Southern National Bancorp
Southern National Bancorp of Virginia Inc (Form: 10-Q, Received: 05/10/2013 12:42:30)


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 March 31, 2013
 
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 May 3, 2013, there were 11,590,212 shares of common stock outstanding.

 
 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
FORM 10-Q
March 31, 2013
 
INDEX

     
PAGE
   
PART 1 - FINANCIAL INFORMATION
   
         
Item 1 -
 
Financial Statements
   
   
Consolidated Balance Sheets as of March 31, 2013 and December 31,
2012
2
 
   
Consolidated Statements of Comprehensive Income
for the three months ended March 31, 2013 and 2012
3
 
   
Consolidated Statements of Changes in Stockholders’ Equity
for the three months ended March 31, 2013
4
 
   
Consolidated Statements of Cash Flows for the three months ended
March 31, 2013 and 2012
5
 
   
Notes to Consolidated Financial Statements
6- 24
 
         
Item 2 -  
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
25- 36
 
         
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
37-40
 
         
Item 4 – Controls and Procedures
41
 
         
   
PART II - OTHER INFORMATION
   
         
Item 1 – Legal Proceedings
41
 
         
Item 1A –  Risk Factors
41
 
         
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
41
 
         
Item 3 – Defaults Upon Senior Securities
41
 
         
Item 4 – Mine Safety Disclosures
41
 
         
Item 5 – Other Information
41
 
         
Item 6 - Exhibits
42
 
         
Signatures
43
 
         
Certifications
44-46
 

 
 

 
 
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)

   
March 31,
   
December 31,
 
   
2013
   
2012
 
ASSETS
           
Cash and cash equivalents:
           
Cash and due from financial institutions
  $ 2,945     $ 4,553  
Interest-bearing deposits in other financial institutions
    51,568       34,647  
Total cash and cash equivalents
    54,513       39,200  
                 
Securities available for sale, at fair value
    2,229       2,391  
                 
Securities held to maturity, at amortized cost (fair value of $81,710 and $84,827, respectively)
    81,971       84,051  
                 
Covered loans
    65,794       71,328  
Non-covered loans
    444,225       458,823  
Total loans
    510,019       530,151  
Less allowance for loan losses
    (7,218 )     (7,066 )
Net loans
    502,801       523,085  
                 
Stock in Federal Reserve Bank and Federal Home Loan Bank
    5,015       6,212  
Bank premises and equipment, net
    6,404       6,552  
Goodwill
    9,160       9,160  
Core deposit intangibles, net
    1,157       1,280  
FDIC indemnification asset
    6,561       6,735  
Bank-owned life insurance
    17,931       17,782  
Other real estate owned
    13,910       13,836  
Deferred tax assets, net
    8,192       8,174  
Other assets
    5,046       5,354  
                 
Total assets
  $ 714,890     $ 723,812  
                 
LIABILITIES AND STOCKHOLDERS EQUITY
               
                 
Noninterest-bearing demand deposits
  $ 42,324     $ 49,644  
Interest-bearing deposits:
               
NOW accounts
    23,521       22,774  
Money market accounts
    156,097       163,233  
Savings accounts
    10,262       9,618  
Time deposits
    327,169       305,708  
Total interest-bearing deposits
    517,049       501,333  
Total deposits
    559,373       550,977  
                 
Securities sold under agreements to repurchase and other short-term borrowings
    15,611       33,411  
Federal Home Loan Bank (FHLB) advances
    30,250       30,250  
Other liabilities
    5,506       5,998  
Total liabilities
    610,740       620,636  
                 
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 March 31, 2013 and December 31, 2012
    116       116  
Additional paid in capital
    96,904       96,840  
Retained earnings
    10,147       9,201  
Accumulated other comprehensive loss
    (3,017 )     (2,981 )
Total stockholders’ equity
    104,150       103,176  
                 
Total liabilities and stockholders’ equity
  $ 714,890     $ 723,812  

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
 
   
March 31,
 
   
2013
   
2012
 
             
Interest and dividend income:
           
    Interest and fees on loans   $ 8,343     $ 8,611  
Interest and dividends on tax exempt securities
    530       402  
Interest and dividends on taxable securities
    38       -  
Interest and dividends on other earning assets
    112       61  
Total interest and dividend income
    9,023       9,074  
Interest expense:
               
