Southern National Bancorp of Virginia, Inc. (SONA) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The filing is by Southern National Bancorp of Virginia, Inc., the parent of Sonabank, not by an entity named Primis Financial Corp. Financial statements are unaudited and prepared under U.S. GAAP.
Business context and financial results
Sonabank provides banking services to individuals and small and medium-sized businesses, with branches in Virginia and Maryland. Unless otherwise noted, amounts below are in millions of dollars.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $21.0 | $22.6 | $62.9 | $68.3 |
| Net interest margin | 3.37% | 3.63% | 3.40% | 3.75% |
| Provision for loan losses | $0.15 | $1.05 | $0.35 | $3.70 |
| Noninterest income | $3.0 | $2.6 | $9.2 | $8.3 |
| Noninterest expense | $12.6 | $13.1 | $42.8 | $40.4 |
| Net income | $8.9 | $8.9 | $24.2 | $26.0 |
| Diluted EPS | $0.36 | $0.36 | $0.99 | $1.07 |
Financial position, cash flow and liquidity
- At September 30, 2019, total assets were $2.70 billion, total loans were $2.14 billion, deposits were $2.18 billion, and stockholders’ equity was $370.6 million.
- Cash and cash equivalents were $48.6 million, up from $28.6 million at year-end 2018. For the first nine months, operating cash flow was $27.5 million; investing activities provided $39.3 million, primarily reflecting loan paydowns; financing activities used $46.8 million, including a $122.1 million net reduction in short-term borrowings. Cash increased $20.0 million.
- Deposits increased $81.1 million from December 31, 2018. Short-term FHLB advances declined to $45.6 million from $163.3 million; repurchase-agreement borrowings were $14.4 million. Long-term junior and senior subordinated debt totaled $56.7 million.
- The allowance for loan losses was $11.2 million, or 0.53% of non-covered loans, versus $12.3 million and 0.57% at year-end 2018. Non-covered nonperforming assets, excluding SBA-guaranteed amounts, were 0.24% of non-covered assets, down from 0.28%.
- Unfunded commitments and undisbursed construction-loan funds totaled $343.1 million; outstanding letters of credit were $17.6 million. Management expected normal funding sources to meet commitment needs and described liquidity sources including deposits, loan and investment repayments, FHLB capacity and correspondent-bank lines.
- Sonabank’s regulatory capital ratios exceeded the stated well-capitalized thresholds: common equity Tier 1 was 14.48%, Tier 1 risk-based capital was 14.48%, total risk-based capital was 15.01%, and leverage was 11.59%.
Material changes versus comparable periods
- Q3 net income was essentially unchanged year over year. Lower loan-loss provision and compensation expense were offset by lower net interest income and higher income-tax expense.
- Nine-month net income declined $1.8 million. Management attributed the decrease primarily to a nonrecurring $3.2 million loss and related legal expense of $0.5 million in Q1 2019, partly offset by a $1.2 million tax benefit in Q2 related to reassessment and rebooking of a net operating loss carryforward.
- Funding costs pressured earnings: nine-month interest expense rose to $28.2 million from $19.5 million, with deposit interest expense increasing to $23.1 million from $12.1 million. Net interest margin fell 35 basis points year over year for the nine-month period.
- Loans declined 1.7% from year-end 2018, despite $95.8 million of new originations, mainly because of $93.6 million in large loan payoffs or paydowns. Deposits grew, while borrowings were reduced.
- Noninterest income increased $1.0 million for the nine months, including improved mortgage-affiliate equity income and higher deposit-service fees; recoveries on acquired charged-off assets were lower.
Outlook, risks and unusual items
- The filing provides no specific earnings or growth guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Key stated risks include changing local economic conditions and borrower repayment capacity; real-estate, commercial and construction-loan concentration; funding availability and deposit competition; interest-rate movements; investment-security credit and impairment; allowance-estimation uncertainty; and execution and goodwill risks from acquisitions.
- Interest-rate modeling showed estimated net interest income down $2.9 million, or 3.6%, under a 100-basis-point rate decline from the modeled base. Estimated economic value of equity declined 10.3% in that scenario. Management noted model limitations; the filing said the EVE decline under this scenario was outside policy guidelines.
- The company adopted lease accounting in 2019 and recorded $8.6 million of right-of-use assets and $9.1 million of lease liabilities. It was evaluating the impact of the forthcoming CECL credit-loss standard.
- Management reported no other-than-temporary impairment charges on investment securities during the periods presented. It considered approximately $66.3 million of securities with fair values below carrying cost temporarily impaired, citing interest rates and market illiquidity rather than credit quality.
- Routine legal claims were disclosed; management did not identify pending or threatened proceedings considered a significant risk. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Confirm the issuer identity and ticker: this filing names Southern National Bancorp of Virginia, Inc. (SONA); the supplied request metadata names Primis Financial Corp.
- Review the detail and recurring implications of the $3.2 million nonrecurring loss and $0.5 million related legal expense, and the $1.2 million tax benefit.
- Track deposit pricing, funding costs and net interest margin, which weakened despite higher asset yields.
- Assess loan paydowns, portfolio concentrations, credit-quality trends, the allowance and the approaching expiration of the GAB single-family loan loss-share agreement in December 2019.
- Evaluate the $343.1 million of unfunded commitments, liquidity capacity, rate sensitivity, and the quality and valuation assumptions for impaired or below-cost securities.