Southern National Bancorp
Southern National Bancorp of Virginia Inc (Form: 10-Q, Received: 08/09/2011 13:19:20)


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, 2011
 
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
of incorporation or organization)
(I.R.S. Employer Identification No.)
 
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 o                       
 
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  o                                             NO o
 
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  o       Accelerated filer  x    Smaller reporting company o
 
Non-accelerated filer  o  (Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o    No x
 
As of July 29, 2011, there were 11,590,212 shares of common stock outstanding.

 
 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
FORM 10-Q
June 30, 2011
 
INDEX
 
     
PAGE
         
     
         
Item 1 - Financial Statements      
   
2
 
   
3
 
   
4
 
   
5
 
   
6- 22
 
       
 
23- 35
 
       
 
36-38
 
       
 
39
 
       
     
       
 
39
 
       
 
39
 
       
 
39
 
       
 
39
 
       
 
39
 
       
 
39
 
       
 
40
 
       
 
41
 
       
Certifications
 
42-44
 
 
 
 

 
 
ITEM I - FINANCIAL INFORMATION
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
(dollars in thousands, except per share amounts) (Unaudited)
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
Cash and cash equivalents:
           
Cash and due from financial institutions
  $ 2,191     $ 2,180  
Interest-bearing deposits in other financial institutions
    1,495       7,565  
Total cash and cash equivalents
    3,686       9,745  
                 
Securities available for sale, at fair value
    10,751       11,068  
                 
Securities held to maturity, at amortized cost
(fair value of $39,791 and $43,965, respectively)
    40,021       44,895  
                 
Covered loans
    82,935       92,171  
 Non-covered loans
    394,052       367,266  
Total loans
    476,987       459,437  
Less allowance for loan losses
    (6,063 )     (5,599 )
Net loans
    470,924       453,838  
                 
Stock in Federal Reserve Bank and Federal Home Loan Bank
    5,972       6,350  
Bank premises and equipment, net
    4,691       4,659  
Goodwill
    8,713       8,713  
Core deposit intangibles, net
    2,455       2,915  
FDIC indemnification asset
    18,088       18,536  
Bank-owned life insurance
    14,310       14,568  
Other real estate owned
    9,613       4,577  
Deferred tax assets, net
    4,128       3,782  
Other assets
    8,035       7,178  
                 
Total assets
  $ 601,387     $ 590,824  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Noninterest-bearing demand deposits
  $ 33,917     $ 34,529  
Interest-bearing deposits:
               
NOW accounts
    15,013       15,961  
Money market accounts
    141,928       169,861  
Savings accounts
    5,814       5,490  
Time deposits
    237,319       205,133  
Total interest-bearing deposits
    400,074       396,445  
Total deposits
    433,991       430,974  
                 
Securities sold under agreements to repurchase and other
short-term borrowings
    19,968       23,908  
Federal Home Loan Bank (FHLB) advances
    43,500       35,000  
Other liabilities
    2,128       1,828  
Total liabilities
    499,587       491,710  
                 
Commitments and contingencies (See Note 5)
    -       -  
                 
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, 11,590,212 shares at June 30, 2011 and December 31, 2010
    116       116  
Additional paid in capital
    96,551       96,478  
Retained earnings
    8,285       5,854  
Accumulated other comprehensive loss
    (3,152 )     (3,334 )
 Total stockholders’ equity
    101,800       99,114  
                 
Total liabilities and stockholders’ equity
  $ 601,387     $ 590,824  
 
See accompanying notes to consolidated financial statements.
 
