Southern National Bancorp
Southern National Bancorp of Virginia Inc (Form: 10-Q, Received: 11/08/2010 09:24:25)
Table of Contents

 

 

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, 2010

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   ¨

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   ¨     NO   ¨

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   ¨    Accelerated filer   ¨
Non-accelerated filer   x    (Do not check if a smaller reporting company)    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   ¨     No   x

As of November 5, 2010, there were 11,590,212 shares of common stock outstanding.

 

 

 


Table of Contents

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

September 30, 2010

INDEX

 

         PAGE  
  PART 1 - FINANCIAL INFORMATION   

Item 1 –

 

Financial Statements

  
 

Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009

     2   
 

Consolidated Statements of Income and Comprehensive Income (Loss) for the three and nine months ended September 30, 2010 and 2009

     3   
 

Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2010

     4   
 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009

     5   
 

Notes to Consolidated Financial Statements

     6-18   

Item 2 –

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     19-31   

Item 3 –

 

Quantitative and Qualitative Disclosures about Market Risk

     32-34   

Item 4 –

 

Controls and Procedures

     35   
  PART II - OTHER INFORMATION   

Item 1 –

 

Legal Proceedings

     35   

Item 1A –

 

Risk Factors

     35   

Item 2 –

 

Unregistered Sales of Equity Securities and Use of Proceeds

     36   

Item 3 –

 

Defaults Upon Senior Securities

     36   

Item 4 –

 

(Removed and Reserved)

     36   

Item 5 –

 

Other Information

     36   

Item 6 –

 

Exhibits

     36   

Signatures

     37   

Certifications

  


Table of Contents

 

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,
2010
    December 31,
2009
 

ASSETS

    

Cash and cash equivalents:

    

Cash and due from financial institutions

   $ 3,259      $ 2,858   

Interest-bearing deposits in other financial institutions

     25,793        5,212   
                

Total cash and cash equivalents

     29,052        8,070   
                

Securities available for sale, at fair value

     11,303        18,505   
                

Securities held to maturity, at amortized cost
(fair value of $48,035 and $57,841, respectively)

     49,224        57,696   
                

Covered loans, net of unearned income

     99,009        111,989   

Non-covered loans, net of unearned income

     364,027        350,298   
                

Total loans, net of unearned income

     463,036        462,287   

Less allowance for loan losses

     (5,525     (5,172
                

Net loans

     457,511        457,115   
                

Stock in Federal Reserve Bank and Federal Home Loan Bank

     6,489        5,940   

Bank premises and equipment, net

     4,731        3,225   

Goodwill

     8,713        8,713   

Core deposit intangibles, net

     3,150        3,858   

FDIC indemnification asset

     18,951        19,408   

Bank-owned life insurance

     14,430        14,014   

Other real estate owned

     4,017        3,537   

Deferred tax assets, net

     4,577        4,559   

Other assets

     6,593        6,034   
                

Total assets

   $ 618,741      $ 610,674   
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Noninterest-bearing demand deposits

   $ 30,330      $ 33,339   

Interest-bearing deposits:

    

NOW accounts

     15,425        17,499   

Money market accounts

     172,871        130,131   

Savings accounts

     5,130        4,398   

Time deposits

     231,513        270,424   
                

Total interest-bearing deposits

     424,939        422,452   
                

Total deposits

     455,269        455,791   
                

Securities sold under agreements to repurchase and other short-term borrowings

     25,475        22,020   

Federal Home Loan Bank (FHLB) advances

     35,000        30,000   

Other liabilities

     2,589        5,739   
                

Total liabilities

     518,333        513,550   
                

Commitments and contingencies (See Note 5)

     —          —     

Stockholders’ equity:

    

Preferred stock, $.01 par value. Authorized 5,000,000 shares; no shares issued and outstanding

     —          —     

Common stock, $.01 par value. Authorized 45,000,000 shares; issued and outstanding, 11,590,212 shares at September 30, 2010 and December 31, 2009

     116        116   

Additional paid in capital

     96,455        96,444   

Retained earnings

     7,225        4,053   

Accumulated other comprehensive loss

     (3,388     (3,489
                

Total stockholders’ equity

     100,408        97,124   
                

Total liabilities and stockholders’ equity

   $ 618,741      $ 610,674   
                

See accompanying notes to consolidated financial statements.

 

2


Table of Contents

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands, except per share amounts) (Unaudited)

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Interest and dividend income :

        

Interest and fees on loans

   $ 7,578      $ 5,138      $ 23,021      $ 14,602   

Interest and dividends on taxable securities

     630        595        2,048        2,052   

Interest and dividends on other earning assets

     47        45        138        121   
                                

Total interest and dividend income

     8,255        5,778        25,207        16,775   
                                

Interest expense:

        

Interest on deposits

     1,825        1,479        5,418        5,310   

Interest on borrowings

     343        348        1,001        978   
                                

Total interest expense

     2,168        1,827        6,419        6,288   
                                

Net interest income

     6,087        3,951        18,788        10,487   
                                

Provision for loan losses

     1,025        1,178        3,775        2,203   
                                

Net interest income after provision for loan losses

     5,062        2,773        15,013        8,284   
                                

Noninterest income:

        

Account maintenance and deposit service fees

     210        171        686        441   

Income from bank-owned life insurance

     140        144        416        432   

Gain on sale of loans

     —          155        —          155   

Net gain on branch acquisition

     —          423        —          423   

Net gain (loss) on other assets

     (435     56        (396     173   

Gain on sales of securities available for sale

     142        148        142        371   

Total other-than-temporary impairment losses

     (127     (4,300     (137     (9,667

Portion of loss recognized in other comprehensive income (before taxes)

     —          3,087        —          7,591   
                                

Net credit impairment losses recognized in earnings

     (127     (1,213     (137     (2,076

Other

     20        24        314        81   
                                

Total noninterest income (loss)

     (50     (92     1,025        —     
                                

Noninterest expenses:

        

Salaries and benefits

     1,634        1,098        4,798        3,097   

Occupancy expenses

     520        387        1,589        1,161   

Furniture and equipment expenses

     142        128        447        374   

Amortization of core deposit intangible

     236        182        708        545   

Virginia franchise tax expense

     184        140        551        422   

FDIC assessment

     139        151        540        638   

Data processing expense

     139        77        453        236   

Telephone and communication expense

     100        64        320        192   

Decrease (increase) in FDIC indemnification asset

     (193     —          457        —     

Other operating expenses

     489        387        1,531        856   
                                

Total noninterest expenses

     3,390        2,614        11,394        7,521   
                                

Income before income taxes

     1,622        67        4,644        763   

Income tax expense (benefit)

     517        (21     1,472        126   
                                

Net income

   $ 1,105      $ 88      $ 3,172      $ 637   
                                

Other comprehensive income (loss):

        

Unrealized gain on available for sale securities

   $ 42      $ 134      $ 264      $ 267   

Realized amount on securities sold, net

     (142     (148     (142     (371

Non-credit component of other-than-temporary impairment on held-to-maturity securities

     20        (3,087     129        (7,591

Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale

     (36     1,100        (97     2,965   
                                

Net unrealized gain (loss)

     (116     (2,001     154        (4,730

Tax effect

     (38     (682     53        (1,609
                                

Other comprehensive income (loss)

     (78     (1,319     101        (3,121
                                

Comprehensive income (loss)

   $ 1,027      $ (1,231   $ 3,273      $ (2,484
                                

Earnings per share, basic and diluted

   $ 0.10      $ 0.01      $ 0.27      $ 0.09   
                                

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

(dollars in thousands, except per share amounts) (Unaudited)

 

     Common
Stock
     Additional
Paid in
Capital
    Retained
Earnings
     Accumulated
Other
Comprehensive
Loss
    Comprehensive
Income
     Total  

Balance - January 1, 2010

   $  116       $  96,444      $  4,053       $  (3,489)         $ 97,124   

Stock-based compensation expense

        59                59   

Additional cost of 2009 common stock issuance

        (48             (48

Comprehensive income:

               

Net income

          3,172         $ 3,172         3,172   

Change in unrealized gain on available-for-sale securities (net of tax, $41)

             81        81         81   

Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $12 and accretion, $97 and amounts recorded into other comprehensive income at transfer)

             20        20         20   
                     

Total comprehensive income

             $ 3,273      
                                                   

Balance - September 30, 2010

   $ 116       $ 96,455      $ 7,225       $ (3,388      $ 100,408   
                                             

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(dollars in thousands) (Unaudited)

 

     2010     2009  

Operating activities:

    

Net income

   $ 3,172      $ 637   

Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:

    

