Southern National Bancorp
Southern National Bancorp of Virginia Inc (Form: 10-Q, Received: 05/09/2011 12:13:09)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2011

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   x
Non-accelerated filer   ¨   (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 April 29, 2011, there were 11,590,212 shares of common stock outstanding.

 

 

 


SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

March 31, 2011

INDEX

 

            PAGE  
PART 1 - FINANCIAL INFORMATION   
Item 1 - Financial Statements   
     Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010      2   
     Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2011 and 2010      3   
     Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2011      4   
     Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010      5   
     Notes to Consolidated Financial Statements      6- 21   
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations      22-32   
Item 3 – Quantitative and Qualitative Disclosures about Market Risk      33-35   
Item 4 – Controls and Procedures      36   
PART II - OTHER INFORMATION   
Item 1 – Legal Proceedings      36   
Item 1A – Risk Factors      36   
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      37   

Signatures

     38   

Certifications

     39-41   


ITEM 1 - FINANCIAL INFORMATION

PART I - FINANCIAL STATEMENTS

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

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

 

     March 31,
2011
    December 31,
2010
 

ASSETS

    

Cash and cash equivalents:

    

Cash and due from financial institutions

   $ 2,634      $ 2,180   

Interest-bearing deposits in other financial institutions

     4,948        7,565   
                

Total cash and cash equivalents

     7,582        9,745   
                

Securities available for sale, at fair value

     10,886        11,068   
                

Securities held to maturity, at amortized cost
(fair value of $40,777 and $43,965, respectively)

     41,525        44,895   
                

Covered loans

     85,490        92,171   

Non-covered loans

     377,555        367,266   
                

Total loans

     463,045        459,437   

Less allowance for loan losses

     (5,704     (5,599
                

Net loans

     457,341        453,838   
                

Stock in Federal Reserve Bank and Federal Home Loan Bank

     6,350        6,350   

Bank premises and equipment, net

     4,550        4,659   

Goodwill

     8,713        8,713   

Core deposit intangibles, net

     2,685        2,915   

FDIC indemnification asset

     17,999        18,536   

Bank-owned life insurance

     14,703        14,568   

Other real estate owned

     7,908        4,577   

Deferred tax assets, net

     3,734        3,782   

Other assets

     6,457        7,178   
                

Total assets

   $ 590,433      $ 590,824   
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Noninterest-bearing demand deposits

   $ 32,591      $ 34,529   

Interest-bearing deposits:

    

NOW accounts

     16,324        15,961   

Money market accounts

     150,964        169,861   

Savings accounts

     5,771        5,490   

Time deposits

     226,708        205,133   
                

Total interest-bearing deposits

     399,767        396,445   
                

Total deposits

     432,358        430,974   
                

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

     19,881        23,908   

Federal Home Loan Bank (FHLB) advances

     35,000        35,000   

Other liabilities

     2,842        1,828   
                

Total liabilities

     490,081        491,710   
                

Commitments and contingencies (See Note 5)

     —          —     

Stockholders’ equity:

    

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

     —          —     

Common stock, $.01 par value. Authorized 45,000,000 shares; issued and outstanding, 11,590,212 shares at March 31, 2011 and December 31, 2010

     116        116   

Additional paid in capital

     96,504        96,478   

Retained earnings

     6,974        5,854   

Accumulated other comprehensive loss

     (3,242     (3,334
                

Total stockholders’ equity

     100,352        99,114   
                

Total liabilities and stockholders’ equity

   $ 590,433      $ 590,824   
                

See accompanying notes to consolidated financial statements.

 

2


SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

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

 

    

For the Three Months Ended

March 31,

 
     2011     2010  

Interest and dividend income:

    

Interest and fees on loans

   $ 7,121      $ 7,614   

Interest and dividends on taxable securities

     556        734   

Interest and dividends on other earning assets

     52        43   
                

Total interest and dividend income

     7,729        8,391   
                

Interest expense:

    

Interest on deposits

     1,277        1,804   

Interest on borrowings

     318        327   
                

Total interest expense

     1,595        2,131   
                

Net interest income

     6,134        6,260   
                

Provision for loan losses

     1,340        1,300   
                

Net interest income after provision for loan losses

     4,794        4,960   
                

Noninterest income:

    

Account maintenance and deposit service fees

     200        241   

Income from bank-owned life insurance

     135        139   

Net gain (loss) on other real estate owned

     (39     20   

Total other-than-temporary impairment losses

     (32     (7

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

     —          —     
                

Net credit impairment losses recognized in earnings

     (32     (7

Other

     44        147   
                

Total noninterest income

     308        540   
                

Noninterest expenses:

    

Salaries and benefits

     1,603        1,641   

Occupancy expenses

     539        542   

Furniture and equipment expenses

     136        154   

Amortization of core deposit intangible

     230        236   

Virginia franchise tax expense

     171        184   

FDIC assessment

     154        189   

Data processing expense

     142        155   

Telephone and communication expense

     88        119   

Change in FDIC indemnification asset

     (159     244   

Other operating expenses

     550        514   
                

Total noninterest expenses

     3,454        3,978   
                

Income before income taxes

     1,648        1,522   

Income tax expense

     528        481   
                

Net income

   $ 1,120      $ 1,041   
                

Other comprehensive income :

    

Unrealized gain on available for sale securities

   $ 96      $ 61   

Realized amount on securities sold, net

     —          —     

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

     55        76   

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

     (11     (30
                

Net unrealized gain (loss)

     140        107   

Tax effect

     (48     (36
                

Other comprehensive income

     92        71   
                

Comprehensive income

   $ 1,212      $ 1,112   
                

Earnings per share, basic and diluted

   $ 0.10      $ 0.09   
                

See accompanying notes to consolidated financial statements.

