Southern National Bancorp
Southern National Bancorp of Virginia Inc (Form: 10-Q, Received: 08/09/2017 15:34:35)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2017

 

Commission File No. 001-33037

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)

 

Virginia   20-1417448
(State or other jurisdiction   (I.R.S. Employer Identification No.)
of incorporation or organization)    

 

6830 Old Dominion Drive

McLean, Virginia 22101

(Address of principal executive offices) (zip code)

 

(703) 893-7400

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES x               NO ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

YES x               NO ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b–2 of the Exchange Act:

 

Large accelerated filer ¨ Accelerated filer x Smaller reporting company ¨
     
Non-accelerated filer ¨ An emerging growth company ¨

 

(Do not check if a smaller reporting company)

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

As of August 2, 2017, there were 23,910,353 shares of common stock outstanding.

 

 

 

 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

June 30, 2017

 

INDEX
     
    PAGE
     
PART I - FINANCIAL INFORMATION    
     
Item 1 - Financial Statements    
Consolidated Balance Sheets as of June 30, 2017 and December 31,  2016   2
Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2017 and 2016   3
Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2017   4
Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016   5
Notes to Consolidated Financial Statements   6-32
     
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations   32-44
     
Item 3 – Quantitative and Qualitative Disclosures about Market Risk   44-46
     
Item 4 – Controls and Procedures   46
     
PART II - OTHER INFORMATION    
     
Item 1 – Legal Proceedings   47
     
Item 1A – Risk Factors   47
     
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds   47
     
Item 3 – Defaults Upon Senior Securities   47
     
Item 4 – Mine Safety Disclosures   47
     
Item 5 – Other Information   47
     
Item 6 - Exhibits   47
     
Signatures   48
     
Certifications  

 

 

 

  

ITEM 1 - FINANCIAL INFORMATION

PART I - FINANCIAL STATEMENTS

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share amounts)

 

    June 30,     December 31,  
    2017     2016  
ASSETS     (unaudited)       (audited)  
Cash and cash equivalents:                
Cash and due from financial institutions   $ 6,813     $ 4,656  
Interest-bearing deposits in other financial institutions     37,787       42,736  
Total cash and cash equivalents     44,600       47,392  
                 
Securities available for sale, at fair value     166,976       3,918  
                 
Securities held to maturity, at amortized cost (fair value of $101,661 and $83,344, respectively)     103,055       85,300  
                 
Covered loans     24,668       28,180  
Non-covered loans     2,008,492       902,235  
Total loans     2,033,160       930,415  
Less allowance for loan losses     (9,197 )     (8,610 )
Net loans     2,023,963       921,805  
                 
Loans held for sale     16,726       -  
Stock in Federal Reserve Bank and Federal Home Loan Bank     13,808       7,929  
Equity investment in mortgage affiliate     4,700       4,629  
Preferred investment in mortgage affiliate     3,305       2,555  
Bank premises and equipment, net     36,756       8,227  
Goodwill     99,166       10,514  
Core deposit intangibles, net     11,647       874  
FDIC indemnification asset     1,698       2,111  
Bank-owned life insurance     50,187       23,826  
Other real estate owned     8,478       8,617  
Deferred tax assets, net     22,573       6,780  
Other assets     23,128       7,966  
                 
Total assets   $ 2,630,766     $ 1,142,443  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
                 
Noninterest-bearing demand deposits   $ 328,300     $ 88,783  
Interest-bearing deposits:                
NOW accounts     328,410       26,338  
Cash management accounts     10,003       9,658  
Money market accounts     380,479       129,835  
Savings accounts     168,029       52,755  
Time deposits     804,938       605,613  
Total interest-bearing deposits     1,691,859       824,199  
Total deposits     2,020,159       912,982  
                 
Securities sold under agreements to repurchase     8,143       -  
Federal Home Loan Bank (FHLB) advances - short term     201,475       95,000  
Junior subordinated debt     9,460       -  
Senior subordinated notes     47,150       -  
Other liabilities     21,113       8,117  
Total liabilities     2,307,500       1,016,099  
                 
Commitments and contingencies (See Note 6)     -       -  
                 
Stockholders' equity:                
Preferred stock, $.01 par value.  Authorized 5,000,000 shares; no shares issued and outstanding     -       -  
Common stock, $.01 par value.  Authorized 45,000,000 shares; issued and outstanding, 23,910,353 shares at June 30, 2017 and 12,263,643 at December 31, 2016     239       123  
Additional paid in capital     304,562       104,884  
Retained earnings     19,366       22,126  
Accumulated other comprehensive loss     (901 )     (789 )
Total stockholders' equity     323,266       126,344  
                 
Total liabilities and stockholders' equity   $ 2,630,766     $ 1,142,443  

 

See accompanying notes to consolidated financial statements.

 

  2  

 

  

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands, except per share amounts) (Unaudited)

 

    For the Three Months Ended     For the Six Months Ended  
    June 30,     June 30,  
    2017     2016     2017     2016  
                         
Interest and dividend income:                                
Interest and fees on loans   $ 13,332     $ 11,241     $ 25,093     $ 21,998  
Interest and dividends on taxable securities     618       797       1,156       1,478  
Interest and dividends on tax exempt securities     90       84       174       168  
Interest and dividends on other earning assets     209       169       371       320  
Total interest and dividend income     14,249       12,291       26,794       23,964  
Interest expense:                                
Interest on deposits     2,258       1,978       4,418       3,790  
Interest on repurchase agreements     1       -       1       -  
Interest on junior subordinated debt     9       -       9       -  
Interest on senior subordinated notes     442       -       771       -  
Interest on other borrowings     334       139       499       288  
Total interest expense     3,044       2,117       5,698       4,078  
                                 
Net interest income     11,205       10,174       21,096       19,886  
                                 
Provision for loan losses     1,050       1,387       1,600       2,012  
Net interest income after provision for loan losses     10,155       8,787       19,496       17,874  
                                 
Noninterest income:                                
Account maintenance and deposit service fees     367       228       580       451  
Income from bank-owned life insurance     163       175       326       349  
Equity income (loss) from mortgage affiliate     112       552       (367 )     632  
Gain on sales of investment securities     257       -       257       -  
Other     (17 )     37       19       61  
Total noninterest income     882       992       815       1,493  
                                 
Noninterest expenses:                                
Salaries and benefits     3,106       2,926       6,004       6,054  
Occupancy expenses     844       785       1,635       1,594  
Furniture and equipment expenses     247       248       494       437  
Amortization of core deposit intangible     74       62       123       124  
Virginia franchise tax expense     130       97       241       194  
FDIC assessment     68       168       205       313  
Data processing expense     210       177       418       349  
Telephone and communication expense     183       198       345       385  
Amortization of FDIC indemnification asset     176       203       367       419  
Net loss (gain) on other real estate owned     266       (38 )     319       83  
Merger expenses     8,603       -       8,926       -  
Other operating expenses     934       771       1,817       1,678  
Total noninterest expenses     14,841       5,597       20,894       11,630  
(Loss) income before income taxes     (3,804 )     4,182       (583 )     7,737  
Income tax (benefit) expense     (962 )     1,393       205       2,382  
Net (loss) income   $ (2,842 )   $ 2,789     $ (788 )   $ 5,355  
Other comprehensive income (loss):                                
Unrealized (loss) gain on available for sale securities   $ (241 )   $ (147 )   $ 81     $ (484 )
Realized amounts on securities sold, net     (257 )     -       (257 )     -  
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale     3       4       6       7  
Net unrealized (loss)     (495 )     (143 )     (170 )     (477 )
Tax effect     168       48       58       162  
Other comprehensive (loss)     (327 )     (95 )     (112 )     (315 )
Comprehensive (loss) income   $ (3,169 )   $ 2,694     $ (900 )   $ 5,040  
(Loss) earnings per share, basic   $ (0.21 )   $ 0.23     $ (0.06 )   $ 0.44  
(Loss) earnings per share, diluted   $ (0.21 )   $ 0.23     $ (0.06 )   $ 0.43  

 

See accompanying notes to consolidated financial statements.

