Southern National Bancorp
Southern National Bancorp of Virginia Inc (Form: 10-Q, Received: 11/10/2014 13:26:40)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
QUARTERLY REPORT PURSUA N T TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 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
of incorporation or organization)
(I.R.S. Employer Identification No.)
 
6830 Old Dominion Drive
McLean, Virginia 22101
(Address of principal executive offices) (zip code)

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

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

YES x        NO o

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

YES x        NO o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b–2 of the Exchange Act:

Large accelerated filer     o                                       Accelerated filer   x                                               Smaller reporting company  o

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

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

As of October 31, 2014, there were 12,196,070 shares of common stock outstanding.
 
 
 

 

 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
FORM 10-Q
September 30, 2014

INDEX
 
   
PAGE
     
PART 1 - FINANCIAL INFORMATION
     
Item 1 -
Financial Statements
 
 
Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013
2
 
Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2014 and 2013
3
 
Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2014
4
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013
5
 
Notes to Consolidated Financial Statements
6- 28
     
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
29- 41
     
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
42-46
     
Item 4 – Controls and Procedures
47
     
PART II - OTHER INFORMATION
     
Item 1 – Legal Proceedings
47
     
Item 1A – Risk Factors
47
     
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
47
     
Item 3 – Defaults Upon Senior Securities
47
     
Item 4 – Mine Safety Disclosures
47
     
Item 5 – Other Information
47
     
Item 6 - Exhibits
48
     
Signatures
49
     
Certifications
 
 
 
 
 

 

 
ITEM I - FINANCIAL INFORMATION
PART I - FINANCIAL STATEMENTS
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts) (Unaudited)
 
   
September 30,
   
December 31,
 
   
2014
   
2013
 
ASSETS
           
Cash and cash equivalents:
           
Cash and due from financial institutions
  $ 5,541     $ 2,679  
Interest-bearing deposits in other financial institutions
    40,262       18,177  
Total cash and cash equivalents
    45,803       20,856  
                 
Securities available for sale, at fair value
    2,271       1,993  
                 
Securities held to maturity, at amortized cost
               
(fair value of $88,970 and $76,193, respectively)
    89,993       82,443  
                 
Covered loans
    47,989       51,701  
Non-covered loans
    617,845       494,357  
Total loans
    665,834       546,058  
Less allowance for loan losses
    (7,124 )     (7,090 )
Net loans
    658,710       538,968  
                 
Stock in Federal Reserve Bank and Federal Home Loan Bank
    6,131       5,915  
Equity investment in mortgage affiliate
    3,745       -  
Preferred investment in mortgage affiliate
    1,805       -  
Bank premises and equipment, net
    9,443       6,324  
Goodwill
    12,073       9,160  
Core deposit intangibles, net
    1,424       813  
FDIC indemnification asset
    3,970       5,804  
Bank-owned life insurance
    20,829       18,374  
Other real estate owned
    12,955       11,792  
Deferred tax assets, net
    8,205       8,281  
Other assets
    5,662       5,462  
                 
Total assets
  $ 883,019     $ 716,185  
                 
LIABILITIES AND STOCKHOLDERS EQUITY
               
                 
Noninterest-bearing demand deposits
  $ 70,679     $ 44,643  
Interest-bearing deposits:
               
NOW accounts
    23,658       24,297  
Money market accounts
    138,390       130,855  
Savings accounts
    41,047       16,999  
Time deposits
    424,311       323,565  
Total interest-bearing deposits
    627,406       495,716  
Total deposits
    698,085       540,359  
                 
Securities sold under agreements to repurchase and other
               
short-term borrowings
    37,779       39,795  
Federal Home Loan Bank (FHLB) advances
    25,000       25,000  
Other liabilities
    5,775       4,417  
Total liabilities
    766,639       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, 12,194,570 shares at September 30, 2014 and 11,590,612 at December 31, 2013
    122       116  
Additional paid in capital
    103,791       97,127  
Retained earnings
    15,486       12,561  
Accumulated other comprehensive loss
    (3,019 )     (3,190 )
Total stockholders’ equity
    116,380       106,614  
                 
Total liabilities and stockholders’ equity
  $ 883,019     $ 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
   
For the Nine Months Ended
 
   
September 30,
   
September 30,
 
                         
   
2014
   
2013
   
2014
   
2013
 
                         
Interest and dividend income:
                       
