Primis Financial Corp. (metadata) — Q2 2019 Form 10-Q summary
Registrant identification: The supplied filing is for Southern National Bancorp of Virginia, Inc. (NASDAQ: SONA), not Primis Financial Corp. It covers the quarter and six months ended June 30, 2019, and was filed August 8, 2019. Verify that this is the intended filing.
Business context and reporting period
Southern National was the holding company for Sonabank, a Virginia-chartered bank serving individuals and small and medium-sized businesses, with 45 branches in Virginia and Maryland. Financial amounts below are in millions unless stated otherwise. Interim results are unaudited.
Financial performance and position
| Metric | Q2 2019 / June 30, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net income | $9.3; diluted EPS $0.38 | Q2 2018: $8.9; diluted EPS $0.37 |
| Six-month net income | $15.3; diluted EPS $0.63 | Six months 2018: $17.1; diluted EPS $0.71 |
| Net interest income | Q2: $21.0; six months: $41.9 | Q2 2018: $23.2; six months 2018: $45.7 |
| Net interest margin | Q2: 3.40%; six months: 3.41% | Q2 2018: 3.79%; six months 2018: 3.80% |
| Noninterest income / expense | Q2: $3.2 / $13.9; six months: $6.3 / $30.2 | Q2 2018: $2.6 / $13.6; six months 2018: $5.6 / $27.2 |
| Total assets / loans / deposits | $2,724 / $2,173 / $2,150 | December 31, 2018: $2,701 / $2,179 / $2,098 |
| Cash and cash equivalents | $33.1 | December 31, 2018: $28.6 |
| Stockholders’ equity | $362.8 | December 31, 2018: $348.3 |
Q2 interest and dividend income was $30.4 million and interest expense was $9.4 million. For the six months, those amounts were $60.7 million and $18.8 million. The allowance for loan losses was $11.6 million, or 0.54% of non-covered loans. Six-month provision was $0.2 million, versus $2.7 million in 2018.
Six-month operating cash flow was $15.5 million, investing cash outflow $2.5 million, and financing cash outflow $8.5 million. Cash increased $4.5 million from year-end. Deposits grew $52.8 million while short-term borrowings declined $57.1 million. At June 30, short-term FHLB advances were $110.6 million, repurchase agreements $14.3 million, and long-term junior and senior subordinated debt totaled $56.7 million. The company reported $342.0 million of unfunded credit lines and construction commitments.
Capital ratios were above stated regulatory minimums. At June 30, the company’s common equity tier 1, tier 1 risk-based, total risk-based, and leverage ratios were 12.00%, 12.48%, 15.29%, and 9.93%. Sonabank’s corresponding ratios were 14.08%, 14.08%, 14.63%, and 11.27%; the bank was categorized as well capitalized.
Material changes versus comparable periods
- Q2 net income increased 5% year over year, mainly because of a $1.2 million tax benefit from reassessing and rebooking a $5.5 million net operating loss carryforward previously written off. Lower net interest income partly offset that benefit.
- Six-month net income declined 10%. Management attributed the decrease principally to a nonrecurring $3.2 million other loss and $0.5 million of related legal expense in Q1 2019, along with lower acquired-loan discount accretion and fewer legacy recoveries.
- Funding costs rose sharply: Q2 interest expense on deposits increased to $7.7 million from $3.8 million, as average interest-bearing deposits and their average rate both rose. Net interest margin contracted despite higher yields on earning assets.
- Noninterest income increased, supported by deposit fees and improved results from the mortgage affiliate; six-month recoveries on acquired charged-off loans and securities fell to $0.9 million from $1.7 million.
- Loans were nearly flat versus year-end. Management cited $44 million of loan growth, offset by large payoffs, including hospitality loans and a construction loan. A $33.9 million reclassification among loan categories also changed reported portfolio composition.
- Adoption of lease accounting in Q1 added $7.9 million of right-of-use assets and $8.4 million of lease liabilities at June 30. The filing reports no material impact from other newly adopted standards.
Outlook, commentary, risks and unusual items
- No quantitative earnings or growth guidance is provided. Management said loan demand remained strong and expected normal funding sources to cover unfunded commitments.
- Asset quality indicators improved in some respects: non-covered nonperforming assets excluding SBA-guaranteed loans were 0.26% of non-covered assets, down from 0.28% at year-end. Nonaccrual loans were $5.2 million including $3.2 million covered by SBA guarantees; there were no loans 90 days past due and accruing. The allowance was 223% of reported nonperforming loans.
- Real estate represented most of the loan portfolio. Management highlighted sensitivity to local economic conditions, borrower repayment capacity, collateral values, commercial real estate and construction exposure, and estimation uncertainty in the allowance.
- Available-for-sale securities had $0.9 million of net unrealized gains at June 30, versus a $3.1 million net unrealized loss at year-end. Management identified approximately $97.1 million of securities in unrealized loss positions, attributing the declines to interest rates and market illiquidity rather than credit quality; it reported no other-than-temporary impairment charges.
- Interest-rate modeling showed estimated economic value of equity down 9.3% under a 100-basis-point rate decline and 20.4% under a 200-basis-point decline. Management said those EVE scenarios were outside its policy guidelines; modeled net interest income remained within guidelines.
- The filing identifies risks including funding costs and liquidity, credit and collateral deterioration, securities impairment, interest-rate changes, goodwill impairment, competition, cybersecurity, regulatory changes, and the ability to realize benefits from growth or acquisitions. Management reported effective disclosure controls, no material change in internal controls, and no pending or threatened significant legal proceeding known to it.
Important facts for investors to verify
- Confirm the issuer: the supplied filing names Southern National Bancorp of Virginia, Inc. (SONA), while the request metadata names Primis Financial Corp.
- Reconcile net interest income disclosures: the income statement reports Q2 net interest income of $20.964 million, while MD&A’s average-balance table reports $20.902 million; the six-month statement and MD&A table also differ slightly ($41.916 million versus $41.791 million).
- Assess whether the $1.2 million tax benefit is nonrecurring and how much of reported earnings depends on it; review the nature and potential recurrence of the Q1 $3.2 million loss and related legal expense.
- Review deposit pricing, funding mix, NIM trends, and the company’s capacity to fund $342 million of commitments while reducing short-term borrowings.
- Examine credit concentrations, nonaccrual trends, allowance assumptions, SBA guarantees, and the remaining covered-loan loss-share period, which was due to expire in December 2019.
- Evaluate securities valuation and rate sensitivity, including the loss-position portfolio and the modeled EVE decline in falling-rate scenarios.