Southern National Bancorp
Southern National Bancorp of Virginia Inc (Form: 10-Q, Received: 05/09/2014 11:43:33)



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, 2014

Commission File No. 001-33037

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
(Exact name of registrant as specified in its charter)
   
Virginia 20-1417448
(State or other jurisdiction (I.R.S. Employer Identification No.)
 of incorporation or organization)  
 
6830 Old Dominion Drive
McLean, Virginia 22101
(Address of principal executive offices) (zip code)

(703) 893-7400
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  

YES x                  NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES x                  NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b–2 of the Exchange Act:

Large accelerated filer    o                     Accelerated filer   x                          Smaller reporting company   o

Non-accelerated filer     o   (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o    No x

As of May 2, 2014, there were 11,607,612 shares of common stock outstanding.
 
 
 

 

 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
FORM 10-Q
March 31, 2014

INDEX
       
     
PAGE
       
PART 1 - FINANCIAL INFORMATION
       
Item 1 - Financial Statements
   
 
Consolidated Balance Sheets as of March 31, 2014 and December 31,
2013
 
2
 
Consolidated Statements of Income and Comprehensive Income
for the three months ended March 31, 2014 and 2013
 
3
 
Consolidated Statements of Changes in Stockholders’ Equity
for the three months ended March 31, 2014
 
4
 
Consolidated Statements of Cash Flows for the three months ended
March 31, 2014 and 2013
 
5
 
Notes to Consolidated Financial Statements
 
6- 24
       
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
25- 35
       
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
 
36-39
       
Item 4 – Controls and Procedures
 
40
       
PART II - OTHER INFORMATION
       
Item 1 – Legal Proceedings
 
40
       
Item 1A – Risk Factors
 
40
       
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
 
40
       
Item 3 – Defaults Upon Senior Securities
 
40
       
Item 4 – Mine Safety Disclosures
 
40
       
Item 5 – Other Information
 
40
       
Item 6 - Exhibits
 
41
       
Signatures
 
42
       
Certifications
 
43-45
 
 
 

 

 
             
ITEM I - FINANCIAL INFORMATION
           
PART I - FINANCIAL STATEMENTS
           
             
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
           
CONSOLIDATED BALANCE SHEETS
           
(dollars in thousands, except per share amounts) (Unaudited)
           
             
   
March 31,
   
December 31,
 
   
2014
   
2013
 
ASSETS
           
Cash and cash equivalents:
           
Cash and due from financial institutions
  $ 3,710     $ 2,679  
Interest-bearing deposits in other financial institutions
    15,672       18,177  
Total cash and cash equivalents
    19,382       20,856  
                 
Securities available for sale, at fair value
    2,135       1,993  
                 
Securities held to maturity, at amortized cost (fair value of $82,631 and $76,193, respectively)
    86,106       82,443  
                 
Covered loans
    50,335       51,701  
Non-covered loans
    488,714       494,357  
Total loans
    539,049       546,058  
Less allowance for loan losses
    (7,356 )     (7,090 )
Net loans
    531,693       538,968  
                 
Stock in Federal Reserve Bank and Federal Home Loan Bank
    4,793       5,915  
Bank premises and equipment, net
    6,260       6,324  
Goodwill     9,160       9,160  
Core deposit intangibles, net
    768       813  
FDIC indemnification asset
    5,066       5,804  
Bank-owned life insurance
    20,514       18,374  
Other real estate owned
    13,755       11,792  
Deferred tax assets, net
    8,130       8,281  
Other assets
    5,466       5,462  
                 
Total assets
  $ 713,228     $ 716,185  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Noninterest-bearing demand deposits
  $ 46,975     $ 44,643  
Interest-bearing deposits:
               
NOW accounts
    22,457       24,297  
Money market accounts
    127,445       130,855  
Savings accounts
    17,410       16,999  
Time deposits
    342,004       323,565  
Total interest-bearing deposits
    509,316       495,716  
Total deposits
    556,291       540,359  
                 
Securities sold under agreements to repurchase and other short-term borrowings
    19,727       39,795  
Federal Home Loan Bank (FHLB) advances
    25,000       25,000  
Other liabilities
    4,563       4,417  
Total liabilities
    605,581       609,571  
                 
