Southern National Bancorp
Southern National Bancorp of Virginia Inc (Form: 10-Q, Received: 08/09/2013 11:03:34)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 30, 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 August 2, 2013, there were 11,590,212 shares of common stock outstanding.
 
 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
FORM 10-Q
June 30, 2013
 
INDEX
 
     
PAGE
   
PART 1 - FINANCIAL INFORMATION
   
         
Item 1 -
 
Financial Statements
   
   
Consolidated Balance Sheets as of June 30, 2013 and December 31,
2012
2
 
   
Consolidated Statements of Comprehensive Income
for the three and six months ended June 30, 2013 and 2012
3
 
   
Consolidated Statements of Changes in Stockholders’ Equity
for the six months ended June 30, 2013
4
 
   
Consolidated Statements of Cash Flows for the six months ended
June 30, 2013 and 2012
5
 
   
Notes to Consolidated Financial Statements
6- 27
 
         
Item 2 -  
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
28- 41
 
         
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
42-45
 
         
Item 4 – Controls and Procedures
46
 
         
   
PART II - OTHER INFORMATION
   
         
Item 1 – Legal Proceedings
46
 
         
Item 1A –  Risk Factors
46
 
         
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
46
 
         
Item 3 – Defaults Upon Senior Securities
46
 
         
Item 4 – Mine Safety Disclosures
46
 
         
Item 5 – Other Information
46
 
         
Item 6 - Exhibits
47
 
         
Signatures
48
 
         
Certifications
49-51
 
 
 
 
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)
           
   
June 30,
   
December 31,
 
   
2013
   
2012
 
ASSETS
           
Cash and cash equivalents:
           
Cash and due from financial institutions
  $ 3,349     $ 4,553  
Interest-bearing deposits in other financial institutions
    25,196       34,647  
Total cash and cash equivalents
    28,545       39,200  
                 
Securities available for sale, at fair value
    2,034       2,391  
                 
Securities held to maturity, at amortized cost (fair value of $79,635 and $84,827, respectively)
    83,354       84,051  
                 
Covered loans
    59,819       71,328  
Non-covered loans
    464,465       458,823  
Total loans
    524,284       530,151  
Less allowance for loan losses
    (7,296 )     (7,066 )
                Net loans     516,988       523,085  
                 
                 
Stock in Federal Reserve Bank and Federal Home Loan Bank
    5,240       6,212  
Bank premises and equipment, net
    6,286       6,552  
Goodwill
    9,160       9,160  
Core deposit intangibles, net
    1,035       1,280  
FDIC indemnification asset
    6,308       6,735  
Bank-owned life insurance
    18,079       17,782  
Other real estate owned
    14,955       13,836  
Deferred tax assets, net
    8,262       8,174  
Other assets
    6,478       5,354  
                 
                Total assets   $ 706,724     $ 723,812  
                 
LIABILITIES AND STOCKHOLDERS EQUITY
               
                 
Noninterest-bearing demand deposits
  $ 45,339     $ 49,644  
Interest-bearing deposits:
               
NOW accounts
    22,008       22,774  
Money market accounts
    146,461       163,233  
Savings accounts
    12,148       9,618  
Time deposits
    319,682       305,708  
Total interest-bearing deposits
    500,299       501,333  
Total deposits
    545,638       550,977  
                 
 
               
Securities sold under agreements to repurchase and other short-term borrowings
    20,530       33,411  
Federal Home Loan Bank (FHLB) advances
    30,250       30,250  
Other liabilities
    5,370       5,998  
Total liabilities
    601,788       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 June 30, 2013 and December 31, 2012
    116       116  
Additional paid in capital
    96,966       96,840  
Retained earnings
    11,007       9,201  
Accumulated other comprehensive loss
    (3,153 )     (2,981 )
                Total stockholders equity     104,936       103,176  
                 
Total liabilities and stockholders equity
  $ 706,724     $ 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
   
For the Six Months Ended
 
   
June 30,
   
June 30,
 
                         
   
2013
   
2012
   
2013
   
2012
 
                         
Interest and dividend income:
                       