Interest and fees on loans
  $ 9,181     $ 8,168     $ 25,037     $ 24,277  
Interest and dividends on taxable securities
    551       504       1,634       1,540  
Interest and dividends on tax exepmt securities
    101       71       289       159  
Interest and dividends on other earning assets
    151       104       591       443  
Total interest and dividend income
    9,984       8,847       27,551       26,419  
Interest expense:
                               
Interest on deposits
    986       966       2,779       3,086  
Interest on borrowings
    186       157       514       465  
Total interest expense
    1,172       1,123       3,293       3,551  
                                 
Net interest income
    8,812       7,724       24,258       22,868  
                                 
Provision for loan losses
    975       1,197       2,344       3,015  
Net interest income after provision for loan losses
    7,837       6,527       21,914       19,853  
                                 
Noninterest income:
                               
Account maintenance and deposit service fees
    220       198       594       593  
Income from bank-owned life insurance
    159       147       455       445  
Equity income from mortgage affiliate
    176       -       507       -  
Gain on other assets
    -       -       202       13  
Net gain on sale of available for sale securities
    -       -       -       142  
Total other-than-temporary impairment losses (OTTI)
    -       -       (41 )     (3 )
Portion of OTTI recognized in other comprehensive income (before taxes)
    -       -       -       -  
Net credit related OTTI recognized in earnings
    -       -       (41 )     (3 )
Other
    54       30       145       169  
                                 
Total noninterest income
    609       375       1,862       1,359  
                                 
Noninterest expenses:
                               
Salaries and benefits
    2,671       2,338       7,487       6,760  
Occupancy expenses
    804       768       2,335       2,280  
Furniture and equipment expenses
    195       197       571       524  
Amortization of core deposit intangible
    61       123       151       368  
Virginia franchise tax expense
    113       115       342       357  
Merger expenses
    65       -       487       -  
FDIC assessment
    149       218       401       676  
Data processing expense
    146       131       406       433  
Telephone and communication expense
    198       166       556       507  
Change in FDIC indemnification asset
    403       113       837       350  
Net (gain) loss on other real estate owned
    (194 )     (698 )     (433 )     (580 )
Other operating expenses
    678       790       2,313       2,334  
Total noninterest expenses
    5,289       4,261       15,453       14,009  
Income before income taxes
    3,157       2,641       8,323       7,203  
Income tax expense
    1,049       861       2,801       2,341  
Net income
  $ 2,108     $ 1,780     $ 5,522     $ 4,862  
Other comprehensive income (loss):
                               
Unrealized gain (loss) on available for sale securities
  $ 66     $ (12 )   $ 283     $ (207 )
Realized amount on securities sold, net
    -       -       -       (142 )
Non-credit component of other-than-temporary impairment on held-to-maturity securities
    -       -       35       97  
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale
    (17 )     (12 )     (59 )     (32 )
Net unrealized gain (loss)
    49       (24 )     259       (284 )
Tax effect
    (17 )     8       (88 )     96  
Other comprehensive income (loss)
    32       (16 )     171       (188 )
Comprehensive income
  $ 2,140     $ 1,764     $ 5,693     $ 4,674  
Earnings per share, basic
  $ 0.18     $ 0.15     $ 0.47     $ 0.42  
Earnings per share, diluted
  $ 0.17     $ 0.15     $ 0.47     $ 0.42  
                                 
See accompanying notes to consolidated financial statements.
 
3
 

 

 
 SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
 
 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
 
 FOR THE NINE MONTHS ENDED SPETEMBER 30, 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
                    5,522               5,522  
Change in unrealized loss  on securities available for sale (net of tax benefit, $96)
                            187       187  
Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $8 and accretion, $59 and amounts recorded into other comprehensive income at transfer)
                            (16 )     (16 )
Dividends on common stock ($.22 per share)
                    (2,597 )             (2,597 )
Issuance of common stock under Stock Incentive Plan (78,100 shares)
    1       688                       689  
Issuance of common stock in exchange for net assets in acquisition (525,858 shares)
    5       5,743                       5,748  
Stock-based compensation expense
            233                       233  
                                         
Balance - September 30, 2014
  $ 122     $ 103,791     $ 15,486     $ (3,019 )   $ 116,380  
                                         
See accompanying notes to consolidated financial statements.
 
