Southern National Bancorp
Southern National Bancorp of Virginia Inc (Form: 10-Q, Received: 11/09/2011 15:57:26)


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 September 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   (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  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  x               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 October 31, 2011, there were 11,590,212 shares of common stock outstanding.

 
 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
FORM 10-Q
September 30, 2011
 
INDEX
     
PAGE
       
   
       
   
   
2
   
3
   
4
   
5
   
6- 23
       
 
24- 36
       
 
37-39
       
 
40
       
   
       
 
40
       
 
40
       
 
40
       
 
40
       
 
40
       
 
40
       
 
41
       
 
42
       
Certifications
 
43-45

 
 

 

PART I -  FINANCIAL STATEMENTS
ITEM I - FINANCIAL INFORMATION
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONS OLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts) (Unaudited)
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
Cash and cash equivalents:
           
Cash and due from financial institutions
  $ 2,432     $ 2,180  
Interest-bearing deposits in other financial institutions
    4,625       7,565  
Total cash and cash equivalents
    7,057       9,745  
                 
Securities available for sale, at fair value
    10,438       11,068  
                 
Securities held to maturity, at amortized cost (fair value of $38,097 and $43,965, respectively)
    38,354       44,895  
                 
Covered loans
    80,398       92,171  
Non-covered loans
    396,494       367,266  
Total loans
    476,892       459,437  
Less allowance for loan losses
    (6,087 )     (5,599 )
Net loans
    470,805       453,838  
                 
Stock in Federal Reserve Bank and Federal Home Loan Bank
    7,356       6,350  
Bank premises and equipment, net
    4,700       4,659  
Goodwill
    8,713       8,713  
Core deposit intangibles, net
    2,225       2,915  
FDIC indemnification asset
    18,226       18,536  
Bank-owned life insurance
    14,435       14,568  
Other real estate owned
    13,097       4,577  
Deferred tax assets, net
    4,440       3,782  
Other assets
    5,532       7,178  
                 
Total assets
  $ 605,378     $ 590,824  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Noninterest-bearing demand deposits
  $ 31,791     $ 34,529  
Interest-bearing deposits:
               
NOW accounts
    16,310       15,961  
Money market accounts
    140,781       169,861  
Savings accounts
    6,335       5,490  
Time deposits
    212,765       205,133  
Total interest-bearing deposits
    376,191       396,445  
Total deposits
    407,982       430,974  
                 
Securities sold under agreements to repurchase and other short-term borrowings
    19,452       23,908  
Federal Home Loan Bank (FHLB) advances
    72,500       35,000  
Other liabilities
    2,377       1,828  
Total liabilities
    502,311       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 September 30, 2011 and December 31, 2010
    116       116  
Additional paid in capital
    96,598       96,478  
Retained earnings
    9,588       5,854  
Accumulated other comprehensive loss
    (3,235 )     (3,334 )
Total stockholders’ equity
    103,067       99,114  
                 
Total liabilities and stockholders’ equity
  $ 605,378     $ 590,824  
 
See accompanying notes to consolidated financial statements.
 
 
2

 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CON SOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(dollars in thousands, except per share amounts) (Unaudited)
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30,
   
September 30,
 
                         
   
2011
   
2010
   
2011
   
2010
 
                         
Interest and dividend income :
                       
Interest and fees on loans
  $ 7,871     $ 7,578     $ 22,202     $ 23,021  
Interest and dividends on taxable securities
    457       630       1,495       2,048  
Interest and dividends on other earning assets
    66       47       169       138  
Total interest and dividend income
    8,394       8,255       23,866       25,207  
Interest expense:
                               
Interest on deposits
    1,217       1,825       3,744       5,418  
Interest on borrowings
    272       343       857       1,001  
Total interest expense
    1,489       2,168       4,601       6,419  
                                 
Net interest income
    6,905       6,087       19,265       18,788  
                                 
Provision for loan losses
    1,550       1,025       5,140       3,775  
Net interest income after provision for loan losses
    5,355       5,062       14,125       15,013  
                                 
Noninterest income:
                               