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, 11,594,912 shares at March 31, 2014 and 11,590,612 at December 31, 2013 
    116       116  
Additional paid in capital
    97,234       97,127  
Retained earnings
    13,392       12,561  
Accumulated other comprehensive loss
    (3,095 )     (3,190 )
Total stockholders’ equity
    107,647       106,614  
                 
Total liabilities and stockholders’ equity
  $ 713,228     $ 716,185  
                 
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,
 
             
   
2014
   
2013
 
             
 Interest and dividend income :
           
 Interest and fees on loans
  $ 7,756     $ 8,343  
 Interest and dividends on taxable securities
    513       530  
 Interest and dividends on tax exempt securities
    92       38  
 Interest and dividends on other earning assets
    280       112  
 Total interest and dividend income
    8,641       9,023  
 Interest expense:
               
 Interest on deposits
    896       1,100  
 Interest on borrowings
    158       153  
 Total interest expense
    1,054       1,253  
                 
 Net interest income
    7,587       7,770  
                 
 Provision for loan losses
    1,175       1,093  
 Net interest income after provision for loan losses
    6,412       6,677  
                 
 Noninterest income:
               
 Account maintenance and deposit service fees
    178       193  
 Income from bank-owned life insurance
    140       149  
 Gain on other assets
    202       -  
 Net gain on sale of available for sale securities
    -       142  
 Total other-than-temporary impairment losses (OTTI)
    (16 )     (3 )
 Portion of OTTI recognized in other comprehensive income (before taxes)
    -       -  
 Net credit related OTTI recognized in earnings
    (16 )     (3 )
     Other     37       55  
                 
 Total noninterest income
    541       536  
                 
 Noninterest expenses:
               
 Salaries and benefits
    2,389       2,246  
 Occupancy expenses
    772       760  
 Furniture and equipment expenses
    187       156  
 Amortization of core deposit intangible
    45       123  
 Virginia franchise tax expense
    116       127  
 Merger expenses
    213       -  
 FDIC assessment
    125       234  
 Data processing expense
    126       148  
 Telephone and communication expense
    178       178  
 Change in FDIC indemnification asset
    124       130  
 Net (gain)  loss on other real estate owned
    (419 )     56  
 Other operating expenses
    663       793  
 Total noninterest expenses
    4,519       4,951  
 Income before income taxes
    2,434       2,262  
 Income tax expense
    792       736  
 Net income
  $ 1,642     $ 1,526  
 Other comprehensive income (loss):
               
Unrealized gain (loss) on available for sale securities
  $ 143     $ (1 )
Realized amount on securities sold, net
    -       (142 )
Non-credit component of other-than-temporary impairment on held-to-maturity securities
    21       97  
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale
    (20 )     (8 )
Net unrealized gain (loss)
    144       (54 )
Tax effect
    (49 )     18  
Other comprehensive income (loss)
    95       (36 )
Comprehensive income
  $ 1,737     $ 1,490  
Earnings per share, basic and diluted
  $ 0.14     $ 0.13  
                 
 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, 2014
                         
(dollars in thousands, except per share amounts) (Unaudited)
             
                               
                     
Accumulated
       
         
Additional
         
Other
       
   
Common
   
Paid in
   
Retained
   
Comprehensive
       
   
Stock
   
Capital
   
Earnings
   
Loss
   
Total
 
                               
Balance - December 31, 2013
  $ 116     $ 97,127     $ 12,561     $ (3,190 )   $ 106,614  
Comprehensive income:
                                       
    Net income
                    1,642               1,642  
    Change in unrealized loss  on securities available for sale (net of tax benefit, $49)
                            94       94  
    Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $0 and accretion, $20 and amounts recorded into other comprehensive income at transfer)
                            1       1  
Dividends on common stock ($.07 per share)
                    (811 )             (811 )
Issuance of common stock under Stock Incentive Plan (4,300 shares)
            30                       30  
Stock-based compensation expense
            77                       77  
                                         
Balance - March 31, 2014
  $ 116     $ 97,234     $ 13,392     $ (3,095 )   $ 107,647  
                                         
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, 2014 AND 2013
     
(dollars in thousands) (Unaudited)
     
   
2014
   
2013
 
             
Operating activities:
           
Net income
  $ 1,642     $ 1,526  
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
               