Depreciation

     407        388   

Amortization of core deposit intangible

     708        545   

Other amortization , net

     132        (11

Decrease in FDIC indemnification asset

     457        —     

Provision for loan losses

     3,775        2,203   

Earnings on bank-owned life insurance

     (416     (432

Stock based compensation expense

     59        39   

Gain on sale of loans

     —          (155

Gain on sales of securities

     (142     (371

Gain on branch acquisition

     —          (423

Net loss (gain) on other real estate owned

     396        (126

Impairment on securities

     137        2,076   

Net increase in other assets

     (912     (545

Net decrease in other liabilities

     (3,150     (856
                

Net cash and cash equivalents provided by operating activities

     4,623        2,969   
                

Investing activities:

    

Purchases of securities available for sale

     —          (10,333

Proceeds from sales of securities available for sale

     4,728        19,558   

Proceeds from paydowns, maturities and calls of securities available for sale

     2,635        1,565   

Purchases of securities held to maturity

     —          (9,343

Proceeds from paydowns, maturities and calls of securities held to maturity

     8,544        10,485   

Loan originations and payments, net

     (7,531     (24,807

Proceeds from sale of SBA loans

     —          2,181   

Net cash received in branch acquisition

     —          3,119   

Net increase in stock in Federal Reserve Bank and Federal Home Loan Bank

     (549     (386

Proceeds from sale of other real estate owned

     2,560        859   

Purchases of bank premises and equipment

     (1,913     (71
                

Net cash and cash equivalents provided (used) in investing activities

     8,474        (7,173
                

Financing activities:

    

Net increase (decrease) in deposits

     (522     4,387   

Proceeds from Federal Home Loan Bank advances

     5,000        —     

Net increase in securities sold under agreement to repurchase and other short-term borrowings

     3,455        2,111   

Additional cost of 2009 common stock issuance

     (48     —     
                

Net cash and cash equivalents provided by financing activities

     7,885        6,498   
                

Increase in cash and cash equivalents

     20,982        2,294   

Cash and cash equivalents at beginning of period

     8,070        14,762   
                

Cash and cash equivalents at end of period

   $ 29,052      $ 17,056   
                

Supplemental Disclosure of Cash Flow Information

    

Cash payments for:

    

Interest

   $ 6,754      $ 6,881   

Income taxes

     1,485        380   

Supplemental schedule of noncash investing and financing activities

    

Transfer from non-covered loans to other real estate owned

     2,684        1,101   

Transfer from covered loans to other real estate owned

     676        —     

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2010

1. ACCOUNTING POLICIES

Southern National Bancorp of Virginia, Inc. (“SNBV”) is a corporation formed on July 28, 2004 under the laws of the Commonwealth of Virginia and is the holding company for Sonabank (“Sonabank”) a Virginia state chartered bank which commenced operations on April 14, 2005. The principal activities of Sonabank are to attract deposits and originate loans as permitted under applicable banking regulations. Sonabank operates 12 branches in Virginia located in Fairfax County (Reston, McLean and Fairfax), in Charlottesville, Warrenton (2), Leesburg (2), South Riding, Front Royal, New Market and Clifton Forge, and we also have a branch in Rockville, Maryland.

The consolidated financial statements include the accounts of Southern National Bancorp of Virginia, Inc. and its subsidiary. Significant inter-company accounts and transactions have been eliminated in consolidation.

The unaudited consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles (“U. S. GAAP”) for interim financial information and instructions for Form 10-Q and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by U. S. GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in SNBV’s Form 10-K for the year ended December 31, 2009.

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.

Reclassifications

Some items in the prior year financial statements were reclassified to conform to the current presentation, and the reclassifications had no impact on prior period net income or shareholders’ equity.

 

6


Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

September 30, 2010

 

 

Recent Accounting Pronouncements

In June 2009, the FASB issued ASC 860-10, “Accounting for Transfers of Financial Assets—an amendment of ASC 860.” This statement removes the concept of a qualifying special-purpose entity from Statement 140 and removes the exception from applying ASC 810 (revised December 2003), Consolidation of Variable Interest Entities, to qualifying special-purpose entities. The objective in issuing this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This Statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The participating interest definition in this statement applies to transfers of government-guaranteed portions of loans, such as those guaranteed by the Small Business Administration (“SBA”). In this regard, if a seller transfers the guaranteed portion on an SBA loan at a premium, the seller is obligated by the SBA to refund the premium to the purchaser if the loan is repaid within 90 days of the transfer. Under this statement, this premium refund obligation is a form of recourse, which means that the transferred guaranteed portion the loan does not meet the definition of a participating interest for the 90-day period that the premium refund obligation exists. As a result, the transfer must be accounted for as a secured borrowing during this period. After the 90 day period, assuming the transferred guaranteed portion and the retained unguaranteed portion of the SBA loan now meet the definition of a participating interest, the transfer of the guaranteed portion can be accounted for as a sale if all of the conditions for sale accounting in the statement are met. Adoption of this statement will result in a 90 day delay in recognizing the sale and gain on sale of the guaranteed portions of any SBA loans.

On June 12, 2009, the FASB issued ASC 810-10, Amendments to FASB Interpretation No. 46(R) . this guidance amends ASC 810 to replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with a qualitative approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity (VIE) that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. Unlike ASC 810, this Statement requires ongoing reconsideration of whether (1) an entity is a VIE and (2) an enterprise is the primary beneficiary of a VIE. It is expected that the amendments will result in more entities consolidating VIEs that previously were not consolidated. The Statement will also require additional disclosures about an enterprise’s involvement in variable interest entities. This Statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The impact of adoption was not material to our results of operations or financial position.

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 December 31, 2009, options to purchase an aggregate of 281,675 shares of common stock were outstanding and 20,825 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

 

7


Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

September 30, 2010

 

awards. The options granted to officers and employees are incentive stock options and the options granted to non-employee directors are non-qualified stock options. The purpose of the plan is to afford key employees an incentive to remain in the employ of SNBV and to assist in the attracting and retaining of non-employee directors by affording them an opportunity to share in SNBV’s future success. Under the plan, the option’s price cannot be less than the fair market value of the stock on the grant date. The maximum term of the options is ten years and options granted may be subject to a graded vesting schedule.

SNBV granted 48,250 options during the first nine months of 2010. 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, 2010:

 

Dividend yield

     0.00

Expected life

     10 years   

Expected volatility

     42.47

Risk-free interest rate

     3.13

Weighted average fair value per option granted

   $ 4.08   

 

   

We have paid no dividends.

 

   

Due to SNBV’s short existence, the volatility was estimated using historical volatility of comparative publicly traded financial institutions in the Virginia market combined with that of SNBV for periods approximating the expected option life.

 

   

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, 2010, stock-based compensation expense was $24 thousand and $59 thousand, respectively, compared to $16 thousand and $39 thousand for the same periods last year. As of September 30, 2010, unrecognized compensation expense associated with the stock options was $380 thousand, which is expected to be recognized over a weighted average period of 3.9 years.

 

8


Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

September 30, 2010

 

 

A summary of the activity in the stock option plan during the nine months ended September 30, 2010 follows (dollars in thousands):

 

     Shares     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value
 

Options outstanding, beginning of period

     281,675      $ 8.56         

Granted

     48,250        7.09         

Forfeited

     (13,250     8.53         

Exercised

     —          —           
                

Options outstanding, end of period

     316,675      $ 8.34         6.6       $ 74   
                                  

Vested or expected to vest

     316,675      $ 8.34         6.6       $ 74   

Exercisable at end of period

     186,015      $ 9.03         5.1       $ 14   

3. SECURITIES

The amortized cost and fair value of securities available-for-sale were as follows (in thousands):

 

     Amortized
Cost
     Gross Unrealized     Fair
Value
 
        Gains      Losses    

September 30, 2010

          

SBA guaranteed loan pools

   $ 11,055       $ 226       $ —          11,281   

FHLMC preferred stock

     16         6         —          22   
                                  

Total

   $ 11,071       $ 232       $ —        $ 11,303   
                                  
     Amortized
Cost
     Gross Unrealized     Fair
Value
 
        Gains      Losses    

December 31, 2009

          

Residential government-sponsored mortgage-backed securities

   $ 4,967       $ —         $ (53   $ 4,914   

SBA guaranteed loan pools

     13,412         151         (13     13,550   

FHLMC preferred stock

     16         25         —          41   
                                  

Total

   $ 18,395       $ 176       $ (66   $ 18,505   
                                  

The carrying amount and fair value of securities held-to-maturity were as follows (in thousands):

 

     Carrying
Amount
     Gross Unrecognized     Fair
Value
 
        Gains      Losses    

September 30, 2010

          

Residential government-sponsored mortgage-backed securities

   $ 37,677       $ 1,783       $ —        $ 39,460   

Residential government-sponsored collateralized mortgage obligations

     227         8         —          235   

Other residential collateralized mortgage obligations

     1,245         —           —          1,245   

Trust preferred securities

     10,075         689         (3,669     7,095   
                                  
   $ 49,224       $ 2,480       $ (3,669   $ 48,035   
                                  
     Carrying
Amount
     Gross Unrecognized     Fair
Value
 
        Gains      Losses    

December 31, 2009

          

Residential government-sponsored mortgage-backed securities

   $ 45,369       $ 1,173       $ (169   $ 46,373   

Residential government-sponsored collateralized mortgage obligations

     398         21         —          419   

Other residential collateralized mortgage obligations

     1,577         —           —          1,577   

Trust preferred securities

     10,352         —           (880     9,472   
                                  
   $ 57,696       $ 1,194       $ (1,049   $ 57,841   
                                  

The fair value and carrying amount, if different, of debt securities as of September 30, 2010, 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.

