Business context and reporting period
This is Southern National Bancorp of Virginia, Inc.’s Form 10-K for the fiscal year ended December 31, 2018; the filing identifies the registrant as Southern National, not Primis Financial Corp. Southern National operated Sonabank, a Virginia-chartered community bank serving consumers and small and midsize businesses, with 45 branches in Virginia and Maryland. Its June 2017 acquisition of Eastern Virginia Bankshares (EVBS) substantially expanded the company.
Financial performance and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Net interest income | $91.1 million | $67.9 million |
| Net income | $33.7 million | $2.4 million |
| Diluted earnings per share | $1.39 | $0.13 |
| Net interest margin | 3.72% | 3.87% |
| Return on average assets | 1.25% | 0.13% |
| Return on average equity | 9.99% | 1.02% |
| Efficiency ratio | 53.09% | 67.01% |
At year-end, total assets were $2.70 billion, loans $2.18 billion, deposits $2.10 billion, and stockholders’ equity $348.3 million. Loans grew 5.65% year over year, primarily through organic growth. Real-estate-secured loans were 86.8% of the loan portfolio.
Net cash provided by operating activities was $41.4 million; investing activities used $93.7 million and financing activities provided $55.4 million. Cash and cash equivalents ended the year at $28.6 million. Year-end FHLB advances were $163.3 million, repurchase agreements $18.7 million, junior subordinated debt $9.6 million, and senior subordinated notes $47.1 million. The Bank reported regulatory capital ratios above well-capitalized requirements: CET1 13.64%, Tier 1 13.64%, total capital 14.22%, and leverage 11.03%.
Changes versus the prior comparable period
- Net income rose sharply from 2017, which included $9.4 million in merger expenses and $7.2 million of additional tax expense from revaluing deferred tax balances after the federal corporate tax-rate reduction. The 2018 result also reflected $4.5 million of acquired-loan discount accretion and $2.6 million in recoveries on acquired charged-off loans and securities.
- Net interest income increased with larger average loan balances, substantially reflecting the EVBS acquisition. However, net interest margin fell 15 basis points to 3.72% as funding costs rose faster than earning-asset yields.
- Provision for loan losses declined to $4.2 million from $8.6 million; net charge-offs fell to $1.3 million from $7.8 million. Non-covered nonperforming assets decreased to $11.8 million from $24.5 million.
- Deposits increased 11.8% to $2.10 billion. Time deposits rose to $925.4 million, including $254.6 million of brokered certificates of deposit. FHLB advances declined from $335.6 million to $163.3 million.
Outlook, risks and unusual items
The filing provides no specific earnings or revenue guidance. Management expected the Bank to remain above well-capitalized standards and its capital conservation buffer in 2019, and anticipated meeting funding needs from normal sources. It planned to have an independent third party review at least 50% of certain commercial loan and commitment balances in 2019, with another 30% reviewed internally.
- Credit and concentration: Real estate-secured lending represents 86.8% of loans; the company is exposed to local property values, commercial real estate and construction lending, and the repayment capacity of smaller businesses.
- Funding and liquidity: Management said core deposits historically have not fully funded lending activity. Brokered deposits were $254.6 million, and $690.6 million of certificates of deposit were scheduled to mature in 2019. Available FHLB borrowing capacity was $513.0 million.
- Interest-rate risk: Net interest margin contracted as funding costs increased. The company’s year-end economic-value-of-equity model showed an 18.36% decline under a 200-basis-point rate decrease; management said this scenario was outside its policy guidelines. LIBOR transition also posed risks to contracts lacking adequate fallback provisions.
- Accounting and acquisition risks: CECL was expected to take effect for the company in 2020; management had not determined its impact and warned it could materially increase the loan-loss allowance. Goodwill was $101.9 million, primarily related to EVBS; no impairment was recorded.
- Cybersecurity: The filing reports a 2017 phishing-related wire fraud loss of approximately $172,000 and exposure of some customer information. The company said it implemented control enhancements.
- Other items: The FDIC loss-sharing agreement covering certain acquired residential loans was due to expire in December 2019. The company reported no material legal proceedings, and the auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer’s identity and relationship to Primis Financial Corp.; this filing is for Southern National Bancorp of Virginia, Inc.
- Assess how much 2018 earnings depended on acquired-loan accretion, acquired-asset recoveries, and the post-acquisition cost base, and whether these items are sustainable.
- Review the quality and funding mix of deposits, particularly brokered deposits and 2019 certificate maturities, alongside available borrowing capacity.
- Reconcile the allowance for loan losses: the balance sheet and allowance rollforward report $12.283 million at year-end, while another allowance-allocation table reports a total of $7.987 million.
- Evaluate the potential CECL adjustment, real-estate concentration, interest-rate sensitivity, and the approaching expiration of FDIC loss sharing.