 

  3  

 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2017

(dollars in thousands, except per share amounts) (Unaudited)

 

                      Accumulated        
          Additional           Other        
    Common     Paid in     Retained     Comphrensive        
    Stock     Capital     Earnings     Loss     Total  
Balance - December 31, 2016   $ 123     $ 104,884     $ 22,126     $ (789 )   $ 126,344  
Comprehensive (loss):                                        
Net (loss)                     (788 )             (788 )
Change in unrealized loss on securities available for sale (net of tax benefit, $60)                             (116 )     (116 )
Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $2 and accretion, $4 and amounts recorded into other comprehensive income at transfer)                             4       4  
Dividends on common stock ($0.16 per share)                     (1,972 )             (1,972 )
Issuance of common stock for warrants exercised (49,500 shares)             449                       449  
Issuance of common stock under Stock Incentive Plan  (39,450 shares)             335                       335  
Issuance of common stock in connection with Eastern Virginia Bankshares, Inc. merger (11,557,760 shares)     116       198,793                       198,909  
Stock-based compensation expense             101                       101  
Balance - June 30, 2017   $ 239     $ 304,562     $ 19,366     $ (901 )   $ 323,266  

 

See accompanying notes to consolidated financial statements.

 

  4  

 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016

(dollars in thousands) (Unaudited)

 

    2017     2016  
             
Operating activities:                
Net (loss) income   $ (788 )   $ 5,355  
Adjustments to reconcile net (loss) income to net cash and cash equivalents provided  by operating activities:                
Depreciation     426       415  
Amortization of core deposit intangible     123       124  
Other amortization, net     110       (97 )
Accretion of loan discount     (848 )     (993 )
Amortization of FDIC indemnification asset     367       419  
Provision for loan losses     1,600       2,012  
Earnings on bank-owned life insurance     (326 )     (349 )
Equity loss (income) on mortgage affiliate     367       (632 )
Stock-based compensation expense     101       136  
Net gain on sales of investment securities     (257 )     -  
Net loss on other real estate owned     319       83  
Net increase in other assets     (338 )     (1,720 )
Net (decrease) increase in other liabilities     (490 )     690  
Net cash and cash equivalents provided by operating activities     366       5,443  
Investing activities:                
Proceeds from sales of investment securities     4,767       -  
Purchases of held to maturity investment securities     (9,950 )     (25,063 )
Proceeds from paydowns, maturities and calls of held to maturity investment securities     7,141       29,679  
Loan originations and payments, net     (63,223 )     (78,074 )
Distribution from mortgage affiliate     48       396  
Net decrease (increase) in stock in Federal Reserve Bank and Federal Home Loan Bank     855       (681 )
Proceeds from sales of other real estate owned     383       1,042  
Purchases of bank premises and equipment     (339 )     (93 )
Acquisition of Eastern Virginia Bankshares, Inc.     (10 )     -  
Cash acquired in acquisition of Eastern Virginia Bankshares, Inc.     24,025       -  
Net cash and cash equivalents used in investing activities     (36,303 )     (72,794 )
Financing activities:                
Net (decrease) increase in deposits     (40,742 )     67,075  
Cash dividends paid - common stock     (1,972 )     (1,959 )
Issuance of common stock for warrants exercised     449       -  
Issuance of common stock under Stock Incentive Plan     335       104  
Issuance of subordinated notes net of cost     26,075       -  
Net increase in short-term borrowings     49,000       18,500  
Net decrease in long-term borrowings     -       (5,000 )
Net cash and cash equivalents provided by financing activities     33,145       78,720  
(Decrease) Increase in cash and cash equivalents     (2,792 )     11,369  
Cash and cash equivalents at beginning of period     47,392       30,336  
Cash and cash equivalents at end of period   $ 44,600     $ 41,705  
                 
Supplemental disclosure of cash flow information                
Cash payments for:                
Interest   $ 4,633     $ 4,089  
Income taxes     2,390       2,658  
Supplemental schedule of noncash investing and financing activities                
Transfer from covered loans to other real estate owned   $ -     $ 144  
Assets acquired, excluding cash and cash equivalents of $24,025     1,343,767       -  
Liabilities assumed     1,257,533       -  

 

See accompanying notes to consolidated financial statements.

 

  5  

 

  

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2017

 

1. ACCOUNTING POLICIES

 

Southern National Bancorp of Virginia, Inc. (“Southern National” or “SNBV” or the “Company”) is a corporation that was formed on July 28, 2004 under the laws of the Commonwealth of Virginia and is the holding company for Sonabank (“Sonabank” or the “Bank”) a Virginia state-chartered bank which commenced operations on April 14, 2005. As of the close of business on June 23, 2017, SNBV completed its previously announced merger of Eastern Virginia Bankshares, Inc. (“EVBS”) with and into SNBV and the completion of the merger of EVBS’s wholly-owned subsidiary, EVB, with and into SNBV’s wholly-owned subsidiary, Sonabank (see Note 2 - Business Combinations).  This combination brings together two banking companies with complementary business lines, creating one of the premier banking institutions headquartered in the Commonwealth of Virginia.  EVBS was the holding company for EVB, a Virginia state-chartered bank which traced its beginnings to 1910. Sonabank provides a range of financial services to individuals and small and medium sized businesses. At June 30, 2017, Sonabank had thirty-nine retail branches in Virginia, located in the counties of Essex (2), Fairfax (Reston, McLean and Fairfax), Gloucester (2), Hanover (3), King William, Lancaster, Middlesex (3), New Kent, Northumberland (3), Southampton, Surry, Sussex, and in Charlottesville, Clifton Forge, Colonial Heights, Front Royal, Hampton, Haymarket, Leesburg (2), Middleburg, New Market, Newport News, Richmond (2), South Riding, Warrenton (2), and Williamsburg, and eight retail branches in Maryland, in Rockville, Shady Grove, Frederick, Bethesda, Upper Marlboro, Brandywine, Owings and Huntingtown.

 

The consolidated financial statements include the accounts of Southern National and its subsidiaries Sonabank and EVB Statutory Trust I (the “Trust”). Significant inter-company accounts and transactions have been eliminated in consolidation.

 

The unaudited consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles (“U. S. GAAP”) for interim financial information and instructions for Form 10-Q and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by U. S. GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in Southern National’s Form 10-K for the year ended December 31, 2016.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the carrying value of investment securities, other than temporary impairment of investment securities, the valuation of goodwill and intangible assets, the FDIC indemnification asset, mortgage servicing rights, other real estate owned, deferred tax assets, and fair value measurements related to assets acquired and liabilities assumed from business combinations.

 

  6  

 

 

Recent Accounting Pronouncements

 

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-1, Financial Instruments Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities . The amendments in ASU 2016-1: (a) require equity investments (except for those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplify the impairment assessment of equity securities without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminate the requirement for public business entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (d) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (e) require an entity to present separately in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (f) require separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the notes to the financial statements; and (g) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2016-01 is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.

 

In February 2016, the FASB issued ASU 2016-02,  Leases (Topic 842) . The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of this ASU is permitted for all entities. Management currently anticipates recognizing a right-of-use asset and a lease liability associated with its long-term operating leases and is in the process of inventorying and categorizing its lease agreements.

 

In March 2016, the FASB issued ASU 2016-07 , Investments – Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting . The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increase the level of ownership interest or degree of influence that result in the adoption of the equity method. The adoption of the amendments did not have an effect on our consolidated financial statements.

 

  7  

 

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606). These amendments affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g. insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The ASU allows for either full retrospective or modified retrospective adoption. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017. Our revenue is balanced between net interest income on financial assets and liabilities, which is explicitly excluded from the scope of the new standard, and noninterest income. The Company has begun to scope its general ledger revenue items and assess its contracts with customers to identify its performance obligations and will continue to evaluate the impact of adoption on our noninterest income and disclosures. The Company plans to adopt using the modified retrospective approach.

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted. SNBV adopted this guidance during the first quarter of 2017 with an immaterial effect.

 

In June 2016 , the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments  ("ASU 2016-13"), which  sets forth a “current expected credit loss” ("CECL") model requiring the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. For public business entities that are U.S. Securities and Exchange Commission filers, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. SNBV is currently assessing the impact of the adoption of this ASU on its consolidated financial statements and is collecting data that will be needed to produce historical inputs into any models created as a result of adopting this ASU .