Depreciation
    172       167  
Amortization of core deposit intangible
    45       123  
Other amortization, net
    47       105  
Accretion of loan discount
    (706 )     (775 )
Amortization of FDIC indemnification asset
    124       130  
Provision for loan losses
    1,175       1,093  
Earnings on bank-owned life insurance
    (140 )     (149 )
Stock based compensation expense
    77       64  
Net gain on sale of available for sale securities
    -       (142 )
Impairment on securities
    16       3  
Net (gain) loss on other real estate owned
    (419 )     56  
Net decrease in other assets
    121       286  
Net increase (decrease) in other liabilities
    146       (492 )
Net cash and cash equivalents provided by operating activities
    2,300       1,995  
Investing activities:
               
Proceeds from sales of available for sale securities
    -       159  
Purchases of  held to maturity securities
    (5,000 )     (6,241 )
Proceeds from paydowns, maturities and calls of held to maturity securities
    1,320       8,353  
Loan originations and payments, net
    2,397       17,823  
Purchase of bank-owned life insurance
    (2,000 )     -  
Net decrease in stock in Federal Reserve Bank and Federal Home Loan Bank
    1,122       1,197  
Payments received on FDIC indemnification asset
    638       17  
Proceeds from sale of other real estate owned
    2,778       2,013  
Purchases of bank premises and equipment
    (112 )     (19 )
Net cash and cash equivalents provided by investing activities
    1,143       23,302  
Financing activities:
               
Net increase in deposits
    15,932       8,396  
Cash dividends paid - common stock
    (811 )     (580 )
Issuance of common stock under Stock Incentive Plan
    30       -  
Net decrease in securities sold under agreement to repurchase and other short-term borrowings
    (20,068 )     (17,800 )
Net cash and cash equivalents used in financing activities
    (4,917 )     (9,984 )
Increase (decrease) in cash and cash equivalents
    (1,474 )     15,313  
Cash and cash equivalents at beginning of period
    20,856       39,200  
Cash and cash equivalents at end of period
  $ 19,382     $ 54,513  
Supplemental disclosure of cash flow information
               
Cash payments for:
               
Interest
  $ 1,035     $ 1,201  
Income taxes
    918       1,363  
Supplemental schedule of noncash investing and financing activities
               
Transfer from non-covered loans to other real estate owned
    4,409       312  
Transfer from covered loans to other real estate owned
    -       1,831  
                 
See accompanying notes to consolidated financial statements.
               
 
5
 

 

 
 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2014
 
1.          ACCOUNTING POLICIES

Southern National Bancorp of Virginia, Inc. (“Southern National” or “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 15 branches in Virginia located in Fairfax County (Reston, McLean and Fairfax), in Charlottesville, Warrenton (2), Loudoun County (Middleburg, Leesburg (2), and South Riding), Front Royal, New Market, Richmond, Haymarket and Clifton Forge, and five branches in Maryland (four in Montgomery County and one in Frederick County).

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

The unaudited consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles (“U. S. GAAP”) for interim financial information and instructions for Form 10-Q and follow general practice within the banking industry.  Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by U. S. GAAP for complete financial statements.  However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in Southern National’s Form 10-K for the year ended December 31, 2013.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the carrying value of investment securities, other than temporary impairment of investment securities, the valuation of goodwill and intangible assets, the FDIC indemnification asset,  mortgage servicing rights, other real estate owned and deferred tax assets.

Recent Accounting Pronouncements

In January 2014, the FASB issued ASU No. 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-04 is not expected to have a material impact on the Southern National’s Consolidated Financial Statements.
 
6
 

 

 
2.
STOCK- BASED COMPENSATION

In 2004, the Board of Directors adopted a stock option plan that authorized the reservation of up to 302,500 shares of common stock and provided for the granting of stock options to certain directors, officers and employees.  As of March 31, 2014, options to purchase an aggregate of 302,500 shares of common stock were outstanding and no shares remained available for issuance. The 2010 Stock Awards and Incentive Plan was approved by the Board of Directors in January 2010 and approved by the stockholders at the Annual Meeting in April 2010. The 2010 plan authorized the reservation of 700,000 shares of common stock for the granting of stock awards. The options granted to officers and employees are incentive stock options and the options granted to non-employee directors are non-qualified stock options.  The purpose of the plan is to afford key employees an incentive to remain in the employ of Southern National and to assist in the attracting and retaining of non-employee directors by affording them an opportunity to share in Southern National’s future success.  Under the plan, the option’s price cannot be less than the fair market value of the stock on the grant date.  The maximum term of the options is ten years and options granted may be subject to a graded vesting schedule.