4
 

 

 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
 
(dollars in thousands) (Unaudited)
 
   
2014
   
2013
 
             
Operating activities:
           
Net income
  $ 5,522     $ 4,862  
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
               
Depreciation
    549       495  
Amortization of core deposit intangible
    151       368  
Other amortization, net
    143       275  
Accretion of loan discount
    (2,305 )     (2,725 )
Amortization of FDIC indemnification asset
    837       350  
Provision for loan losses
    2,344       3,015  
Earnings on bank-owned life insurance
    (455 )     (445 )
Equity income on mortgage affiliate
    (507 )     -  
Stock based compensation expense
    233       205  
Net gain on sale of available for sale securities
    -       (142 )
Impairment loss on securities (OTTI)
    41       3  
Net gain on other real estate owned
    (433 )     (580 )
Net decrease in other assets
    1,232       2,261  
Net increase (decrease) in other liabilities
    860       (757 )
Net cash and cash equivalents provided by operating activities
    8,212       7,185  
Investing activities:
               
Proceeds from sales of available for sale securities
    -       159  
Purchases of held to maturity securities
    (12,243 )     (11,345 )
Proceeds from paydowns, maturities and calls of held to maturity securities
    4,616       14,497  
Loan originations and payments, net
    (62,358 )     (2,996 )
Proceeds from sale of PGFSB loans
    3,499       -  
Net cash received in PGFSB acquisition
    22,430       -  
Purchase of bank-owned life insurance
    (2,000 )     -  
Investment in mortgage affiliate
    (5,043 )     -  
Net (increase) decrease in stock in Federal Reserve Bank and Federal Home Loan Bank
    (123 )     972  
Payments received on FDIC indemnification asset
    1,018       1,016  
Proceeds from sale of other real estate owned
    3,029       3,902  
Purchases of bank premises and equipment
    (664 )     (204 )
Net cash and cash equivalents provided by (used in) investing activities
    (47,839 )     6,001  
Financing activities:
               
Net increase (decrease) in deposits
    68,498       (5,023 )
Cash dividends paid - common stock
    (2,597 )     (2,086 )
Issuance of common stock under Stock Incentive Plan
    689       3  
Net decrease in securities sold under agreement to repurchase and other short-term borrowings
    (2,016 )     (12,930 )
Net cash and cash equivalents provided by (used in) financing activities
    64,574       (20,036 )
Increase (decrease) in cash and cash equivalents
    24,947       (6,850 )
Cash and cash equivalents at beginning of period
    20,856       39,200  
Cash and cash equivalents at end of period
  $ 45,803     $ 32,350  
Supplemental disclosure of cash flow information
               
Cash payments for:
               
Interest
  $ 3,144     $ 3,419  
Income taxes
    2,238       3,113  
Supplemental schedule of noncash investing and financing activities
               
Transfer from non-covered loans to other real estate owned
    4,409       3,044  
Transfer from covered loans to other real estate owned
    -       4,158  
Issuance of common stock in exchange for net assets in acquisition
    5,748       -  
                 
See accompanying notes to consolidated financial statements.
 
5
 

 

 
 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2014
 
1.
ORGANIZATION AND 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 nine branches in Maryland in Rockville, Shady Grove, Germantown, Frederick, Bethesda, Upper Marlboro, Brandywine, Owings and Huntingtown.

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.

The merger with Prince George’s Federal Savings Bank (PGFSB) was completed on August 1, 2014. Southern National acquired PGFSB in a cash and stock transaction. PGFSB was founded in 1931 and is headquartered in Upper Marlboro, which is the County Seat of Prince George’s County, Maryland. Prince George’s FSB has four offices, all of which are in Maryland, including a main office in Upper Marlboro and three branch offices in Dunkirk, Brandywine and Huntingtown. Prince George’s FSB has an excellent core deposit base reflecting its tenure in the communities it serves. Its lending activities have historically been focused on residential mortgages. See Footnote 8 for details regarding the merger.

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.
 
6
 

 

 
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.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). These amendments affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g. insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This ASU will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The ASU allows for either full retrospective or modified retrospective adoption. SNBV is assessing the effects of this ASU, which exclude financial instruments from its scope, but does not anticipate that it will have a material impact on its financial position or results of operations.
 
In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period . The amendments clarify the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Management does not anticipate that this ASU will significantly impact SNBV.
 
7
 

 

 
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. 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 an additional 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 104,750 options during the first nine months of 2014. The fair value of each option granted is estimated on the date of grant using the Black-Scholes options-pricing model. The following weighted-average assumptions were used to value options granted in the nine months ended September 30, 2014:
 
Expected life
 
10 years
 
Expected volatility
    29.30 %
Risk-free interest rate
    2.48 %
Weighted average fair value per option granted
  $ 2.88  
Dividend yield
    2.55 %

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

For the three and nine months ended September 30, 2014 and 2013, stock-based compensation expense was $82 thousand and $233 thousand, respectively, compared to $79 thousand and $205 thousand for the same periods last year. As of September 30, 2014, unrecognized compensation expense associated with the stock options was $984 thousand, which is expected to be recognized over a weighted average period of 3.5 years.
 