 
2

 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(dollars in thousands, except per share amounts) (Unaudited)
 
   
For the Three Months Ended
   
For the Six Months Ended
 
   
June 30,
   
June 30,
 
                         
   
2011
   
2010
   
2011
   
2010
 
                         
Interest and dividend income:
                       
 Interest and fees on loans
  $ 7,210     $ 7,829     $ 14,331     $ 15,443  
 Interest and dividends on taxable securities
    482       684       1,038       1,418  
 Interest and dividends on other earning assets
    51       48       103       91  
 Total interest and dividend income
    7,743       8,561       15,472       16,952  
Interest expense:
                               
 Interest on deposits
    1,249       1,790       2,526       3,593  
 Interest on borrowings
    267       330       585       657  
 Total interest expense
    1,516       2,120       3,111       4,250  
                                 
 Net interest income
    6,227       6,441       12,361       12,702  
                                 
Provision for loan losses
    2,250       1,450       3,590       2,750  
 
                               
 Net interest income after provision for loan losses
    3,977       4,991       8,771       9,952  
                                 
Noninterest income:
                               
 Account maintenance and deposit service fees
    218       235       418       476  
 Income from bank-owned life insurance
    933       137       1,067       276  
 Net gain (loss) on other real estate owned
    (108 )     19       (147 )     39  
 Total other-than-temporary impairment losses (OTTI)
    (38 )     (4 )     (70 )     (10 )
 Portion of OTTI recognized in other comprehensive income (before taxes)
    -       -       -       -  
 Net credit related OTTI recognized in earnings
    (38 )     (4 )     (70 )     (10 )
 Other
    44       148       89       293  
                                 
 Total noninterest income
    1,049       535       1,357       1,074  
                                 
Noninterest expenses:
                               
 Salaries and benefits
    1,705       1,523       3,308       3,164  
 Occupancy expenses
    554       527       1,093       1,069  
 Furniture and equipment expenses
    131       151       267       305  
 Amortization of core deposit intangible
    230       236       460       472  
 Virginia franchise tax expense
    171       184       343       368  
FDIC assessment
    119       212       272       401  
 Data processing expense
    132       159       274       314  
 Telephone and communication expense
    100       101       188       220  
 Change in FDIC indemnification asset
    (192 )     406       (351 )     650  
 Other operating expenses
    543       528       1,093       1,042  
 Total noninterest expenses
    3,493       4,027       6,947       8,005  
Income before income taxes
    1,533       1,499       3,181       3,021  
Income tax expense
    222       474       750       955  
 Net income
  $ 1,311     $ 1,025     $ 2,431     $ 2,066  
Other comprehensive income:
                               
Unrealized gain on available for sale securities
  $ 101     $ 161     $ 197     $ 222  
Realized amount on securities sold, net
    -       -       -       -  
Non-credit component of other-than-temporary impairment on held-to-maturity securities
    41       33       96       109  
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale
    (6 )     (31 )     (17 )     (61 )
Net unrealized gain
    136       163       276       270  
Tax effect
    46       55       94       91  
Other comprehensive income
    90       108       182       179  
Comprehensive income
  $ 1,401     $ 1,133     $ 2,613     $ 2,245  
Earnings per share, basic and diluted
  $ 0.11     $ 0.09     $ 0.21     $ 0.18  
 
See accompanying notes to consolidated financial statements.
 
 
3

 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2011
(dollars in thousands, except per share amounts) (Unaudited)
 
                     
Accumulated
             
         
Additional
         
Other
             
   
Common
   
Paid in
   
Retained
   
Comprehensive
   
Comprehensive
       
   
Stock
   
Capital
   
Earnings
   
Loss
   
Income
   
Total
 
                                     
Balance - January 1, 2011
  $ 116     $ 96,478     $ 5,854     $ (3,334 )         $ 99,114  
                                               
Comprehensive income:
                                             
                                               
Net income
                    2,431             $ 2,431       2,431  
Change in unrealized gain on available for sale securities (net of tax, $67)
                            130       130       130  
Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $27 and accretion, $17 and amounts recorded into other comprehensive income at transfer)
                            52       52       52  
                                                 
Total comprehensive income
                                  $ 2,613          
                                                 
Stock-based compensation expense
            73                               73  
                                                 
Balance - June 30, 2011
  $ 116     $ 96,551     $ 8,285     $ (3,152 )           $ 101,800  
 
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, 2011 AND 2010
(dollars in thousands) (Unaudited)
 
   
2011
 
2010
 
               
Operating activities:
             
Net income
 
$
2,431
 
$
2,066
 
Adjustments to reconcile net income to net cash and cash equivalents provided  by operating activities:
             
