Southern National Bancorp
Southern National Bancorp of Virginia Inc (Form: 10-Q, Received: 11/08/2012 13:52:40)


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, 2012
 
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  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, 2012, there were 11,590,212 shares of common stock outstanding.

 
 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
FORM 10-Q
September 30, 2012
 
INDEX

     
PAGE
         
 
PART 1 - FINANCIAL INFORMATION
     
         
Item 1 -
Financial Statements
     
 
Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011
 
2
 
 
Consolidated Statements of Comprehensive Income
for the three and nine months ended September 30, 2012 and 2011
 
3
 
 
Consolidated Statements of Changes in Stockholders’ Equity
for the nine months ended September 30, 2012
 
4
 
 
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2012 and 2011
 
5
 
 
Notes to Consolidated Financial Statements
 
6- 29
 
         
Item 2 - Management’s Discussion and Analysis of
     
 
Financial Condition and Results of Operations
 
30- 42
 
         
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
 
43-45
 
         
Item 4 – Controls and Procedures
 
46
 
         
 
PART II - OTHER INFORMATION
     
         
Item 1 – Legal Proceedings
 
48
 
         
Item 1A – Risk Factors
 
48
 
         
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
 
48
 
         
Item 3 – Defaults Upon Senior Securities
 
48
 
         
Item 4 – Mine Safety Disclosures
 
48
 
         
Item 5 – Other Information
 
48
 
         
Item 6 - Exhibits
 
48
 
         
Signatures
 
49
 
         
Certifications
 
50-52
 

 
 

 

ITEM I - FINANCIAL INFORMATION
PART I - FINANCIAL STATEMENTS
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts) (Unaudited)
 
   
September 30,
   
December 31,
 
   
2012
   
2011
 
ASSETS
           
Cash and cash equivalents:
           
Cash and due from financial institutions
  $ 4,229     $ 2,432  
Interest-bearing deposits in other financial institutions
    18,059       2,603  
Total cash and cash equivalents
    22,288       5,035  
                 
Securities available for sale, at fair value
    49       9,905  
                 
Securities held to maturity, at amortized cost (fair value of $81,609 and $34,464, respectively)
    80,496       35,075  
                 
Covered loans
    76,600       82,588  
Non-covered loans
    461,169       409,180  
Total loans
    537,769       491,768  
Less allowance for loan losses
    (6,911 )     (6,295 )
Net loans
    530,858       485,473  
                 
Stock in Federal Reserve Bank and Federal Home Loan Bank
    6,190       6,653  
Bank premises and equipment, net
    6,476       6,350  
Goodwill
    9,160       9,160  
Core deposit intangibles, net
    1,480       1,995  
FDIC indemnification asset
    7,006       7,537  
Bank-owned life insurance
    17,633       17,575  
Other real estate owned
    13,452       14,256  
Deferred tax assets, net
    6,153       6,255  
Other assets
    7,021       6,104  
                 
Total assets
  $ 708,262     $ 611,373  
                 
LIABILITIES AND STOCKHOLDERS EQUITY
               
                 
Noninterest-bearing demand deposits
  $ 43,096     $ 32,582  
Interest-bearing deposits:
               
NOW accounts
    20,520       17,497  
Money market accounts
    167,370       148,959  
Savings accounts
    8,997       6,273  
Time deposits
    297,268       255,784  
Total interest-bearing deposits
    494,155       428,513  
Total deposits
    537,251       461,095  
                 
Securities sold under agreements to repurchase and other  short-term borrowings
    32,713       17,736  
Federal Home Loan Bank (FHLB) advances
    30,250       30,000  
Other liabilities
    4,025       3,491  
Total liabilities
    604,239       512,322  
                 
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, 2012 and December 31, 2011
    116       116  
Additional paid in capital
    96,791       96,645  
Retained earnings
    10,100       5,472  
Accumulated other comprehensive loss
    (2,984 )     (3,182 )
Total stockholders equity
    104,023       99,051  
                 
Total liabilities and stockholders equity
  $ 708,262     $ 611,373  

See accompanying notes to consolidated financial statements.