Account maintenance and deposit service fees
    218       210       636       686  
Income from bank-owned life insurance
    129       140       1,196       416  
Net loss on other real estate owned
    -       (435 )     (147 )     (396 )
Gain on sales of securities available for sale
    -       142       -       142  
Total other-than-temporary impairment losses (OTTI)
    (43 )     (127 )     (113 )     (137 )
Portion of OTTI recognized in other comprehensive income (before taxes)
    -       -       -       -  
Net credit related OTTI recognized in earnings
    (43 )     (127 )     (113 )     (137 )
Other
    62       20       151       314  
                                 
Total noninterest income (loss)
    366       (50 )     1,723       1,025  
                                 
Noninterest expenses:
                               
Salaries and benefits
    1,759       1,634       5,066       4,798  
Occupancy expenses
    573       520       1,667       1,589  
Furniture and equipment expenses
    140       142       406       447  
Amortization of core deposit intangible
    230       236       690       708  
Virginia franchise tax expense
    171       184       514       551  
FDIC assessment
    125       139       397       540  
Data processing expense
    126       139       400       453  
Telephone and communication expense
    101       100       289       320  
Change in FDIC indemnification asset
    (140 )     (193 )     (490 )     457  
Other operating expenses
    695       489       1,788       1,531  
Total noninterest expenses
    3,780       3,390       10,727       11,394  
Income before income taxes
    1,941       1,622       5,121       4,644  
Income tax expense
    638       517       1,387       1,472  
Net income
  $ 1,303     $ 1,105     $ 3,734     $ 3,172  
Other comprehensive income (loss):
                               
Unrealized gain on available for sale securities
  $ (30 )   $ 42     $ 167     $ 264  
Realized amount on securities sold, net
    -       (142 )     -       (142 )
Non-credit component of other-than-temporary impairment on held-to-maturity securities
    (70 )     20       26       129  
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale
    (27 )     (36 )     (44 )     (97 )
Net unrealized gain (loss)
    (127 )     (116 )     149       154  
Tax effect
    (44 )     (38 )     50       53  
Other comprehensive income (loss)
    (83 )     (78 )     99       101  
Comprehensive income
  $ 1,220     $ 1,027     $ 3,833     $ 3,273  
Earnings per share, basic and diluted
  $ 0.11     $ 0.10     $ 0.32     $ 0.27  
 
See accompanying notes to consolidated financial statements.
 
 
3

 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
C ONS OLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(dollars in thousands, except per share amounts) (Unaudited)
 
                     
Accumulated
       
         
Additional
         
Other
       
   
Common
   
Paid in
   
Retained
   
Comprehensive
       
   
Stock
   
Capital
   
Earnings
   
Loss
   
Total
 
                               
Balance - January 1, 2011
  $ 116     $ 96,478     $ 5,854     $ (3,334 )   $ 99,114  
                                         
Comprehensive income:
                                       
                                         
Net income
                    3,734               3,734  
Change in unrealized gain on available for sale securities (net of tax, $57)
                            110       110  
Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $7 and accretion, $44 and amounts recorded into other comprehensive income at transfer)
                            (11 )     (11 )
                                         
Total comprehensive income
                                       
                                         
Stock-based compensation expense
            120                       120  
                                         
Balance - September 30, 2011
  $ 116     $ 96,598     $ 9,588     $ (3,235 )   $ 103,067  
 
See accompanying notes to consolidated financial statements.
 
 
4

 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
C ONSO LIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
(dollars in thousands) (Unaudited)
 
    2011     2010  
             
Operating activities:
           
Net income
  $ 3,734     $ 3,172  
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
               
Depreciation
    393       407  
Amortization of core deposit intangible
    690       708  
Other amortization , net
    (1 )     132  
(Increase) decrease in FDIC indemnification asset
    (490 )     457  
Provision for loan losses
    5,140       3,775  
Earnings on bank-owned life insurance
    (396 )     (416 )
Stock based compensation expense
    120       59  
Gain on sales of securities
    -       (142 )
Impairment on securities
    113       137  
Net loss on other real estate owned
    147       396  
Net decrease (increase) in other assets
    1,318       (912 )
Net increase (decrease) in other liabilities
    549       (3,150 )
Net cash and cash equivalents provided by operating activities
    11,317       4,623  
Investing activities:
               