Southern National granted no options during the first three months of 2014.

For the three months ended March 31, 2014 and 2013, stock-based compensation expense was $77 thousand and $64 thousand, respectively.  As of March 31, 2014, unrecognized compensation expense associated with the stock options was $854 thousand, which is expected to be recognized over a weighted average period of 3.4 years.

A summary of the activity in the stock option plan during the three months ended March 31, 2014 follows (dollars in thousands):

               
Weighted
       
         
Weighted
   
Average
   
Aggregate
 
         
Average
   
Remaining
   
Intrinsic
 
         
Exercise
   
Contractual
   
Value
 
   
Shares
   
Price
   
Term
   
(in thousands)
 
Options outstanding, beginning of period
    631,075     $ 8.21              
Granted
    -       -              
Forfeited
    -       -              
Exercised
    (4,300 )     6.87              
Options outstanding, end of period
    626,775     $ 8.22       5.8     $ 1,248  
                                 
Vested or expected to vest
    626,775     $ 8.22       5.8     $ 1,248  
                                 
Exercisable at end of period
    367,275     $ 8.19       3.9     $ 749  
 
7
 

 

 
3.          SECURITIES

The amortized cost and fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows (in thousands):
 
   
Amortized
   
Gross Unrealized
   
Fair
 
March 31, 2014
 
Cost
   
Gains
   
Losses
   
Value
 
Obligations of states and political subdivisions
  $ 2,300     $ -     $ (165 )   $ 2,135  
                                 
   
Amortized
   
Gross Unrealized
   
Fair
 
December 31, 2013
 
Cost
   
Gains
   
Losses
   
Value
 
Obligations of states and political subdivisions
  $ 2,302     $ -     $ (309 )   $ 1,993  
 
The amortized cost, unrecognized gains and losses, and fair value of securities held to maturity were as follows (in thousands):
 
   
Amortized
   
Gross Unrecognized
   
Fair
 
March 31, 2014
 
Cost
   
Gains
   
Losses
   
Value
 
Residential government-sponsored mortgage-backed securities
  $ 24,722     $ 680     $ (172 )   $ 25,230  
Residential government-sponsored collateralized mortgage obligations
    4,101       -       (60 )     4,041  
Government-sponsored agency securities
    34,972       41       (2,910 )     32,103  
Obligations of states and political subdivisions
    14,360       28       (555 )     13,833  
Other residential collateralized mortgage obligations
    645       -       -       645  
Trust preferred securities
    7,306       1,241       (1,768 )     6,779  
    $ 86,106     $ 1,990     $ (5,465 )   $ 82,631  
 
   
Amortized
   
Gross Unrecognized
   
Fair
 
December 31, 2013
 
Cost
   
Gains
   
Losses
   
Value
 
Residential government-sponsored mortgage-backed securities
  $ 25,609     $ 673     $ (294 )   $ 25,988  
Residential government-sponsored collateralized mortgage obligations
    4,295       2       (349 )     3,948  
Government-sponsored agency securities
    29,971       -       (3,994 )     25,977  
Obligations of states and political subdivisions
    14,388       -       (987 )     13,401  
Other residential collateralized mortgage obligations
    659       -       (12 )     647  
Trust preferred securities
         7,521       939       (2,228 )     6,232  
    $ 82,443     $ 1,614     $ (7,864 )   $ 76,193  
 
The amortized cost amounts are net of recognized other than temporary impairment.

The fair value and carrying amount, if different, of debt securities as of March 31, 2014, by contractual maturity were as follows (in thousands).  Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations, are shown separately.
 
   
Held to Maturity
   
Available for Sale
 
   
Amortized
         
Amortized
       
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
Due in five to ten years
  $ 6,535     $ 6,363     $ -     $ -  
Due after ten years
    50,103       46,352       2,300       2,135  
Residential government-sponsored mortgage-backed securities
    24,722       25,230       -       -  
Residential government-sponsored collateralized mortgage obligations
    4,101       4,041       -       -  
Other residential collateralized mortgage obligations
    645       645       -       -  
Total
  $ 86,106     $ 82,631     $ 2,300     $ 2,135  
 
Securities with a carrying amount of approximately $69.2 million and $65.3 million at March 31, 2014 and December 31, 2013, 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”).
 