Depreciation
   
253
   
276
 
Amortization of core deposit intangible
   
460
   
472
 
Other amortization, net
   
(23
)
 
88
 
(Increase) decrease in FDIC indemnification asset
   
(351
)
 
650
 
Provision for loan losses
   
3,590
   
2,750
 
Earnings on bank-owned life insurance
   
(1,067
)
 
(276
)
Stock based compensation expense
   
73
   
35
 
Impairment on securities
   
70
   
10
 
Net (gain) loss on other real estate owned
   
147
   
(39
)
Net increase in other assets
   
(59
)
 
(1,685
)
Net increase (decrease) in other liabilities
   
300
   
(3,014
)
Net cash and cash equivalents provided by operating activities
   
5,824
   
1,333
 
Investing activities:
             
Proceeds from paydowns, maturities and calls of securities available for sale
   
489
   
1,126
 
Proceeds from paydowns, maturities and calls of securities held to maturity
   
5,056
   
5,308
 
Loan originations and payments, net
   
(26,668
)
 
(5,940
)
Net (increase) decrease in stock in Federal Reserve Bank and Federal Home Loan Bank
   
378
   
(835
)
Payments received on FDIC indemnification asset
   
799
   
-
 
Proceeds from sale of other real estate owned
   
771
   
583
 
Purchases of bank premises and equipment
   
(285
)
 
(1,826
)
Net cash and cash equivalents used in investing activities
   
(19,460
)
 
(1,584
)
Financing activities:
             
Net increase (decrease) in deposits
   
3,017
   
(76
)
Proceeds from Federal Home Loan Bank advances
   
8,500
   
5,000
 
Net decrease  in securities sold under agreement to repurchase and other short-term borrowings
   
(3,940
)
 
(1,646
)
Additional cost of 2009 common stock issuance
   
-
   
(48
)
Net cash and cash equivalents provided by financing activities
   
7,577
   
3,230
 
Increase (decrease) in cash and cash equivalents
   
(6,059
)
 
2,979
 
Cash and cash equivalents at beginning of period
   
9,745
   
8,070
 
Cash and cash equivalents at end of period
 
$
3,686
 
$
11,049
 
Supplemental Disclosure of Cash Flow Information
             
Cash payments for:
             
Interest
 
$
3,250
 
$
4,566
 
Income taxes
   
825
   
880
 
Supplemental schedule of noncash investing and financing activities
             
Transfer from non-covered loans to other real estate owned
   
5,910
   
2,352
 
Transfer from covered loans to other real estate owned
   
82
   
-
 
 
See accompanying notes to consolidated financial statements.
 
 
5

 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2011
 
1.    ACCOUNTING POLICIES
 
Southern National Bancorp of Virginia, Inc. (“SNBV”) is a corporation formed on July 28, 2004 under the laws of the Commonwealth of Virginia and is the holding company for Sonabank (“Sonabank”) a Virginia state chartered bank which commenced operations on April 14, 2005.  The principal activities of Sonabank are to attract deposits and originate loans as permitted under applicable banking regulations.  Sonabank operates 13 branches in Virginia located in Fairfax County (Reston, McLean and Fairfax), in Charlottesville, Warrenton (2), Loudoun County (Middleburg, Leesburg (2), and South Riding), Front Royal, New Market and Clifton Forge, and we also have a branch in Rockville, Maryland.
 
The consolidated financial statements include the accounts of Southern National Bancorp of Virginia, Inc. and its subsidiary.  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 SNBV’s Form 10-K for the year ended December 31, 2010.
 
Use of Estimates
 
The preparation of the consolidated financial statements in conformity with U. S. generally accepted accounting principles 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 and deferred tax assets.
 
Reclassifications
 
Some items in the prior year financial statements were reclassified to conform to the current presentation, and the reclassifications had no impact on prior period net income or shareholders’ equity.
 