Proceeds from sales of securities available for sale
    -       4,728  
Proceeds from paydowns, maturities and calls of securities available for sale
    763       2,635  
Proceeds from paydowns, maturities and calls of securities held to maturity
    6,632       8,544  
Loan originations and payments, net
    (31,666 )     (7,531 )
Net increase in stock in Federal Reserve Bank and Federal Home Loan Bank
    (1,006 )     (549 )
Payments received on FDIC indemnification asset
    800       -  
Proceeds from sale of other real estate owned
    854       2,560  
Purchases of bank premises and equipment
    (434 )     (1,913 )
Net cash and cash equivalents (used in) provided by investing activities
    (24,057 )     8,474  
Financing activities:
               
Net decrease in deposits
    (22,992 )     (522 )
Proceeds from Federal Home Loan Bank advances
    37,500       5,000  
Net increase (decrease) in securities sold under agreement to repurchase and  other short-term borrowings
    (4,456 )     3,455  
Additional cost of 2009 common stock issuance
    -       (48 )
Net cash and cash equivalents provided by financing activities
    10,052       7,885  
Increase (decrease) in cash and cash equivalents
    (2,688 )     20,982  
Cash and cash equivalents at beginning of period
    9,745       8,070  
Cash and cash equivalents at end of period
  $ 7,057     $ 29,052  
Supplemental Disclosure of Cash Flow Information
               
Cash payments for:
               
Interest
  $ 4,706     $ 6,754  
Income taxes
    855       1,485  
Supplemental schedule of noncash investing and financing activities
               
Transfer from non-covered loans to other real estate owned
    9,477       2,684  
Transfer from covered loans to other real estate owned
    82       676  
 
See accompanying notes to consolidated financial statements.
 
 
5

 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
September 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.   On October 3, 2011, Southern National Bancorp of Virginia, Inc. completed the acquisition of the Midlothian branch office of the Bank of Hampton Roads and the assumption of $46 million in deposits. The new office is operational under the Sonabank banner, and a Sonabank loan officer previously located in the Richmond area has moved into an office in the branch.
 
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,  other real estate owned and deferred tax assets.
 
 
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 September 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  The adoption of this standard during the third quarter did not have a material impact on our consolidated financial condition or results of operation.
 
In May 2011, the FASB issued FASB ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS . The new standard does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where it already is required or permitted under U.S. GAAP. A public entity is required to apply the ASU prospectively for interim and annual periods beginning after December 15, 2011.  The adoption of this standard is not expected to have a material impact on our consolidated financial condition or results of operation.
 
In September 2011, The FASB issued ASU No. 2011-08, Testing Goodwill for Impairmen t.   This ASU permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test.   The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.   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 September 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 nine 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 nine months ended September 30, 2011:
 
 
7

 
 
   
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.
 
 
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 nine months ended September 30, 2011, stock-based compensation expense was $47 thousand and $120 thousand, respectively, compared to $24 thousand and $59 thousand for the same periods last year.  As of September 30, 2011, unrecognized compensation expense associated with the stock options was $653 thousand, which is expected to be recognized over a weighted average period of 3.9 years.
 
A summary of the activity in the stock option plan during the nine months ended September 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       6.5     $ 30  
                                 
Vested or expected to vest
    416,425     $ 8.06       6.5     $ 30  
                                 
Exercisable at end of period
    221,645     $ 8.80       4.6     $ 12  
 
 
8

 
 
3. SECURITIES
 
The amortized cost and fair value of securities available-for-sale were as follows (in thousands):
 
   
Amortized
   
Gross Unrealized
   
Fair
 
September 30, 2011
 
Cost
   
Gains
   
Losses
   
Value
 
SBA guaranteed loan pools
  $ 10,025     $ 298     $ -       10,323  
FHLMC preferred stock
    16       99       -       115  
Total
  $ 10,041     $ 397     $ -     $ 10,438  
 
   
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  
 
The carrying amount and fair value of securities held-to-maturity were as follows (in thousands):
 