8
 

 

 
A summary of the activity in the stock option plan during the nine months ended September 30, 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
    104,750       10.47              
Forfeited
    (12,575 )     8.18              
Exercised
    (78,100 )     8.82              
Options outstanding, end of period
    645,150     $ 8.51       6.4     $ 1,999  
                                 
Vested or expected to vest
    645,150     $ 8.51       6.4     $ 1,999  
                                 
Exercisable at end of period
    326,865     $ 8.06       4.3     $ 1,158  
 
3.
SECURITIES
 
The amortized cost and fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows (in thousands):
                         
   
Amortized
   
Gross Unrealized
 
Fair
 
September 30, 2014
 
Cost
   
Gains
   
Losses
   
Value
 
Obligations of states and political subdivisions
  $ 2,296     $ 1     $ (26 )   $ 2,271  
                                 
   
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
 
September 30, 2014
 
Cost
   
Gains
   
Losses
   
Value
 
Residential government-sponsored mortgage-backed securities
  $ 22,350     $ 599     $ (58 )   $ 22,891  
Residential government-sponsored collateralized mortgage obligations
    3,724       -       (88 )     3,636  
Government-sponsored agency securities
    40,954       162       (1,697 )     39,419  
Obligations of states and political subdivisions
    15,560       80       (166 )     15,474  
Other residential collateralized mortgage obligations
    612       -       (2 )     610  
Trust preferred securities
    6,793       1,690       (1,543 )     6,940  
    $ 89,993     $ 2,531     $ (3,554 )   $ 88,970  
 
   
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 September 30, 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.
 
9
 

 

 
   
Held to Maturity
 
Available for Sale
 
   
Amortized
         
Amortized
       
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
 Due in five to ten years
  $ 12,685     $ 12,436     $ -     $ -  
 Due after ten years
    50,622       49,397       2,296       2,271  
 Residential government-sponsored mortgage-backed securities
    22,350       22,891       -       -  
 Residential government-sponsored collateralized mortgage obligations
    3,724       3,636       -       -  
 Other residential  collateralized mortgage obligations
    612       610       -       -  
      Total
  $ 89,993     $ 88,970     $ 2,296     $ 2,271  
 
Securities with a carrying amount of approximately $71.4 million and $65.3 million at September 30, 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”).

Southern National monitors the portfolio for indicators of other than temporary impairment. At September 30, 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 $60.3 million in the portfolio with the carrying value exceeding the estimated fair value that are considered temporarily impaired at September 30, 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 September 30, 2014. The following tables present information regarding securities in a continuous unrealized loss position as of September 30, 2014 and December 31, 2013 (in thousands) by duration of time in a loss position:
 
September 30, 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
  $ -     $ -     $ 1,785     $ (26 )   $ 1,785     $ (26 )
 
   
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
  $ 11,256     $ (58 )   $ -     $ -     $ 11,256     $ (58 )
 Residential government-sponsored collateralized mortgage obligations
    734       (13 )     2,902       (75 )     3,636       (88 )
 Government-sponsored agency securities
    943       (18 )     28,296       (1,679 )     29,239       (1,697 )
 Obligations of states and political subdivisions
    479       (25 )     9,254       (141 )     9,733       (166 )
 Other residential collateralized mortgage obligations
    610       (2 )     -       -       610       (2 )
 Trust preferred securities
    -       -       4,031       (1,543 )     4,031       (1,543 )
    $ 14,022     $ (116 )   $ 44,483     $ (3,438 )   $ 58,505     $ (3,554 )
 
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 )
 
10
 

 

 
As of September 30, 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
    $ 5,773     $ 5,249     $ 3,829       15 %   $ 268        
MMCF III B
Senior Sub
    A3       A-    
Ba1
   
CC
      331       325       202       34 %     6        
                                      6,104       5,574       4,031             $ 274        
                                                                               
                                                                   
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       509       530       41 %     591     $ 400  
TRAP 2007-XII C1
Mezzanine
    A3       A       C       C       2,170       57       428       28 %     820        1,293  
TRAP 2007-XIII D
Mezzanine
 