 

3


SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2011

(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, 2011

   $ 116       $ 96,478       $ 5,854       $ (3,334      $ 99,114   

Comprehensive income:

                

Net income

           1,120         $ 1,120         1,120   

Change in unrealized gain on available for sale securities (net of tax, $33)

              63        63         63   

Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $15 and accretion, $11 and amounts recorded into other comprehensive income at transfer)

              29        29         29   

Total comprehensive income

              $ 1,212      
                      

Stock-based compensation expense

        26                 26   
                                              

Balance - March 31, 2011

   $ 116       $ 96,504       $ 6,974       $ (3,242      $ 100,352   
                                              

See accompanying notes to consolidated financial statements.

 

 

4


SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(dollars in thousands) (Unaudited)

 

     2011     2010  

Operating activities:

    

Net income

   $ 1,120      $ 1,041   

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

    

Depreciation

     126        136   

Amortization of core deposit intangible

     230        236   

Other amortization , net

     (37     50   

Increase (decrease) in FDIC indemnification asset

     (159     244   

Provision for loan losses

     1,340        1,300   

Earnings on bank-owned life insurance

     (135     (139

Stock based compensation expense

     26        17   

Impairment on securities

     32        7   

Net (gain) loss on other real estate owned

     39        (20

Net (increase) decrease in other assets

     111        (404

Net increase in other liabilities

     1,014        2,218   
                

Net cash and cash equivalents provided by operating activities

     3,707        4,686   
                

Investing activities:

    

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

     265        521   

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

     3,486        2,598   

Loan originations and payments, net

     (8,045     9,625   

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

     —          (835

Proceeds from sale of other real estate owned

     388        294   

Payments received on FDIC indemnification asset

     696        —     

Purchases of bank premises and equipment

     (17     (1,672
                

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

     (3,227     10,531   
                

Financing activities:

    

Net increase (decrease) in deposits

     1,384        (6,569

Proceeds from Federal Home Loan Bank advances

     —          5,000   

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

     (4,027     (772
                

Net cash and cash equivalents used in financing activities

     (2,643     (2,341
                

Increase (decrease) in cash and cash equivalents

     (2,163     12,876   

Cash and cash equivalents at beginning of period

     9,745        8,070   
                

Cash and cash equivalents at end of period

   $ 7,582      $ 20,946   
                

Supplemental Disclosure of Cash Flow Information

    

Cash payments for:

    

Interest

   $ 1,640      $ 2,141   

Supplemental schedule of noncash investing and financing activities

    

Transfer from non-covered loans to other real estate owned

     3,759        —     

See accompanying notes to consolidated financial statements.

 

 

5


SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2011

 

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, 2010.

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


Recent Accounting Pronouncements

In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This amendment clarifies the guidance on the evaluation made by a creditor on whether a restructuring constitutes a troubled debt restructuring. It clarifies the guidance related to a creditor’s evaluation of whether it has granted a concession to a debtor and also clarifies the guidance on a creditor’s evaluation of whether the debtor is experiencing financial difficulties. The amendment is effective for public entities for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The disclosures required which were deferred by ASU No. 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, is effective for interim and annual periods beginning on or after June 15, 2011. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our consolidated financial condition or results of operation.

 

2. STOCK- BASED COMPENSATION

In 2004, the Board of Directors adopted a stock option plan that authorized the reservation of up to 302,500 shares of common stock and provided for the granting of stock options to certain directors, officers and employees. As of March 31, 2011, options to purchase an aggregate of 302,500 shares of common stock were outstanding and no shares remained available for issuance. The 2010 Stock Awards and Incentive Plan was approved by the Board of Directors in January 2010 and approved by the stockholders at the Annual Meeting in April 2010. The 2010 plan authorized the reservation of 700,000 shares of common stock for the granting of stock awards. The options granted to officers and employees are incentive stock options and the options granted to non-employee directors are non-qualified stock options. The purpose of the plan is to afford key employees an incentive to remain in the employ of 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 97,750 options during the first three months of 2011. The fair value of each option granted is estimated on the date of grant using the Black-Scholes options-pricing model. The following weighted-average assumptions were used to value options granted in the three months ended March 31, 2011:

 

     2011  

Dividend yield

     0.00

Expected life

     10 years   

Expected volatility

     46.13

Risk-free interest rate

     3.34

Weighted average fair value per option granted

   $ 4.39   

 

   

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.

 

7


   

The risk-free interest rate was developed using the U. S. Treasury yield curve for periods equal to the expected life of the options on the grant date. An increase in the risk-free interest rate will increase stock compensation expense on future option grants.

For the three months ended March 31, 2011 and 2010, stock-based compensation expense was $26 thousand and $17 thousand, respectively. As of March 31, 2011, unrecognized compensation expense associated with the stock options was $721 thousand, which is expected to be recognized over a weighted average period of 4.3 years.