 
6

 
 
Recent Accounting Pronouncements
 
In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310):  A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This amendment clarifies the guidance on the evaluation made by a creditor on whether a restructuring constitutes a troubled debt restructuring.  It clarifies the guidance related to a creditor’s evaluation of whether it has granted a concession to a debtor and also clarifies the guidance on a creditor’s evaluation of whether the debtor is experiencing financial difficulties.  The amendment is effective for public entities for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  The disclosures required which were deferred by ASU No. 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, is effective for interim and annual periods beginning on or after June 15, 2011, and we will adopt the standard effective for the third quarter.  The adoption of this standard is not expected to have a material impact on our consolidated financial condition or results of operation.
 
2.    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.  As of June 30, 2011, options to purchase an aggregate of 302,500 shares of common stock were outstanding and no shares remained available for issuance. The 2010 Stock Awards and Incentive 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 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 SNBV and to assist in the attracting and retaining of non-employee directors by affording them an opportunity to share in SNBV’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.
 
SNBV granted 103,750 options during the first six months of 2011. The fair value of each option granted is estimated on the date of grant using the Black-Scholes options-pricing model.  The following weighted-average assumptions were used to value options granted in the six months ended June 30, 2011:
 
   
2011
 
Dividend yield
    0.00%  
Expected life
 
10 years
 
Expected volatility
    46.13%  
Risk-free interest rate
    3.34%  
Weighted average fair value per option granted
  $ 4.39  
 
 
We have paid no dividends.
 
 
Due to SNBV’s short existence, the volatility was estimated using historical volatility of comparative publicly traded financial institutions in the Virginia market combined with that of SNBV.
 
 
7

 
 
 
The risk-free interest rate was developed using the U. S. Treasury yield curve for periods equal to the expected life of the options on the grant date.  An increase in the risk-free interest rate will increase stock compensation expense on future option grants.
 
For the three and six months ended June 30, 2011, stock-based compensation expense was $47 thousand and $73 thousand, respectively, compared to $18 thousand and $35 thousand for the same periods last year.  As of June 30, 2011, unrecognized compensation expense associated with the stock options was $700 thousand, which is expected to be recognized over a weighted average period of 4.1 years.
 
A summary of the activity in the stock option plan during the three months ended June 30, 2011 follows (dollars in thousands):
 
               
Weighted
       
         
Weighted
   
Average
       
         
Average
   
Remaining
   
Aggregate
 
         
Exercise
   
Contractual
   
Intrinsic
 
   
Shares
   
Price
   
Term
   
Value
 
Options outstanding, beginning of period
    312,675     $ 8.35              
Granted
    103,750       7.20              
Forfeited
    -       -              
Exercised
    -       -              
Options outstanding, end of period
    416,425     $ 8.06       6.8     $ 52  
                                 
Vested or expected to vest
    416,425     $ 8.06       6.8     $ 52  
                                 
Exercisable at end of period
    207,745     $ 8.90       4.6     $ 21  
 
3.    SECURITIES
 
The amortized cost and fair value of securities available-for-sale were as follows (in thousands):
 
     
Amortized
   
Gross Unrealized
   
Fair
 
 
June 30, 2011
 
Cost
   
Gains
   
Losses
   
Value
 
 
SBA guaranteed loan pools
  $ 10,308     $ 278     $ -       10,586  
 
FHLMC preferred stock
    16       149       -       165  
 
Total
  $ 10,324     $ 427     $ -     $ 10,751  
                                   
     
Amortized
   
Gross Unrealized
   
Fair
 
 
December 31, 2010
 
Cost
   
Gains
   
Losses
   
Value
 
 
SBA guaranteed loan pools
  $ 10,822     $ 216     $ -       11,038  
 
FHLMC preferred stock
    16       14       -       30  
 
Total
  $ 10,838     $ 230     $ -     $ 11,068  
 
 
8

 
 
The carrying amount and fair value of securities held-to-maturity were as follows (in thousands):
 
   
Amortized
   
Gross Unrecognized
   
Fair
 
June 30, 2011
 
Cost
   
Gains
   
Losses
   
Value
 
Residential government-sponsored mortgage-backed securities
  $ 29,982     $ 1,409     $ -     $ 31,391  
Residential government-sponsored collateralized mortgage obligations
    127       5       -       132  
Other residential collateralized mortgage obligations
    1,040       -       -       1,040  
Trust preferred securities
    8,872       816       (2,460 )     7,228  
    $ 40,021     $ 2,230     $ (2,460 )   $ 39,791  
                                 