 

In August 2016, the FASB issued new guidance related to the  Statement of Cash Flows in ASU 2016-15. The new guidance clarifies the classification within the statement of cash flows for certain transactions, including debt extinguishment costs, zero-coupon debt, contingent consideration related to business combinations, insurance proceeds, equity method distributions and beneficial interests in securitizations. The guidance also clarifies that cash flows with aspects of multiple classes of cash flows or that cannot be separated by source or use should be classified based on the activity that is likely to be the predominant source or use of cash flows for the item. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04 , Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04") , which eliminates the second step of the previous FASB guidance for testing goodwill for impairment and is intended to reduce cost and complexity of goodwill impairment testing. The amendments in this ASU modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. After determining if the carrying amount of a reporting unit exceeds its fair value, the entity should take an impairment charge of the same amount to the goodwill for that reporting unit, not to exceed the total goodwill amount for that reporting unit. ASU 2017-04 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. SNBV is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.

 

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In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which is intended to provide guidance in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses in order to provide stakeholders with more detailed reporting and less cost to analyze transactions. This ASU provides a screen to determine when a set of assets is not a business. It requires that when substantially all fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set of assets is not a business. If the screen is not met, the amendments in this update provide a framework to assist entities in evaluating whether both an input and a substantive process are present for the set to be a business. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. No disclosures are required at transition and early adoption is permitted. We are currently evaluating the impact of adopting the new guidance on our consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections  (Topic 250) and  Investments – Equity Method and Joint Ventures  (Topic 323)  – Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. ASU 2017-03 provides amendments that add paragraph 250-10-S99-6 which includes the text of "SEC Staff Announcement: Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of a Registrant When Such Standards Are Adopted in a Future Period” (in accordance with Staff Accounting Bulletin (SAB) Topic 11.M). Registrants are required to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. In cases where a registrant cannot reasonably estimate the impact of the adoption, then additional qualitative disclosures should be considered to assist the reader in assessing the significance of the standard's impact on its financial statements. SNBV has enhanced its disclosures regarding the impact of recently issued accounting standards adopted in a future period will have on its accounting and disclosures.

 

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities, which shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date.  The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.  ASU 2017-08 is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  SNBV is currently reviewing its portfolio of debt securities to determine the impact that this ASU will have on its consolidated financial statements.

 

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718) , Scope of Modification Accounting . These amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. SNBV is currently evaluating the impact of the amendments in the ASU on its consolidated financial statements.

 

2. BUSINESS COMBINATIONS

 

On June 23, 2017, SNBV completed its acquisition of EVBS and its subsidiaries, the Trust and EVB. Pursuant to the Agreement and Plan of Merger, dated December 13, 2016, as amended, holders of EVBS common stock received 0.6313 shares of SNBV common stock for each outstanding share of EVBS common stock held immediately prior to the effective time of the Merger and holders of Non-Voting Mandatorily Convertible Non-Cumulative Preferred Stock, Series B of EVBS (“EVBS Series B Preferred Stock”) received 0.6313 shares of SNBV common stock for each share of EVBS Series B Preferred Stock held immediately prior to the effective time of the Merger, which totaled approximately $198.9 million based on SNBV’s closing common stock price on June 23, 2017 of $17.21 per share. EVBS was a bank holding company organized and chartered under the laws of the Commonwealth of Virginia on September 5, 1997, commenced operations on December 29, 1997 and was headquartered in Glen Allen, Virginia. EVBS operated twenty-four retail branches, which served diverse markets that primarily are in the counties of Essex, Gloucester, Hanover, Henrico, King and Queen, King William, Lancaster, Middlesex, New Kent, Northumberland, Southampton, Surry, Sussex and the cities of Colonial Heights, Hampton, Newport News, Richmond and Williamsburg.

 

SNBV accounted for the acquisition using the acquisition method of accounting in accordance with FASB Accounting Standards Codification (“ASC”) 805, “Business Combinations.” Under the acquisition method of accounting, the assets and liabilities of EVBS were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate the estimated fair values. The fair values are preliminary and subject to refinement for up to one year after the acquisition date as additional information relative to the acquisition date fair values becomes available. SNBV recognized goodwill of $88.7 million in connection with the acquisition, none of which is deductible for income tax purposes.

 

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The following table details the total consideration paid by SNBV on June 23, 2017 in connection with the acquisition of EVBS, the fair values of the assets acquired and liabilities assumed, and the resulting goodwill.

 

    As Recorded     Fair Value     As Recorded  
(dollars in thousands)(unaudited)   by EVBS     Adjustments     by the Company  
Consideration paid:                        
Cash                   $ 10  
SNBV common stock                     198,909  
Total consideration paid                   $ 198,919  
                         
Identifiable assets acquired:                        
Cash and due from banks   $ 4,350     $ -     $ 4,350  
Interest bearing deposits with banks     18,993       -       18,993  
Federal funds sold     682       -       682  
Securities available for sale, at fair value     163,029       262       163,291  
Securities held to maturity, at carrying value     19,036       508       19,544  
Restricted securities, at cost     6,734       -       6,734  
Loans     1,048,563       (8,876 )     1,039,687  
Loans held for sale     16,726       -       16,726  
Deferred income taxes     15,735       -       15,735  
Bank premises and equipment     24,242       4,352       28,594  
Assets held for sale     2,970       (1,285 )     1,685  
Accrued interest receivable     4,272       -       4,272  
Other real estate owned     563       -       563  
Core deposit intangible     435       10,462       10,897  
Bank owned life insurance     26,035       -       26,035  
Other assets     10,004       -       10,004  
Total identifiable assets acquired     1,362,369       5,423       1,367,792  
                         
Identifiable liabilities assumed:                        
Noninterest-bearing demand accounts     226,637       -       226,637  
Interest-bearing deposits     920,743       1,081       921,824  
Federal funds purchased and repurchase agreements     7,598       -       7,598  
Federal Home Loan Bank advances     57,475       -       57,475  
Junior subordinated debt     10,310       (851 )     9,459  
Senior subordinated notes     19,175       1,879       21,054  
Accrued interest payable     902       -       902  
Other liabilities     12,584       -       12,584  
Total identifiable liabilities assumed     1,255,424       2,109       1,257,533  
                         
Net identifiable assets acquired   $ 106,945     $ 3,314     $ 110,259  
                         
Goodwill resulting from acquisition                   $ 88,660  

 

The net effect of the amortization and accretion of premiums and discounts associated with the Company’s acquisition accounting adjustments to assets acquired and liabilities assumed from EVBS had the following impact on the consolidated statements of operations during the three and six months ended June 30, 2017:

 

    Three and Six Months  
(dollars in thousands)   Ended June 30, 2017  
Loans (1)   $ 91  
Time deposits (2)     4  
Junior and senior subordinated debt (3)     2  
Core deposit intangible (4)     (26 )
Net impact to income before income taxes   $ 71  

 

(1) Loan discount accretion is included in the “Interest and fees on loans” section of “Interest and dividend income” in the Consolidated Statements of Operations.

(2) Time deposit premium amortization is included in the "Interest on deposits" section of "Interest expense" in the Consolidated Statements of Operations.

(3) The junior subordinated debt discount accretion and senior subordinated debt premium amortization are included in the “Interest on junior subordinated debt” and “Interest on senior subordinated notes” section of “Interest expense”, respectively, in the Consolidated Statements of Operations.

(4) Core deposit intangible premium amortization is included in the "Other operating expenses" section of "Noninterest expenses" in the Consolidated Statements of Operations.

 

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Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:

 

Loans : The acquired loans were recorded at fair value at the acquisition date of $1.04 billion without carryover of EVBS’s allowance for loan losses. The unpaid principal balance and discount at the merger date were $1.06 billion and $15.4 million, respectively. Where loans exhibited characteristics of performance, fair value was determined based on a discounted cash flow analysis which included default estimates; loans without such characteristics, fair value was determined based on the estimated values of the underlying collateral. While estimating the amount and timing of both principal and interest cash flows expected to be collected, a market-based discount rate was applied.  In this regard, the acquired loans were segregated into pools based on loan type and credit risk.  Loan type was determined based on collateral type and purpose, industry segment and loan structure.  Credit risk characteristics included risk rating groups pass, special mention, substandard, and doubtful and lien position. For valuation purposes, these pools were further disaggregated by maturity and pricing characteristics (e.g., fixed-rate, adjustable-rate, balloon maturities).