8
 

 

 
Southern National monitors the portfolio for indicators of other than temporary impairment.  At March 31, 2014 and December 31, 2013, certain securities’ fair values were below cost. As outlined in the table below, there were securities with fair values totaling approximately $62.3 million in the portfolio with the carrying value exceeding the estimated fair value that are considered temporarily impaired at March 31, 2014.  Because the decline in fair value is attributable to changes in interest rates and market illiquidity, and not credit quality, and because we do not have the intent to sell these securities and it is likely that we will not be required to sell the securities before their anticipated recovery, management does not consider these securities to be other-than-temporarily impaired as of March 31, 2014. The following tables present information regarding securities in a continuous unrealized loss position as of March 31, 2014 and December 31, 2013 (in thousands) by duration of time in a loss position:

March 31, 2014
                                   
   
Less than 12 months
   
12 Months or More
   
Total
 
Available for Sale
 
Fair value
   
Unrealized Losses
   
Fair value
   
Unrealized Losses
   
Fair value
   
Unrealized Losses
 
Obligations of states and political subdivisions
  $ -     $ -     $ 2,135     $ (165 )   $ 2,135     $ (165 )
 
   
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
  $ 12,392     $ (172 )   $ -     $ -     $ 12,392     $ (172 )
Residential government-sponsored collateralized mortgage obligations
    4,041       (60 )     -       -       4,041       (60 )
Government-sponsored agency securities
    9,064       (920 )     17,998       (1,990 )     27,062       (2,910 )
Obligations of states and political subdivisions
    8,875       (292 )     3,442       (263 )     12,317       (555 )
Other residential collateralized mortgage obligations
    -       -       -       -       -       -  
Trust preferred securities
    -       -       4,309       (1,768 )     4,309       (1,768 )
    $ 34,372     $ (1,444 )   $ 25,749     $ (4,021 )   $ 60,121     $ (5,465 )
 
December 31, 2013
                                               
   
Less than 12 months
   
12 Months or More
   
Total
 
Available for Sale
 
Fair value
   
Unrealized Losses
   
Fair value
   
Unrealized Losses
   
Fair value
   
Unrealized Losses
 
 Obligations of states and political subdivisions
  $ 409     $ (78 )   $ 1,584     $ (231 )   $ 1,993     $ (309 )
 
   
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
  $ 12,644     $ (294 )   $ -     $ -     $ 12,644     $ (294 )
 Residential government-sponsored collateralized mortgage obligations
    2,984       (349 )     -       -       2,984       (349 )
 Government-sponsored agency securities
    8,733       (1,250 )     17,244       (2,744 )     25,977       (3,994 )
 Obligations of states and political subdivisions
    10,327       (588 )     3,064       (399 )     13,391       (987 )
 Other residential collateralized mortgage obligations
    647       (12 )     -       -       647       (12 )
 Trust preferred securities
    -       -       4,070       (2,228 )     4,070       (2,228 )
    $ 35,335     $ (2,493 )   $ 24,378     $ (5,371 )   $ 59,713     $ (7,864 )
 
9
 

 

As of March 31, 2014, we owned pooled trust preferred securities as follows:
                                                               
                                                     
Previously
       
                                               
% of Current
 
Recognized
       
                                               
Defaults and
 
Cumulative
       
     
Ratings
                           
Estimated
   
Deferrals to
 
Other
       
 
Tranche
 
When Purchased
   
Current Ratings
         
Fair
   
Total
 
Comprehensive
       
Security
Level
 
Moody’s
   
Fitch
   
Moody’s
   
Fitch
   
Par Value
   
Book Value
   
Value
   
Collateral
 
Loss (1)
       
                             
(in thousands)
                   
ALESCO VII  A1B
Senior
 
Aaa
   
  AAA
    A3    
BBB
    $ 6,340     $ 5,750     $ 4,107       16 %   $ 274        
MMCF III B
Senior Sub
  A3     A-    
  Ba1
   
CC
      333       327       202       34 %     6        
                                6,673       6,077       4,309             $ 280        
                                                                         
                                                             
Cumulative Other
   
Cumulative
 
                                                             
Comprehensive
   
OTTI Related to
 
Other Than Temporarily Impaired:
                                                         
Loss (2)
   
Credit Loss (2)
 