 
2

 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands, except per share amounts) (Unaudited)
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30,
   
September 30,
 
                         
   
2012
   
2011
   
2012
   
2011
 
         
(As Restated)
         
(As Restated)
 
 Interest and dividend income :
                       
 Interest and fees on loans
  $ 9,008     $ 8,165     $ 26,387     $ 23,255  
 Interest and dividends on taxable securities
    490       457       1,401       1,495  
 Interest and dividends on other earning assets
    102       66       247       169  
 Total interest and dividend income
    9,600       8,688       28,035       24,919  
 Interest expense:
                               
 Interest on deposits
    1,304       1,217       3,803       3,744  
 Interest on borrowings
    165       272       628       857  
 Total interest expense
    1,469       1,489       4,431       4,601  
                                 
 Net interest income
    8,131       7,199       23,604       20,318  
                                 
 Provision for loan losses
    1,830       1,550       4,605       5,140  
 Net interest income after provision for loan losses
    6,301       5,649       18,999       15,178  
                                 
 Noninterest income:
                               
 Account maintenance and deposit service fees
    222       218       624       636  
 Income from bank-owned life insurance
    148       129       649       1,196  
 Bargain purchase gain on acquisition
    -       -       3,484       -  
 Gain on sale of loans
    -       -       657       -  
 Net gain (loss) on other real estate owned
    24       -       (2,376 )     (147 )
 Gain on other assets
    -       -       14       -  
 Net gain on sale of available for sale securities
    287       -       274       -  
 Total other-than-temporary impairment losses (OTTI)
    (480 )     (43 )     (721 )     (113 )
 Portion of OTTI recognized in other comprehensive income (before taxes)
    -       -       4       -  
 Net credit related OTTI recognized in earnings
    (480 )     (43 )     (717 )     (113 )
Other
    63       62       198       151  
                                 
 Total noninterest income
    264       366       2,807       1,723  
                                 
 Noninterest expenses:
                               
 Salaries and benefits
    2,073       1,759       5,868       5,066  
 Occupancy expenses
    753       573       2,040       1,667  
 Furniture and equipment expenses
    149       140       448       406  
 Amortization of core deposit intangible
    236       230       694       690  
 Virginia franchise tax expense
    145       171       436       514  
Merger expenses
    11       -       360       -  
FDIC assessment
    146       125       417       397  
 Data processing expense
    175       126       474       400  
 Telephone and communication expense
    183       101       418       289  
 Change in FDIC indemnification asset
    242       (13 )     481       (85 )
 Other operating expenses
    665       702       2,417       1,809  
 Total noninterest expenses
    4,778       3,914       14,053       11,153  
 Income before income taxes
    1,787       2,101       7,753       5,748  
 Income tax expense
    579       692       2,487       1,602  
 Net income
  $ 1,208     $ 1,409     $ 5,266     $ 4,146  
 Other comprehensive income:
                               
   Unrealized gain (loss) on available for sale securities
  $ (107 )   $ (30 )   $ (26 )   $ 167  
   Realized amount on securities sold, net
    (287 )     -       (274 )     -  
   Non-credit component of other-than-temporary impairment on held-to-maturity securities
    475       (70 )     676       26  
 
                               
   Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale
    (17 )     (27 )     (77 )     (44 )
 Net unrealized gain
    64       (127 )     299       149  
 Tax effect
    21       (44 )     101       50  
 Other comprehensive income
    43       (83 )     198       99  
 Comprehensive income
  $ 1,251     $ 1,326     $ 5,464     $ 4,245  
 Earnings per share, basic and diluted
  $ 0.10     $ 0.12     $ 0.45     $ 0.36  
                                 
 See accompanying notes to consolidated financial statements.
                               