 

Loans Held for Sale : The $16.7 million of acquired loans held for sale were recorded at fair value at the acquisition date. Acquired loans held for sale represent the potentially credit-impaired loans that were moved out of the held for investment portfolio and marked to fair value by EVBS just prior to the closing of the merger. Fair value was determined using quoted prices from an independent, third party buyer. Subsequent to quarter end, acquired loans held for sale were sold to an independent third party.

 

Premises and Equipment and Assets Held for Sale : The fair value of EVBS’s premises, including land, buildings and improvements, was determined based upon appraisal by licensed appraisers. These appraisals were based upon the best and highest use of the property with final values determined based upon an analysis of the cost, sales comparison and income capitalization approaches for each property appraised. The fair value of bank-owned real estate resulted in a premium of $3.1 million.  Land is not depreciated.

 

Core Deposit Intangible : The fair value of the core deposit intangible (“CDI”) was determined based on a combined discounted economic benefit and market approach.  The economic benefit was calculated as the cost savings between maintaining the core deposit base and using an alternate funding source, such as FHLB advances.  The life of the deposit base and projected deposit attrition rates was determined using EVBS's historical deposit data.  The CDI was estimated at $10.9 million or 1.0% of total deposits.  The CDI is being amortized over a weighted average life of 96 months using the straight-line method.

 

Time Deposits : The fair value of time deposits was determined based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

 

FHLB Advances : The fair value of FHLB advances was considered to be equivalent to EVBS’s recorded book balance as the advances mature in 90 days or less.

 

Junior Subordinated Debt and Senior Subordinated Notes: The fair value of the junior subordinated debt and senior subordinated notes were based on discounted cash flows using rates for securities with similar terms.

 

Deferred Income Taxes : Certain deferred tax assets and liabilities were carried over to SNBV from EVBS based on the Company’s ability to utilize them in the future. Additionally, deferred tax assets and liabilities will be established for acquisition accounting fair value adjustments as the future amortization/accretion of these adjustments represent temporary differences between book income and taxable income once our tax analysis is complete.

 

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The table below illustrates the unaudited pro forma revenue and net income of the combined entities had the acquisition taken place on January 1, 2016. The unaudited combined pro forma revenue and net income combines the historical results of EVBS with the Company's consolidated statements of operations for the periods listed below and, while certain adjustments were made for the estimated effect of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition actually taken place on January 1, 2016. Acquisition-related expenses of $8.6 million and $8.9 million were included in the Company's actual consolidated statements of operations for the three and six months ended June 30, 2017, but were excluded from the unaudited pro forma information listed below. While the majority of the acquisition-related expenses have been recognized in the first half of 2017, the Company believes that additional legal and other transition expenses related to this acquisition will be likely throughout the remainder of 2017. Additionally, the Company expects to achieve further operational cost savings and other efficiencies as a result of the acquisition which are not reflected in the unaudited pro forma amounts below:

 

    Unaudited     Unaudited     Unaudited     Unaudited  
    Pro Forma     Pro Forma     Pro Forma     Pro Forma  
    Three Months Ended     Three Months Ended     Six Months Ended     Six Months Ended  
    June 30,     June 30,     June 30,     June 30,  
(dollars in thousands)   2017     2016     2017     2016  
Net interest income   $ 21,584     $ 21,139     $ 43,421     $ 41,866  
Net income     6,585       5,706       12,218       11,506  

 

3. STOCK-BASED COMPENSATION

 

In 2004, the Board of Directors adopted a stock option plan that authorized the reservation of up to 302,500 shares of common stock and provided for the granting of stock options to certain directors, officers and employees. The 2010 Stock Awards and Incentive Plan (the “2010 Plan”) was approved by the Board of Directors in January 2010 and approved by the stockholders at the Annual Meeting in April 2010. The 2010 plan authorized the reservation of an additional 700,000 shares of common stock for the granting of stock awards. The options granted to officers and employees are incentive stock options and the options granted to non-employee directors are non-qualified stock options. The purpose of the plan is to afford key employees an incentive to remain in the employ of Southern National and to assist in the attracting and retaining of non-employee directors by affording them an opportunity to share in Southern National’s future success. Under the plan, the option’s price cannot be less than the fair market value of the stock on the grant date. The maximum term of the options is ten years and options granted may be subject to a graded vesting schedule. At the June 21, 2017 Annual Meeting of Stockholders of Southern National, the 2017 Equity Compensation Plan (the “2017 Plan”) was approved as recommended by the Board of Directors. The 2017 Plan replaces the 2010 Plan and has a maximum number of 750,000 shares reserved for issuance. The purpose of the 2017 Plan is to promote the success of the Company by providing greater incentive to employees, non-employee directors, consultants and advisors to associate their personal interests with the long-term financial success of the Company, including its subsidiaries, and with growth in stockholder value, consistent with the Company’s risk management practices. Because the 2017 Plan was approved, shares under the 2004 stock-option plan or 2010 Plan will no longer be awarded.

 

Southern National granted no regular options during the first six months of 2017, but did issue 22,559 options in connection with the merger with EVBS. Immediately prior to the effective time of the merger, each option to purchase shares of EVBS common stock granted under an EVBS stock plan vested and was converted into and became an option to purchase shares of common stock of SNBV (each, an “Assumed Option”), which was adjusted (i) by multiplying the number of shares of common stock that could be purchased under the Assumed Option by the 0.6313 exchange ratio and rounding down to the nearest share and (ii) by dividing the per share exercise price of the option by the 0.6313 exchange ratio and rounding up to the nearest cent. SNBV assumed each Assumed Option in accordance with the terms of the EVBS stock plan and award agreement by which it is evidenced.

 

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For the three and six months ended June 30, 2017, stock-based compensation expense was $41 thousand and $101 thousand, respectively, compared to $58 thousand and $136 thousand for the same periods last year. As of June 30, 2017, unrecognized compensation expense associated with the stock options was $349 thousand, which is expected to be recognized over a weighted average period of 2.1 years.

A summary of the activity in the stock option plan during the six months ended June 30, 2017 follows (dollars in thousands):

 

                Weighted        
          Weighted     Average     Aggregate  
          Average     Remaining     Intrinsic  
          Exercise     Contractual     Value  
    Shares     Price     Term     (in thousands)  
Options outstanding, beginning of period     782,200     $ 9.56                  
Granted     -       -                  
Options issued in connection with EVBS merger     22,559       24.54                  
Forfeited     (2,200 )     14.73                  
Exercised     (39,450 )     8.50                  
Options outstanding, end of period     763,109     $ 10.04       6.0     $ 5,926  
                                 
Vested or expected to vest     763,109     $ 10.04       6.0     $ 5,926  
                                 
Exercisable at end of period     413,839     $ 7.75       4.4     $ 3,646  

 

4. INVESTMENT SECURITIES

 

The amortized cost and fair value of available for sale investment securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows (in thousands):

 

    Amortized     Gross Unrealized     Fair  
June 30, 2017   Cost     Gains     Losses     Value  
Agency residential mortgage-backed securities (fixed and variable rate)   $ 33,487     $ -     $ (188 )   $ 33,299  
Obligations of states and political subdivisions     18,719       19       (126 )     18,612  
Corporate securities     2,015       -       -       2,015  
Trust preferred securities     2,589       -       (313 )     2,276  
Residential government-sponsored collateralized mortgage obligations     56,020       1       (270 )     55,751  
Agency commercial mortgage-backed securities     28,346       -       (228 )     28,118  
SBA pool securities     26,929       6       (30 )     26,905  
    $ 168,105     $ 26     $ (1,155 )   $ 166,976  

 

    Amortized     Gross Unrealized     Fair  
December 31, 2016   Cost     Gains     Losses     Value  
Obligations of states and political subdivisions   $ 2,280     $ 9     $ (30 )   $ 2,259  
Trust preferred securities     2,590       -       (931 )     1,659  
    $ 4,870     $ 9     $ (961 )   $ 3,918  

 

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The amortized cost, unrecognized gains and losses, and fair value of investment securities held to maturity were as follows (in thousands):

 