   
Amortized
   
Gross Unrecognized
   
Fair
 
September 30, 2011
 
Cost
   
Gains
   
Losses
   
Value
 
Residential government-sponsored mortgage-backed securities
  $ 28,489     $ 1,798     $  -     $ 30,287  
Residential government-sponsored collateralized mortgage obligations
    106       2      -       108  
Other residential collateralized mortgage obligations
    1,030       -       (11 )     1,019  
Trust preferred securities
    8,729       758       (2,804 )     6,683  
    $ 38,354     $ 2,558     $ (2,815 )   $ 38,097  
 
   
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 September 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
  $ -     $ -     $ 283     $ 289  
Due in five to ten years
    -       -       1,090       1,114  
Due after ten years
    8,729       6,683       8,652       8,920  
Residential government-sponsored mortgage-backed securities
    28,489       30,287       -       -  
Residential government-sponsored collateralized mortgage obligations
    106       108       -       -  
Other residential  collateralized mortgage obligations
    1,030       1,019       -       -  
Total
  $ 38,354     $ 38,097     $ 10,025     $ 10,323  
 
Securities with a carrying amount of approximately $38.9 million and $45.3 million at September 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”).
 
 
9

 
 
SNBV monitors the portfolio for indicators of other than temporary impairment.  At September 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 $5.8 million in the portfolio that are considered temporarily impaired at September 30, 2011. The following tables present information regarding securities in a continuous unrealized loss position as of September 30, 2011 and December 31, 2010 (in thousands) by duration of time in a loss position:
 
September 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
 
Other residential collateralized mortgage obligations
  $ 1,019     $ (11 )   $ -     $ -     $ 1,019     $ (11 )
Trust preferred securities
    -       -       4,815       (2,804 )     4,815       (2,804 )
    $ 1,019     $ (11 )   $ 4,815     $ (2,804 )   $ 5,834     $ (2,815 )
 
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 )
 
As of September 30, 2011, our pooled trust preferred securities included:
 
                                                     
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
    $ 7,126     $ 6,385     $ 3,811     $ 100,400     $ 307        
MMCF II B
Senior Sub
    A3    
AA-
   
Baa2
   
BB
      493       455       476       34,000       38        
MMCF III B
Senior Sub
    A3       A-    
Ba1
   
CC
      652       638       476       34,000       13        
                                    8,271       7,478       4,763             $ 358        
                                                                 
 
   
 
 
Other Than Temporarily Impaired:
                                                             
Cumulative
Other
Comprehensive
Loss (2)
   
Cumulative
OTTI Related to
Credit Loss (2)
 
TPREF FUNDING II
Mezzanine
    A1       A-    
Caa3
      C       1,500       383       383       134,100       763     $ 354  
TRAP 2007-XII C1
Mezzanine
    A3       A       C       C       2,074       128       282       155,705       1,367       579  
TRAP 2007-XIII D
Mezzanine
 
NR
      A-    
NR
      C       2,032       -       32       218,750       -       2,032  
MMC FUNDING XVIII
Mezzanine
    A3       A-    
Ca
      C       1,053       133       87       111,682       446       474  
ALESCO V C1
Mezzanine
    A2       A       C       C       2,093       463       441       85,000       969       661  
ALESCO XV C1
Mezzanine
    A3       A-       C       C       3,123       29       258       266,100       535       2,559  
ALESCO XVI  C
Mezzanine
    A3       A-       C       C       2,079       115       437       82,400       784       1,180  
                                        13,954       1,251       1,920             $ 4,864     $ 7,839  
                                                                                   
Total
                                    $ 22,225     $ 8,729     $ 6,683                          

(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:
 
 
.5% of the remaining performing collateral will default or defer per annum.
 
Recoveries ranging from 25% to 47% with a two year lag on all defaults and deferrals.
 
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.
 
 
10

 
 
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 more likely than not 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 September 30, 2011, except for the Tpref Funding II security.
   
The application of these assumptions resulted in OTTI charges related to credit on one of the trust preferred securities in the amount of $43 thousand during the quarter ended September 30, 2011, compared to no OTTI charges related to credit on the trust preferred securities for the quarter ended September 30, 2010.  This trust preferred security (Tpref Funding II) had a book value and a fair value of $383 thousand at September 30, 2011.
 