 
3

 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012
 
(dollars in thousands, except per share amounts) (Unaudited)
 
 
                     
Accumulated
       
         
Additional
         
Other
       
   
Common
   
Paid in
   
Retained
   
Comprehensive
       
   
Stock
   
Capital
   
Earnings
   
Loss
   
Total
 
                               
Balance - January 1, 2012
  $ 116     $ 96,645     $ 5,472     $ (3,182 )   $ 99,051  
Comprehensive income:
                                       
Net income
                    5,266               5,266  
Change in unrealized gain  on available for sale securities (net of tax benefit, $102)
 
 
                      (198 )     (198 )
Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax expense, $203 and accretion, $77 and amounts recorded into other comprehensive income at transfer)
                            396       396  
Dividends on common stock ($.015 per share)
                    (638 )             (638 )
Stock-based compensation expense
            146                       146  
                                         
Balance - September 30, 2012
  $ 116     $ 96,791     $ 10,100     $ (2,984 )   $ 104,023  
                                         
See accompanying notes to consolidated financial statements.
                         

 
4

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
(dollars in thousands) (Unaudited)
 
   
2012
   
2011
 
         
(As Restated)
 
Operating activities:
           
Net income
  $ 5,266     $ 4,146  
Adjustments to reconcile net income  to net cash and
cash equivalents provided  by operating activities:
               
Depreciation
    430       393  
Amortization of core deposit intangible
    694       690  
Other amortization, net
    210       (1 )
Accretion of loan discount
    (3,277 )     (2,552 )
(Increase) decrease in FDIC indemnification asset
    481       (85 )
Provision for loan losses
    4,605       5,140  
Earnings on bank-owned life insurance
    (649 )     (396 )
Stock based compensation expense
    146       120  
Bargain purchase gain on acquisition
    (3,484 )     -  
Net gain on sale of available for sale securities
    (274 )     -  
Gain on sale of loans
    (657 )     -  
Impairment on securities
    717       113  
Net loss on other real estate owned
    2,376       147  
Net (increase) decrease in other assets
    (456 )     501  
Net increase in other liabilities
    399       549  
Net cash and cash equivalents provided by operating activities
    6,527       8,765  
Investing activities:
               
Purchases of securities available-for-sale
    (3,128 )     -  
Proceeds from sales of securities available for sale
    22,914       -  
Proceeds from paydowns, maturities and calls of securities available for sale
    1,318       763  
Purchases of securities held to maturity
    (27,410 )     -  
Proceeds from paydowns, maturities and calls of securities held to maturity
    8,973       6,632  
Loan originations and payments, net
    11,238       (29,114 )
Proceeds from sale of HarVest loans
    7,568       -  
Proceeds from sale of SBA loans
    5,713       -  
Net cash received in HarVest acquisition
    47,257       -  
Net (increase) decrease in stock in Federal Reserve Bank and Federal Home Loan Bank
    1,630       (1,006 )
Proceeds from cash surrender value of bank-owned life insurance
    395       -  
Proceeds from sale of other real estate owned
    1,137       854  
Payments received on FDIC indemnification asset
    155       800  
Purchases of bank premises and equipment
    (557 )     (434 )
Net cash and cash equivalents provided by (used in) investing activities
    77,203       (21,505 )
Financing activities:
               
Net decrease in deposits
    (64,328 )     (22,992 )
Cash dividends paid - common stock
    (638 )     -  
Proceeds from Federal Home Loan Bank advances
    -       37,500  
Repayment of Federal Home Loan Bank advances
    (16,488 )     -  
Net increase (decrease)  in securities sold under agreement to repurchase and other short-term borrowings
    14,977       (4,456 )
Net cash and cash equivalents provided by (used in) financing activities
    (66,477 )     10,052  
Increase (decrease) in cash and cash equivalents
    17,253       (2,688 )
Cash and cash equivalents at beginning of period
    5,035       9,745  
Cash and cash equivalents at end of period
  $ 22,288     $ 7,057  
Supplemental Disclosure of Cash Flow Information
               
Cash payments for:
               
Interest
  $ 4,464     $ 4,706  
Income taxes
    1,788       855  
Supplemental schedule of noncash investing and financing activities
               
Transfer from non-covered loans to other real estate owned
    1,959       9,477  
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)
September 30, 2012
 
1.      ACCOUNTING POLICIES
 
Southern National Bancorp of Virginia, Inc. (“Southern National”) 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 15 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, Richmond, Haymarket and Clifton Forge, and five branches in Maryland (four in Montgomery County and one in Frederick County).
 