 Interest and fees on loans
  $ 7,765     $ 8,768     $ 16,109     $ 17,379  
 Interest and dividends on taxable securities
    507       509       1,036       911  
 Interest and dividends on tax exepmt securities
    50       -       88       -  
 Interest and dividends on other earning assets
    227       84       339       145  
 Total interest and dividend income
    8,549       9,361       17,572       18,435  
Interest expense:
                               
 Interest on deposits
    1,020       1,301       2,120       2,499  
 Interest on borrowings
    155       227       308       463  
 Total interest expense
    1,175       1,528       2,428       2,962  
                                 
 Net interest income
    7,374       7,833       15,144       15,473  
                                 
Provision for loan losses
    725       1,325       1,818       2,775  
 Net interest income after provision for loan losses
    6,649       6,508       13,326       12,698  
                                 
Noninterest income:
                               
 Account maintenance and deposit service fees
    203       206       396       402  
 Income from bank-owned life insurance
    148       347       297       500  
 Bargain purchase gain on acquisition
    -       3,484       -       3,484  
 Gain on sale of loans
    -       -       -       657  
 Gain on other assets
    13       -       13       14  
 Net gain (loss) on sale of available for sale securities
    -       (13 )     142       (13 )
 Total other-than-temporary impairment losses (OTTI)
    -       (235 )     (3 )     (241 )
 Portion of OTTI recognized in other comprehensive income (before taxes)
    -       -       -       4  
 Net credit related OTTI recognized in earnings
    -       (235 )     (3 )     (237 )
Other
    84       81       139       135  
                                 
 Total noninterest income
    448       3,870       984       4,942  
                                 
Noninterest expenses:
                               
 Salaries and benefits
    2,176       1,970       4,422       3,795  
 Occupancy expenses
    753       705       1,513       1,287  
 Furniture and equipment expenses
    171       143       327       299  
 Amortization of core deposit intangible
    123       228       246       458  
 Virginia franchise tax expense
    115       145       242       291  
Merger expenses
    -       349       -       349  
FDIC assessment
    224       142       458       271  
 Data processing expense
    154       162       302       299  
 Telephone and communication expense
    163       133       341       235  
 Change in FDIC indemnification asset
    107       253       237       239  
 Net loss on other real estate owned
    62       2,201       118       2,400  
 Other operating expenses
    750       732       1,543       1,752  
 Total noninterest expenses
    4,798       7,163       9,749       11,675  
Income before income taxes
    2,299       3,215       4,561       5,965  
Income tax expense
    744       1,000       1,480       1,907  
 Net income
  $ 1,555     $ 2,215     $ 3,081     $ 4,058  
Other comprehensive income (loss):
                               
   Unrealized gain (loss) on available for sale securities
  $ (194 )   $ 65     $ (195 )   $ 94  
   Realized amount on securities sold, net
    -       -       (142 )     -  
Non-credit component of other-than-temporary impairment on held-to-maturity securities
    -       205       97       201  
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale
    (12 )     (28 )     (20 )     (60 )
Net unrealized gain (loss)
    (206 )     242       (260 )     235  
Tax effect
    70       (82 )     88       (80 )
Other comprehensive income (loss)
    (136 )     160       (172 )     155  
Comprehensive income
  $ 1,419     $ 2,375     $ 2,909     $ 4,213  
Earnings per share, basic and diluted
  $ 0.13     $ 0.19     $ 0.27     $ 0.35  
                                 
See accompanying notes to consolidated financial statements.
                               
 
3
 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
                         
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
             
FOR THE SIX MONTHS ENDED JUNE 30, 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
                    3,081               3,081  
    Change in unrealized loss  on securities available for sale (net of tax benefit, $115)
                            (222 )     (222 )
    Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $27 and accretion, $20 and amounts recorded into other comprehensive income at transfer)
                            50       50  
Dividends on common stock ($.11 per share)
                    (1,275 )             (1,275 )
Stock-based compensation expense
            126                       126  
                                         
Balance - June 30, 2013
  $ 116     $ 96,966     $ 11,007     $ (3,153 )   $ 104,936  
                                         
See accompanying notes to consolidated financial statements.
                         
