Southern National Bancorp
Southern National Bancorp of Virginia Inc (Form: 10-Q, Received: 11/12/2013 11:17:34)



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 September 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
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 November 1, 2013, there were 11,590,612 shares of common stock outstanding.
 
 
 

 


SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
FORM 10-Q
September 30, 2013

INDEX

       PAGE
       
PART 1 - FINANCIAL INFORMATION
     
         
Item 1 - Financial Statements      
 
Consolidated Balance Sheets as of September 30, 2013 and December 31,
2012
 
2
 
 
Consolidated Statements of Comprehensive Income
for the three and nine months ended September 30, 2013 and 2012
 
3
 
 
Consolidated Statements of Changes in Stockholders’ Equity
for the nine months ended September 30, 2013
 
4
 
 
Consolidated Statements of Cash Flows for the nine months ended
September 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)
             
   
September 30,
   
December 31,
 
   
2013
   
2012
 
ASSETS
           
Cash and cash equivalents:
           
Cash and due from financial institutions
  $ 4,859     $ 4,553  
Interest-bearing deposits in other financial institutions
    27,491       34,647  
Total cash and cash equivalents
    32,350       39,200  
                 
Securities available for sale, at fair value
    2,020       2,391  
                 
Securities held to maturity, at amortized cost (fair value of $76,117 and $84,827, respectively)
    80,831       84,051  
                 
Covered loans
    53,817       71,328  
Non-covered loans
    472,215       458,823  
Total loans
    526,032       530,151  
Less allowance for loan losses
    (7,443 )     (7,066 )
Net loans
    518,589       523,085  
                 
Stock in Federal Reserve Bank and Federal Home Loan Bank
    5,240       6,212  
Bank premises and equipment, net
    6,260       6,552  
Goodwill
    9,160       9,160  
Core deposit intangibles, net
    912       1,280  
FDIC indemnification asset
    5,338       6,735  
Bank-owned life insurance
    18,226       17,782  
Other real estate owned
    15,699       13,836  
Deferred tax assets, net
    8,270       8,174  
Other assets
    5,003       5,354  
                 
Total assets
  $ 707,898     $ 723,812  
                 
LIABILITIES AND STOCKHOLDERS EQUITY
               
                 
Noninterest-bearing demand deposits
  $ 46,536     $ 49,644  
Interest-bearing deposits:
               
NOW accounts
    23,701       22,774  
Money market accounts
    136,181       163,233  
Savings accounts
    13,933       9,618  
Time deposits
    325,603       305,708  
Total interest-bearing deposits
    499,418       501,333  
Total deposits
    545,954       550,977  
                 
Securities sold under agreements to repurchase and other short-term borrowings
    20,481       33,411  
Federal Home Loan Bank (FHLB) advances
    30,250       30,250  
Other liabilities
    5,241       5,998  
Total liabilities
    601,926       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, 11,590,612 shares at September 30, 2013 and 11,590,212 at December 31, 2012
    116       116  
Additional paid in capital
    97,048       96,840  
Retained earnings
    11,977       9,201  
Accumulated other comprehensive loss
    (3,169 )     (2,981 )
Total stockholders equity
    105,972       103,176  
                 
Total liabilities and stockholders equity
  $ 707,898     $ 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 Nine Months Ended
 
   
September 30,
   
September 30,
 
                         
   
2013
   
2012
   
2013
   
2012
 
                         
 Interest and dividend income :
                       
 Interest and fees on loans
  $ 8,168     $ 9,008     $ 24,277     $ 26,387  
 Interest and dividends on taxable securities
    504       490       1,540       1,401  
 Interest and dividends on tax exempt securities
    71       -       159       -  
 Interest and dividends on other earning assets
    104       102       443       247  
 Total interest and dividend income
    8,847       9,600       26,419       28,035  
 Interest expense:
                               
 Interest on deposits
    966       1,304       3,086       3,803  
 Interest on borrowings
    157       165       465       628  
 Total interest expense
    1,123       1,469       3,551       4,431  
                                 
 Net interest income
    7,724       8,131       22,868       23,604  
                                 
 Provision for loan losses
    1,197       1,830       3,015       4,605  
 Net interest income after provision for loan losses
    6,527       6,301       19,853       18,999  
                                 
 Noninterest income:
                               