Interest on deposits
    1,100       1,197  
Interest on borrowings
    153       237  
Total interest expense
    1,253       1,434  
                 
Net interest income
    7,770       7,640  
                 
Provision for loan losses
    1,093       1,450  
Net interest income after provision for loan losses
    6,677       6,190  
                 
Noninterest income:
               
Account maintenance and deposit service fees
    193       196  
Income from bank-owned life insurance
    149       153  
Gain on sale of SBA loans
    -       657  
Net loss on other real estate owned
    (56 )     (199 )
Gain on other assets
    -       14  
Gain on sale of available for sale securities
    142       -  
Total other-than-temporary impairment losses
    (3 )     (6 )
Portion of loss recognized in other comprehensive income (before taxes)
    -       4  
Net credit impairment losses recognized in earnings
    (3 )     (2 )
Other
    55       53  
                 
Total noninterest income
    480       872  
                 
Noninterest expenses:
               
Salaries and benefits
    2,246       1,825  
Occupancy expenses
    760       582  
Furniture and equipment expenses
    156       156  
Amortization of core deposit intangible
    123       230  
Virginia franchise tax expense
    127       145  
FDIC assessment
    234       129  
Data processing expense
    148       137  
Telephone and communication expense
    178       102  
Change in FDIC indemnification asset
    130       (14 )
Other operating expenses
    793       1,020  
Total noninterest expenses
    4,895       4,312  
Income before income taxes
    2,262       2,750  
Income tax expense
    736       907  
Net income
  $ 1,526     $ 1,843  
Other comprehensive income (loss) :
               
Unrealized gain (loss) on available for sale securities
  $ (1 )   $ 29  
Realized amount on securities sold, net
    (142 )     -  
Non-credit component of other-than-temporary impairment on held-to-maturity securities
    97       (4 )
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale
    (8 )     (32 )
Net unrealized gain (loss)
    (54 )     (7 )
Tax effect
    18       2  
Other comprehensive loss
    (36 )     (5 )
Comprehensive income
  $ 1,490     $ 1,838  
 Earnings per share, basic and diluted
  $ 0.13     $ 0.16  
 
See accompanying notes to consolidated financial statements.
 
 
3

 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2013
(dollars in thousands, except per share amounts) (Unaudited)
 
                     
Accumulated
       
         
Additional
         
Other
       
   
Common
   
Paid in
   
Retained
   
Comprehensive
       
   
Stock
   
Capital
   
Earnings
   
Loss
   
Total
 
                               
Balance - January 1, 2013
  $ 116     $ 96,840     $ 9,201     $ (2,981 )   $ 103,176  
Comprehensive income:
                                       
    Net income
                    1,526               1,526  
Change in unrealized loss  on securities available for sale (net of tax benefit, $49)
                            (94 )     (94 )
Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $31 and accretion, $8 and amounts recorded into other comprehensive income at transfer)
                            58       58  
Dividends on common stock ($.05 per share)
                    (580 )             (580 )
Stock-based compensation expense
            64                       64  
                                         
Balance - March 31, 2013
  $ 116     $ 96,904     $ 10,147     $ (3,017 )   $ 104,150  
 
 See accompanying notes to consolidated financial statements.
 
 
4

 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012
(dollars in thousands) (Unaudited)
 
   
2013
   
2012
 
             
Operating activities:
           
    Net income   $ 1,526     $ 1,843  
    Adjustments to reconcile net income to net cash and                
cash equivalents provided  by operating activities:
               
Depreciation
    167       147  
Amortization of core deposit intangible
    123       230  
Other amortization, net
    105       44  
Accretion of loan discount
    (775 )     (1,472 )
Amortization (accretion) of FDIC indemnification asset
    130       (14 )
Provision for loan losses
    1,093       1,450  
Earnings on bank-owned life insurance
    (149 )     (153 )
Stock based compensation expense
    64       50  
Net gain on sale of available for sale securities
    (142 )     -  
Gain on sale of loans
    -       (657 )
Impairment on securities
    3       2  
Net loss on other real estate owned
    56       199  
Net decrease in other assets
    286       195  
Net increase (decrease) in other liabilities
    (492 )     577  
                Net cash and cash equivalents provided by operating activities     1,995       2,441  
Investing activities:
               