 
4
 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
           
CONSOLIDATED STATEMENTS OF CASH FLOWS
           
FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012
           
(dollars in thousands) (Unaudited)
           
   
2013
   
2012
 
             
Operating activities:
           
Net income
  $ 3,081     $ 4,058  
Adjustments to reconcile net income to net cash and
               
cash equivalents provided by operating activities:
               
Depreciation
    329       289  
Amortization of core deposit intangible
    246       458  
Other amortization, net
    200       114  
Accretion of loan discount
    (1,577 )     (2,360 )
Amortization of FDIC indemnification asset
    237       239  
Provision for loan losses
    1,818       2,775  
Earnings on bank-owned life insurance
    (297 )     (500 )
Stock based compensation expense
    126       97  
Bargain purchase gain on acquisition
    -       (3,484 )
Net (gain) loss on sale of available for sale securities
    (142 )     13  
Gain on sale of loans
    -       (657 )
Impairment on securities
    3       237  
Net loss on other real estate owned
    118       2,400  
Net decrease in other assets
    621       204  
Net increase (decrease) in other liabilities
    (628 )     72  
Net cash and cash equivalents provided by operating activities
    4,135       3,955  
Investing activities:
               
Purchases of available for sale securities
    -       (3,128 )
Proceeds from sales of available for sale securities
    159       14,414  
Proceeds from paydowns, maturities and calls of available for sale securities
    -       946  
Purchases of held to maturity securities
    (11,345 )     (5,000 )
Proceeds from paydowns, maturities and calls of held to maturity securities
    12,014       5,375  
Loan originations and payments, net
    220       3,020  
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 decrease in stock in Federal Reserve Bank and Federal Home Loan Bank
    972       1,790  
Proceeds from cash surrender value of bank-owned life insurance
    -       395  
Payments received on FDIC indemnification asset
    171       89  
Proceeds from sale of other real estate owned
    2,578       1,107  
Purchases of bank premises and equipment
    (64 )     (72 )
Net cash and cash equivalents provided by investing activities
    4,705       79,474  
Financing activities:
               
Net decrease in deposits
    (5,339 )     (57,577 )
Cash dividends paid - common stock
    (1,275 )     (349 )
Repayment of Federal Home Loan Bank advances
    -       (16,488 )
     Net increase (decrease) in securities sold under agreement to repurchase and other short-term borrowings
    (12,881 )     13,293  
Net cash and cash equivalents used in financing activities
    (19,495 )     (61,121 )
Increase (decrease) in cash and cash equivalents
    (10,655 )     22,308  
Cash and cash equivalents at beginning of period
    39,200       5,035  
Cash and cash equivalents at end of period
  $ 28,545     $ 27,343  
Supplemental disclosure of cash flow information
               
Cash payments for:
               
Interest
  $ 2,326     $ 2,985  
Income taxes
    2,238       1,200  
Supplemental schedule of noncash investing and financing activities
               
Transfer from non-covered loans to other real estate owned
    1,605       1,959  
Transfer from covered loans to other real estate owned
    4,031       -  
                 
See accompanying notes to consolidated financial statements.
               

5
 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
Notes to Consolidated Financial Statements (Unaudited)
June 30, 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 June 30, 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 120,250 options during the first six 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 six months ended June 30, 2013:
 
Expected life
 
10 years
 
Expected volatility
    34.21 %
Risk-free interest rate
    2.42 %
Weighted average fair value per option granted
  $ 3.58  
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 and six months ended June 30, 2013 and 2012, stock-based compensation expense was $63 thousand and $126 thousand, respectively, compared to $47 thousand and $96 thousand for the same periods last year.  As of June 30, 2013, unrecognized compensation expense associated with the stock options was $1.1 million, which is expected to be recognized over a weighted average period of 4.0 years.
 