A summary of the activity in the stock option plan during the three months ended March 31, 2011 follows (dollars in thousands):

 

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

Options outstanding, beginning of period

     312,675       $ 8.35         

Granted

     97,750         7.20         

Forfeited

     —           —           

Exercised

     —           —           
                 

Options outstanding, end of period

     410,425       $ 8.07         7.0       $ 72   
                                   

Vested or expected to vest

     410,425       $ 8.07         7.0       $ 72   

Exercisable at end of period

     207,745       $ 8.90         4.9       $ 27   

 

3. SECURITIES

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

 

March 31, 2011    Amortized
Cost
     Gross Unrealized      Fair
Value
 
      Gains      Losses     

SBA guaranteed loan pools

   $ 10,544       $ 251       $ —           10,795   

FHLMC preferred stock

     16         75         —           91   

Total

   $ 10,560       $ 326       $ —         $ 10,886   
                                   
December 31, 2010    Amortized
Cost
    

 

Gross Unrealized

     Fair
Value
 
        Gains         Losses      

SBA guaranteed loan pools

   $ 10,822       $ 216       $ —           11,038   

FHLMC preferred stock

     16         14         —           30   
                                   

Total

   $ 10,838       $ 230       $ —         $ 11,068   
                                   

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

 

8


March 31, 2011    Amortized
Cost
     Gross Unrecognized     Fair
Value
 
      Gains      Losses    

Residential government-sponsored mortgage-backed securities

   $ 31,334       $ 1,161       $ (14   $ 32,481   

Residential government-sponsored collateralized mortgage obligations

     153         5         —          158   

Other residential collateralized mortgage obligations

     1,100         4         —          1,104   

Trust preferred securities

     8,938         864         (2,768     7,034   
                                  
   $ 41,525       $ 2,034       $ (2,782   $ 40,777   
                                  
December 31, 2010    Amortized
Cost
     Gross Unrecognized     Fair
Value
 
      Gains      Losses    

Residential government-sponsored mortgage-backed securities

   $ 34,088       $ 1,247       $ —        $ 35,335   

Residential government-sponsored collateralized mortgage obligations

     188         8         —          196   

Other residential collateralized mortgage obligations

     1,166         5         —          1,171   

Trust preferred securities

     9,453         675         (2,865     7,263   
                                  
   $ 44,895       $ 1,935       $ (2,865   $ 43,965   
                                  

The fair value and carrying amount, if different, of debt securities as of March 31, 2011, by contractual maturity were as follows (in thousands). Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations, are shown separately.

 

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

Due in one to five years

   $ —         $ —         $ 322       $ 329   

Due in five to ten years

     —           —           1,170         1,194   

Due after ten years

     8,938         7,034         9,052         9,272   

Residential government-sponsored mortgage-backed securities

     31,334         32,481         —           —     

Residential government-sponsored collateralized mortgage obligations

     153         158         —           —     

Other residential collateralized mortgage obligations

     1,100         1,104         —           —     
                                   

Total

   $ 41,525       $ 40,777       $ 10,544       $ 10,795   
                                   

Securities with a carrying amount of approximately $42.3 million and $45.3 million at March 31, 2011 and December 31, 2010, respectively, were pledged to secure public deposits, repurchase agreements and a line of credit for advances from the Federal Home Loan Bank of Atlanta (“FHLB”).

SNBV monitors the portfolio for indicators of other than temporary impairment. At March 31, 2011 and December 31, 2010, certain securities’ fair values were below cost. As outlined in the table below, there were securities with fair values totaling approximately $8.9 million in the portfolio that are considered temporarily impaired at March 31, 2011. 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 March 31, 2011. The following tables present information regarding securities in a continuous unrealized loss position as of March 31, 2011 and December 31, 2010 (in thousands) by duration of time in a loss position:

 

March 31, 2011

               
       Less than 12 months     12 Months or More     Total  
Held to Maturity    Fair value      Unrecognized
Losses
    Fair value      Unrecognized
Losses
    Fair value      Unrecognized
Losses
 

Residential government-sponsored mortgage-backed securities

   $ 4,510       $ (14   $ —         $ —        $ 4,510       $ (14

Trust preferred securities

     —           —          4,359         (2,768     4,359         (2,768
                                                   
   $ 4,510       $ (14   $ 4,359       $ (2,768   $ 8,869       $ (2,782
                                                   

December 31, 2010

               
       Less than 12 months     12 Months or More     Total  
Held to Maturity    Fair value      Unrecognized
Losses
    Fair value      Unrecognized
Losses
    Fair value      Unrecognized
Losses
 

Trust preferred securities

   $ —         $ —        $ 4,805       $ (2,865   $ 4,805       $ (2,865
                                                   

 

9


As of March 31, 2011, we owned pooled trust preferred securities as follows:

 

Security

  Tranche    

Ratings

When Purchased

  Current Ratings                 Estimated
Fair
    Current
Defaults and
   

% of Current
Defaults and
Deferrals

to Current

    Previously
Recognized
Cumulative
Other
Comprehensive
 
  Level     Moody’s     Fitch   Moody’s     Fitch     Par Value     Book Value     Value     Deferrals     Collateral     Loss (1)  
    (in thousands)  

ALESCO VII A1B

    Senior        Aaa      AAA     Baa3        BB      $ 7,256      $ 6,486      $ 3,943      $ 204,056        43   $ 313   

MMCF II B

    Senior Sub        A3      AA-     Baa2        BB        496        457        465        34,000        29     39   