    Amortized     Gross Unrecognized     Fair  
June 30, 2017   Cost     Gains     Losses     Value  
Residential government-sponsored mortgage-backed securities   $ 12,718     $ 33     $ (62 )   $ 12,689  
Residential government-sponsored collateralized mortgage obligations     10,312       -       (51 )     10,261  
Government-sponsored agency securities     52,927       52       (1,425 )     51,554  
Obligations of states and political subdivisions     23,656       135       (64 )     23,727  
Trust preferred securities     3,442       13       (25 )     3,430  
    $ 103,055     $ 233     $ (1,627 )   $ 101,661  

 

    Amortized     Gross Unrecognized     Fair  
December 31, 2016   Cost     Gains     Losses     Value  
Residential government-sponsored mortgage-backed securities   $ 18,594     $ 308     $ (118 )   $ 18,784  
Residential government-sponsored collateralized mortgage obligations     2,371       -       (54 )     2,317  
Government-sponsored agency securities     47,975       28       (1,865 )     46,138  
Obligations of states and political subdivisions     12,706       53       (162 )     12,597  
Trust preferred securities     3,654       -       (146 )     3,508  
    $ 85,300     $ 389     $ (2,345 )   $ 83,344  

 

The amortized cost amounts are net of recognized other than temporary impairment.

 

The fair value and carrying amount, if different, of debt investment securities as of June 30, 2017, by contractual maturity were as follows (in thousands). Investment securities not due at a single maturity date are shown separately.

 

    Held to Maturity     Available for Sale  
    Amortized           Amortized        
    Cost     Fair Value     Cost     Fair Value  
Due in one to five years   $ 1,457     $ 1,474     $ 1,960     $ 1,955  
Due in five to ten years     12,056       11,987       4,866       4,855  
Due after ten years     66,512       65,250       16,497       16,093  
Agency residential mortgage-backed securities (fixed and variable rate)     12,718       12,689       33,487       33,299  
Residential government-sponsored collateralized mortgage obligations     10,312       10,261       56,020       55,751  
Agency commercial mortgage-backed securities     -       -       28,346       28,118  
SBA pool securities     -       -       26,929       26,905  
Total   $ 103,055     $ 101,661     $ 168,105     $ 166,976  

 

Investment securities with a carrying amount of approximately $69.6 million and $73.9 million at June 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits, certain other deposits, a line of credit for advances from the Federal Home Loan Bank of Atlanta (“FHLB”), and repurchase agreements.

 

Southern National monitors the portfolio for indicators of other than temporary impairment. At June 30, 2017 and December 31, 2016, certain investment securities’ fair values were below cost. As outlined in the table below, there were investment securities with fair values totaling approximately $227.7 million in the portfolio with the carrying value exceeding the estimated fair value that are considered temporarily impaired at June 30, 2017. Because the decline in fair value is attributable to changes in interest rates and market illiquidity, and not credit quality, and because we do not have the intent to sell these investment securities and it is likely that we will not be required to sell the investment securities before their anticipated recovery, management does not consider these investment securities to be other-than-temporarily impaired as of June 30, 2017.

 

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The following tables present information regarding investment securities in a continuous unrealized loss position as of June 30, 2017 and December 31, 2016 (in thousands) by duration of time in a loss position:

 

June 30, 2017

 

  Less than 12 months     12 Months or More     Total  
Available for Sale   Fair value     Unrealized
Losses
    Fair value     Unrealized
Losses
    Fair value     Unrealized
Losses
 
Agency residential mortgage-backed securities (fixed and variable rate)   $ 33,299     $ (188 )   $ -     $ -     $ 33,299     $ (188 )
Obligations of states and political subdivisions     15,901       (126 )     -       -       15,901       (126 )
Trust preferred securities     -       -       2,276       (313 )     2,276       (313 )
Residential government-sponsored collateralized mortgage obligations     55,333       (270 )     -       -       55,333       (270 )
Agency commercial mortgage-backed securities     28,118       (228 )     -       -       28,118       (228 )
SBA pool securities     24,271       (30 )     -       -       24,271       (30 )
    $ 156,922     $ (842 )   $ 2,276     $ (313 )   $ 159,198     $ (1,155 )

 

    Less than 12 months     12 Months or More     Total  
Held to Maturity   Fair value     Unrecognized
Losses
    Fair value     Unrecognized
Losses
    Fair value     Unrecognized
Losses
 
Residential government-sponsored mortgage-backed securities   $ 6,576     $ (53 )   $ 421     $ (9 )   $ 6,997     $ (62 )
Residential government-sponsored collateralized mortgage obligations     9,404       (30 )     857       (21 )     10,261       (51 )
Government-sponsored agency securities     25,080       (896 )     14,471       (529 )     39,551       (1,425 )
Obligations of states and political subdivisions     10,368       (38 )     1,100       (26 )     11,468       (64 )
Trust preferred securities     -       -       236       (25 )     236       (25 )
    $ 51,428     $ (1,017 )   $ 17,085     $ (610 )   $ 68,513     $ (1,627 )

 

December 31, 2016

 

    Less than 12 months     12 Months or More     Total  
Available for Sale   Fair value     Unrealized
Losses
    Fair value     Unrealized
Losses
    Fair value     Unrealized
Losses
 
Obligations of states and political subdivisions   $ 1,706     $ (30 )   $ -     $ -     $ 1,706     $ (30 )
Trust preferred securities     -       -       1,658       (931 )     1,658       (931 )
    $ 1,706     $ (30 )   $ 1,658     $ (931 )   $ 3,364     $ (961 )

 

    Less than 12 months     12 Months or More     Total  
Held to Maturity   Fair value     Unrecognized
Losses
    Fair value     Unrecognized
Losses
    Fair value     Unrecognized
Losses
 
Residential government-sponsored mortgage-backed securities   $ 10,238     $ (110 )   $ 457     $ (8 )   $ 10,695     $ (118 )
Residential government-sponsored collateralized mortgage obligations     1,346       (27 )     971       (27 )     2,317       (54 )
Government-sponsored agency securities     41,110       (1,865 )     -       -       41,110       (1,865 )
Obligations of states and political subdivisions     3,578       (98 )     1,065       (64 )     4,643       (162 )
Trust preferred securities     -       -       3,508       (146 )     3,508       (146 )
    $ 56,272     $ (2,100 )   $ 6,001     $ (245 )   $ 62,273     $ (2,345 )

 

As of June 30, 2017, we owned pooled trust preferred securities as follows:

 

                                                Previously  
                                          % of Current     Recognized  
                                          Defaults and     Cumulative  
        Ratings                       Estimated     Deferrals to     Other  
    Tranche   When Purchased   Current Ratings         Fair     Total     Comprehensive  
Security   Level   Moody's   Fitch   Moody's   Fitch   Par Value     Book Value     Value     Collateral     Loss (1)  
Held to Maturity                       (in thousands)              
ALESCO VII  A1B   Senior   Aaa   AAA   Aa2   A   $ 3,454     $ 3,181     $ 3,195       11 %   $ 233  
MMCF III B   Senior Sub   A3   A-   Ba1   BB     265       261       235       32 %     4  
                          3,719       3,442       3,430             $ 237  
                                                             
                                                        Cumulative OTTI  
Available for Sale                                                       Related to  
Other Than Temporarily Impaired:                                                       Credit Loss (2)  
TPREF FUNDING II   Mezzanine   A1   A-   Caa3   C     1,500       1,099       847       37 %   $ 400  
ALESCO V C1   Mezzanine   A2   A   Caa2   C     2,150       1,490       1,429       10 %     660  
                          3,650       2,589       2,276             $ 1,060  
                                                             
Total                       $ 7,369     $ 6,031     $ 5,706                  

 

(1) Pre-tax, and represents unrealized losses at date of transfer from available-for-sale to held-to-maturity, net of accretion
(2) Pre-tax

 

Each of these securities has been evaluated for other-than-temporary-impairment. In performing a detailed cash flow analysis of each security, Sonabank works with independent third parties to estimate expected cash flows and assist with the evaluation of other than temporary impairment. The cash flow analyses performed included the following assumptions:

 

· 0.5% of the remaining performing collateral will default or defer per annum.
· Recoveries of 9% with a two year lag on all defaults and deferrals.