 

9


Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

September 30, 2010

 

 

     Held to Maturity      Available for Sale  
     Carrying
Amount
     Fair Value      Fair Value      Amortized
Cost
 

Due in one to five years

   $ —         $ —         $ 215       $ 213   

Due in five to ten years

     —           —           1,453         1,425   

Due after ten years

     10,075         7,095         9,613         9,417   

Residential government-sponsored mortgage-backed securities

     37,677         39,460         —           —     

Residential government-sponsored collateralized mortgage obligations

     227         235         —           —     

Other residential collateralized mortgage obligations

     1,245         1,245         —           —     
                                   

Total

   $ 49,224       $ 48,035       $ 11,281       $ 11,055   
                                   

During the three and nine months ended September 30, 2010, we sold $4.7 million of available-for-sale mortgage-backed securities resulting in a gross gain of $142 thousand with a tax provision of $48 thousand. During the three months ended September 30, 2009, we sold $9.7 million of available-for-sale mortgage-backed securities and 25,000 shares of FHLMC preferred stock resulting in a gross gain of $148 thousand with a tax provision of $50 thousand. During the nine months ended September 30, 2009, we sold $19.5 million of available-for-sale mortgage-backed securities and 25,000 shares of FHLMC preferred stock resulting in a gross gain of $371 thousand with a tax provision of $126 thousand.

Securities with a carrying amount of approximately $49.2 million and $40.1 million at September 30, 2010 and December 31, 2009, respectively, were pledged to secure public deposits, repurchase agreements and a line of credit for advances from the Federal Home Loan Bank of Atlanta (“FHLB”).

SNBV monitors the portfolio which is subject to liquidity needs, market rate changes and credit risk changes to see if adjustments are needed. At September 30, 2010 and December 31, 2009, some securities’ fair values were below cost. As outlined in the table below, there were securities with stated maturities totaling approximately $7.1 million in the portfolio that are considered temporarily impaired at September 30, 2010. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because we do not have the intent to sell these securities and it is 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, 2010. The following tables present information regarding securities in a continuous unrealized loss position as of September 30, 2010 and December 31, 2009 (in thousands) by duration of time in a loss position:

September 30, 2010

 

     Less than 12 months      12 Months or More     Total  

Held to Maturity

   Fair value      Unrealized
Losses
     Fair value      Unrealized
Losses
    Fair value      Unrealized
Losses
 

Trust preferred securities

   $ —         $ —         $ 5,659       $ (3,669   $ 5,659       $ (3,669
                                                    

December 31, 2009

 

     Less than 12 months     12 Months or More     Total  

Available for Sale

   Fair value      Unrealized
Losses
    Fair value      Unrealized
Losses
    Fair value      Unrealized
Losses
 

Residential government-sponsored mortgage-backed securities

   $ 4,914       $ (53   $ —         $ —        $ 4,914       $ (53

SBA guaranteed loan pools

     819         (13     —           —          819         (13
                                                   
   $ 5,733       $ (66   $ —         $ —        $ 5,733       $ (66
                                                   
     Less than 12 months     12 Months or More     Total  

Held to Maturity

   Fair value      Unrealized
Losses
    Fair value      Unrealized
Losses
    Fair value      Unrealized
Losses
 

Residential government-sponsored mortgage-backed securities

   $ 14,039       $ (169   $ —         $ —        $ 14,039       $ (169

Trust preferred securities

     —           —          8,094         (880     8,094         (880
                                                   
   $ 14,039       $ (169   $ 8,094       $ (880   $ 22,133       $ (1,049
                                                   

 

10


Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

September 30, 2010

 

 

As of September 30, 2010, we owned pooled trust preferred securities as follows:

 

                                              Estimated
Fair
Value
    Current
Defaults  and
Deferrals
    % of
Current
Defaults and

Deferrals
to Current
Collateral
    Previously
Recognized
Cumulative

Other
Comprehensive
Loss (1)
       
     

Tranche

Level

  Ratings When
Purchased
    Current
Ratings
                       

Security

    Moody’s     Fitch     Moody’s     Fitch     Par Value     Book Value            
    (in thousands)    

ALESCO VII A1B

  Senior     Aaa        AAA        Baa3        BB      $ 8,387      $ 7,479      $ 4,221      $ 179,056        29   $ 319     

MMCF II B

  Senior Sub     A3        AA-        Baa2        BB        573        526        525        34,000        29     47     

MMCF III B

  Senior Sub     A3        A-        Ba1        CC        695        679        363        27,000        23     16     
                                               
              9,655        8,684        5,109          $ 382     
                                               
                                                              Cumulative
Other
Comprehensive

Loss (2)
    Cumulative
OTTI
Related to

Credit
Loss (2)
 
                                                           

Other Than Temporarily Impaired:

  

               

TPREF FUNDING II

  Mezzanine     A1        A-        Caa3        C        1,500        478        486        119,100        34     780      $ 242   

TRAP 2007-XII C1

  Mezzanine     A3        A        C        C        2,043        126        308        137,705        28     1,338        579   

TRAP 2007-XIII D

  Mezzanine     NR        A-        NR        C        2,032        —          10        237,750        32     —          2,032   

MMC FUNDING XVIII

  Mezzanine     A3        A-        Ca        C        1,039        84        81        111,682        34     485        470   

ALESCO V C1

  Mezzanine     A2        A        Ca        C        2,052        560        469        99,442        31     979        513   

ALESCO XV C1

  Mezzanine     A3        A-        C        C        3,078        29        304        246,100        37     490        2,559   

ALESCO XVI C

  Mezzanine     A3        A-        Ca        C        2,050        114        328        149,900        30     756        1,180   
                                                     
              13,794        1,391        1,986          $ 4,828      $ 7,575   
                                                     

Total

            $ 23,449      $ 10,075      $ 7,095           
                                         

 

(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 potential impairment under ASC 325. In performing a detailed cash flow analysis of each security, Sonabank works with independent third parties to identify the best estimate of the cash flow estimated to be collected. If this estimate results in a present value of expected cash flows that is less than the amortized cost basis of a security (that is, credit loss exists), an OTTI is considered to have occurred. If there is no credit loss, any impairment is considered temporary. Deferrals in the collateral pools we own peaked in the first quarter of 2010 and then declined in the second and third quarters. Going forward the cash flow analyses performed included the following assumptions:

 

   

We assume that .5% of the remaining performing collateral will default or defer in the fourth quarter of 2010 and 50 basis points per annum thereafter.

 

   

We assume recoveries of 25% with a two year lag on all defaults and deferrals.

 

   

We assume no prepayments for 10 years and then 1% per annum for the remaining life of the security.

 

   

Our securities have been modeled using the above assumptions by independent third parties using the forward LIBOR curve plus original spread to discount projected cash flows to present values.

These assumptions resulted in no OTTI recognition on the trust preferred securities during the third quarter of 2010.

We also own $1.7 million of SARM 2005-22 1A2. This residential collateralized mortgage obligation was downgraded from B to CCC by Standard and Poors in September 2009, and it was downgraded from CC to C by Fitch in July 2010. The fair market value is $1.2 million. We have evaluated this security for potential impairment and, based on our review of the trustee report, shock analysis and current information regarding delinquencies, nonperforming loans and credit support, determined that an OTTI does exist as of September 30, 2010 in the amount of $127 thousand. The assumptions used in the analysis included a 6.5% prepayment speed, 15% default rate, a 55% loss severity (which is roughly equivalent to the cumulative severity of the past 12 months) and an accounting yield of 4.75%.