Sonabank assumed substantially all of the deposits and liabilities and acquired substantially all of the assets of the HarVest Bank of Maryland from the FDIC as receiver. The acquisition included HarVest Bank’s branches in Bethesda, North Rockville, Germantown and Frederick. Adding the new branches to an existing branch in Rockville brings Sonabank’s total number of branches in Maryland to five, four of which are in Montgomery County. This was a strategic acquisition for Sonabank given the expansion into an affluent market. Full details on the transaction are contained in an 8-K/A filed on July 13, 2012.
 
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 Southern National’s Form 10-K for the year ended December 31, 2011.
 
As disclosed in our 2011 Annual Report on Form 10-K filed on April 16, 2012, Southern National restated its financial statements for the year ended December 31, 2009, the interim quarterly periods and year ended December 31, 2010 and the interim quarterly periods through September 30, 2011.  In December 2009, we acquired Greater Atlantic Bank from the FDIC.  We identified errors in the purchase accounting related to that acquisition.  All amounts for the three and nine months ended September 30, 2011 set forth in this Quarterly Report on Form 10-Q, as applicable, reflect the restatement of previously issued financial statements.  See Note 8 for further details.
 
 
6

 
 
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, fair value measurements related to assets acquired and liabilities assumed from business combinations, the FDIC indemnification asset,  mortgage servicing rights, other real estate owned and deferred tax assets.
 
Recent Accounting Pronouncements
 
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS . The guidance clarifies and expands the disclosures pertaining to unobservable inputs used in Level 3 fair value measurements, including the disclosure of quantitative information related to (1) the valuation processes used, (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, and (3) use of a nonfinancial asset in a way that differs from the asset’s highest and best use. The guidance also requires disclosure of the level within the fair value hierarchy for assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed. The amendments in this Update are to be applied prospectively, effective during interim and annual periods beginning after December 15, 2011. This ASU was adopted in the first quarter of 2012 and its requirements are reflected in our disclosures.
 
In September 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income . This ASU amends the disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in stockholder’s equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  In December 2011, the FASB issued ASU 2011-12 to defer changes that relate to the presentation of reclassification adjustments but the other requirements of ASU 2011-05 remain in effect. We present OCI in a single continuous statement of comprehensive income.
 
In October 2012, the FASB issued ASU 2012-06, Business Combinations (Topic 805), Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution . The amendments of this ASU clarify the applicable guidance for subsequently measuring an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. The amended guidance requires an indemnification asset recognized in a government-assisted acquisition of a financial institution that includes a loss-sharing agreement to be measured on the same basis as the indemnified asset and changes in the indemnification asset to be amortized over the lesser of the term of the indemnification agreement or the remaining life of the indemnified assets. The changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2012.  The guidance will be applied prospectively to any new indemnification assets acquired and to changes in expected cash flows of existing indemnification assets occurring on or after the date of adoption.  Any unamortized balance that exists at the date of adoption also will be amortized over the shorter of the remaining term of the loss-sharing agreement or the remaining life of the indemnified assets.  Early adoption is permitted.  We applied the proposed guidance in this ASU in determining the amortization period for the indemnification asset resulting from our re-forecasting of estimated recoveries under the loss-sharing agreement with the FDIC for the 2009 Greater Atlantic Bank acquisition in the second quarter of 2012.
 
 
7

 
 
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, 2012, options to purchase an aggregate of 302,500 shares of common stock were outstanding and no shares remained available for issuance under this plan. 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 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 exercise 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 19,000 options during the first nine months of 2012. 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, 2012:
 
Expected life
 
10 years
 
Expected volatility
    35.64 %
Risk-free interest rate
    2.04 %
Weighted average fair value per option granted
  $ 3.03  
 
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. The dividend yield has a de minimis impact on the fair value of the awards given the recent iniation of the dividend and the amount.
 