MMCF III B

    Senior Sub        A3      A-     Ba1        CC        656        641        416        37,000        32     15   
                                             
              8,408        7,584        4,824          $ 367   
                                             

 

Other Than Temporarily Impaired:                                                               Cumulative
Other

Comprehensive
Loss (2)
    Cumulative
OTTI

Related to
Credit  Loss (2)
 

TPREF FUNDING II

    Mezzanine        A1        A-        Caa3        C        1,500        541        541        127,100        37     682      $ 277   

TRAP 2007-XII C1

    Mezzanine        A3        A        C        C        2,059        126        437        140,705        28     1,354        579   

TRAP 2007-XIII D

    Mezzanine        NR        A-        NR        C        2,032        —          33        231,250        31     —          2,032   

MMC FUNDING XVIII

    Mezzanine        A3        A-        Ca        C        1,046        85        123        111,682        34     491        470   

ALESCO V C1

    Mezzanine        A2        A        Ca        C        2,073        458        576        117,942        41     954        661   

ALESCO XV C1

    Mezzanine        A3        A-        C        C        3,100        29        79        266,100        40     512        2,559   

ALESCO XVI C

    Mezzanine        A3        A-        Ca        C        2,065        115        421        149,900        35     770        1,180   
                                                     
              13,875        1,354        2,210          $ 4,763      $ 7,758   
                                                     

Total

            $ 22,283      $ 8,938      $ 7,034           
                                         

 

(1) Pre-tax, and represents unrealized losses at date of transfer from available-for-sale to held-to-maturity, net of accretion
(2) Pre-tax

Each of these securities has been evaluated for other than temporary impairment. In performing a detailed cash flow analysis of each security, Sonabank works with independent third parties to estimate expected cash flows and assist with the evaluation of other than temporary impairment. The cash flow analyses performed included the following assumptions:

 

   

We assume that .5% of the remaining performing collateral will default or defer per annum.

 

   

We assume recoveries ranging from 25% to 50% 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.

 

   

Additionally banks with assets over $15 billion will no longer be allowed to count down streamed trust preferred proceeds as Tier 1 capital (although it will still be counted as Tier 2 capital). That will incent the large banks to prepay their trust preferred securities if they can or if it is economically desirable. As a consequence we have projected in all of our pools that 25% of the collateral issued by banks with assets over $15 billion will prepay in 2013.

 

   

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

These assumptions resulted in OTTI charges related to credit on one of the trust preferred securities in the amount of $32 thousand during the quarter ended March 31, 2011, compared to no OTTI charges related to credit on the trust preferred securities for the quarter ended March 31, 2010.

We also own $1.1 million of SARM 2005-22 1A2. This residential collateralized mortgage obligation was originally rated AAA by Standard and Poors. After a series of downgrades this security has been evaluated for potential impairment. Based on our review of the trustee report, shock analysis and current information regarding delinquencies, nonperforming loans and credit support it has been determined that no OTTI charge for credit was required for the quarter ended March 31, 2011. The assumptions used in the analysis included a 5.5% prepayment speed, 15%

 

10


default rate, a 50% loss severity and an accounting yield of 2.60%. We recorded OTTI charges for credit on this security of $7 thousand in the first quarter of 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 three months ended March 31, 2011 and 2010 (in thousands):

 

     2011      2010  

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

   $ 8,002       $ 7,714   

Amounts related to credit loss for which an other-than-temporary impairment was previously recognized

     32         7   
                 

Amount of cumulative other-than-temporary impairment related to credit loss as of March 31

   $ 8,034       $ 7,721   
                 

4. LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table summarizes the composition of our loan portfolio as of March 31, 2011 and December 31, 2010:

 

       Covered
Loans
     Non-covered
Loans
    Total
Loans
    Covered
Loans
     Non-covered
Loans
    Total
Loans
 
       March 31, 2011     December 31, 2010  

Mortgage loans on real estate:

              

Commercial real estate - owner-occupied

   $ 4,812       $ 86,407      $ 91,219      $ 5,246       $ 81,487      $ 86,733   

Commercial real estate - non-owner-occupied

     10,341         85,634        95,975        13,898         76,068        89,966   

Secured by farmland

     —           3,507        3,507        —           3,522        3,522   

Construction and land loans

     998         32,079        33,077        1,098         39,480        40,578   

Residential 1-4 family

     28,944         57,029        85,973        29,935         58,900        88,835   

Multi- family residential

     558         23,289        23,847        563         19,177        19,740   

Home equity lines of credit

     38,865         9,581        48,446        40,287         10,532        50,819   
                                                  

Total real estate loans

     84,518         297,526        382,044        91,027         289,166        380,193   

Commercial loans

     830         78,687        79,517        998         76,644        77,642   

Consumer loans

     142         2,061        2,203        146         2,010        2,156   
                                                  

Gross loans

     85,490         378,274        463,764        92,171         367,820        459,991   

Less unearned income on loans

     —           (719     (719     —           (554     (554
                                                  

Loans, net of unearned income

   $ 85,490       $ 377,555      $ 463,045      $ 92,171       $ 367,266      $ 459,437   
                                                  

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 not acquired from Greater Atlantic Bank are referred to as “non-covered loans.” The covered loans are 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. There has been no incremental provision recorded on covered loans since acquisition. The FDIC indemnification asset is reduced for cash payments received, and adjusted each quarter for changes in expected recoveries from the FDIC based on the expected cash flows from the covered loans. The adjustment amount is recorded through earnings.

