposit competition and funding availability, integration execution, and regulatory or accounting changes. The filing reported no pending or threatened legal proceedings known to management and no material changes to previously disclosed risk factors other than the cyber-risk disclosure.
- Off-balance-sheet commitments included $399.8 million of unfunded lines and undisbursed construction funds, and $14.3 million of letters of credit. Management expected normal funding sources to meet commitments. The company reported effective disclosure controls, while noting acquisition-related changes to internal financial-reporting controls were being evaluated and augmented.
Important facts for investors to verify
- Confirm the registrant’s corporate identity and continuity with Primis Financial Corp., since the filing names Southern National Bancorp of Virginia, Inc.
- Track post-merger integration, remaining transition costs, realization and timing of expected savings, and the effects of the system conversion.
- Review subsequent credit developments involving the borrower behind the $5.3 million Q3 charge-offs, the $10.0 million construction nonaccrual, total nonaccruals, and allowance adequacy.
- Assess deposit stability, reliance on short-term FHLB funding, liquidity available for commitments, and the maturity, cost, and terms of subordinated debt.
- Monitor the cyber incident for additional losses, customer claims, litigation, regulatory action, or evidence of broader data exposure.
- Evaluate goodwill and acquisition fair-value adjustments as purchase accounting is finalized, along with sensitivity to interest-rate and investment-security valuation changes.