7
 
 
A summary of the activity in the stock option plan during the six months ended June 30, 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
    120,250       9.18              
Forfeited
    -       -              
Exercised
    -       -              
Options outstanding, end of period
    633,075     $ 8.21       6.5     $ 1,011  
                                 
Vested or expected to vest
    633,075     $ 8.21       6.5     $ 1,011  
                                 
Exercisable at end of period
    304,775     $ 8.35       4.0     $ 451  
 
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
 
June 30, 2013
 
Cost
   
Gains
   
Losses
   
Value
 
Obligations of states and political subdivisions
  $ 2,305     $ -     $ (271 )   $ 2,034  
                                 
   
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
 
June 30, 2013
 
Cost
   
Gains
   
Losses
   
Value
 
Residential government-sponsored mortgage-backed securities
  $ 29,029     $ 769     $ (206 )   $ 29,592  
Residential government-sponsored collateralized mortgage obligations
    4,844       5       (233 )     4,616  
Government-sponsored agency securities
    29,969       -       (2,084 )     27,885  
Obligations of states and political subdivisions
    11,012       -       (883 )     10,129  
Other residential collateralized mortgage obligations
    741       27               768  
Trust preferred securities
    7,759       1,071       (2,185 )     6,645  
    $ 83,354     $ 1,872     $ (5,591 )   $ 79,635  
 
   
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  
 
8
 
 
The amortized cost amounts are net of recognized other than temporary impairment.
 
During the six months ended June 30, 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 June 30, 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 in five to ten years
  $ 4,257     $ 4,015     $ -     $ -  
Due after ten years
    44,483       40,644       2,305       2,034  
Residential government-sponsored mortgage-backed securities
    29,029       29,592       -       -  
Residential government-sponsored collateralized mortgage obligations
    4,844       4,616       -       -  
Other residential  collateralized mortgage obligations
    741       768       -       -  
Total
  $ 83,354     $ 79,635     $ 2,305     $ 2,034  
 
Securities with a carrying amount of approximately $66.7 million and $62.3 million at June 30, 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 June 30, 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 $63.2 million in the portfolio with the carrying value exceeding the estimated fair value that are considered temporarily impaired at June 30, 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 June 30, 2013. The following tables present information regarding securities in a continuous unrealized loss position as of June 30, 2013 and December 31, 2012 (in thousands) by duration of time in a loss position:
 
9
 
 
June 30, 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
  $ 2,034     $ (271 )   $ -     $ -     $ 2,034     $ (271 )
                                                 
   
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
  $ 15,439     $ (206 )   $ -     $ -     $ 15,439     $ (206 )
Residential government-sponsored collateralized mortgage obligations
    3,337       (233 )     -       -       3,337       (233 )
Government-sponsored agency securities
    27,885       (2,084 )     -       -       27,885       (2,084 )
Obligations of states and political subdivisions
    10,129       (883 )                   $ 10,129     $ (883 )
Trust preferred securities
    -       -       4,352       (2,185 )     4,352       (2,185 )
    $ 56,790     $ (3,406 )   $ 4,352     $ (2,185 )   $ 61,142     $ (5,591 )
                                                 
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 )
 
As of June 30, 2013, we owned pooled trust preferred securities as follows:
 
                                                     
Previously
       
                                               
% of Current
   
Recognized
       
                                               
Defaults and
   
Cumulative
       
     
Ratings
                           
Estimated
   
Deferrals to
   
Other
       
 
Tranche
 
When Purchased
   
Current Ratings
               
Fair
   
Total
   
Comprehensive
       
Security
Level
 
Moody s
   
Fitch
   
Moody’s
   
Fitch
   
Par Value
   
Book Value
   
Value
   
Collateral
   
Loss (1)
       
                             
(in thousands)
                   
ALESCO VII  A1B
Senior
 
Aaa
   
AAA
   
Baa3
   
BB
    $ 6,777     $ 6,124     $ 4,097     24 %   $ 281        
MMCF III B
Senior Sub
  A3     A-    
Ba1
   
CC
      421       413       255     30 %     8        
                                7,198       6,537       4,352           $ 289        
                                                                       
                                                           
Cumulative Other
   
Cumulative
 
                                                           
Comprehensive
   
OTTI Related to
 
Other Than Temporarily Impaired:
                                                         
Loss (2)
   
Credit Loss (2)
 