 

11


Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

September 30, 2010

 

 

The following table presents a roll forward of the credit losses for the trust preferred securities and the residential collateralized mortgage obligation recognized in earnings for the nine months ended September 30, 2010 (in thousands):

 

Amount of cumulative other-than-temporary impairment related to credit loss prior to January 1, 2010

   $ 7,714   

Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized

     137   
        

Amount of cumulative other-than-temporary impairment related to credit loss as of September 30, 2010

   $ 7,851   
        

4. LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table summarizes the composition of our loan portfolio as of September 30, 2010 and December 31, 2009:

 

     Covered Loans      Non-covered Loans     Total Loans     Covered Loans      Non-covered Loans     Total Loans  
     September 30, 2010     December 31, 2009  

Mortgage loans on real estate:

              

Commercial

   $ 19,084       $ 153,099      $ 172,183      $ 24,494       $ 146,295      $ 170,789   

Construction loans to residential builders

     —           1,613        1,613        —           5,436        5,436   

Other construction and land loans

     1,100         42,339        43,439        3,498         42,564        46,062   

Residential 1-4 family

     31,544         61,919        93,463        33,815         61,024        94,839   

Multi- family residential

     2,517         13,677        16,194        2,570         10,726        13,296   

Home equity lines of credit

     42,562         10,830        53,392        44,235         10,532        54,767   
                                                  

Total real estate loans

     96,807         283,477        380,284        108,612         276,577        385,189   

Commercial loans

     2,040         78,594        80,634        3,184         70,757        73,941   

Consumer loans

     162         2,439        2,601        193         3,528        3,721   
                                                  

Gross loans

     99,009         364,510        463,519        111,989         350,862        462,851   

Less unearned income on loans

     —           (483     (483     —           (564     (564
                                                  

Loans, net of unearned income

   $ 99,009       $ 364,027      $ 463,036      $ 111,989       $ 350,298      $ 462,287   
                                                  

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.”

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 with a partially offsetting noninterest income item reflecting the increase to the FDIC indemnification asset. There has been no provision recorded on covered loans since acquisition.

 

12


Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

September 30, 2010

 

 

The following summarizes activity in the allowance for loan losses for the nine months ended September 30, 2010 and 2009 (in thousands):

 

     2010     2009  

Balance, beginning of period

   $ 5,172      $ 4,218   

Provision charged to operations

     3,775        2,203   

Recoveries credited to allowance

     130        156   
                

Total

     9,077        6,577   

Loans charged off

     (3,552     (1,706
                

Balance, end of period

   $ 5,525      $ 4,871   
                

Non-covered loans identified as impaired in accordance with ASC 310 totaled $11.3 million with allocated allowance for loan losses in the amount of $371 thousand as of September 30, 2010, including $4.7 million of nonaccrual loans and $6.6 million of restructured loans. The restructured loans are well secured, but the borrowers were experiencing financial difficulties. As a consequence, we agreed to defer some interest payments, and payments are being made in accordance with the restructured terms. This compares to $4.2 million of impaired loans, which were nonaccrual loans, with allocated allowance for loan losses in the amount of $554 thousand at December 31, 2009. Nonaccrual loans were $4.7 million and $4.2 million at September 30, 2010 and December 31, 2009, respectively. At September 30, 2010 and December 31, 2009, there were no loans past due 90 days or more and accruing interest.

At September 30, 2010 we had three restructured loans included in impaired loans totaling $6.6 million with borrowers who experienced deterioration in financial condition. These loans are secured by single-family residential properties or commercial real estate properties. There were no restructured loans as of December 31, 2009. Management believes these loans are well secured and the borrowers have the ability to repay the loans in accordance with the renegotiated terms. These restructured loans were on accrual status as payments were being made according to the restructured loan terms.

Covered loans identified as impaired in accordance with ASC 310 totaled $4.2 million as of September 30, 2010 and $4.9 million at December 31, 2009. Nonaccrual loans were $2.1 million and $5.1 million at September 30, 2010 and December 31, 2009, respectively. At September 30, 2010 and December 31, 2009, there were no loans past due 90 days or more and accruing interest.

5. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

SNBV is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve elements of credit and funding risk in excess of the amount recognized in the consolidated balance sheet. Letters of credit are written conditional commitments issued by SNBV to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. We had letters of credit outstanding totaling $2.6 million and $3.8 million as of September 30, 2010 and December 31, 2009, respectively.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit is based on the contractual amount of these instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.

 

13


Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

September 30, 2010

 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments are made predominately for adjustable rate loans, and generally have fixed expiration dates of up to three months or other termination clauses and usually require payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis.

At September 30, 2010 and December 31, 2009, we had unfunded lines of credit and undisbursed construction loan funds totaling $106.9 million and $121.7 million, respectively. Our approved loan commitments were $2.1 million and $850 thousand at September 30, 2010 and December 31, 2009, respectively.

6. EARNINGS PER SHARE

The following is a reconciliation of the denominators of the basic and diluted earnings per share (“EPS”) computations (dollars in thousands, except per share data):

 

     Income (Loss)
(Numerator)
     Weighted
Average
Shares
(Denominator)
     Per Share
Amount
 

For the three months ended September 30, 2010

        

Basic EPS

   $ 1,105         11,590       $ 0.10   

Effect of dilutive stock options and warrants

        1         —     
                          

Diluted EPS

   $ 1,105         11,591       $ 0.10   
                          

For the three months ended September 30, 2009

        

Basic EPS

   $ 88         6,799       $ 0.01   

Effect of dilutive stock options and warrants

     —           1         —     
                          

Diluted EPS

   $ 88         6,800       $ 0.01   
                          

For the nine months ended September 30, 2010

        

Basic EPS

   $ 3,172         11,590       $ 0.27   

Effect of dilutive stock options and warrants

        3         —     
                          

Diluted EPS

   $ 3,172         11,593       $ 0.27   
                          

For the nine months ended September 30, 2009

        

Basic EPS

   $ 637         6,799       $ 0.09   

Effect of dilutive stock options and warrants

     —           —           —     
                          

Diluted EPS

   $ 637         6,799       $ 0.09   
                          

There were 459,674 and 457,625 anti-dilutive options and warrants during the three and nine months ended September 30, 2010, respectively, and there were 383,675 and 425,175 anti-dilutive options and warrants during the three and nine months ended September 30, 2009, respectively.

7. FAIR VALUE

ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date

 

14


Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

September 30, 2010

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability

The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities Available for Sale

Where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U. S. agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy. Currently, all of SNBV’s available-for-sale debt securities are considered to be level 2 securities.

Assets measured at fair value on a recurring basis are summarized below:

 

            Fair Value Measurements Using  

(dollars in thousands)

   Total at
September 30, 2010
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Financial assets:

           

Available for sale securities

           

SBA guaranteed loan pools

   $ 11,281       $ —         $ 11,281       $ —     

FHLMC preferred stock

     22         22         —           —     
                                   

Total available-for-sale securities

   $ 11,303       $ 22       $ 11,281       $ —     
                                   

 

            Fair Value Measurements Using  

(dollars in thousands)

   Total at
December 31, 2009
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Financial assets:

           

Available for sale securities

           

Residential government-sponsored mortgage-backed securities

   $ 4,914       $ —         $ 4,914       $ —     

SBA guaranteed loan pools

     13,550         —           13,550         —     

FHLMC preferred stock

     41         41         —           —     
                                   

Total available-for-sale securities

   $ 18,505       $ 41       $ 18,464       $ —     
                                   

 

15


Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

September 30, 2010

 

 

Assets and Liabilities Measured on a Non-recurring Basis:

Trust Preferred Securities Classified as Held-to-Maturity

Management utilized guidance in ASC 820-10 to value these securities. The base input in calculating fair value is a Bloomberg Fair Value Index yield curve for single issuer trust preferred securities which correspond to the ratings of the securities we own. We also use composite rating indices to fill in the gaps where the bank rating indices did not correspond to the ratings in our portfolio. When a bank index that matches the rating of our security is not available, we used the bank index that most closely matches the rating, adjusted by the spread between the composite index that most closely matches the security’s rating and the composite index with a rating that matches the bank index used. Then, we use the adjusted index yield, which is further adjusted by a liquidity premium, as the discount rate to be used in the calculation of the present value of the same cash flows used to evaluate the securities for OTTI. The liquidity premiums were derived in consultation with a securities advisor. The liquidity premiums we used ranged from 2% to 5%, and the adjusted discount rates ranged from 10.14% to 15.83%. Due to current market conditions as well as the limited trading activity of these securities, the market value of the securities is highly sensitive to assumption changes and market volatility. We have determined that our trust preferred securities are classified within Level 3 of the fair value hierarchy.

Based on our analysis in the first nine months of 2010, there were no OTTI charges on trust preferred securities. There were OTTI charges on trust preferred securities totaling $2.1 million during the first nine months of 2009.