For the three and nine months ended September 30, 2012, stock-based compensation expense was $49 thousand and $146 thousand, respectively, compared to $47 thousand and $120 thousand for the same periods last year.  As of September 30, 2012, unrecognized compensation expense associated with the stock options was $518 thousand, which is expected to be recognized over a weighted average period of 3.2 years.
 
 
8

 
 
A summary of the activity in the stock option plan during the nine months ended September 30, 2012 follows (dollars in thousands):
 
               
Weighted
       
         
Weighted
   
Average
       
         
Average
   
Remaining
   
Aggregate
 
         
Exercise
   
Contractual
   
Intrinsic
 
   
Shares
   
Price
   
Term
   
Value
 
Options outstanding, beginning of period
    415,325     $ 8.06              
Granted
    19,000       6.48              
Forfeited
    (11,250 )     8.08              
Exercised
    -       -              
Options outstanding, end of period
    423,075     $ 7.99       5.7        
                               
Vested or expected to vest
    423,075     $ 7.99       5.7     $ 245  
                                 
Exercisable at end of period
    251,825     $ 8.59       4.1     $ 91  
 
3.     SECURITIES
 
The amortized cost and fair value of securities available-for-sale were as follows (in thousands):
 
   
Amortized
Cost
   
Gross Unrealized
 
Fair
Value
 
September 30, 2012
     
Gains
   
Losses
     
 FHLMC preferred stock
  $ 16     $ 33     $ -     $ 49  
                                 
   
Amortized
Cost
   
Gross Unrealized
 
Fair
Value
 
December 31, 2011
     
Gains
   
Losses
     
 SBA guaranteed loan pools
  $ 9,557     $ 280     $ -       9,837  
 FHLMC preferred stock
    16       52       -       68  
      Total
  $ 9,573     $ 332     $ -     $ 9,905  
 
The carrying amount and fair value of securities held-to-maturity were as follows (in thousands):
 
    Amortized
Cost
   
Gross Unrecognized
  Fair
Value
 
September 30, 2012
     
Gains
   
Losses
     
 Residential government-sponsored mortgage-backed securities
  $ 38,765     $ 1,930     $ -     $ 40,695  
 Residential government-sponsored collateralized mortgage obligations
    5,713       79       -       5,792  
 Government-sponsored agency securities
    24,982       131       -       25,113  
 Obligations of states and political subdivisions
    2,427       1       -       2,428  
 Other residential collateralized mortgage obligations
    842       8       -       850  
 Trust preferred securities
    7,767       1,188       (2,224 )     6,731  
    $ 80,496     $ 3,337     $ (2,224 )   $ 81,609  
                                 
   
Amortized
Cost
   
Gross Unrecognized
 
Fair
Value
 
December 31, 2011
     
Gains
   
Losses
     
 Residential government-sponsored mortgage-backed securities
  $ 26,105     $ 1,710             $ 27,815  
 Residential government-sponsored collateralized mortgage obligations
    85       2               87  
 Other residential collateralized mortgage obligations
    957       -       (157 )     800  
 Trust preferred securities
    7,928       674       (2,840 )     5,762  
    $ 35,075     $ 2,386     $ (2,997 )   $ 34,464  
 
 
9

 
 
The fair value and carrying amount, if different, of debt securities as of September 30, 2012, 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
 
   
Amortized
       
   
Cost
   
Fair Value
 
 Due after ten years
  $ 35,176     $ 34,272  
 Residential government-sponsored mortgage-backed securities
    38,765       40,695  
 Residential government-sponsored collateralized mortgage obligations
    5,713       5,792  
 Other residential  collateralized mortgage obligations
    842       850  
      Total
  $ 80,496     $ 81,609  
 
During the three and nine months ended September 30, 2012, we sold $8.0 million of available-for-sale SBA pooled securities acquired in the Greater Atlantic Bank transaction resulting in a gross gain of $287 thousand. 
 