Proceeds from sales of available for sale securities
    159       -  
Proceeds from paydowns, maturities and calls of available for sale securities
    -       710  
Purchases of  held to maturity securities
    (6,241 )     (5,000 )
Proceeds from paydowns, maturities and calls of held to maturity securities
    8,353       2,509  
Loan originations and payments, net
    17,823       (3,839 )
Proceeds from sale of SBA loans
    -       5,713  
Net decrease in stock in Federal Reserve Bank and Federal Home Loan Bank
    1,197       -  
Payments received on FDIC indemnification asset
    17       2  
Proceeds from sale of other real estate owned
    2,013       511  
Purchases of bank premises and equipment
    (19 )     (36 )
                Net cash and cash equivalents provided by investing activities     23,302       570  
Financing activities:
               
Net increase (decrease) in deposits
    8,396       (8,432 )
Cash dividends paid - common stock
    (580 )     (175 )
Net increase (decrease) in securities sold under agreement to repurchase and other short-term borrowings
    (17,800 )     5,610  
                Net cash and cash equivalents used in financing activities     (9,984 )     (2,997 )
Increase in cash and cash equivalents
    15,313       14  
Cash and cash equivalents at beginning of period
    39,200       5,035  
Cash and cash equivalents at end of period
  $ 54,513     $ 5,049  
Supplemental disclosure of cash flow information
               
Cash payments for:
               
Interest
  $ 1,201     $ 1,420  
Income taxes
    1,363       125  
Supplemental schedule of noncash investing and financing activities
               
Transfer from non-covered loans to other real estate owned
    312       -  
Transfer from covered loans to other real estate owned
    1,831       -  
 
See accompanying notes to consolidated financial statements.
 
 
5

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2013
 
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 has fifteen branches in Virginia, located in Fairfax County (Reston, McLean and Fairfax), in Charlottesville, Warrenton (2), Middleburg, Leesburg (2), South Riding, Front Royal, New Market, Haymarket,  Richmond and Clifton Forge, and five branches in Maryland, in Rockville, Shady Grove, Germantown, Frederick and Bethesda.
 
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, 2012.
 
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.
 
Recent Accounting Pronouncements
 
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This standard update requires companies to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in the consolidated statements of comprehensive income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. We adopted this standard in the first quarter of 2013 and have included the additional disclosures.
 
 
6

 
 
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 March 31, 2013, 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 Southern National and to assist in the attracting and retaining of non-employee directors by affording them an opportunity to share in Southern National’s future success.  Under the plan, the option’s price cannot be less than the fair market value of the stock on the grant date.  The maximum term of the options is ten years and options granted may be subject to a graded vesting schedule.
 
Southern National granted 22,500 options during the first three months of 2013. 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 three months ended March 31, 2013:
 
   
2013
 
Expected life
 
10 years
 
Expected volatility
    34.21 %
Risk-free interest rate
    2.03 %
Weighted average fair value per option granted
  $ 3.55  
Dividend yield
    1.29 %
 
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 months ended March 31, 2013 and 2012, stock-based compensation expense was $64 thousand and $50 thousand, respectively.  As of March 31, 2013, unrecognized compensation expense associated with the stock options was $815 thousand, which is expected to be recognized over a weighted average period of 3.7 years.
 
 
7

 
 
A summary of the activity in the stock option plan during the three months ended March 31, 2013 follows (dollars in thousands):
 
               
Weighted
       
         
Weighted
   
Average
       
         
Average
   
Remaining
   
Aggregate
 
         
Exercise
   
Contractual
   
Intrinsic
 
   
Shares
   
Price
   
Term
   
Value
 
Options outstanding, beginning of period
    512,825     $ 7.98              
Granted
    22,500       9.32              
Forfeited
    -       -              
Exercised
    -       -              
Options outstanding, end of period
    535,325     $ 8.04       6.1     $ 896  
                                 
Vested or expected to vest
    535,325     $ 8.04       6.1     $ 896  
                                 
Exercisable at end of period
    298,025     $ 8.37       4.2     $ 418  
 
3.     SECURITIES
 
The amortized cost and fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows (in thousands):
 
   
Amortized
   
Gross Unrealized
   
Fair
 
March 31, 2013
 
Cost
   
Gains
   
Losses
   
Value
 
Obligations of states and political subdivisions
  $ 2,307     $ -     $ (78 )   $ 2,229  
                                 