TPREF FUNDING II
Mezzanine
  A1     A-    
  Caa3
    C       1,500       520       520       41 %     605     $ 375  
TRAP 2007-XII C1
Mezzanine
  A3     A     C     C       2,155       57       372       30 %     805       1,293  
TRAP 2007-XIII D
Mezzanine
 
NR
    A-    
NR
    C       2,039       -       168       25 %     7       2,032  
MMC FUNDING XVIII
Mezzanine
  A3     A-    
Ca
    C       1,092       27       271       27 %     374       691  
ALESCO V C1
Mezzanine
  A2     A     C     C       2,149       475       582       15 %     1,013       661  
ALESCO XV C1
Mezzanine
  A3     A-     C     C       3,245       30       79       33 %     656       2,559  
ALESCO XVI  C
Mezzanine
  A3     A-     C     C       2,158       120       478       14 %     858       1,180  
                                14,338       1,229       2,470             $ 4,318     $ 8,791  
                                                                           
Total
                            $ 21,011     $ 7,306     $ 6,779                          
 
(1)  Pre-tax, and represents unrealized losses at date of transfer from available-for-sale to held-to-maturity, net of accretion
(2)  Pre-tax
 
Each of these securities has been evaluated for other than temporary impairment.  In performing a detailed cash flow analysis of each security, Sonabank works with independent third parties to estimate expected cash flows and assist with the evaluation of other than temporary impairment. The cash flow analyses performed included the following assumptions:

 
.5% of the remaining performing collateral will default or defer per annum.
 
Recoveries of 16% with a two year lag on all defaults and deferrals.
 
No prepayments for 10 years and then 1% per annum for the remaining life of the security.
 
Additionally banks with assets over $15 billion will no longer be allowed to count down streamed trust preferred proceeds as Tier 1 capital (although it will still be counted as Tier 2 capital). That will incent the large banks to prepay their trust preferred securities if they can or if it is economically desirable. As a consequence, we have projected in all of our pools that 10% of the collateral issued by banks with assets over $15 billion will prepay in the first year of the forecast, and 15% in the second year.
 
Our securities have been modeled using the above assumptions by independent third parties using the forward LIBOR curve to discount projected cash flows to present values.

We recognized OTTI charges of $16 thousand during the first quarter of 2014 compared to OTTI charges related to credit on the trust preferred securities totaling $3 thousand during the first quarter of 2013.
 
10
 

 

 
The following table presents a roll forward of the credit losses on our securities held to maturity recognized in earnings for the three months ended March 31, 2014 and 2013 (in thousands):
             
   
2014
   
2013
 
             
 
           
Amount of cumulative other-than-temporary impairment related to credit loss prior to January 1
  $ 8,911     $ 8,964  
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized
    -       -  
Amounts related to credit loss for which an other-than-temporary impairment was previously recognized
    16       3  
Reductions due to realized losses
    (2 )     (25 )
Amount of cumulative other-than-temporary impairment related to credit loss as of March 31
  $ 8,925     $ 8,942  
 
Changes in accumulated other comprehensive income by component for the three months ended March 31, 2014 and 2013 are shown in the table below.  All amounts are net of tax (in thousands).
                   
   
Unrealized Holding
             
   
Gains (Losses) on
             
For the three months ended March 31, 2014
 
Available for Sale
   
Held to Maturity
       
   
Securities
   
Securities
   
Total
 
Beginning balance
  $ (203 )   $ (2,987 )   $ (3,190 )
Other comprehensive income/(loss) before reclassifications
    94       1       95  
Amounts reclassified from accumulated other comprehensive income/(loss)
    -       -       -  
Net current-period other comprehensive income/(loss)
    94       1       95  
Ending balance
  $ (109 )   $ (2,986 )   $ (3,095 )
                         
   
Unrealized Holding
                 
   
Gains (Losses) on
                 
For the three months ended March 31, 2013
 
Available for Sale
   
Held to Maturity
         
   
Securities
   
Securities
   
Total
 
Beginning balance
  $ 44     $ (3,025 )   $ (2,981 )
Other comprehensive income/(loss) before reclassifications
    (1 )     60       59  
Amounts reclassified from accumulated other comprehensive income/(loss)
    (93 )     (2 )     (95 )
Net current-period other comprehensive income/(loss)
    (94 )     58       (36 )
Ending balance
  $ (50 )   $ (2,967 )   $ (3,017 )
 