Securities with a carrying amount of approximately $28.2 million and $36.0 million at September 30, 2012 and December 31, 2011, 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 September 30, 2012, certain securities’ fair values were below cost. As outlined in the table below, there were securities (ALESCO VII A1B, MMCF III B, and ALESCO V C1) with fair values totaling approximately $4.9 million in the portfolio with the carrying value exceeding the estimated fair value for a period of time greater than twelve months that are considered temporarily impaired at September 30, 2012.  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 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 September 30, 2012.  The following tables present information regarding securities in a continuous unrealized loss position as of September 30, 2012 and December 31, 2011 (in thousands) by duration of time in a loss position:
 
September 30, 2012
                                   
   
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
  $ -     $ -     $ 4,891     $ (2,224 )   $ 4,891       (2,224 )
                                                 
December 31, 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
  $ 800     $ (157 )   $ -     $ -     $ 800     $ (157 )
Trust preferred securities
    -       -       4,783       (2,840 )     4,783       (2,840 )
    $ 800     $ (157 )   $ 4,783     $ (2,840 )   $ 5,583     $ (2,997 )
 
 
10

 
 
As of September 30, 2012, 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
  $ 6,904   $ 6,216   $ 4,211     $ 117,400   $ 296      
MMCF III B
Senior Sub
  A3   A-  
Ba1
 
CC
    435     426     254       37,000     9      
                        7,339     6,642     4,465           $ 305      
                                                         
                                               
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     423     423       134,100     722   $ 355  
TRAP 2007-XII C1
Mezzanine
  A3   A   C   C     2,107     55     55       202,705     759     1,293  
TRAP 2007-XIII D
Mezzanine
 
NR
  A-  
NR
  C     2,039     -     83       214,000     7     2,032  
MMC FUNDING XVIII
Mezzanine
  A3   A-  
Ca
  C     1,070     27     166       96,682     352     691  
ALESCO V C1
Mezzanine
  A2   A   C   C     2,138     473     426       84,000     1,004     661  
ALESCO XV C1
Mezzanine
  A3   A-   C   C     3,175     30     641       249,100     586     2,559  
ALESCO XVI  C
Mezzanine
  A3   A-   C   C     2,113     117     472       86,150     816     1,180  
                        14,142     1,125     2,266           $ 4,246   $ 8,771  
                                                           
Total
                    $ 21,481   $ 7,767   $ 6,731                      
 
(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.
 
TRAP 2007-XII C1 and TPREF Funding II were determined to be other than temporarily impaired during the three months ended September 30, 2012. Our analyses resulted in OTTI charges related to credit on TRAP 2007-XII C1 and TPREF Funding II in the amount of $479 thousand and $1 thousand, respectively, during the three months ended September 30, 2012, compared to OTTI charges related to credit on TPREF Funding II in the amount of $43 thousand during the third quarter of 2011.   The OTTI charge on TRAP 2007-XII C1 was caused by the deferral of interest payments by a large issuer in the deal which has eroded the credit support below the tranche we own.  This adverse credit development impacts the amount and timing of expected cash flows to the tranche, resulting in the recognition of OTTI. In the first quarter of 2012 we recognized OTTI charges related to credit on MMCF Funding XVIII in the amount of $2 thousand, and in the second quarter of 2012 we recognized OTTI charges related to credit on TRAP 2007-XII C1 in the amount of $235 thousand.
 
 
11

 
 
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, 2012 and 2011 (in thousands):
 
   
2012
   
2011
 
             
Amount of cumulative other-than-temporary impairment  related to credit loss prior to January 1
  $ 8,277     $ 8,002  
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
    717       113  
Reductions due to realized losses
    (25 )     (28 )
Amount of cumulative other-than-temporary impairment related to credit loss as of September 30
  $ 8,969     $ 8,087  
 
4.       LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The following table summarizes the composition of our loan portfolio as of September 30, 2012 and December 31, 2011:
 
   
 
   
Non-covered Loans
                         
   
Covered
   
HarVest
   
Other
   
Total
   
Covered
   
Non-covered
   
Total
 
   
Loans (1)
   
Loans (2)
   
Loans
   
Loans
   
Loans (1)
   
Loans
   
Loans
 
   
September 30, 2012
   
December 31, 2011
 
Mortgage loans on real estate:
                                         