   
Amortized
   
Gross Unrealized
   
Fair
 
December 31, 2012
 
Cost
   
Gains
   
Losses
   
Value
 
Obligations of states and political subdivisions
  $ 2,309     $ 2     $ (22 )   $ 2,289  
FHLMC preferred stock
    16       86       -       102  
Total
  $ 2,325     $ 88     $ (22 )   $ 2,391  
 
The amortized cost, unrecognized gains and losses, and fair value of securities held to maturity were as follows (in thousands):
 
   
Amortized
   
Gross Unrecognized
   
Fair
 
March 31, 2013
 
Cost
   
Gains
   
Losses
   
Value
 
Residential government-sponsored mortgage-backed securities
  $ 32,367     $ 1,322     $ (5 )   $ 33,684  
Residential government-sponsored collateralized mortgage obligations
    5,156       16       (43 )     5,129  
Government-sponsored agency securities
    29,967       53       (239 )     29,781  
Obligations of states and political subdivisions
    5,927       -       (200 )     5,727  
Other residential collateralized mortgage obligations
    778       -       (39 )     739  
Trust preferred securities
    7,776       978       (2,104 )     6,650  
    $ 81,971     $ 2,369     $ (2,630 )   $ 81,710  
                                 
   
Amortized
   
Gross Unrecognized
   
Fair
 
December 31, 2012
 
Cost
   
Gains
   
Losses
   
Value
 
Residential government-sponsored mortgage-backed securities
  $ 35,375     $ 1,559     $ -     $ 36,934  
Residential government-sponsored collateralized mortgage obligations
    5,444       81       -       5,525  
Government-sponsored agency securities
    29,983       52       (4 )     30,031  
Obligations of states and political subdivisions
    4,689       1       (69 )     4,621  
Other residential collateralized mortgage obligations
    817       -       (24 )     793  
Trust preferred securities
    7,743       1,422       (2,242 )     6,923  
    $ 84,051     $ 3,115     $ (2,339 )   $ 84,827  
 
The amortized cost amounts are net of recognized other than temporary impairment.
 
 
8

 
 
During the three ended March 31, 2013, we sold 55 thousand shares of available for sale FHLMC preferred stock resulting in a gain of $142 thousand.
 
The fair value and carrying amount, if different, of debt securities as of March 31, 2013, 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 after ten years
  $ 43,670     $ 42,158     $ 2,307     $ 2,229  
Residential government-sponsored mortgage-backed securities
    32,367       33,684       -       -  
Residential government-sponsored collateralized mortgage obligations
    5,156       5,129       -       -  
Other residential  collateralized mortgage obligations
    778       739       -       -  
Total
  $ 81,971     $ 81,710     $ 2,307     $ 2,229  
 
Securities with a carrying amount of approximately $65.3 million and $62.3 million at March 31, 2013 and December 31, 2012, 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”).
 
Southern National monitors the portfolio for indicators of other than temporary impairment.  At March 31, 2013 and December 31, 2012, certain securities’ fair values were below cost. As outlined in the table below, there were securities with fair values totaling approximately $43.2 million in the portfolio with the carrying value exceeding the estimated fair value that are considered temporarily impaired at March 31, 2013.  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 March 31, 2013. The following tables present information regarding securities in a continuous unrealized loss position as of March 31, 2013 and December 31, 2012 (in thousands) by duration of time in a loss position:
 
March 31, 2013
                                   
   
Less than 12 months
   
12 Months or More
   
Total
 
Available for Sale
 
Fair value
   
Unrealized Losses
   
Fair value
   
Unrealized Losses
   
Fair value
   
Unrealized Losses
 
Obligations of states and political subdivisions
  $ 2,229     $ (78 )   $ -     $ -     $ 2,229     $ (78 )
                                                 
   
Less than 12 months
   
12 Months or More
   
Total
 
Held to Maturity
 
Fair value
   
Unrecognized Losses
   
Fair value
   
Unrecognized Losses
   
Fair value
   
Unrecognized Losses
 
Residential government-sponsored mortgage-backed securities
  $ 1,640     $ (5 )   $ -     $ -     $ 1,640     $ (5 )
Residential government-sponsored collateralized mortgage obligations
    3,637       (43 )     -       -       3,637       (43 )
Government-sponsored agency securities
    24,744       (239 )     -       -       24,744       (239 )
Obligations of states and political subdivisions
    5,727       (200 )     -       -     $ 5,727     $ (200 )
Other residential collateralized mortgage obligations
    739       (39 )     -       -       739       (39 )
Trust preferred securities
    -       -       4,451       (2,104 )     4,451       (2,104 )
    $ 36,487     $ (526 )   $ 4,451     $ (2,104 )   $ 40,938     $ (2,630 )
December 31, 2012
                                               