   
Amortized
   
Gross Unrecognized
   
Fair
 
December 31, 2010
 
Cost
   
Gains
   
Losses
   
Value
 
Residential government-sponsored mortgage-backed securities
  $ 34,088     $ 1,247     $ -     $ 35,335  
Residential government-sponsored collateralized mortgage obligations
    188       8       -       196  
Other residential collateralized mortgage obligations
    1,166       5       -       1,171  
Trust preferred securities
    9,453       675       (2,865 )     7,263  
    $ 44,895     $ 1,935     $ (2,865 )   $ 43,965  
 
The fair value and carrying amount, if different, of debt securities as of June 30, 2011, by contractual maturity were as follows (in thousands).  Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations, are shown separately.
 
   
Held to Maturity
   
Available for Sale
 
   
Amortized
         
Amortized
       
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
Due in one to five years
  $ -     $ -     $ 304     $ 310  
Due in five to ten years
    -       -       1,130       1,154  
Due after ten years
    8,872       7,228       8,874       9,122  
Residential government-sponsored mortgage-backed securities
    29,982       31,391       -       -  
Residential government-sponsored collateralized mortgage obligations
    127       132       -       -  
Other residential collateralized mortgage obligations
    1,040       1,040       -       -  
Total
  $ 40,021     $ 39,791     $ 10,308     $ 10,586  
 
Securities with a carrying amount of approximately $40.7 million and $45.3 million at June 30, 2011 and December 31, 2010, respectively, were pledged to secure public deposits, repurchase agreements and a line of credit for advances from the Federal Home Loan Bank of Atlanta (“FHLB”).
 
SNBV monitors the portfolio for indicators of other than temporary impairment.  At June 30, 2011 and December 31, 2010, certain securities’ fair values were below cost. As outlined in the table below, there were securities with fair values totaling approximately $4.6 million in the portfolio that are considered temporarily impaired at June 30, 2011.  Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because we do not have the intent to sell these securities and it is likely that we will not be required to sell the securities before their anticipated recovery, management does not consider these securities to be other-than-temporarily impaired as of June 30, 2011.  The following tables present information regarding securities in a continuous unrealized loss position as of June 30, 2011 and December 31, 2010 (in thousands) by duration of time in a loss position:
 
June 30, 2011
                                   
   
Less than 12 months
   
12 Months or More
   
Total
 
Held to Maturity
 
Fair value
   
Unrecognized Losses
   
Fair value
   
Unrecognized Losses
   
Fair value
   
Unrecognized Losses
 
Trust preferred securities
  $ -     $ -     $ 4,597     $ (2,460 )   $ 4,597     $ (2,460 )
                                                 
December 31, 2010
                                               
                                                 
   
Less than 12 months
   
12 Months or More
   
Total
 
Held to Maturity
 
Fair value
   
Unrecognized Losses
   
Fair value
   
Unrecognized Losses
   
Fair value
   
Unrecognized Losses
 
Trust preferred securities
  $ -     $ -     $ 4,805     $ (2,865 )   $ 4,805     $ (2,865 )
 
 
9

 
 
As of June 30, 2011, we owned pooled trust preferred securities as follows:

                                                     
Previously
       
                                                     
Recognized
       
                                                     
Cumulative
       
     
Ratings
                           
Estimated
   
Current
   
Other
       
 
Tranche
 
When Purchased
   
Current Ratings
         
Fair
   
Defaults and
   
Comprehensive
       
Security
Level
 
Moody s
   
Fitch
   
Moody’s
   
Fitch
   
Par Value
   
Book Value
   
Value
   
Deferrals
   
Loss (1)
       
                             
(in thousands)
                   
ALESCO VII  A1B
Senior
 
Aaa
   
AAA
   
Baa3
   
BB
    $ 7,174     $ 6,420     $ 4,189     $ 209,056     $ 310        
MMCF II B
Senior Sub
    A3    
AA-
   
Baa2
   
BB
      493       455       477       34,000       38        
MMCF III B
Senior Sub
    A3       A-    
Ba1
   