 

  15  

 

 

 

· No prepayments for 10 years and then 1% per annum for the remaining life of the security.
· Our securities have been modeled using the above assumptions by independent third parties using the forward LIBOR curve to discount projected cash flows to present values.

 

We recognized no other-than-temporary impairment charges during the three and six months ended June 30, 2017 and 2016, respectively.

 

The following table presents a roll forward of the credit losses on our investment securities previously classified as held to maturity and now classified as available for sale recognized in earnings for the six months ended June 30, 2017 and 2016 (in thousands):

 

    2017     2016  
             
Amount of cumulative other-than-temporary impairment related to credit loss prior to January 1   $ 1,060     $ 1,060  
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized     -       -  
Amounts related to credit loss for which an other-than-temporary impairment was previously recognized     -       -  
Reductions due to realized losses     -       -  
Amount of cumulative other-than-temporary impairment related to credit loss as of June 30   $ 1,060     $ 1,060  

 

  16  

 

  

Changes in accumulated other comprehensive income by component for the three and six months ended June 30, 2017 and 2016 are shown in the table below. All amounts are net of tax (in thousands).

 

    Unrealized Holding              
For the three months ended June 30, 2017   (Losses) on     Held to Maturity        
    Available for Sale Securities     Securities     Total  
Beginning balance   $ (414 )   $ (160 )   $ (574 )
Other comprehensive (loss) income  before reclassifications     (329 )     2       (327 )
Net current-period other comprehensive (loss) income     (329 )     2       (327 )
Ending balance   $ (743 )   $ (158 )   $ (901 )

 

    Unrealized Holding              
For the six months ended June 30, 2017   (Losses) on     Held to Maturity        
    Available for Sale Securities     Securities     Total  
Beginning balance   $ (627 )   $ (162 )   $ (789 )
Other comprehensive (loss) income  before reclassifications     (116 )     4       (112 )
Net current-period other comprehensive (loss) income     (116 )     4       (112 )
Ending balance   $ (743 )   $ (158 )   $ (901 )

 

    Unrealized Holding              
For the three months ended June 30, 2016   (Losses) on     Held to Maturity        
    Available for Sale Securities     Securities     Total  
Beginning balance   $ (662 )   $ (168 )   $ (830 )
Other comprehensive (loss) income  before reclassifications     (98 )     3       (95 )
Net current-period other comprehensive (loss) income     (98 )     3       (95 )
Ending balance   $ (760 )   $ (165 )   $ (925 )

 

    Unrealized Holding              
For the six months ended June 30, 2016   (Losses) on     Held to Maturity        
    Available for Sale Securities     Securities     Total  
Beginning balance   $ (440 )   $ (170 )   $ (610 )
Other comprehensive (loss) income  before reclassifications     (320 )     5       (315 )
Net current-period other comprehensive (loss) income     (320 )     5       (315 )
Ending balance   $ (760 )   $ (165 )   $ (925 )

 

  17  

 

  

5. LOANS AND ALLOWANCE FOR LOAN LOSSES

 

The following table summarizes the composition of our loan portfolio as of June 30, 2017 and December 31, 2016:

 

    Covered     Non-covered     Total     Covered     Non-covered     Total  
    Loans (1)     Loans     Loans     Loans (1)     Loans     Loans  
    June 30, 2017     December 31, 2016  
Loans secured by real estate:                                                
Commercial real estate - owner-occupied   $ -     $ 396,489     $ 396,489     $ -     $ 154,807     $ 154,807  
Commercial real estate - non-owner-occupied     -       465,065       465,065       -       279,634       279,634  
Secured by farmland     -       13,405       13,405       -       541       541  
Construction and land loans     -       188,093       188,093       -       91,067       91,067  
Residential 1-4 family     9,808       446,303       456,111       10,519       220,291       230,810  
Multi- family residential     -       72,014       72,014       -       30,021       30,021  
Home equity lines of credit     14,860       138,082       152,942       17,661       11,542       29,203  
Total real estate loans     24,668       1,719,451       1,744,119       28,180       787,903       816,083  
                                                 
Commercial loans     -       249,343       249,343       -       115,365       115,365  
Consumer loans     -       41,405       41,405       -       856       856  
Gross loans     24,668       2,010,199       2,034,867       28,180       904,124       932,304  
                                                 
Less deferred fees on loans     -       (1,707 )     (1,707 )     -       (1,889 )     (1,889 )
Loans, net of deferred fees   $ 24,668     $ 2,008,492     $ 2,033,160     $ 28,180     $ 902,235     $ 930,415  
                                                 
Loans held for sale   $ -     $ 16,726     $ 16,726     $ -     $ -     $ -  

 

(1) Covered Loans were acquired in the Greater Atlantic transaction and are covered under an FDIC loss-share agreement. The agreement covering single family loans expires in December 2019.

 

Accounting policy related to the allowance for loan losses is considered a critical policy given the level of estimation, judgment, and uncertainty in the levels of the allowance required to account for the inherent probable losses in the loan portfolio and the material effect such estimation, judgment, and uncertainty can have on the consolidated financial results.

 

On June 23, 2017, in connection with the merger with EVBS, SNBV acquired loans held for sale with a fair value of $16.7 million and loans held for investment with an unpaid principal balance of $1.06 billion and an estimated fair value of $1.04 billion, which created an accretable discount of $15.4 million at acquisition. Accretion of $91 thousand associated with these acquired loans held for investment was recognized in the second quarter of 2017.

 

Loans held for sale represent the potentially credit-impaired loans acquired in the EVBS acquisition that were moved out of loans held for investment and marked to fair value by EVBS just prior to the merger with the intent to sell the loans to a third party.

 

As part of the Greater Atlantic Bank acquisition, the Bank and the FDIC entered into loss sharing agreements on approximately $143.4 million (contractual basis) of Greater Atlantic Bank’s assets.  There were two agreements with the FDIC: one for single family loans which is a 10-year agreement expiring in December 2019, and one for non-single family (commercial) assets which was a 5-year agreement which expired in December 2014. The Bank will share in the losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharing agreements; we refer to these assets collectively as “covered assets.”  Loans that are not covered in the loss sharing agreement are referred to as “non-covered loans”. As of June 30, 2017, non-covered loans included $22.1 million of loans acquired in the HarVest acquisition and $38.8 million acquired in the Prince Georges Federal Savings Bank (“PGFSB”) acquisition.

 

Accretable discount on the acquired EVBS, Greater Atlantic Bank, PGFSB, and the HarVest loans totaled $21.1 million and $6.5 million at June 30, 2017 and December 31, 2016, respectively.

 

  18  

 

 

Credit-impaired covered loans are those loans which presented evidence of credit deterioration at the date of acquisition and it is probable that Southern National would not collect all contractually required principal and interest payments. Generally, acquired loans that meet Southern National’s definition for nonaccrual status fell within the definition of credit-impaired covered loans.

 

Impaired loans for the covered and non-covered portfolios were as follows (in thousands):

 

June 30, 2017   Covered Loans     Non-covered Loans     Total Loans  
          Unpaid                 Unpaid                 Unpaid        
    Recorded     Principal     Related     Recorded     Principal     Related     Recorded     Principal     Related  
    Investment     Balance     Allowance     Investment (1)     Balance     Allowance     Investment     Balance     Allowance  
With no related allowance recorded                                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
Commercial real estate - non-owner occupied (2)     -       -       -       -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -       -       -       -  
Commercial loans     -       -       -       2,043       2,610       -       2,043       2,610       -  
Residential 1-4 family (3)     1,285       1,495       -       -       -       -       1,285       1,495       -  
Other consumer loans     -       -       -       -       -       -       -       -       -  
                                                                         
Total   $ 1,285     $ 1,495     $ -     $ 2,043     $ 2,610     $ -     $ 3,328     $ 4,105     $ -  
                                                                         
With an allowance recorded                                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ 1,220     $ 1,326     $ 250     $ 1,220     $ 1,326     $ 250  
Commercial real estate - non-owner occupied (2)     -       -       -       -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -       -       -       -  
Commercial loans     -       -       -       -       -       -       -       -       -  
Residential 1-4 family (3)     -       -       -       376       517       100       376       517       100  
Other consumer loans     -       -       -       -       -       -       -       -       -  
                                                                         
Total   $ -     $ -     $ -     $ 1,596     $ 1,843     $ 350     $ 1,596     $ 1,843     $ 350  
Grand total   $ 1,285     $ 1,495     $ -     $ 3,639     $ 4,453     $ 350     $ 4,924     $ 5,948     $ 350  

 

(1) Recorded investment is after cumulative prior charge offs of $814 thousand. These loans also have aggregate SBA guarantees of $2.0 million.
(2) Includes loans secured by farmland and multi-family residential loans.
(3) Includes home equity lines of credit.