TPREF FUNDING II
Mezzanine
  A1     A-    
Caa3
    C       1,500       515       520     44 %     626     $ 359  
TRAP 2007-XII C1
Mezzanine
  A3     A     C     C       2,132       56       140     39 %     783       1,293  
TRAP 2007-XIII D
Mezzanine
 
NR
    A-    
NR
    C       2,039       -       103     29 %     7       2,032  
MMC FUNDING XVIII
Mezzanine
  A3     A-    
Ca
    C       1,081       27       254     30 %     363       691  
ALESCO V C1
Mezzanine
  A2     A     C     C       2,150       475       548     23 %     1,014       661  
ALESCO XV C1
Mezzanine
  A3     A-     C     C       3,210       30       152     35 %     621       2,559  
ALESCO XVI  C
Mezzanine
  A3     A-     C     C       2,136       119       576     16 %     837       1,180  
                                14,248       1,222       2,293           $ 4,251     $ 8,775  
                                                                         
Total
                            $ 21,446     $ 7,759     $ 6,645                        
 
(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 (“OTTI”).  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.

10
 
 
 
Recoveries ranging from 25% to 46% 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 no OTTI charges during the second quarter of 2013 and recognized OTTI charges of $3 thousand during the first six months of 2013 compared to OTTI charges related to credit on the trust preferred securities totaling $235 thousand and $237 thousand during the same periods of 2012.
 
The following table presents a roll forward of the credit losses on our securities held to maturity recognized in earnings for the six months ended June 30, 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       237  
Reductions due to realized losses
    (32 )     (89 )
Amount of cumulative other-than-temporary impairment related to credit loss as of June 30
  $ 8,935     $ 8,425  
 
11
 
 
Changes in accumulated other comprehensive income by component for the three and six months ended June 30, 2013 are shown in the table below.  All amounts are net of tax (in thousands).
                         
   
Unrealized Holding
             
   
Gains (Losses) on
             
For the three months ended June 30, 2013
 
Available for Sale
   
Held to Maturity
       
   
Securities
   
Securities
   
Total
 
Beginning balance
  $ (50 )   $ (2,967 )   $ (3,017 )
Other comprehensive income/(loss) before reclassifications
    (128 )     (8 )     (136 )
Amounts reclassified from accumulated other comprehensive income/(loss)
    -       -       -  
Net current-period other comprehensive income/(loss)
    (128 )     (8 )     (136 )
Ending balance
  $ (178 )   $ (2,975 )   $ (3,153 )
                         
   
Unrealized Holding
                 
   
Gains (Losses) on
                 
For the six months ended June 30, 2013
 
Available for Sale
   
Held to Maturity
         
   
Securities
   
Securities
   
Total
 
Beginning balance
  $ 44     $ (3,025 )   $ (2,981 )
Other comprehensive income/(loss) before reclassifications
    (129 )     52       (77 )
Amounts reclassified from accumulated other comprehensive income/(loss)
    (93 )     (2 )     (95 )
Net current-period other comprehensive income/(loss)
    (222 )     50       (172 )
Ending balance
  $ (178 )   $ (2,975 )   $ (3,153 )

4.     LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table summarizes the composition of our loan portfolio as of June 30, 2013 and December 31, 2012:
                                     
   
Covered
   
Non-covered
   
Total
   
Covered
   
Non-covered
   
Total
 
   
Loans (1)
   
Loans
   
Loans
   
Loans (1)
   
Loans
   
Loans
 
   
June 30, 2013
   
December 31, 2012
 
 Loans secured by real estate:
                                   
    Commercial real estate - owner-occupied
  $ 3,662     $ 93,837     $ 97,499     $ 4,143     $ 93,288     $ 97,431  
    Commercial real estate - non-owner-occupied
    6,028       140,929       146,957       10,246       130,152       140,398  
    Secured by farmland
    103       517       620       -       1,479       1,479  
    Construction and land loans
    52       31,076       31,128       1,261       44,946       46,207  
    Residential 1-4 family
    19,067       62,544       81,611       21,005       61,319       82,324  
    Multi- family residential
    598