 

11


Credit-impaired covered loans are those loans showing evidence of credit deterioration since origination and it is probable, at the date of acquisition, that SNBV will not collect all contractually required principal and interest payments. Generally, acquired loans that meet SNBV’s definition for nonaccrual status fall within the definition of credit-impaired covered loans.

Impaired loans were as follows (in thousands):

 

March 31, 2011   Covered Loans     Non-covered Loans     Total Loans  
      Recorded
Investment
    Allowance
for Loan
Losses Allocated
    Recorded
Investment (1)
    Allowance
for Loan
Losses Allocated
    Recorded
Investment
    Allowance
for Loan
Losses Allocated
 

With no related allowance recorded

           

Commercial real estate - owner occupied

  $ 141      $ —        $ 413      $ —        $ 554      $ —     

Commercial real estate - non-owner occupied (2)

    1,702        —          4,669        —          6,371        —     

Construction and land development

    701        —          1,789        —          2,490        —     

Commercial loans

    217        —          2,364        —          2,581        —     

Residential 1-4 family

    599        —          2,062        —          2,661        —     

Other consumer loans

    —          —          —          —          —          —     
                                               

Total

  $ 3,360      $ —        $ 11,297      $ —        $ 14,657      $ —     
                                               

With an allowance recorded

           

Commercial real estate - owner occupied

  $ —        $ —        $ —          $ —        $ —     

Commercial real estate - non-owner occupied (2)

    —          —          —            —          —     

Construction and land development

    —          —          2,014        52        2,014        52   

Commercial loans

    —          —          1,389        427        1,389        427   

Residential 1-4 family

    —          —          4,564        20        4,564        20   

Other consumer loans

    —          —          —          —          —          —     
                                               

Total

  $ —        $ —        $ 7,967      $ 499      $ 7,967      $ 499   
                                               

Grand total

  $ 3,360      $ —        $ 19,264      $ 499      $ 22,624      $ 499   
                                               

 

(1) Recorded investment is after charge offs of $5.9 million and includes SBA guarantees of $2.0 million.
(2) Includes loans secured by farmland and multi-family residential loans.

 

December 31, 2010   Covered Loans     Non-covered Loans     Total Loans  
      Recorded
Investment
    Allowance
for Loan
Losses Allocated
    Recorded
Investment (1)
    Allowance
for Loan
Losses Allocated
    Recorded
Investment
    Allowance
for Loan
Losses Allocated
 

With no related allowance recorded

           

Commercial real estate - owner occupied

  $ 141      $ —        $ 358      $ —        $ 499      $ —     

Commercial real estate - non-owner occupied (2)

    1,807        —          5,508        —          7,315        —     

Construction and land development

    1,055        —          4,844        —          5,899        —     

Commercial loans

    285        —          1,558        —          1,843        —     

Residential 1-4 family

    108        —          2,969        —          3,077        —     

Other consumer loans

    77        —          —          —          77        —     
                                               

Total

  $ 3,473      $ —        $ 15,237      $ —        $ 18,710      $ —     
                                               

With an allowance recorded

           

Commercial real estate - owner occupied

  $ —        $ —        $ —        $ —        $ —        $ —     

Commercial real estate - non-owner occupied (2)

    —          —          1,076        50        1,076        50   

Construction and land development

    —          —          —          —          —          —     

Commercial loans

    —          —          935        376        935        376   

Residential 1-4 family

    —          —          4,564        20        4,564        20   

Other consumer loans

    —          —          —          —          —          —     
                                               

Total

  $ —        $ —        $ 6,575      $ 446      $ 6,575      $ 446   
                                               

Grand total

  $ 3,473      $ —        $ 21,812      $ 446      $ 25,285      $ 446   
                                               

 

(1) Recorded investment is after charge offs of $7.8 million and includes SBA guarantees of $1.7 million.
(2) Includes loans secured by farmland and multi-family residential loans.

The following table presents the average recorded investment and interest income for impaired loans recognized by class of loans for the three months ended March 31, 2011 (in thousands):

 

12


      Covered Loans     Non-covered Loans     Total Loans  
      Average
Recorded
Investment
    Interest
Income
Recognized
    Average
Recorded
Investment
    Interest
Income
Recognized
    Average
Recorded
Investment
    Interest
Income
Recognized
 

With no related allowance recorded

           

Commercial real estate - owner occupied

  $ 141      $ 5      $ 323      $ 6      $ 464      $ 11   

Commercial real estate - non-owner occupied (2)

    1,748        21        5,119        44        6,867        65   

Construction and land development

    702        26        1,789        26        2,491        52   

Commercial loans

    218        5        1,842        13        2,060        18   

Residential 1-4 family

    225        3        2,062        —          2,287        3   

Other consumer loans

        —          —          —          —     
                                               

Total

  $ 3,034      $ 60      $ 11,135      $ 89      $ 14,169      $ 149   
                                               

With an allowance recorded

           

Commercial real estate - owner occupied

  $ —        $ —        $ —        $ —        $ —        $ —     

Commercial real estate - non-owner occupied (2)

    —          —          —          —          —          —     

Construction and land development

    —          —          2,014        31        2,014        31   

Commercial loans

    —          —          1,048        —          1,048        —     

Residential 1-4 family

    —          —          4,564        74        4,564        74   

Other consumer loans

    —          —          —          —          —          —     
                                               

Total

  $ —        $ —        $ 7,626      $ 105      $ 7,626      $ 105   
                                               

Grand total

  $ 3,034      $ 60      $ 18,761      $ 194      $ 21,795      $ 254   
                                               

 

(2) Includes loans secured by farmland and multi-family residential loans.