 Account maintenance and deposit service fees
    198       222       593       624  
 Income from bank-owned life insurance
    147       148       445       649  
 Bargain purchase gain on acquisition
    -       -       -       3,484  
 Gain on sale of loans
    -       -       -       657  
 Gain on other assets
    -       -       13       14  
 Net gain on sale of available for sale securities
    -       287       142       274  
 Total other-than-temporary impairment losses (OTTI)
    -       (480 )     (3 )     (721 )
 Portion of OTTI recognized in other comprehensive income (before taxes)
    -       -       -       4  
 Net credit related OTTI recognized in earnings
    -       (480 )     (3 )     (717 )
 Other
    30       63       169       198  
                                 
 Total noninterest income
    375       240       1,359       5,183  
                                 
 Noninterest expenses:
                               
 Salaries and benefits
    2,338       2,073       6,760       5,868  
 Occupancy expenses
    768       753       2,280       2,040  
 Furniture and equipment expenses
    197       149       524       448  
 Amortization of core deposit intangible
    123       236       368       694  
 Virginia franchise tax expense
    115       145       357       436  
 Merger expenses
    -       11       -       360  
 FDIC assessment
    218       146       676       417  
 Data processing expense
    131       175       433       474  
 Telephone and communication expense
    166       183       507       418  
 Change in FDIC indemnification asset
    113       242       350       481  
 Net (gain)  loss on other real estate owned
    (698 )     (24 )     (580 )     2,376  
 Other operating expenses
    790       665       2,334       2,417  
 Total noninterest expenses
    4,261       4,754       14,009       16,429  
 Income before income taxes
    2,641       1,787       7,203       7,753  
 Income tax expense
    861       579       2,341       2,487  
 Net income
  $ 1,780     $ 1,208     $ 4,862     $ 5,266  
 Other comprehensive income (loss):
                               
   Unrealized loss on available for sale securities
  $ (12 )   $ (107 )   $ (207 )   $ (26 )
   Realized amount on securities sold, net
    -       (287 )     (142 )     (274 )
   Non-credit component of other-than-temporary impairment on held-to-maturity securities
    -       475       97       676  
   Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale
    (12 )     (17 )     (32 )     (77 )
Net unrealized gain (loss)
    (24 )     64       (284 )     299  
Tax effect
    8       (21 )     96       (101 )
Other comprehensive income (loss)
    (16 )     43       (188 )     198  
Comprehensive income
  $ 1,764     $ 1,251     $ 4,674     $ 5,464  
Earnings per share, basic and diluted
  $ 0.15     $ 0.10     $ 0.42     $ 0.45  
 
 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, 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
                    4,862               4,862  
Change in unrealized loss  on securities a vailable for sale (net of tax benefit, $119)
                            (230 )     (230 )
Change in unrecognized loss on securities h eld to maturity for which a portion of OTTI has been recognized (net of tax, $23 and accretion, $32 and amounts recorded into other comprehensive income at transfer)
                            42       42  
Dividends on common stock ($.18 per share)
                    (2,086 )             (2,086 )
Issuance of common stock under Stock Incentive Plan (400 shares)
            3                       3  
Stock-based compensation expense
            205                       205  
                                         
Balance - September 30, 2013
  $ 116     $ 97,048     $ 11,977     $ (3,169 )   $ 105,972  
                                         
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, 2013 AND 2012
(dollars in thousands) (Unaudited)
 
   
2013
   
2012
 
             
Operating activities:
           
Net income
  $ 4,862     $ 5,266  
Adjustments to reconcile net income to net cash and cash equivalents provided  by operating activities:
               
Depreciation
    495       430  
Amortization of core deposit intangible
    368       694  
Other amortization, net
    275       210  
Accretion of loan discount
    (2,725 )     (3,277 )
Amortization of FDIC indemnification asset
    350       481  
Provision for loan losses
    3,015       4,605  
Earnings on bank-owned life insurance
    (445 )     (649 )
Stock based compensation expense
    205       146  
Bargain purchase gain on acquisition
    -       (3,484 )
Net gain on sale of available for sale securities
    (142 )     (274 )
Gain on sale of loans
    -       (657 )
Impairment on securities
    3       717  
Net (gain) loss on other real estate owned
    (580 )     2,376  
Net (increase) decrease in other assets
    2,261       (456 )
Net increase (decrease) in other liabilities
    (757 )     399  
Net cash and cash equivalents provided by operating activities
    7,185       6,527  
Investing activities:
               