Commercial real estate - owner-occupied
  $ 4,276     $ 17,067     $ 77,731     $ 99,074     $ 4,854     $ 82,450     $ 87,304  
Commercial real estate - non-owner-occupied
    11,965       11,233       107,307       130,505       11,243       117,059       128,302  
Secured by farmland
    -       -       1,486       1,486       -       1,506       1,506  
Construction and land loans
    1,244       5,500       54,647       61,391       2,883       39,565       42,448  
Residential 1-4 family
    22,038       13,709       47,330       83,077       25,307       49,288       74,595  
Multi- family residential
    621       736       18,358       19,715       629       19,553       20,182  
Home equity lines of credit
    33,288       1,991       6,925       42,204       35,442       9,040       44,482  
Total real estate loans
    73,432       50,236       313,784       437,452       80,358       318,461       398,819  
                                                         
Commercial loans
    3,058       7,098       89,413       99,569       2,122       89,939       92,061  
Consumer loans
    104       18       1,626       1,748       108       1,868       1,976  
Gross loans
    76,594       57,352       404,823       538,769       82,588       410,268       492,856  
                                                         
Less deferred fees on loans
    6       (5 )     (1,001 )     (1,000 )     -       (1,088 )     (1,088 )
Loans, net of deferred fees
  $ 76,600     $ 57,347     $ 403,822     $ 537,769     $ 82,588     $ 409,180     $ 491,768  
 
(1) Covered Loans are loans acquired in the Greater Atlantic transaction and are covered under an FDIC loss-share agreement.
(2) HarVest Loans are loans acquired in the HarVest transaction and are not covered under an FDIC loss-share agreement.
 
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 that are not covered in the loss sharing agreement are referred to as “non-covered loans.”   Non-covered loans included $57.3 million of loans acquired in the HarVest acquisition.
 
The covered loans acquired in the Greater Atlantic transaction are and will continue to be 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.
 
Credit-impaired covered loans are those loans showing evidence of credit deterioration since origination and it is probable, at the date of acquisition, that Southern National will not collect all contractually required principal and interest payments. Generally, acquired loans that meet Southern National’s definition for nonaccrual status fall within the definition of credit-impaired covered loans.
 
 
12

 
 
Impaired loans were as follows (in thousands):
 
September 30, 2012
 
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 (3)
   
Investment
   
Losses Allocated
 
With no related allowance recorded
                                   
Commercial real estate - owner occupied
  $ 132     $ -     $ 2,032     $ -     $ 2,164     $ -  
Commercial real estate - non-owner occupied (2)
    2,321       -       1,714       -       4,035       -  
Construction and land development
    1,091       -       4,518       -       5,609       -  
Commercial loans
    208       -       5,550       -       5,758       -  
Residential 1-4 family
    1,162       -       9,946       -       11,108       -  
  Other consumer loans
    -       -       -       -       -       -  
                                                 
Total
  $ 4,914     $ -     $ 23,760     $ -     $ 28,674     $ -  
                                                 
With an allowance recorded
                                               
Commercial real estate - owner occupied
  $ -     $ -     $ 277     $ 75     $ 277     $ 75  
Commercial real estate - non-owner occupied (2)
    -       -       1,181       200       1,181       200  
Construction and land development
    -       -       1,975       300       1,975       300  
Commercial loans
    -       -       -       -       -       -  
Residential 1-4 family
    -       -       -       -       -       -  
  Other consumer loans
    -       -       -       -       -       -  
                                                 
Total
  $ -     $ -     $ 3,433     $ 575     $ 3,433     $ 575  
Grand total
  $ 4,914     $ -     $ 27,193     $ 575     $ 32,107     $ 575  
 
(1) Recorded investment is after cumulative prior charge offs of $5.9 million. These loans also have aggregate SBA guarantees of $2.6 million.
(2) Includes loans secured by farmland and multi-family residential loans.
(3) The Bank recognizes loan impairment through earnings and may concurrently record a charge off to the allowance for loan losses.
 
December 31, 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 (3)
   
Investment
   
Losses Allocated
 
With no related allowance recorded