The following tables present the recorded investment in nonaccrual and loans past due over 90 days and still accruing by class of loans as of March 31, 2011 and December 31, 2010 (in thousands):

 

March 31, 2011   Covered Loans     Non-covered Loans     Total Loans  
    Nonaccrual
Loans
    Loans Past Due
90 Days or More
Still on Accrual
    Nonaccrual
Loans
    Loans Past Due
90 Days or More
Still on Accrual
    Nonaccrual
Loans
    Loans Past Due
90 Days or More
Still on Accrual
 

Commercial real estate - owner occupied

  $ —        $ —        $ 290      $ —        $ 290      $ —     

Commercial real estate - non-owner occupied (1)

    1,784        —          2,001        —          3,785        —     

Construction and land development

      —          204        —          204        —     

Commercial loans

      —          2,016        —          2,016        —     

Residential 1-4 family

    600        —          2,062        —          2,662        —     

Other consumer loans

    —          —          —          —          —          —     
                                               

Total

  $ 2,384      $ —        $ 6,573      $ —        $ 8,957      $ —     
                                               
December 31, 2010   Covered Loans     Non-covered Loans     Total Loans  
    Nonaccrual
Loans
    Loans Past Due
90 Days or More
Still on Accrual
    Nonaccrual
Loans
    Loans Past Due
90 Days or More
Still on Accrual
    Nonaccrual
Loans
    Loans Past Due
90 Days or More
Still on Accrual
 

Commercial real estate - owner occupied

  $ —        $ —        $ 358      $ —        $ 358      $ —     

Commercial real estate - non-owner occupied (1)

    1,796        —          2,600        —          4,396        —     

Construction and land development

    —          —          2,304        —          2,304        —     

Commercial loans

    67        —          1,516        —          1,583        —     

Residential 1-4 family

    108        —          2,807        —          2,915        —     

Other consumer loans

    77        234        —          —          77        234   
                                               

Total

  $ 2,048      $ 234      $ 9,585      $ —        $ 11,633      $ 234   
                                               

 

(1) Includes loans secured by farmland and multi-family residential loans.

Non-covered nonaccrual loans include SBA guaranteed amounts totaling $2.0 million and $1.4 million at March 31, 2011 and December 31, 2010, respectively.

The following tables present the aging of the recorded investment in past due loans by class of loans as of March 31, 2011 and December 31, 2010 (in thousands):

 

13


March 31, 2011    30 - 59
Days
Past Due
     60 - 89
Days
Past Due
     90 Days
or More
     Total
Past Due
     Nonaccrual
Loans
     Loans Not
Past Due
     Total
Loans
 

Covered loans:

                    

Commercial real estate - owner occupied

   $ 725       $ —         $ —         $ 725       $ —         $ 4,087       $ 4,812   

Commercial real estate - non-owner occupied (1)

     234         —           —           234         1,784         8,881         10,899   

Construction and land development

     106         —           —           106            892         998   

Commercial loans

     —           —           —           —              830         830   

Residential 1-4 family

     452         —           —           452         600         66,757         67,809   

Other consumer loans

     1         —           —           1         —           141         142   
                                                              

Total

   $ 1,518       $ —         $ —         $ 1,518       $ 2,384       $ 81,588       $ 85,490   
                                                              

Non-covered loans:

                    

Commercial real estate - owner occupied

   $ 556       $ 511       $ —         $ 1,067       $ 290       $ 85,050       $ 86,407   

Commercial real estate - non-owner occupied (1)

     —           —           —           —           2,001         110,429         112,430   

Construction and land development

     28         —           —           28         204         31,847         32,079   

Commercial loans

     1,752         —           —           1,752         2,016         74,919         78,687   

Residential 1-4 family

     1,034         744         —           1,778         2,062         62,770         66,610   

Other consumer loans

     7         13         —           20         —           2,041         2,061   
                                                              

Total

   $ 3,377       $ 1,268       $ —         $ 4,645       $ 6,573       $ 367,056       $ 378,274   
                                                              

Total loans:

                    

Commercial real estate - owner occupied

   $ 1,281       $ 511       $ —         $ 1,792       $ 290       $ 89,137       $ 91,219   

Commercial real estate - non-owner occupied (1)

     234         —           —           234         3,785         119,310         123,329   

Construction and land development

     134         —           —           134         204         32,739         33,077   

Commercial loans

     1,752         —           —           1,752         2,016         75,749         79,517   

Residential 1-4 family

     1,486         744         —           2,230         2,662         129,527         134,419   

Other consumer loans

     8         13         —           21         —           2,182         2,203   
                                                              

Total

   $ 4,895       $ 1,268       $ —         $ 6,163       $ 8,957       $ 448,644       $ 463,764   
                                                              

 

December 31, 2010    30 - 59
Days
Past Due
     60 - 89
Days
Past Due
     90 Days
or More
     Total
Past Due
     Nonaccrual
Loans
     Loans Not
Past Due
     Total
Loans
 