Purchases of available for sale securities
    -       (3,128 )
Proceeds from sales of available for sale securities
    159       22,914  
Proceeds from paydowns, maturities and calls of available for sale securities
    -       1,318  
Purchases of  held to maturity securities
    (11,345 )     (27,410 )
Proceeds from paydowns, maturities and calls of held to maturity securities
    14,497       8,973  
Loan originations and payments, net
    (2,996 )     11,238  
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       1,630  
Proceeds from cash surrender value of bank-owned life insurance
    -       395  
Payments received on FDIC indemnification asset
    1,016       155  
Proceeds from sale of other real estate owned
    3,902       1,137  
Purchases of bank premises and equipment
    (204 )     (557 )
Net cash and cash equivalents provided by investing activities
    6,001       77,203  
Financing activities:
               
Net decrease in deposits
    (5,023 )     (64,328 )
Cash dividends paid - common stock
    (2,086 )     (638 )
Issuance of common stock under Stock Incentive Plan
    3       -  
Repayment of Federal Home Loan Bank advances
    -       (16,488 )
     Net increase (decrease) in securities sold under agreement to repurchase and other short-term borrowings
    (12,930 )     14,977  
Net cash and cash equivalents used in financing activities
    (20,036 )     (66,477 )
Increase (decrease) in cash and cash equivalents
    (6,850 )     17,253  
Cash and cash equivalents at beginning of period
    39,200       5,035  
Cash and cash equivalents at end of period
  $ 32,350     $ 22,288  
Supplemental disclosure of cash flow information
               
Cash payments for:
               
Interest
  $ 3,419     $ 4,464  
Income taxes
    3,113       1,788  
Supplemental schedule of noncash investing and financing activities
               
Transfer from non-covered loans to other real estate owned
    3,044       1,959  
Transfer from covered loans to other real estate owned
    4,158       -  
                 
See accompanying notes to consolidated financial statements.
 
5
 

 

 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
Notes to Consolidated Financial Statements (Unaudited)
September 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. GAAP 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 September 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 nine 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 nine months ended September 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 nine months ended September 30, 2013 and 2012, stock-based compensation expense was $79 thousand and $205 thousand, respectively, compared to $49 thousand and $146 thousand for the same periods last year.  As of September 30, 2013, unrecognized compensation expense associated with the stock options was $1.0 million, which is expected to be recognized over a weighted average period of 3.8 years.
 
7
 

 

 
A summary of the activity in the stock option plan during the nine months ended September 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
    (400 )     6.90              
Options outstanding, end of period
    632,675     $ 8.21       6.3     $ 915  
                                 
Vested or expected to vest
    632,675     $ 8.21       6.3     $ 915  
                                 
Exercisable at end of period
    304,695     $ 8.36       4.0     $ 405  
 
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
 
September 30, 2013
 
Cost
   
Gains
   
Losses
   
Value
 
Obligations of states and political subdivisions
  $ 2,303     $ -     $ (283 )   $ 2,020  
                                 
   
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
 
September 30, 2013
 
Cost
   
Gains
   
Losses
   
Value
 
 Residential government-sponsored mortgage-backed securities
  $ 26,964     $ 751     $ (105 )   $ 27,610  
 Residential government-sponsored collateralized mortgage obligations
    4,538       5       (292 )     4,251  
 Government-sponsored agency securities
    29,970       -       (3,042 )     26,928  
 Obligations of states and political subdivisions
    10,991       -       (871 )     10,120  
 Other residential collateralized mortgage obligations
    713       -       (17 )     696  
 Trust preferred securities
    7,655       975       (2,118 )     6,512  
    $ 80,831     $ 1,731     $ (6,445 )   $ 76,117  
                   
   
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 nine months ended September 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 September 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
  $ 4,254     $ 4,035     $ -     $ -  
 Due after ten years
    44,362       39,525       2,303       2,020  
 Residential government-sponsored mortgage-backed securities
    26,964       27,610       -       -  
 Residential government-sponsored collateralized mortgage obligations
    4,538       4,251       -       -  
 Other residential  collateralized mortgage obligations
    713       696       -       -  
      Total
  $ 80,831     $ 76,117     $ 2,303     $ 2,020  
 
Securities with a carrying amount of approximately 64.3 million and $62.3 million at September 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”).
 