Other Residential Collateralized Mortgage Obligation Classified as Held-to Maturity

The fair value was estimated within Level 2 fair value hierarchy, as the fair value is based on either pricing models, quoted market prices of securities with similar characteristics, or discounted cash flows. We have evaluated this security for potential impairment and, based on our review of the trustee report, shock analysis and current information regarding delinquencies, nonperforming loans and credit support. The assumptions used in the analysis included a 6.5% prepayment speed, 15% default rate, a 55% loss severity and an accounting yield of 4.75%. Based on this analysis, an OTTI existed as of September 30, 2010 in the amount of $127 thousand. There was an OTTI on this security in the amount of $137 thousand for the nine months ended September 30, 2010, and there was no OTTI for the same period last year.

Other Securities Classified as Held-to-Maturity

Where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U. S. agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy. Currently, all of SNBV’s other securities classified as held-to-maturity are considered to be level 2 securities.

 

16


Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

September 30, 2010

 

 

Impaired Loans

ASC 820-10 applies to loans measured for impairment using the practical expedients permitted by ASC 310 at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral. Fair value is classified as Level 3 in the fair value hierarchy. Non-covered loans identified as impaired in accordance with ASC 310 totaled $11.3 million as of September 30, 2010 with an allocated allowance for loan losses totaling $371 thousand compared to a carrying amount of $4.2 million with an allocated allowance for loan losses totaling $554 thousand at December 31, 2009. Provision expense related to the impaired loans at September 30, 2010 totaled $675 thousand and $1.1 million during the three and nine months ended September 30, 2010. Provision expense related to impaired loans totaled $20 thousand and $35 thousand during the three and nine months ended September 30, 2009, respectively.

Other Real Estate Owned (OREO)

OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or internal market evaluation less cost to sell. OREO is further evaluated quarterly for any additional impairment. Fair value is classified as Level 3 in the fair value hierarchy.

Assets measured at fair value on a non-recurring basis are summarized below:

 

            Fair Value Measurements Using  

(dollars in thousands)

   Total at
September 30, 2010
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Other residential collateralized mortgage obligations

   $ 1,245       $ —         $ 1,245       $ —     

Impaired non-covered loans

     10,943         —           —           10,943   

 

            Fair Value Measurements Using  

(dollars in thousands)

   Total at
December 31, 2009
     Quoted Prices in
Active Markets for
Identical Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Trust preferred securities, held to maturity

   $ 1,378       $ —         $ —         $ 1,378   

Other residential collateralized mortgage obligations

     1,577         —           1,577         —     

Impaired non-covered loans

     3,636         —           —           3,636   

Impaired covered loans

     4,933         —           —           4,933   

Non-covered other real estate owned

     2,797         —           —           2,797   

Covered other real estate owned

     740         —           —           740   

 

17


Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

September 30, 2010

 

 

Fair Value of Financial Instruments

The carrying amount and estimated fair values of financial instruments were as follows (in thousands):

 

     September 30, 2010      December 31, 2009  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Financial assets:

           

Cash and cash equivalents

   $ 29,052       $ 29,052       $ 8,070       $ 8,070   

Securities available for sale

     11,303         11,303         18,505         18,505   

Securities held to maturity

     49,224         48,035         57,696         57,841   

Stock in Federal Reserve Bank and Federal

           

Home Loan Bank

     6,489         n/a         5,940         n/a   

Net uncovered loans

     358,502         360,397         345,126         348,978   

Net covered loans

     99,009         99,648         111,989         111,989   

Accrued interest receivable

     2,348         2,348         2,167         2,167   

FDIC indemnification asset

     18,951         18,951         19,408         19,408   

Financial liabilities:

           

Deposits:

           

Demand deposits

     45,755         45,755         50,838         50,838   

Money market and savings accounts

     178,001         178,001         134,529         134,529   

Certificates of deposit

     231,513         234,592         270,424         272,073   

Securities sold under agreements to repurchase and other short-term borrowings

     25,475         25,475         22,020         22,020   

FHLB advances

     35,000         35,856         30,000         30,441   

Accrued interest payable

     418         418         753         753   

Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life. It was not practicable to determine the fair value of Federal Reserve Bank and Federal Home Loan Bank stock due to restrictions placed on its transferability. Fair value of long-term debt is based on current rates for similar financing. The FDIC indemnification asset was measured at estimated fair value on the date of acquisition. The fair value was determined by discounting estimated future cash flows using the long-term risk free rate plus a premium. Subsequent additions to the asset are valued at par as it is anticipated that these amounts will be shortly received. The fair value of off-balance-sheet items is not considered material.

 

18


Table of Contents

 

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of SNBV. This discussion and analysis should be read with the consolidated financial statements, the footnotes thereto, and the other financial data included in this report and in our annual report on Form 10-K for the year ended December 31, 2009. Results of operations for the three and nine month periods ended September 30, 2010 are not necessarily indicative of results that may be attained for any other period.

SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and involve a number of risks and uncertainties, many of which are beyond our control. The words “believe,” “may,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “continue,” “would,” “could,” “hope,” “might,” “assume,” “objective,” “seek,” “plan,” “strive” and similar words, or the negatives of these words, are intended to identify forward-looking statements.

Many possible events or factors could affect our future financial results and performance and could cause our actual results to differ materially from the expectations of future results we express or imply in any forward-looking statements. In addition to the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009, factors that could contribute to those differences include, but are not limited to:

 

   

our limited operating history;

 

   

changes in the strength of the United States economy in general and the local economies in our market areas adversely affect our customers and their ability to transact profitable business with us, including the ability of our borrowers to repay their loans according to their terms or a change in the value of the related collateral;

 

   

changes in the availability of funds resulting in increased costs or reduced liquidity;

 

   

our reliance on brokered deposits;

 

   

a deterioration or downgrade in the credit quality and credit agency ratings of the securities in our securities portfolio;

 

   

impairment concerns and risks related to our investment portfolio of collateralized mortgage obligations, agency mortgage-backed securities and pooled trust preferred securities;

 

   

the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations;

 

   

increased credit risk in our assets and increased operating risk caused by a material change in commercial, consumer and/or real estate loans as a percentage of our total loan portfolio;

 

   

the concentration of our loan portfolio in loans collateralized by real estate;

 

   

our level of construction and land development and commercial real estate loans;

 

   

changes in the levels of loan prepayments and the resulting effects on the value of our loan portfolio;

 

   

the failure of assumptions underlying the establishment of and provisions made to the allowance for loan losses;

 

19


Table of Contents

 

   

our ability to expand and grow our business and operations, including the establishment of additional branches and acquisition of additional branches and banks, and our ability to realize the cost savings and revenue enhancements we expect from such activities;

 

   

changes in interest rates and market prices, which could reduce our net interest margins, asset valuations and expense expectations;

 

   

increased competition for deposits and loans adversely affecting rates and terms;

 

   

increases in FDIC deposit insurance premiums and assessments;

 

   

the continued service of key management personnel;

 

   

increased asset levels and changes in the composition of assets and the resulting impact on our capital levels and regulatory capital ratios;

 

   

our ability to acquire, operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive but necessary technological changes; and

 

   

fiscal and governmental policies of the United States federal government.

Forward-looking statements are not guarantees of performance or results. A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe we have chosen these assumptions or bases in good faith and that they are reasonable. We caution you, however, that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Quarterly Report on Form 10-Q. These statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by applicable law, we undertake no obligation to update publicly these statements in light of new information or future events.

OVERVIEW

Southern National Bancorp of Virginia, Inc. (“SNBV”) is a corporation formed on July 28, 2004 under the laws of the Commonwealth of Virginia and is the holding company for Sonabank (“Sonabank”) a Virginia state bank. Sonabank was originally chartered as a national bank under the laws of the United States of America on April 14, 2005. On January 1, 2009, Sonabank converted from a nationally chartered bank to a state chartered bank and moved its headquarters from Charlottesville to McLean, Virginia. Sonabank is now regulated by the State Corporation Commission of Virginia and the Federal Reserve Bank of Richmond. Sonabank conducts full-service banking operations in Charlottesville, Clifton Forge, Leesburg, Warrenton, New Market, Front Royal, South Riding and Fairfax County in Virginia and in Rockville, Maryland. We also have loan production offices in Charlottesville, Fredericksburg, Warrenton and Richmond in Virginia. We have administrative offices in Warrenton and an executive office in Georgetown, Washington, D.C where senior management is located.

RESULTS OF OPERATIONS

Net Income

Net income for the quarter ended September 30, 2010 was $1.1 million and $3.2 million for the nine months ended September 30, 2010, compared to $88 thousand and $637 thousand during the third quarter and the first nine months of 2009. Earnings in the three and nine months ended September 30, 2010 were positively affected by the acquisition of Greater Atlantic Bank and the branch acquisition from Millennium. Earnings in the third quarter and the first nine months of 2009 were adversely impacted by OTTI charges of $1.2 million and $2.1 million, respectively, on several of Sonabank’s trust preferred securities. There were no OTTI charges on the trust preferred securities during the first nine months of 2010. There were OTTI charges on a collateralized mortgage obligation of $127 thousand and $137 thousand during the three and nine months ended September 30, 2010, respectively.