Covered loans:

                    

Commercial real estate - owner occupied

   $ 316       $ 412       $ —         $ 728       $ —         $ 4,518       $ 5,246   

Commercial real estate - non-owner occupied (1)

     436         —           —           436         1,796         12,229         14,461   

Construction and land development

     —           —           —           —           —           1,098         1,098   

Commercial loans

     —           —           —           —           67         931         998   

Residential 1-4 family

     —           134         —           134         108         29,693         29,935   

Other consumer loans

     —           39         234         273         77         40,083         40,433   
                                                              

Total

   $ 752       $ 585       $ 234       $ 1,571       $ 2,048       $ 88,552       $ 92,171   
                                                              

Non-covered loans:

                    

Commercial real estate - owner occupied

   $ 551       $ 719       $ —         $ 1,270       $ 358       $ 79,859       $ 81,487   

Commercial real estate - non-owner occupied (1)

     868         —           —           868         2,600         95,299         98,767   

Construction and land development

     30         —           —           30         2,304         37,146         39,480   

Commercial loans

     1,646         30         —           1,676         1,516         73,452         76,644   

Residential 1-4 family

     3,739         32         —           3,771         2,807         52,322         58,900   

Other consumer loans

     10         134         —           144         —           12,398         12,542   
                                                              

Total

   $ 6,844       $ 915       $ —         $ 7,759       $ 9,585       $ 350,476       $ 367,820   
                                                              

Total loans:

                    

Commercial real estate - owner occupied

   $ 867       $ 1,131       $ —         $ 1,998       $ 358       $ 84,377       $ 86,733   

Commercial real estate - non-owner occupied (1)

     1,304         —           —           1,304         4,396         107,528         113,228   

Construction and land development

     30         —           —           30         2,304         38,244         40,578   

Commercial loans

     1,646         30         —           1,676         1,583         74,383         77,642   

Residential 1-4 family

     3,739         166         —           3,905         2,915         82,015         88,835   

Other consumer loans

     10         173         234         417         77         52,481         52,975   
                                                              

Total

   $ 7,596       $ 1,500       $ 234       $ 9,330       $ 11,633       $ 439,028       $ 459,991   
                                                              

 

(1) Includes loans secured by farmland and multi-family residential loans.

Activity in the allowance for loan and lease losses for the three months ended March 31, 2011, is summarized below (in thousands):

 

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     Commercial
Real Estate
Owner
Occupied
    Commercial
Real Estate
Non-owner
Occupied (1)
    Construction
and Land
Development
    Commercial
Loans
    1-4 Family
Residential
    Other
Consumer
Loans
     Unallocated      Total  

Allowance for loan losses:

                  

Beginning balance

   $ 562      $ 1,265      $ 326      $ 2,425      $ 999      $ 9       $ 13       $ 5,599   

Charge offs

     (60     (600     (7     (521     (102     —           —           (1,290

Recoveries

     —          —          5        36        13        1         —           55   

Provision

     243        334        580        (135     (16     17         317         1,340   
                                                                  

Ending balance

   $ 745      $ 999      $ 904      $ 1,805      $ 894      $ 27       $ 330       $ 5,704   
                                                                  

 

(1) Includes loans secured by farmland and multi-family residential loans.

The following tables present the balance in the allowance for loan losses and the recorded investment in non-covered loans by portfolio segment and based on impairment method as of March 31, 2011 and December 31, 2010 (in thousands):

 

     Commercial
Real Estate
Owner
Occupied
     Commercial
Real Estate
Non-owner
Occupied (1)
     Construction
and Land
Development
     Commercial
Loans
     1-4 Family
Residential
     Other
Consumer
Loans
     Unallocated      Total  

March 31, 2011

                       

Ending allowance balance attributable to loans:

                       

Individually evaluated for impairment

   $ —         $ 50       $ 2       $ 427       $ 20       $ —         $ —         $ 499   

Collectively evaluated for impairment

     745         949         902         1,378         874         27         330         5,205   
                                                                       

Total ending allowance

   $ 745       $ 999       $ 904       $ 1,805       $ 894       $ 27       $ 330       $ 5,704   
                                                                       

Loans:

                       

Individually evaluated for impairment

   $ —         $ 6,159       $ 2,727       $ 3,590       $ 6,788       $ —         $ —         $ 19,264   

Collectively evaluated for impairment

     86,407         106,271         29,352         75,097         59,822         2,061         —           359,010   
                                                                       

Total ending loan balances

   $ 86,407       $ 112,430       $ 32,079       $ 78,687       $ 66,610       $ 2,061       $ —         $ 378,274   
                                                                       

December 31, 2010

                       

Ending allowance balance attributable to loans:

                       

Individually evaluated for impairment

   $ —         $ 50       $ —         $ 376       $ 20       $ —         $ —         $ 446   

Collectively evaluated for impairment

     562         1,215         326         2,049         979         9         13         5,153   
                                                                       

Total ending allowance

   $ 562       $ 1,265       $ 326       $ 2,425       $ 999       $ 9       $ 13       $ 5,599   
                                                                       

Loans:

                       

Individually evaluated for impairment

   $ 358       $ 6,584       $ 4,844       $ 2,493       $ 7,533       $ —         $ —         $ 21,812   

Collectively evaluated for impairment

     81,129         92,183         34,636         74,151         61,899         2,010         —           346,008   
                                                                       

Total ending loan balances

   $ 81,487       $ 98,767       $ 39,480       $ 76,644       $ 69,432       $ 2,010       $ —         $ 367,820   
                                                                       

 

(1) Includes loans secured by farmland and multi-family residential loans.