CC
      652       637       408       37,000       14        
                                    8,319       7,512       5,074             $ 362        
                                                                             
                                                                 
Cumulative
   
Cumulative
 
                                                                 
Other Comprehensive
   
OTTI Related to
 
Other Than Temporarily Impaired:
                                                             
Loss (2)
   
Credit Loss (2)
 
TPREF FUNDING II
Mezzanine
    A1       A-    
Caa3
      C       1,500       496       496       131,100       693     $ 311  
TRAP 2007-XII C1
Mezzanine
    A3       A       C       C       2,066       127       352       155,705       1,360       579  
TRAP 2007-XIII D
Mezzanine
 
NR
      A-    
NR
      C       2,032       -       38       231,250       -       2,032  
MMC FUNDING XVIII
Mezzanine
    A3       A-    
Ca
      C       1,050       132       132       111,682       444       474  
ALESCO V C1
Mezzanine
    A2       A    
Ca
      C       2,083       461       537       117,942       961       661  
ALESCO XV C1
Mezzanine
    A3       A-       C       C       3,112       29       159       266,100       524       2,559  
ALESCO XVI  C
Mezzanine
    A3       A-    
Ca
      C       2,072       115       440       149,900       777       1,180  
                                        13,915       1,360       2,154             $ 4,759     $ 7,796  
                                                                                   
Total
                                    $ 22,234     $ 8,872     $ 7,228                          
 
(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:
 
 
We assume that .5% of the remaining performing collateral will default or defer per annum.
 
We assume recoveries ranging from 25% to 47% with a two year lag on all defaults and deferrals.
 
We assume no prepayments for 10 years and then 1% per annum for the remaining life of the security.
 
Additionally banks with assets over $15 billion will no longer be allowed to count down streamed trust preferred proceeds as Tier 1 capital (although it will still be counted as Tier 2 capital). That will incent the large banks to prepay their trust preferred securities if they can or if it is economically desirable. As a consequence we have projected in all of our pools that 25% of the collateral issued by banks with assets over $15 billion will prepay in 2013.
 
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.
 
These assumptions resulted in OTTI charges related to credit on two of the trust preferred securities in the amount of $38 thousand during the quarter ended June 30, 2011, compared to no OTTI charges related to credit on the trust preferred securities for the quarter ended June 30, 2010.
 
We also own approximately $1.0 million of SARM 2005-22 1A2. This residential collateralized mortgage obligation was originally rated AAA by Standard and Poor’s. After a series of downgrades this security has been evaluated for potential impairment. Based on our review of the trustee report, shock analysis and current information regarding delinquencies, nonperforming loans and credit support it has been determined that no OTTI charge for credit was required for the quarter ended June 30, 2011.  The assumptions used in the analysis included a 4.7% prepayment speed, 14% default rate, a 50% loss severity and an accounting yield of 2.55%.  We recorded OTTI charges for credit on this security of $3 thousand in the second quarter of 2010.
 
 
10

 
 
The following table presents a roll forward of the credit losses for the trust preferred securities and the residential collateralized mortgage obligation recognized in earnings for the six months ended June 30, 2011 and 2010 (in thousands):
 
   
2011
   
2010
 
             
Amount of cumulative other-than-temporary impairment related to credit loss prior to January 1
  $ 8,002     $ 7,714  
Amounts related to credit loss for which an other-than-temporary impairment was previously recognized
    70       10  
                 
Amount of cumulative other-than-temporary impairment related to credit loss as of June 30
  $ 8,072     $ 7,724  
 
4.    LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The following table summarizes the composition of our loan portfolio as of June 30, 2011 and December 31, 2010:
 
   
Covered
   
Non-covered
   
Total
   
Covered
   
Non-covered
   
Total
 
   
Loans
   
Loans
   
Loans
   
Loans
   
Loans
   
Loans
 
   
June 30, 2011
   
December 31, 2010
 
Mortgage loans on real estate:
                                   