 

20


Table of Contents

 

Net Interest Income

Our operating results depend primarily on our net interest income, which is the difference between interest and dividend income on interest-earning assets such as loans and investments, and interest expense on interest-bearing liabilities such as deposits and borrowings.

Net interest income for the three months ended September 30, 2010 was $6.1 million compared to $4.0 million for the same period last year. Average interest-earning assets for the three months ended September 30, 2010 increased $148.2 million over the same period in 2009. Average loans outstanding increased by $132.1 million in the third quarter of 2010 compared to the third quarter of 2009. Average investment securities increased by $11.0 million in the quarter ended September 30, 2010, compared to the same period last year. The average yield on interest-earning assets increased from 5.69% in 2009 to 5.94% in 2010. Average interest-bearing liabilities for the three months ended September 30, 2010 increased $134.3 million compared to the same period in 2009. Average interest-bearing deposits increased by $129.2 million, while average borrowings increased by $5.2 million compared to the third quarter of 2009. The average cost of interest-bearing liabilities decreased from 2.08% in 2009 to 1.78% in 2010. The interest rate spread for the three months ended September 30, 2010 increased from 3.61% to 4.16% compared to the same period last year. The net interest margin for the three months ended September 30, 2010 increased to 4.38% from 3.89% compared to the same period last year.

Net interest income for the nine months ended September 30, 2010 was $18.8 million compared to $10.5 million for the same period last year. Average interest-earning assets for the nine months ended September 30, 2010 increased $150.7 million over the same period in 2009. Average loans outstanding increased by $141.0 million in the first nine months of 2010 compared to the first nine months of 2009. Average investment securities increased by $8.9 million in the nine months ended September 30, 2010, compared to the same period last year. The average yield on interest-earning assets increased from 5.62% in 2009 to 6.13% in 2010. Average interest-bearing liabilities for the nine months ended September 30, 2010 increased $135.2 million compared to the same period in 2009. Average interest-bearing deposits increased by $130.5 million, while average borrowings increased by $4.7 million compared to the first nine months of 2009. The average cost of interest-bearing liabilities decreased from 2.45% in 2009 to 1.79% in 2010. The interest rate spread for the nine months ended September 30, 2010 increased from 3.17% to 4.34% compared to the same period last year. The net interest margin for the nine months ended September 30, 2010 increased to 4.57% from 3.51% compared to the same period last year.

The significant improvement in the net interest income was attributable to:

 

   

The impact of the Greater Atlantic Bank and Millennium loan purchase transactions. The accretion of the discount on the Greater Atlantic Bank loans contributed $604 thousand to third quarter net interest income and $2.1 million to net interest income for the nine months ended September 30, 2010.

 

   

The bottoming of the decline in interest rates in the first quarter of 2009. The prime rate was 3.25% at the end of the first quarter of 2009 and it remained at that level at the end of the third quarter of 2010.

 

   

Our practice of establishing floor rates on loans, where possible, as they mature or roll over notwithstanding the index rates. On non-SBA loans we have been establishing floors ranging from 6% to 7  1 / 2 %.

 

21


Table of Contents

 

The net interest margin was 4.38% in the third quarter of 2010, down from 4.70% in the second quarter of 2010. This decline is attributable to repricing of loans that had fixed rates which expired and converted to floating rates during the third quarter of 2010.

The following table details average balances of interest-earning assets and interest-bearing liabilities, the amount of interest earned/paid on such assets and liabilities, and the yield/rate for the periods indicated:

 

     Average Balance Sheets and Net Interest
Analysis For the Quarters Ended
 
     9/30/2010     9/30/2009  
     Average
Balance
    Interest
Income/
Expense
     Yield/
Rate
    Average
Balance
    Interest
Income/
Expense
     Yield/
Rate
 
     (Dollar amounts in thousands)  

Assets

              

Interest-earning assets:

              

Loans, net of unearned income (1) (2)

   $ 466,284      $ 7,578         6.45   $ 334,160      $ 5,138         6.10

Investment securities

     67,396        630         3.74     56,367        595         4.22

Other earning assets

     17,716        47         1.05     12,665        45         1.41
                                      

Total earning assets

     551,396        8,255         5.94     403,192        5,778         5.69
                          

Allowance for loan losses

     (5,889          (4,715     

Total non-earning assets

     69,890             42,217        
                          

Total assets

   $ 615,397           $ 440,694        
                          

Liabilities and stockholders’ equity

              

Interest-bearing liabilities:

              

NOW accounts

   $ 15,482        10         0.27   $ 6,473        2         0.11

Money market accounts

     169,019        730         1.71     55,759        238         1.69

Savings accounts

     5,087        9         0.67     2,393        4         0.66

Time deposits

     234,368        1,076         1.82     230,171        1,235         2.13
                                      

Total interest-bearing deposits

     423,956        1,825         1.71     294,796        1,479         1.99

Borrowings

     58,280        343         2.33     53,128        348         2.60
                                      

Total interest-bearing liabilities

     482,236        2,168         1.78     347,924        1,827         2.08
                          

Noninterest-bearing liabilities:

              

Demand deposits

     30,178             22,520        

Other liabilities

     2,755             2,149        
                          

Total liabilities

     515,169             372,593        

Stockholders’ equity

     100,228             68,101        
                          

Total liabilities and stockholders’ equity

   $ 615,397           $ 440,694        
                          

Net interest income

       6,087             3,951      
                          

Interest rate spread

          4.16          3.61

Net interest margin

          4.38          3.89

 

(1) Includes loan fees in both interest income and the calculation of the yield on loans.
(2) Calculations include non-accruing loans in average loan amounts outstanding.

 

22


Table of Contents

 

     Average Balance Sheets and Net Interest
Analysis For the Nine Months Ended
 
     9/30/2010     9/30/2009  
     Average
Balance
    Interest
Income/
Expense
     Yield/
Rate
    Average
Balance
    Interest
Income/
Expense
     Yield/
Rate
 
     (Dollar amounts in thousands)  

Assets

              

Interest-earning assets:

              

Loans, net of unearned income (1) (2)

   $ 462,451      $ 23,021         6.66   $ 321,499      $ 14,602         6.07

Investment securities

     71,358        2,048         3.83     62,500        2,052         4.38

Other earning assets

     16,141        138         1.14     15,208        121         1.06
                                      

Total earning assets

     549,950        25,207         6.13     399,207        16,775         5.62
                          

Allowance for loan losses

     (5,667          (4,490     

Total non-earning assets

     70,138             42,005        
                          

Total assets

   $ 614,421           $ 436,722        
                          

Liabilities and stockholders’ equity

              

Interest-bearing liabilities:

              

NOW accounts

   $ 15,408        33         0.29   $ 7,065        6         0.11

Money market accounts

     162,349        2,069         1.70     51,568        629         1.63

Savings accounts

     4,931        25         0.68     2,222        8         0.48

Time deposits

     239,362        3,291         1.84     230,676        4,667         2.70
                                      

Total interest-bearing deposits

     422,050        5,418         1.72     291,531        5,310         2.44

Borrowings

     56,297        1,001         2.38     51,591        978         2.53
                                      

Total interest-bearing liabilities

     478,347        6,419         1.79     343,122        6,288         2.45
                          

Noninterest-bearing liabilities:

              

Demand deposits

     31,631             22,568        

Other liabilities

     5,340             2,039        
                          

Total liabilities

     515,318             367,729        

Stockholders’ equity

     99,103             68,993        
                          

Total liabilities and stockholders’ equity

   $ 614,421           $ 436,722        
                          

Net interest income

     $ 18,788           $ 10,487      
                          

Interest rate spread

          4.34          3.17

Net interest margin

          4.57          3.51

 

(1) Includes loan fees in both interest income and the calculation of the yield on loans.
(2) Calculations include non-accruing loans in average loan amounts outstanding.

Provision for Loan Losses

The provision for loan losses is a current charge to earnings made in order to increase the allowance for loan losses to a level deemed appropriate by management based on an evaluation of the loan portfolio. This process involves segmenting the portfolio by loan type and estimating loss experience for each loan type based on historical loss experience, changes in the nature and volume of lending, the external economic and market environment and all other known internal and external factors affecting loan collectability.

The provision for loan losses was $1.0 million for the quarter ended September 30, 2010 compared to $1.2 million for the third quarter of 2009. For the nine months ended September 30, 2010, the provision for loan losses was $3.8 million compared to $2.2 million for the same period last year.