4.           LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table summarizes the composition of our loan portfolio as of March 31, 2014 and December 31, 2013:
                                     
   
Covered
   
Non-covered
   
Total
   
Covered
   
Non-covered
   
Total
 
   
Loans (1)
   
Loans
   
Loans
   
Loans (1)
   
Loans
   
Loans
 
   
March 31, 2014
   
December 31, 2013
 
 Loans secured by real estate:
                                   
    Commercial real estate - owner-occupied
  $ 1,552     $ 105,121     $ 106,673     $ 1,603     $ 106,225     $ 107,828  
    Commercial real estate - non-owner-occupied
    5,769       148,962       154,731       5,829       150,008       155,837  
    Secured by farmland
    -       504       504       100       508       608  
    Construction and land loans
    -       39,872       39,872       1       39,068       39,069  
    Residential 1-4 family
    16,589       61,222       77,811       16,631       66,482       83,113  
    Multi- family residential
    580       21,414       21,994       585       21,496       22,081  
    Home equity lines of credit
    24,866       7,526       32,392       25,769       6,431       32,200  
       Total real estate loans
    49,356       384,621       433,977       50,518       390,218       440,736  
                                                 
 Commercial loans
    898       104,258       105,156       1,097       104,284       105,381  
 Consumer loans
    77       1,249       1,326       81       1,308       1,389  
        Gross loans
    50,331       490,128       540,459       51,696       495,810       547,506  
                                                 
 Less deferred fees on loans
    4       (1,414 )     (1,410 )     5       (1,453 )     (1,448 )
 Loans, net of deferred fees
  $ 50,335     $ 488,714     $ 539,049     $ 51,701     $ 494,357     $ 546,058  
 
(1) Covered Loans were acquired in the Greater Atlantic transaction and are covered under an FDIC loss-share agreement.
 
11
 

 

 
Accounting policy related to the allowance for loan losses is considered a critical policy given the level of estimation, judgment, and uncertainty in the levels of the allowance required to account for the inherent probable losses in the loan portfolio and the material effect such estimation, judgment, and uncertainty can have on the consolidated financial results.

As part of the Greater Atlantic acquisition, the Bank and the FDIC entered into loss sharing agreements on approximately $143.4 million (contractual basis) of Greater Atlantic Bank’s assets.  There are two agreements with FDIC, one for single family loans which is a 10-year agreement expiring in December 2019, and one for non-single family (commercial) assets which is a 5-year agreement expiring in December 2014. The Bank will share in the losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharing agreements; 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” at March 31, 2014. Non-covered loans included $38.1 million of loans acquired in the HarVest acquisition.

Accretable discount on the acquired covered loans and the HarVest loans was $8.3 million and $8.9 million at March 31, 2014 and December 31, 2013 respectively.
 
Credit-impaired covered loans are those loans which presented evidence of credit deterioration at the date of acquisition and it is probable that Southern National would not collect all contractually required principal and interest payments. Generally, acquired loans that meet Southern National’s definition for nonaccrual status fell within the definition of credit-impaired covered loans.

12
 

 

 
Impaired loans for the covered and non-covered portfolios were as follows (in thousands):
                                                       
March 31, 2014
 
Covered Loans
   
Non-covered Loans
   
Total Loans
 
         
Unpaid
               
Unpaid
               
Unpaid
       
   
Recorded
   
Principal
   
Related
   
Recorded
   
Principal
   
Related
   
Recorded
   
Principal
   
Related
 
   
Investment
   
Balance
   
Allowance
   
Investment (1)
   
Balance
   
Allowance
   
Investment
   
Balance
   
Allowance
 
With no related allowance recorded
                                                     
    Commercial real estate - owner occupied
  $ 737     $ 835     $ -     $ 7,624     $ 7,695     $ -     $ 8,361     $ 8,530     $ -  
    Commercial real estate - non-owner occupied (2)
    2,137       2,477       -       347       435       -       2,484       2,912       -  
    Construction and land development
    -       -       -       -       -       -       -       -       -  
    Commercial loans
    -       -       -       3,406       3,844       -       3,406       3,844       -  
    Residential 1-4 family (4)
    1,210       1,427       -       5,730       5,781       -       6,940       7,208       -  
    Other consumer loans
    -       -       -       -       -       -       -