Commercial real estate - owner-occupied
  $ 4,703     $ 94,137     $ 98,840     $ 5,246     $ 81,487     $ 86,733  
Commercial real estate - non-owner-occupied
    10,412       87,323       97,735       13,898       76,068       89,966  
Secured by farmland
    -       3,503       3,503       -       3,522       3,522  
Construction and land loans
    849       33,599       34,448       1,098       39,480       40,578  
Residential 1-4 family
    27,615       54,562       82,177       29,935       58,900       88,835  
Multi- family residential
    553       22,227       22,780       563       19,177       19,740  
Home equity lines of credit
    37,954       9,308       47,262       40,287       10,532       50,819  
Total real estate loans
    82,086       304,659       386,745       91,027       289,166       380,193  
                                                 
Commercial loans
    713       88,251       88,964       998       76,644       77,642  
Consumer loans
    136       1,997       2,133       146       2,010       2,156  
Gross loans
    82,935       394,907       477,842       92,171       367,820       459,991  
                                                 
Less deferred fees on loans
    -       (855 )     (855 )     -       (554 )     (554 )
Loans, net of unearned income
  $ 82,935     $ 394,052     $ 476,987     $ 92,171     $ 367,266     $ 459,437  
 
As part of the Greater Atlantic acquisition, the Bank and the FDIC entered into a loss sharing agreement on approximately $143.4 million (contractual basis) of Greater Atlantic Bank’s assets.  The Bank will share in the losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharing agreement; we refer to these assets collectively as “covered assets.”  Loans not acquired from Greater Atlantic Bank are referred to as “non-covered loans.” The covered loans are subject to our internal and external credit review. As a result, if and when credit deterioration is noted subsequent to the acquisition date, such deterioration will be measured through our allowance for loan loss calculation methodology and a provision for credit losses will be charged to earnings. There has been no incremental provision recorded on covered loans since acquisition.  The FDIC indemnification asset is reduced for cash payments received, and adjusted each quarter for changes in expected recoveries from the FDIC based on the expected cash flows from the covered loans.  The adjustment amount is recorded through earnings.  As information and other developments warrant, we reassess our anticipated recoveries from the FDIC on the covered loans and adjust the carrying value of the FDIC indemnification asset through earnings.
 
 
11

 

Credit-impaired covered loans are those loans showing evidence of credit deterioration since origination and it is probable, at the date of acquisition, that SNBV will not collect all contractually required principal and interest payments. Generally, acquired loans that meet SNBV’s definition for nonaccrual status fall within the definition of credit-impaired covered loans.
 
Impaired loans were as follows (in thousands):
 
June 30, 2011
 
Covered Loans
   
Non-covered Loans
   
Total Loans
 
         
Allowance
         
Allowance
         
Allowance
 
   
Recorded
   
for Loan
   
Recorded
   
for Loan
   
Recorded
   
for Loan
 
   
Investment
   
Losses Allocated
   
Investment (1)
   
Losses Allocated
   
Investment
   
Losses Allocated
 
With no related allowance recorded
                                   
Commercial real estate - owner occupied
  $ 245     $ -     $ 5,333     $ -     $ 5,578     $ -  
Commercial real estate - non-owner occupied (2)
    1,854       -       5,769       -       7,623       -  
Construction and land development
    745       -       2,821       -       3,566       -  
Commercial loans
    215       -       11,067       -       11,282       -  
Residential 1-4 family
    762       -       4,339       -       5,101       -  
Other consumer loans
    -       -       -       -       -       -  
                                                 
Total
  $ 3,821     $ -     $ 29,329     $ -     $ 33,150     $ -  
                                                 
With an allowance recorded
                                               
Commercial real estate - owner occupied
  $ -     $ -     $ -             $ -     $ -  
Commercial real estate - non-owner occupied (2)
    -       -       -               -       -  
Construction and land development
    -       -       1,994       52       1,994       52  
Commercial loans
    -       -       1,617       527       1,617       527  
Residential 1-4 family
    -       -       -       -       -       -  
Other consumer loans
    -       -       -       -       -       -  
                                                 
Total
  $ -     $ -     $ 3,611     $ 579     $ 3,611     $ 579  
Grand total
  $ 3,821     $ -     $ 32,940     $ 579     $