 

December 31, 2016   Covered Loans     Non-covered Loans     Total Loans  
          Unpaid                 Unpaid                 Unpaid        
    Recorded     Principal     Related     Recorded     Principal     Related     Recorded     Principal     Related  
    Investment     Balance     Allowance     Investment (1)     Balance     Allowance     Investment     Balance     Allowance  
With no related allowance recorded                                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ 5,583     $ 5,592     $ -     $ 5,583     $ 5,592     $ -  
Commercial real estate - non-owner occupied (2)     -       -       -       -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -       -       -       -  
Commercial loans     -       -       -       3,002       3,603       -       3,002       3,603       -  
Residential 1-4 family (3)     963       1,113       -       -       -       -       963       1,113       -  
Other consumer loans     -       -       -       -       -       -       -       -       -  
                                                                         
Total   $ 963     $ 1,113     $ -     $ 8,585     $ 9,195     $ -     $ 9,548     $ 10,308     $ -  
                                                                         
With an allowance recorded                                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ 688     $ 688     $ 150     $ 688     $ 688     $ 150  
Commercial real estate - non-owner occupied (2)     -       -       -       -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -       -       -       -  
Commercial loans     -       -       -       3,378       5,798       750       3,378       5,798       750  
Residential 1-4 family (3)     -       -       -       -       -       -       -       -       -  
Other consumer loans     -       -       -       -       -       -       -       -       -  
                                                                         
Total   $ -     $ -     $ -     $ 4,066     $ 6,486     $ 900     $ 4,066     $ 6,486     $ 900  
Grand total   $ 963     $ 1,113     $ -     $ 12,651     $ 15,681     $ 900     $ 13,614     $ 16,794     $ 900  

 

(1) Recorded investment is after cumulative prior charge offs of $3.0 million. These loans also have aggregate SBA guarantees of $2.2 million.
(2) Includes loans secured by farmland and multi-family residential loans.
(3) Includes home equity lines of credit.

 

  19  

 

  

The following tables present the average recorded investment and interest income for impaired loans recognized by class of loans for the three and six months ended June 30, 2017 and 2016 (in thousands):

 

Three months ended June 30, 2017   Covered Loans     Non-covered Loans     Total Loans  
    Average     Interest     Average     Interest     Average     Interest  
    Recorded     Income     Recorded     Income     Recorded     Income  
    Investment     Recognized     Investment     Recognized     Investment     Recognized  
With no related allowance recorded                                                
Commercial real estate - owner occupied   $ -     $ -     $ -     $ -     $ -     $ -  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       2,052       -       2,052       -  
Residential 1-4 family (2)     1,287       9       -       -       1,287       9  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ 1,287     $ 9     $ 2,052     $ -     $ 3,339     $ 9  
                                                 
With an allowance recorded                                                
Commercial real estate - owner occupied   $ -     $ -     $ 1,271     $ 8     $ 1,271     $ 8  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       -       -       -       -  
Residential 1-4 family (2)     -       -       430       -       430       -  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ -     $ -     $ 1,701     $ 8     $ 1,701     $ 8  
Grand total   $ 1,287     $ 9     $ 3,753     $ 8     $ 5,040     $ 17  

 

(1) Includes loans secured by farmland and multi-family residential loans.
(2) Includes home equity lines of credit.

 

Three months ended June 30, 2016   Covered Loans     Non-covered Loans     Total Loans  
    Average     Interest     Average     Interest     Average     Interest  
    Recorded     Income     Recorded     Income     Recorded     Income  
    Investment     Recognized     Investment     Recognized     Investment     Recognized  
With no related allowance recorded                                                
Commercial real estate - owner occupied   $ -     $ -     $ 6,826     $ 73     $ 6,826     $ 73  
Commercial real estate - non-owner occupied (1)     -       -       133       3       133       3  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       3,031       14       3,031       14  
Residential 1-4 family (2)     1,047       9       -       -       1,047       9  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ 1,047     $ 9     $ 9,990     $ 90     $ 11,037     $ 99  
                                                 
With an allowance recorded                                                
Commercial real estate - owner occupied   $ -     $ -     $ 695     $ 8     $ 695     $ 8  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       3,494       39       3,494       39  
Residential 1-4 family (2)     -       -       -       -       -       -  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ -     $ -     $ 4,189     $ 47     $ 4,189     $ 47  
Grand total   $ 1,047     $ 9     $ 14,179     $ 137     $ 15,226     $ 146  

 

(1) Includes loans secured by farmland and multi-family residential loans.
(2) Includes home equity lines of credit.

 

  20  

 

  

Six months ended June 30, 2017   Covered Loans     Non-covered Loans     Total Loans  
    Average     Interest     Average     Interest     Average     Interest  
    Recorded     Income     Recorded     Income     Recorded     Income  
    Investment     Recognized     Investment     Recognized     Investment     Recognized  
With no related allowance recorded                                                
Commercial real estate - owner occupied   $ -     $ -     $ -     $ -     $ -     $ -  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       2,085       -       2,085       -  
Residential 1-4 family (2)     1,288       17       -       -       1,288       17  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ 1,288     $ 17     $ 2,085     $ -     $ 3,373     $ 17  
                                                 
With an allowance recorded                                                
Commercial real estate - owner occupied   $ -     $ -     $ 1,297     $ 16     $ 1,297     $ 16  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       -       -       -       -  
Residential 1-4 family (2)     -       -       336       -       336       -  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ -     $ -     $ 1,633     $ 16     $ 1,633     $ 16  
Grand total   $ 1,288     $ 17     $ 3,718     $ 16     $ 5,006     $ 33  

 

(1) Includes loans secured by farmland and multi-family residential loans.
(2) Includes home equity lines of credit.

 

Six months ended June 30, 2016   Covered Loans     Non-covered Loans     Total Loans  
    Average     Interest     Average     Interest     Average     Interest  
    Recorded     Income     Recorded     Income     Recorded     Income  
    Investment     Recognized     Investment     Recognized     Investment     Recognized  
With no related allowance recorded                                                
Commercial real estate - owner occupied   $ -     $ -     $ 6,166     $ 146     $ 6,166     $ 146  
Commercial real estate - non-owner occupied (1)     -       -       135       5       135       5  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       2,959       28       2,959       28  
Residential 1-4 family (2)     1,012       17       -       -       1,012       17  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ 1,012     $ 17     $ 9,260     $ 179     $ 10,272     $ 196  
                                                 
With an allowance recorded                                                
Commercial real estate - owner occupied   $ -     $ -     $ 697     $ 16     $ 697     $ 16  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       2,942       78       2,942       78  
Residential 1-4 family (2)     -       -       -       -       -       -  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ -     $ -     $ 3,639     $ 94     $ 3,639     $ 94  
Grand total   $ 1,012     $ 17     $ 12,899     $ 273     $ 13,911     $ 290  

 

(1) Includes loans secured by farmland and multi-family residential loans.
(2) Includes home equity lines of credit.