Net charge-offs during the third quarter were $943 thousand and $3.4 million for the first nine months of 2010 compared to $878 thousand and $1.5 million during the same periods in 2009 as credit quality continued to be a challenge for our loan portfolio.

 

23


Table of Contents

 

Noninterest Income

The following table presents the major categories on noninterest income for the three and nine months ended September 30, 2010 and 2009:

 

     For the Three Months Ended
September 30,
 
     2010     2009     Change  
     (dollars in thousands)  

Account maintenance and deposit service fees

   $ 210      $ 171      $ 39   

Income from bank-owned life insurance

     140        144        (4

Gain on sale of loans

     —          155        (155

Net gain on branch acquisition

     —          423        (423

Net gain (loss) on other assets

     (435     56        (491

Gain on sales of securities available for sale

     142        148        (6

Net credit impairment losses recognized in earnings

     (127     (1,213     1,086   

Other

     20        24        (4
                        

Total noninterest income (loss)

   $ (50   $ (92   $ 42   
                        
     For the Nine Months Ended
September 30,
 
     2010     2009     Change  
     (dollars in thousands)  

Account maintenance and deposit service fees

   $ 686      $ 441      $ 245   

Income from bank-owned life insurance

     416        432        (16

Gain on sale of loans

     —          155        (155

Net gain on branch acquisition

     —          423        (423

Net gain (loss) on other assets

     (396     173        (569

Gain on sales of securities available for sale

     142        371        (229

Net credit impairment losses recognized in earnings

     (137     (2,076     1,939   

Other

     314        81        233   
                        

Total noninterest income

   $ 1,025      $ —        $ 1,025   
                        

During the third quarter of 2010 Sonabank had a noninterest loss of $50 thousand compared to a noninterest loss of $92 thousand during the third quarter of 2009. The third quarter of 2010 loss was primarily attributable to a loss of $460 thousand on the expedited sale of the commercial real estate property we foreclosed on last quarter. In addition, during the third quarter of 2010 there was an other than temporary impairment (“OTTI”) charge of $127 thousand on a collateralized mortgage obligation offset by a gain on the sale of available-for-sale mortgage-backed securities in the amount of $142 thousand. The third quarter of 2009 loss included OTTI charges of $1.2 million partially offset by a gain of $423 thousand related to the Warrenton branch acquisition, a gain on sale of securities of $148 thousand and a gain on sale of loans of $155 thousand.

Noninterest income increased to $1.0 million in the first nine months of 2010 from zero in the first nine months of 2009. During the nine months ended September 30, 2009, there were OTTI charges of $2.1 million compared to $137 thousand for the same period in 2010. Noninterest income for the first nine months of 2010 included account maintenance and deposit service fees of $686 thousand compared to $441 thousand for the same period last year with the increases resulting from the Greater Atlantic Bank and Millennium Branch acquisitions. Other noninterest income for the nine months ended September 30, 2010 included fees in the amount of $227 thousand earned on short-term letters of credit which expired in June 2010.

 

24


Table of Contents

 

Noninterest Expense

The following table presents the major categories on noninterest expense for the three and nine months ended September 30, 2010 and 2009:

 

     For the Three Months Ended
September 30,
 
     2010     2009      Change  
     (dollars in thousands)  

Salaries and benefits

   $ 1,634      $ 1,098       $ 536   

Occupancy expenses

     520        387         133   

Furniture and equipment expenses

     142        128         14   

Amortization of core deposit intangible

     236        182         54   

Virginia franchise tax expense

     184        140         44   

FDIC assessment

     139        151         (12

Data processing expense

     139        77         62   

Telephone and communication expense

     100        64         36   

Increase in FDIC indemnification asset

     (193     —           (193

Other operating expenses

     489        387         102   
                         

Total noninterest expense

   $ 3,390      $ 2,614       $ 776   
                         
     For the Nine Months Ended
September 30,
 
     2010     2009      Change  
     (dollars in thousands)  

Salaries and benefits

   $ 4,798      $ 3,097       $ 1,701   

Occupancy expenses

     1,589        1,161         428   

Furniture and equipment expenses

     447        374         73   

Amortization of core deposit intangible

     708        545         163   

Virginia franchise tax expense

     551        422         129   

FDIC assessment

     540        638         (98

Data processing expense

     453        236         217   

Telephone and communication expense

     320        192         128   

Decrease in FDIC indemnification asset

     457        —           457   

Other operating expenses

     1,531        856         675   
                         

Total noninterest expense

   $ 11,394      $ 7,521       $ 3,873   
                         

Noninterest expenses were $3.4 million and $11.4 million during the third quarter and the first nine months of 2010, respectively, compared to $2.6 million and $7.5 million during the same periods in 2009. Accretion of the FDIC indemnification asset net of decreases resulting from loans identified with evidence of credit deterioration at acquisition that paid off in 2010 reduced noninterest expense by $193 thousand during the third quarter of 2010, and increased noninterest expense by $457 thousand for the nine months ended September 30, 2010. The amortization of the Greater Atlantic Bank core deposit intangible added $50 thousand during the third quarter

 

25


Table of Contents

and $150 thousand during the first nine months of 2010. The remaining increases were primarily attributable to the costs of operating a thirteen branch system rather than an eight branch system. At September 30, 2010, we had 106 full-time equivalent employees compared to 67 at September 30, 2009, which increased our salaries and benefits. Data processing, on-line banking and ATM-related expenses increased by $93 thousand for the third quarter and $345 thousand for the nine months ended September 30, 2010, compared to the same periods last year. Consulting and legal expenses increased from $106 thousand during the first nine months of 2009 to $164 thousand during the nine months ended September 30, 2010, primarily affecting consulting expenses due to the increasingly complex accounting and auditing environment.

Despite the costs associated with the acquisitions of Greater Atlantic Bank and the Millennium Branch, our efficiency ratio improved to 56.4% in the first nine months of 2010 compared to 65.7% in the same period last year.

FINANCIAL CONDITION

Balance Sheet Overview

Total assets of Southern National Bancorp of Virginia were $618.7 million as of September 30, 2010 up from $610.7 million as of December 31, 2009. Net loans receivable increased from $457.1 million at the end of 2009 to $457.5 million at September 30, 2010. Two large loans in the non-covered portfolio totaling approximately $6.4 million were paid off, one on a project completed and refinanced and the other as a result of our borrower being acquired by a larger company. Loans in the amount of $2.7 million were transferred from the non-covered loan portfolio to OREO, and covered loans totaling $676 thousand were transferred to OREO. There were also principal repayments in the covered portfolio acquired in the Greater Atlantic transaction, including large repayments on three loans totaling approximately $3.2 million.

The increase in bank premises and equipment was due to the purchase of certain fixed assets of Greater Atlantic from the FDIC in the amount of $1.6 million.

Total deposits were $455.3 million at September 30, 2010 compared to $455.8 million at December 31, 2009. Brokered certificates of deposit decreased from $70.0 million as of December 31, 2009 to $47.0 million at September 30, 2010, while other certificates of deposit decreased by $15.9 million. Money market accounts increased by $42.7 million during the nine months ended September 30, 2010. Noninterest-bearing deposits were $30.3 million at September 30, 2010 and $33.3 million at December 31, 2009.

Loan Portfolio

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.”

 

26


Table of Contents

 

The following table summarizes the composition of our loan portfolio as of September 30, 2010 and December 31, 2009:

 

     Covered
Loans
     Non-covered
Loans
    Total
Loans
    Covered
Loans
     Non-covered
Loans
    Total
Loans
 
     September 30, 2010     December 31, 2009  

Mortgage loans on real estate:

              

Commercial

   $ 19,084       $ 153,099      $ 172,183      $ 24,494       $ 146,295      $ 170,789   

Construction loans to residential builders

     —           1,613        1,613        —           5,436        5,436   

Other construction and land loans

     1,100         42,339        43,439        3,498         42,564        46,062   

Residential 1-4 family

     31,544         61,919        93,463        33,815         61,024        94,839   

Multi- family residential

     2,517         13,677        16,194        2,570         10,726        13,296   

Home equity lines of credit

     42,562         10,830        53,392        44,235         10,532        54,767   
                                                  

Total real estate loans

     96,807         283,477        380,284        108,612         276,577        385,189   

Commercial loans

     2,040         78,594        80,634        3,184         70,757        73,941   

Consumer loans

     162         2,439        2,601        193         3,528        3,721   
                                                  

Gross loans

     99,009         364,510        463,519        111,989         350,862        462,851   

Less unearned income on loans

     —           (483     (483     —           (564     (564
                                                  

Loans, net of unearned income

   $ 99,009       $ 364,027      $ 463,036      $ 111,989       $ 350,298      $ 462,287   
                                                  

Asset Quality

We will generally place a loan on nonaccrual status when it becomes 90 days past due. Loans will also be placed on nonaccrual status in cases where we are uncertain whether the borrower can satisfy the contractual terms of the loan agreement. Cash payments received while a loan is categorized as nonaccrual will be recorded as a reduction of principal as long as doubt exists as to future collections.