It is Sonabank’s practice to charge off collateral dependent loans to recoverable value rather than establish a specific reserve. Charge offs on loans individually evaluated for impairment totaled approximately $1.3 million during the first quarter of 2011.

Troubled Debt Restructurings

At March 31, 2011, 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. These restructured loans totaled $6.6 million as of December 31, 2010. 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.

SNBV allocated $72 thousand of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2011.

Credit Quality Indicators

Through its system of internal controls SNBV evaluates and segments loan portfolio credit quality on a quarterly basis using regulatory definitions for Special Mention, Substandard and Doubtful. Special Mention loans are considered to be criticized. Substandard and Doubtful loans are considered to be classified. SNBV has no loans classified Doubtful.

 

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Special Mention loans are loans that have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position.

Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

As of March 31, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):

 

March 31, 2011    Covered Loans      Non-covered Loans      Total Loans  
     Classified/
Criticized  (1)
     Pass      Total      Special
Mention
     Substandard      Pass      Total      Classified/
Criticized
     Pass      Total  

Commercial real estate - owner occupied

   $ 141       $ 4,671       $ 4,812       $ 1,863       $ 413       $ 84,131       $ 86,407       $ 2,417       $ 88,802       $ 91,219   

Commercial real estate - non-owner occupied (2)

     1,702         9,197         10,899         —           4,669         107,762         112,431         6,371         116,959         123,330   

Construction and land development

     701         297         998         —           3,803         28,276         32,079         4,504         28,573         33,077   

Commercial loans

     217         613         830         5,694         3,753         68,855         78,302         9,664         69,468         79,132   

Residential 1-4 family

     599         67,210         67,809         706         6,626         59,663         66,995         7,931         126,873         134,804   

Other consumer loans

     —           142         142         —           —           2,060         2,060         —           2,202         2,202   
                                                                                         

Total

   $ 3,360       $ 82,130       $ 85,490       $ 8,263       $ 19,264       $ 350,747       $ 378,274       $ 30,887       $ 432,877       $ 463,764   
                                                                                         

 

December 31, 2010    Covered Loans      Non-covered Loans      Total Loans  
     Classified/
Criticized  (1)
     Pass      Total      Special
Mention
     Substandard      Pass      Total      Classified/
Criticized
     Pass      Total  

Commercial real estate - owner occupied

   $ 141       $ 5,105       $ 5,246       $ 557       $ 358       $ 80,572       $ 80,572       $ 1,056       $ 85,677       $ 86,733   

Commercial real estate - non-owner occupied (2)

     1,807         12,654         14,461         867         6,585         91,315         91,315         9,259         103,969         113,228   

Construction and land development

     1,055         43         1,098         —           4,844         34,636         34,636         5,899         34,679         40,578   

Commercial loans

     285         713         998         233         2,492         73,919         73,919         3,010         74,632         77,642   

Residential 1-4 family

     108         29,827         29,935         40         7,533         61,859         69,432         7,681         91,686         99,367   

Other consumer loans

     77         40,356         40,433         —           —           2,010         2,010         77         42,366         42,443   
                                                                                         

Total

   $ 3,473       $ 88,698       $ 92,171       $ 1,697       $ 21,812       $ 344,311       $ 351,884       $ 26,982       $ 433,009       $ 459,991   
                                                                                         

 

(1) Credit quality is enhanced by a loss sharing agreement with the FDIC in the covered portfolio. The same credit quality indicators used in the non-covered portfolio are combined.
(2) Includes loans secured by farmland and multi-family residential loans.

 

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 $6.6 million and $2.4 million as of March 31, 2011 and December 31, 2010, 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.

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

 

16


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 March 31, 2011 and December 31, 2010, we had unfunded lines of credit and undisbursed construction loan funds totaling $111.9 million and $104.9 million, respectively. Our approved loan commitments were $7.6 million and $35.0 million at March 31, 2011 and December 31, 2010, 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
(Numerator)
     Weighted
Average
Shares
(Denominator)
     Per Share
Amount
 

For the three months ended March 31, 2011

        

Basic EPS

   $ 1,120         11,590       $ 0.10   

Effect of dilutive stock options and warrants

     —           4         —     
                          

Diluted EPS

   $ 1,120         11,594       $ 0.10   
                          

For the three months ended March 31, 2010

        

Basic EPS

   $ 1,041         11,590       $ 0.09   

Effect of dilutive stock options and warrants

     —           3         —     
                          

Diluted EPS

   $ 1,041         11,593       $ 0.09   
                          

Anti-dilutive options and warrants totaled 550,365 and 414,766 for the three months ended March 31, 2011and 2010, respectively, as the exercise price exceeded the average share price during the period.

 

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

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:

 

17


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 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
March 31, 2011
    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

  $ 10,795      $ —        $ 10,795      $ —     

FHLMC preferred stock

    91        91        —          —     
                               

Total available-for-sale securities

  $ 10,886      $ 91      $ 10,795      $ —     
                               
          Fair Value Measurements Using  
(dollars in thousands)   Total at
December 31, 2010
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)