 

  21  

 

 

The following tables present the aging of the recorded investment in past due loans by class of loans as of June 30, 2017 and December 31, 2016 (in thousands):

 

June 30, 2017   30 - 59     60 - 89                                
    Days     Days     90 Days     Total     Nonaccrual     Loans Not     Total  
    Past Due     Past Due     or More     Past Due     Loans     Past Due     Loans  
Covered loans:                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ -     $ -     $ -     $ -  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -       -  
Commercial loans     -       -       -       -       -       -       -  
Residential 1-4 family (2)     268       87       -       355       850       23,463       24,668  
Other consumer loans     -       -       -       -       -       -       -  
                                                         
Total   $ 268     $ 87     $ -     $ 355     $ 850     $ 23,463     $ 24,668  
                                                         
Non-covered loans:                                                        
Commercial real estate - owner occupied   $ 1,033     $ -     $ -     $ 1,033     $ 633     $ 394,823     $ 396,489  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       550,484       550,484  
Construction and land development     18       -       -       18       -       188,075       188,093  
Commercial loans     796       9,984       -       10,780       2,043       236,520       249,343  
Residential 1-4 family (2)     1,566       767       -       2,333       431       581,621       584,385  
Other consumer loans     16       -       -       16       -       41,389       41,405  
                                                         
Total   $ 3,429     $ 10,751     $ -     $ 14,180     $ 3,107     $ 1,992,912     $ 2,010,199  
                                                         
Total loans:                                                        
Commercial real estate - owner occupied   $ 1,033     $ -     $ -     $ 1,033     $ 633     $ 394,823     $ 396,489  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       550,484       550,484  
Construction and land development     18       -       -       18       -       188,075       188,093  
Commercial loans     796       9,984       -       10,780       2,043       236,520       249,343  
Residential 1-4 family (2)     1,834       854       -       2,688       1,281       605,084       609,053  
Other consumer loans     16       -       -       16       -       41,389       41,405  
                                                         
Total   $ 3,697     $ 10,838     $ -     $ 14,535     $ 3,957     $ 2,016,375     $ 2,034,867  

 

December 31, 2016   30 - 59     60 - 89                                
    Days     Days     90 Days     Total     Nonaccrual     Loans Not     Total  
    Past Due     Past Due     or More     Past Due     Loans     Past Due     Loans  
Covered loans:                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ -     $ -     $ -     $ -  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -       -  
Commercial loans     -       -       -       -       -       -       -  
Residential 1-4 family (2)     221       95       -       316       850       27,014       28,180  
Other consumer loans     -       -       -       -       -       -       -  
                                                         
Total   $ 221     $ 95     $ -     $ 316     $ 850     $ 27,014     $ 28,180  
                                                         
Non-covered loans:                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ -     $ 637     $ 154,170     $ 154,807  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       310,196       310,196  
Construction and land development     -       -       -       -       -       91,067       91,067  
Commercial loans     1,349       -       -       1,349       3,158       110,858       115,365  
Residential 1-4 family (2)     1,011       -       -       1,011       -       230,822       231,833  
Other consumer loans     -       -       -       -       -       856       856  
                                                         
Total   $ 2,360     $ -     $ -     $ 2,360     $ 3,795     $ 897,969     $ 904,124  
                                                         
Total loans:                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ -     $ 637     $ 154,170     $ 154,807  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       310,196       310,196  
Construction and land development     -       -       -       -       -       91,067       91,067  
Commercial loans     1,349       -       -       1,349       3,158       110,858       115,365  
Residential 1-4 family (2)     1,232       95       -       1,327       850       257,836       260,013  
Other consumer loans     -       -       -       -       -       856       856  
                                                         
Total   $ 2,581     $ 95     $ -     $ 2,676     $ 4,645     $ 924,983     $ 932,304  

 

(1) Includes loans secured by farmland and multi-family residential loans.
(2) Includes home equity lines of credit.

 

Non-covered nonaccrual loans include SBA guaranteed amounts totaling $2.0 million and $2.2 million at June 30, 2017 and December 31, 2016, respectively.

 

  22  

 

 

Activity in the allowance for non-covered loan and lease losses for the three and six months ended June 30, 2017 and 2016 is summarized below (in thousands):

 

    Commercial     Commercial                                      
    Real Estate     Real Estate     Construction                 Other              
Non-covered loans:   Owner     Non-owner     and Land     Commercial     1-4 Family     Consumer              
Three months ended June 30, 2017   Occupied     Occupied (1)     Development     Loans     Residential (2)     Loans     Unallocated     Total  
Allowance for loan losses:                                                
Beginning balance   $ 1,188     $ 1,546     $ 801     $ 3,007     $ 1,254     $ 74     $ 808     $ 8,678  
Charge offs     -       (100 )     -       (467 )     (307 )     (5 )     -       (879 )
Recoveries     11       299       -       36       2       -       -       348  
Provision     (261 )     45       295       115       474       15       367       1,050  
Ending balance   $ 938     $ 1,790     $ 1,096     $ 2,691     $ 1,423     $ 84     $ 1,175     $ 9,197  
                                                                 
Three months ended June 30, 2016                                                                
Allowance for loan losses:                                                                
Beginning balance   $ 1,251     $ 1,553     $ 716     $ 2,892     $ 1,556     $ 82     $ 640     $ 8,690  
Charge offs     -       -       (449 )     (1,156 )     (22 )     (69 )     -       (1,696 )
Recoveries     -       -       -       37       2       1       -       40  
Provision     (530 )     (150 )     588       1,572       (274 )     108       73       1,387  
Ending balance   $ 721     $ 1,403     $ 855     $ 3,345     $ 1,262     $ 122     $ 713     $ 8,421  

 

(1) Includes loans secured by farmland and multi-family residential loans.
(2) Includes home equity lines of credit.

 

    Commercial     Commercial                                      
    Real Estate     Real Estate     Construction                 Other              
Non-covered loans:   Owner     Non-owner     and Land     Commercial     1-4 Family     Consumer              
Six months ended June 30, 2017   Occupied     Occupied (1)     Development     Loans     Residential (2)     Loans     Unallocated     Total  
Allowance for loan losses:                                                
Beginning balance   $ 905     $ 1,484     $ 752     $ 3,366     $ 1,279     $ 78     $ 746     $ 8,610  
Charge offs     -       (100 )     -       (967 )     (319 )     (5 )     -       (1,391 )
Recoveries     21       299       -       51       5       2       -       378  
Provision     12       107       344       241       458       9       429       1,600  
Ending balance   $ 938     $ 1,790     $ 1,096     $ 2,691     $ 1,423     $ 84     $ 1,175     $ 9,197  
                                                                 
Six months ended June 30, 2016                                                                
Allowance for loan losses:                                                                
Beginning balance   $ 1,185     $ 1,222     $ 865     $ 3,041     $ 1,408     $ 48     $ 652     $ 8,421  
Charge offs     -       -       (449 )     (1,271 )     (22 )     (322 )     -       (2,064 )
Recoveries     -       -       -       46       4       2       -       52  
Provision     (464 )     181       439       1,529       (128 )     394       61       2,012  
Ending balance   $ 721     $ 1,403     $ 855     $ 3,345     $ 1,262     $ 122     $ 713     $ 8,421  

 

(1) Includes loans secured by farmland and multi-family residential loans.
(2) Includes home equity lines of credit.

 

No activity in the allowance for covered loan and lease losses was recorded during the three and six months ended June 30, 2017 and 2016.

 

  23  

 

 

The following tables present the balance in the allowance for loan losses and the recorded investment in non-covered loans by portfolio segment and based on impairment method as of June 30, 2017 and December 31, 2016 (in thousands):

 

    Commercial     Commercial                                      
    Real Estate     Real Estate     Construction                 Other              
    Owner     Non-owner     and Land     Commercial     1-4 Family     Consumer              
Non-covered loans:   Occupied     Occupied (1)     Development     Loans     Residential (2)     Loans     Unallocated     Total  
June 30, 2017                                                
Ending allowance balance attributable to loans:                                                                
Individually evaluated for impairment   $ 250     $ -     $ -     $ -     $ 100     $ -     $ -     $ 350  
Collectively evaluated for impairment     688       1,790       1,096       2,691       1,323       84       1,175       8,847  
Total ending allowance   $ 938     $ 1,790     $ 1,096     $ 2,691     $ 1,423     $ 84     $ 1,175     $ 9,197  
                                                                 
Loans:                                                                
Individually evaluated for impairment   $ 1,220     $ -     $ -     $ 2,043     $ 376     $ -     $ -     $ 3,639  
Collectively evaluated for impairment     395,269       550,484       188,093       247,300       584,009       41,405       -       2,006,560  
Total ending loan balances   $ 396,489     $ 550,484     $ 188,093     $ 249,343     $ 584,385     $ 41,405     $ -     $ 2,010,199  
                                                                 
December 31, 2016                                                                
Ending allowance balance attributable to loans:                                                                
Individually evaluated for impairment   $ 150     $ -     $ -     $ 750     $ -     $ -