We also own $1.0 million of SARM 2005-22 1A2. This residential collateralized mortgage obligation was originally rated AAA by Standard and Poors. After a series of downgrades, this security has been other than temporarily impaired in past reporting periods. For the third quarter of 2011 and 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 September 30, 2011.  The assumptions used in the analysis included a 4.6% prepayment speed, 13% default rate, a 48% loss severity and an accounting yield of 2.53%.  We recorded OTTI charges for credit on this security of $127 thousand in the third quarter of 2010.
 
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 nine months ended September 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
    113       10  
Reductions due to realized losses
    (28 )     -  
Amount of cumulative other-than-temporary impairment  related to credit loss as of September 30
  $ 8,087     $ 7,724  
 
 
11

 
 
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The following table summarizes the composition of our loan portfolio as of September 30, 2011 and December 31, 2010:
 
   
Covered
   
Non-covered
   
Total
   
Covered
   
Non-covered
   
Total
 
   
Loans
   
Loans
   
Loans
   
Loans
   
Loans
   
Loans
 
   
September 30, 2011
   
December 31, 2010
 
 Mortgage loans on real estate:
                                   
Commercial real estate - owner-occupied
  $ 4,576     $ 93,084     $ 97,660     $ 5,246     $ 81,487     $ 86,733  
Commercial real estate - non-owner-occupied
    10,311       97,200       107,511       13,898       76,068       89,966  
Secured by farmland
    -       3,147       3,147       -       3,522       3,522  
Construction and land loans
    813       34,641       35,454       1,098       39,480       40,578  
Residential 1-4 family
    26,663       50,580       77,243       29,935       58,900       88,835  
Multi- family residential
    547       18,681       19,228       563       19,177       19,740  
Home equity lines of credit
    36,816       8,973       45,789       40,287       10,532       50,819  
Total real estate loans
    79,726       306,306       386,032       91,027       289,166       380,193  
                                                 
Commercial loans
    552       89,154       89,706       998       76,644       77,642  
Consumer loans
    120       1,959       2,079       146       2,010       2,156  
Gross loans
    80,398       397,419       477,817       92,171       367,820       459,991  
                                                 
Less deferred fees on loans
    -       (925 )     (925 )     -       (554 )     (554 )
Loans, net of unearned income
  $ 80,398     $ 396,494     $ 476,892     $ 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 loans” or “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.  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.  The current outstanding balance for the covered home equity lines of credit at September 30, 2011 was $36.8 million.  The available commitment at this date was $62.7 million, for a total exposure to loss for these covered loans of $99.5 million.
 
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.
 
 
12

 
 
Impaired loans were as follows (in thousands):
 
September 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
  $ 239     $ -     $ 5,277     $ -     $ 5,516     $ -  
Commercial real estate - non-owner occupied (2)
    1,831       -       4,927       -       6,758       -  
Construction and land development
    727       -       3,775       -       4,502       -  
Commercial loans
    215       -       10,608       -       10,823       -  
Residential 1-4 family
    1,190       -       947       -       2,137       -  
Other consumer loans
    -       -       -       -       -       -  
                                                 
Total
  $ 4,202     $ -     $ 25,534     $ -     $ 29,736     $ -  
                                                 
With an allowance recorded
                                               
Commercial real estate - owner occupied
  $ -     $ -     $ -     $ -     $ -     $ -  
Commercial real estate - non-owner occupied (2)
    -       -       -       -       -       -  
Construction and land development
    -       -       2,873       1,039       2,873       1,039  
Commercial loans
    -       -       2,138       550       2,138       550  
Residential 1-4 family
    -       -       -       -       -       -  
Other consumer loans
    -       -       -       -       -       -  
                                                 
Total
  $ -     $ -     $ 5,011     $ 1,589     $ 5,011     $ 1,589  
Grand total
  $ 4,202     $ -     $ 30,545     $ 1,589     $ 34,747     $ 1,589  
 
(1) Recorded investment is after charge offs of $3.3 million and includes SBA guarantees of $1.5 million.
(2) Includes loans secured by farmland and multi-family residential loans.
 
December 31, 2010
 
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
  $ 141     $ -     $ 358     $ -     $ 499     $ -  
Commercial real estate - non-owner occupied (2)
    1,807       -       5,508       -       7,315       -  
Construction and land development