In accordance with regulatory guidance we obtain appraisals, prior to closing, on all real estate loans. In the event that a real estate loan becomes non-performing or a problem loan, collateral fair market value is reassessed either by obtaining a new appraisal or an internal evaluation, and our exposure is reduced, if necessary, to fair market value, less cost to sell, either through a charge off or by establishing a specific reserve. In accordance with regulatory guidance a new appraisal is obtained in the event of foreclosure and we record other real estate owned at the lower of our recorded investment in the loan or fair value less our estimated costs to sell.

Our loss and delinquency experience on our loan portfolio has been limited by a number of factors, including our underwriting standards and the relatively short period of time since the loans were originated. Future loss and delinquency experience will, to a large extend, be a function of external market factors affecting the value of loan collateral, particularly real estate, and the financial well being of our borrowers.

Non-covered Loans and Assets

Non-covered loans identified as impaired in accordance with ASC 310 totaled $11.3 million with allocated allowance for loan losses in the amount of $371 thousand as of September 30, 2010, including $4.7 million of nonaccrual loans and $6.6 million of restructured loans. The restructured loans are well secured, but the borrowers were experiencing financial difficulties. As a consequence, we agreed to defer some interest payments, and payments are being made in accordance with the restructured terms. This compares to $4.2 million of impaired loans which were nonaccrual loans with allocated allowance for loan losses in the amount of $554 thousand at December 31, 2009. Nonaccrual loans were $4.7 million and $4.2 million at September 30, 2010 and December 31, 2009, respectively. The increase in impaired loans is primarily due to the addition of three restructured loans totaling $6.6 million. At September 30, 2010 and December 31, 2009, there were no loans past due 90 days or more and accruing interest.

Non-covered nonperforming assets increased from $7.0 million at December 31, 2009 to $8.1 million at September 30, 2010.

 

27


Table of Contents

 

During the nine months ended September 30, 2010, there were transfers from non-covered loans to OREO in the amount of $2.7 million, and there were sales of non-covered OREO totaling $2.1 million. The non-covered OREO balance includes 3 single-family residential properties totaling $545 thousand. The rest of our non-covered OREO balance continues to be comprised of one property in the amount of $2.8 million, which contains 33 finished 2 to 4 acre lots in Culpeper, Virginia. There are no new developments on that property. We continue to monitor the fair value of this property to ensure our carrying value is realizable.

Sonabank has an internal loan review and a loan committee, both of which provide on-going monitoring to identify and address issues with problem loans. The loan loss provision is determined after consideration of all known relevant internal and external factors affecting loan collectability to maintain the allowance for loan and lease losses at a level necessary to absorb estimated credit losses. We believe the allowance for loan losses is sufficient to cover probable incurred credit losses at September 30, 2010.

The following table sets forth selected asset quality ratios as of the dates indicated:

 

     As of  
     September 30,
2010
    December 31,
2009
 

Allowance for loan losses to total non-covered loans

     1.52     1.48

Non-covered nonperforming assets to total non-covered assets

     1.56     1.41

Non-covered nonperforming assets to total non-covered loans and OREO

     2.19     1.98

We do not have a formal loan modification program. Rather, we work with individual customers on a case-by-case basis to facilitate the orderly collection of our principal and interest before a loan becomes a non-performing loan. If a customer is unable to make contractual payments, we review the circumstances of the customer’s situation and negotiate a revised payment stream. In other words, we identify performing customers experiencing financial difficulties and through negotiations, we lower their interest rate or defer the receipt of interest payments for a period of up to a year. Our goal when restructuring a credit is to afford the customer a reasonable period of time to remedy the issue causing cash flow constraints within their business so that they can return to performing status over time.

Our loan modifications have taken the form of deferral of interest payments and/or curtailment of scheduled principal payments. Our restructured loans are all collateral secured loans. If a customer fails to perform under the modified terms, we place the loan on non-accrual status and begin the process of working with the customer to liquidate the underlying collateral to satisfy the debt.

At September 30, 2010, we had three restructured loans totaling $6.6 million with borrowers who experienced deterioration in financial condition. These loans were included in impaired loans. All of these loans were granted interest rate deferrals to provide cash flow relief to customers experiencing cash flow difficulties. There were no concessions made to forgive principal or interest relative to these loans. These loans are secured by first liens on single-family residential or commercial real estate properties. We do not hold a second or junior lien position on these restructured loans. Management believes these loans are well secured and the borrowers have the ability to repay the loans in accordance with the renegotiated terms. As such, these restructured loans were on accrual status at the balance sheet date as payments were being made according to the restructured loan terms. These loans have not had a partial charge-off. In

 

28


Table of Contents

accordance with ASC 310-50-2, we continue to report restructured loans as restructured until such time as the loan has developed a reasonable repayment history, the borrower displays the financial capacity to repay, and the loan terms return to the terms in place prior to the restructure. If the customer fails to perform, we place the loan on non-accrual status and seek to liquidate the underlying collateral for these loans. Changes in value for impairment, including the amount attributed to the passage of time, are recorded entirely within the provision for loans losses.

We consider any loan that is restructured for a borrower experiencing financial difficulties due to a borrower’s potential inability to pay in accordance with contractual terms of the loan a troubled debt restructure (“TDR”). Specifically, we consider a concession involving a modification of the loan terms, such as (i) a reduction of the stated interest rate, (ii) reduction or deferral of principal, (iii) reduction or deferral of accrued interest at a stated interest rate lower than the current market rate for new debt with similar risk all to be TDRs. When a modification of terms is made for a competitive reason, we do not consider that to be a TDR. The primary example of a competitive modification would be an interest rate reduction for a performing credit worthy customer to a market rate as the result of a market decline in rates.

Covered Loans and Assets

Covered loans identified as impaired in accordance with ASC 310 totaled $4.2 million as of September 30, 2010 and $4.9 million at December 31, 2009. Nonaccrual loans were $2.1 million and $5.1 million at September 30, 2010 and December 31, 2009, respectively. At September 30, 2010 and December 31, 2009, there were no loans past due 90 days or more and accruing interest.

We sold the property with several apartment units in Georgia from the Greater Atlantic covered OREO portfolio. The covered OREO portfolio consists of 2 commercial properties totaling $676 thousand at September 30, 2010.

Securities

Investment securities, available for sale and held to maturity, were $60.5 million at September 30, 2010 and $76.2 million at December 31, 2009.

As of September 30, 2010 we owned pooled trust preferred securities as follows:

 

Security

 

Tranche

Level

  Ratings
When  Purchased
    Current Ratings     Par Value     Book Value     Estimated
Fair
Value
    Current
Defaults
and

Deferrals
    % of
Current
Defaults and
Deferrals

to Current
Collateral
    Previously
Recognized
Cumulative
Other

Comprehensive
Loss (1)
       
                   
    Moody’s     Fitch     Moody’s     Fitch                
    (in thousands)        

ALESCO VII A1B

  Senior     Aaa        AAA        Baa3        BB      $ 8,387      $ 7,479      $ 4,221      $ 179,056        29   $ 319     

MMCF II B

  Senior Sub     A3        AA-        Baa2        BB        573        526        525        34,000        29     47     

MMCF III B

  Senior Sub     A3        A-        Ba1        CC        695        679        363        27,000        23     16     
                                               
              9,655        8,684        5,109          $ 382     
                                               
                                                              Cumulative
Other

Comprehensive
Loss (2)
    Cumulative
OTTI
Related to

Credit
Loss (2)
 

Other Than Temporarily Impaired:

  

                   

TPREF FUNDING II

  Mezzanine     A1        A-        Caa3        C        1,500        478        486        119,100        34     780      $ 242   

TRAP 2007-XII C1

  Mezzanine     A3        A        C        C        2,043        126        308        137,705        28     1,338        579   

TRAP 2007-XIII D

  Mezzanine     NR        A-        NR        C        2,032        —          10        237,750        32     —          2,032   

MMC FUNDING XVIII

  Mezzanine     A3        A-        Ca        C        1,039        84        81        111,682        34     485        470   

ALESCO V C1

  Mezzanine     A2        A        Ca        C        2,052        560        469        99,442        31     979        513   

ALESCO XV C1

  Mezzanine     A3        A-        C        C        3,078        29        304        246,100        37     490        2,559   

ALESCO XVI C

  Mezzanine     A3        A-        Ca