9
 

 

 
Southern National monitors the portfolio for indicators of other than temporary impairment.  At September 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 $61.1 million in the portfolio with the carrying value exceeding the estimated fair value that are considered temporarily impaired at September 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 September 30, 2013. The following tables present information regarding securities in a continuous unrealized loss position as of September 30, 2013 and December 31, 2012 (in thousands) by duration of time in a loss position:
                                     
September 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
  $ 2,020     $ (283 )   $ -     $ -     $ 2,020     $ (283 )
                                                 
   
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
  $ 13,312     $ (105 )   $ -     $ -     $ 13,312     $ (105 )
Residential government-sponsored collateralized mortgage obligations
    3,161       (292 )     -       -       3,161       (292 )
Government-sponsored agency securities
    26,928       (3,042 )     -       -       26,928       (3,042 )
Obligations of states and political subdivisions
    10,120       (871 )                     10,120       (871 )
Other residential collateralized mortgage obligations
    696       (17 )     -       -       696       (17 )
Trust preferred securities
    -       -       4,830       (2,118 )     4,830       (2,118 )
    $ 54,217     $ (4,327 )   $ 4,830     $ (2,118 )   $ 59,047     $ (6,445 )
                                                 
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 September 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
    $ 6,654     $ 6,020     $ 4,077       16 %   $ 281        
MMCF III B
Senior Sub
    A3       A-    
Ba1
   
CC
      421       413       241       30 %     8        
                                    7,075       6,433       4,318             $ 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       512       41 %     626     $ 359  
TRAP 2007-XII C1
Mezzanine
    A3       A       C       C       2,140       56       104       39 %     791       1,293  
TRAP 2007-XIII D
Mezzanine
   
NR
      A-      
NR
      C       2,039       -       76       29 %     7       2,032  
MMC FUNDING XVIII
Mezzanine
    A3       A-      
Ca
      C       1,084       27       239       30 %     366       691  
ALESCO V C1
Mezzanine
    A2       A       C       C       2,150       475       586       18 %     1,014       661  
ALESCO XV C1
Mezzanine
    A3       A-       C       C       3,222       30       105       35 %     633       2,559  
ALESCO XVI  C
Mezzanine
    A3       A-       C       C       2,143       119       572       15 %     844       1,180  
                                        14,278       1,222       2,194             $ 4,281     $ 8,775  
                                                                                   
Total
                                    $ 21,353     $ 7,655     $ 6,512                          
                                                                                   
(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
                                                                                 
 
10
 

 

 
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.
 
Recoveries ranging from 23% to 39% 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 third quarter of 2013 and recognized OTTI charges of $3 thousand during the first nine months of 2013 compared to OTTI charges related to credit on the trust preferred securities totaling $480 thousand and $717 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 nine months ended September 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       717  
Reductions due to realized losses
    (51 )     (25 )
Amount of cumulative other-than-temporary impairment  related to credit loss as of September 30
  $ 8,916     $ 8,969  
 
11
 

 

Changes in accumulated other comprehensive income by component for the three and nine months ended September 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 September 30, 2013
 
Available for Sale
   
Held to Maturity
       
   
Securities
   
Securities
   
Total
 
Beginning balance
  $ (178 )   $ (2,975 )   $ (3,153 )
Other comprehensive income/(loss) before reclassifications
    (8 )     (8 )     (16 )
Amounts reclassified from accumulated other comprehensive income/(loss)
    -       -       -  
Net current-period other comprehensive income/(loss)
    (8 )     (8 )     (16 )
Ending balance
  $ (186 )   $ (2,983 )   $ (3,169 )
                         
   
Unrealized Holding
                 
   
Gains (Losses) on
                 
For the nine months ended September 30, 2013
 
Available for Sale
   
Held to Maturity
         
   
Securities
   
Securities
   
Total
 
Beginning balance
  $ 44     $ (3,025 )   $ (2,981 )
Other comprehensive income/(loss) before reclassifications
    (137 )     43       (94 )
Amounts reclassified from accumulated other comprehensive income/(loss)
    (93 )     (1 )     (94 )
Net current-period other comprehensive income/(loss)
    (230 )     42       (188 )
Ending balance
  $ (186 )   $ (2,983 )   $ (3,169 )
 
   4.             LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table summarizes the composition of our loan portfolio as of September 30, 2013 and December 31, 2012:
 
   
Covered
   
Non-covered
   
Total
   
Covered
   
Non-covered
   
Total
 
   
Loans (1)
   
Loans
   
Loans
   
Loans (1)
   
Loans
   
Loans
 
   
September 30, 2013
   
December 31, 2012
 
Loans secured by real estate:
                                   
Commercial real estate - owner-occupied
  $ 1,618     $ 100,182     $ 101,800     $ 4,143     $ 93,288     $ 97,431  
Commercial real estate - non-owner-occupied
    5,863       139,773       145,636