NR
      A-    
NR
      C       2,039       -       347       19 %     7        2,032  
MMC FUNDING XVIII
Mezzanine
    A3       A-    
Ca
      C       1,095       27       328       21 %     377       691  
ALESCO V C1
Mezzanine
    A2       A       C       C       2,150       475       609       15 %      1,014       661  
ALESCO XV C1
Mezzanine
    A3       A-       C       C       3,268       30       85       33 %     679        2,559  
ALESCO XVI  C
Mezzanine
    A3       A-       C       C       2,172       121       582       14 %     871        1,180  
                                        14,394       1,219       2,909             $ 4,359     $ 8,816  
                                                                                   
Total
                                    $ 20,498     $ 6,793     $ 6,940                          
 
(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 11% 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 no OTTI charges during the three months ended September 30, 2014, and we recognized OTTI charges of $41 thousand for the nine months ended September 30, 2014 related to the TPREF Funding II security. We recognized no OTTI charges during the third quarter of 2013 and recognized OTTI charges of $3 thousand during the first nine months of 2013.
 
11
 

 

 
The following table presents a roll forward of the credit losses on our securities held to maturity recognized in earnings for the nine months ended September 30, 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
    41       3  
Reductions due to realized losses
    (3 )     (51 )
Amount of cumulative other-than-temporary impairment  related to credit loss as of September 30
  $ 8,949     $ 8,916  
 
Changes in accumulated other comprehensive income by component for the three and nine months ended September 30, 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 September 30, 2014
 
Available for Sale
   
Held to Maturity
       
   
Securities
   
Securities
   
Total
 
Beginning balance
  $ (60 )   $ (2,991 )   $ (3,051 )
Other comprehensive income/(loss) before reclassifications
    44       (12 )     32  
Amounts reclassified from accumulated other comprehensive income/(loss)
    -       -       -  
Net current-period other comprehensive income/(loss)
    44       (12 )     32  
Ending balance
  $ (16 )   $ (3,003 )   $ (3,019 )

   
Unrealized Holding
             
   
Gains (Losses) on
             
For the nine months ended September 30, 2014
 
Available for Sale
   
Held to Maturity
       
   
Securities
   
Securities
   
Total
 
Beginning balance
  $ (203 )   $ (2,987 )   $ (3,190 )
Other comprehensive income/(loss) before reclassifications
    187       (16 )     171  
Amounts reclassified from accumulated other comprehensive income/(loss)
    -       -       -  
Net current-period other comprehensive income/(loss)
    187       (16 )     171  
Ending balance
  $ (16 )   $ (3,003 )   $ (3,019 )
 
   
Unrealized Holding
             
   
Gains (Losses) on
             
For the three months ended September 30, 2013
 
Available for Sale
   
Held to Maturity
       
   
Securities
   
Securities
   
Total
 
Beginning balance
  $ (178 )   $ (2,975 )   $ (3,153 )
Other comprehensive income/(loss) before reclassifications
    (8 )     (8 )     (16 )
Amounts reclassified from accumulated other comprehensive income/(loss)
    -       -       -  
Net current-period other comprehensive income/(loss)
    (8 )     (8 )     (16 )
Ending balance
  $ (186 )   $ (2,983 )   $ (3,169 )
 
   
Unrealized Holding
             
   
Gains (Losses) on
             
For the nine months ended September 30, 2013
 
Available for Sale
   
Held to Maturity
       
   
Securities
   
Securities
   
Total
 
Beginning balance
  $ 44     $ (3,025 )   $ (2,981 )
Other comprehensive income/(loss) before reclassifications
    (137 )     43       (94 )
Amounts reclassified from accumulated other comprehensive income/(loss)
    (93 )     (1 )     (94 )
Net current-period other comprehensive income/(loss)
    (230 )     42       (188 )
Ending balance
  $ (186 )   $ (2,983 )   $ (3,169 )
 
12
 

 

 
4.
LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The following table summarizes the composition of our loan portfolio as of September 30, 2014 and December 31, 2013:

   
Covered
   
Non-covered
   
Total
   
Covered
   
Non-covered
   
Total
 
   
Loans (1)
   
Loans
   
Loans
   
Loans (1)
   
Loans
   
Loans
 
   
September 30, 2014
   
December 31, 2013
 
 Loans secured by real estate:
                                   
Commercial real estate - owner-occupied
  $ 1,363     $ 115,971     $ 117,334     $ 1,603     $ 106,225     $ 107,828  
Commercial real estate - non-owner-occupied
    5,791       182,138       187,929       5,829       150,008       155,837  
    Secured by farmland
    -       580       580       100