   
Less than 12 months
   
12 Months or More
   
Total
 
Available for Sale
 
Fair value
   
Unrealized Losses
   
Fair value
   
Unrealized Losses
   
Fair value
   
Unrealized Losses
 
Obligations of states and political subdivisions
  $ 1,552     $ (22 )   $ -     $ -     $ 1,552     $ (22 )
                                                 
   
Less than 12 months
   
12 Months or More
   
Total
 
Held to Maturity
 
Fair value
   
Unrecognized Losses
   
Fair value
   
Unrecognized Losses
   
Fair value
   
Unrecognized Losses
 
Obligations of states and political subdivisions
  $ 4,189     $ (69 )   $ -     $ -     $ 4,189     $ (69 )
Government-sponsored agency securities
    4,996       (4 )     -       -       4,996       (4 )
Other residential collateralized mortgage obligations
    793       (24 )     -       -       793       (24 )
Trust preferred securities
    -       -       4,849       (2,242 )     4,849       (2,242 )
    $ 9,978     $ (97 )   $ 4,849     $ (2,242 )   $ 14,827     $ (2,339 )
 
 
9

 
 
As of March 31, 2013, 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
    $ 6,801     $ 6,139     $ 4,195     $ 107,400     $ 287        
MMCF III B
Senior Sub
  A3     A-    
Ba1
   
CC
      425       416       256       27,000       9        
                                7,226       6,555       4,451             $ 296        
                                                                         
                                                             
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       515       515       134,100       626     $ 359  
TRAP 2007-XII C1
Mezzanine
  A3     A     C     C       2,124       56       78       201,909       775       1,293  
TRAP 2007-XIII D
Mezzanine
 
NR
    A-    
NR
    C       2,039       -       120       207,012       7       2,032  
MMC FUNDING XVIII
Mezzanine
  A3     A-    
Ca
    C       1,077       27       244       96,682       359       691  
ALESCO V C1
Mezzanine
  A2     A     C     C       2,150       475       530       73,225       1,014       661  
ALESCO XV C1
Mezzanine
  A3     A-     C     C       3,199       30       184       224,100       610       2,559  
ALESCO XVI  C
Mezzanine
  A3     A-     C     C       2,128       118       528       71,150       830       1,180  
                                14,217       1,221       2,199             $ 4,221     $ 8,775  
                                                                           
Total
                            $ 21,443     $ 7,776     $ 6,650                          
 
(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.
 
We recognized OTTI charges of $3 thousand during the first quarter of 2013 compared to OTTI charges related to credit on the trust preferred securities totaling $2 thousand during the first quarter of 2012.
 
 
10

 
 
The following table presents a roll forward of the credit losses on our securities held to maturity recognized in earnings for the three months ended March 31, 2013 and 2012 (in thousands):
 
   
2013
   
2012
 
             
 
           
Amount of cumulative other-than-temporary impairment related to credit loss prior to January 1
  $ 8,964     $ 8,277  
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
    3       2  
Reductions due to realized losses
    (25 )     (5 )
Amount of cumulative other-than-temporary impairment related to credit loss as of March 31
  $ 8,942     $ 8,274  
 
Changes in accumulated other comprehensive income by component for the three months ended March 31, 2013 are shown in the table below.  All amounts are net of tax (in thousands).
 
   
Unrealized Holding
             
   
Gains (Losses) on
             
   
Available for Sale
   
Held to Maturity
       
   
Securities
   
Securities
   
Total
 
Beginning balance
  $ 44     $ (3,025 )   $ (2,981 )
Other comprehensive income/(loss) before reclassifications
    (1 )     60       59  
Amounts reclassified from accumulated other comprehensive income/(loss)
    (93 )     (2 )     (95 )
Net current-period other comprehensive income/(loss)
    (94 )     58       (36 )
Ending balance
  $ (50 )   $ (2,967 )   $ (3,017 )
 
   4.         LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The following table summarizes the composition of our loan portfolio as of March 31, 2013 and December 31, 2012:
 
   
Covered
   
Non-covered
   
Total
   
Covered
   
Non-covered
   
Total
 
   
Loans (1)
   
Loans
   
Loans
   
Loans (1)
   
Loans
   
Loans
 
   
March 31, 2013
   
December 31, 2012
 
 Loans secured by real estate:
                                   
Commercial real estate - owner-occupied
  $ 4,038     $ 91,728     $ 95,766     $ 4,143     $ 93,288     $ 97,431  
Commercial real estate - non-owner-occupied  
    8,818       122,382       131,200       10,246       130,152       140,398  
Secured by farmland
    104       846       950       -       1,479       1,479  
Construction and land loans
    91       41,992       42,083       1,261       44,946       46,207  
Residential 1-4 family
    20,020       59,601       79,621       21,005       61,319       82,324  
Multi- family residential
    606       21,127       21,733       614       18,774       19,388  
Home equity lines of credit
    30,650       7,602       38,252       31,292       9,178       40,470  
Total real estate loans
    64,327       345,278       409,605       68,561       359,136       427,697  
                                                 
Commercial loans
    1,376       98,546       99,922       2,672       99,081       101,753  
Consumer loans
    86       1,394       1,480       88       1,623       1,711  
Gross loans
    65,789       445,218       511,007       71,321       459,840       531,161  
                                                 
Less deferred fees on loans
    5       (993 )     (988 )     7       (1,017 )     (1,010 )
Loans, net of deferred fees
  $ 65,794     $ 444,225     $ 510,019     $ 71,328     $ 458,823     $ 530,151  
 
(1) Covered Loans were acquired in the Greater Atlantic transaction and are covered under an FDIC loss-share agreement.
 
Accounting policy related to the allowance for loan losses is considered a critical policy given the level of estimation, judgment, and uncertainty in evaluation of the levels of the allowance required to account for the inherent probable losses in the loan portfolio and the material effect such estimation, judgment, and uncertainty can have on the consolidated financial results.
 
 
11

 
 
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 $50.9 million of loans acquired in the HarVest acquisition. Accretable discount on the acquired covered loans and the HarVest loans was $10.9 million and $11.7 million at March 31, 2013 and December 31, 2012, respectively.
 
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 which presented evidence of credit deterioration at the date of acquisition and it is probable that Southern National would not collect all contractually required principal and interest payments. Generally, acquired loans that meet Southern National’s definition for nonaccrual status fell within the definition of credit-impaired covered loans.
 
 
12

 
 
Impaired loans for the covered and non-covered portfolios were as follows (in thousands):
 
March 31, 2013
 
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
  $ 137     $ -     $ 7,918     $ -     $ 8,055     $ -  
Commercial real estate - non-owner occupied (2)
    3,633       -       1,076       -       4,709       -  
Construction and land development
    45       -       2,285       -       2,330       -  
Commercial loans
    45       -       4,815       -       4,860       -  
Residential 1-4 family
    1,788       -       3,336       -       5,124       -  
Other consumer loans
    -       -       -       -       -       -  
                                                 
Total
  $ 5,648     $ -     $ 19,430     $ -     $ 25,078     $ -  
                                                 
With an allowance recorded
                                               
Commercial real estate - owner occupied
  $ -     $ -     $ 127     $ 127     $ 127     $ 127  
Commercial real estate - non-owner occupied (2)
    -       -       973       61       973       61  
Construction and land development
    -       -       -       -       -       -  
Commercial loans
    -       -       -       -       -       -  
Residential 1-4 family
    -       -       5,780       440       5,780       440  
Other consumer loans
    -       -       -       -       -       -  
                                                 
Total
  $ -     $ -     $ 6,880     $ 628     $ 6,880     $ 628  
Grand total
  $ 5,648     $ -     $ 26,310     $ 628     $ 31,958     $ 628  
                                                 
(1) Recorded investment is after cumulative prior charge offs of $3.1 million. These loans also have aggregate SBA guarantees of $1.8 million.
(2) Includes loans secured by farmland and multi-family residential loans.
(3) The Bank recognizes loan impairment and may concurrently record a charge off to the allowance for loan losses.
                                                 
December 31, 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