Southern National Bancorp
Southern National Bancorp of Virginia Inc (Form: 10-Q, Received: 05/11/2015 10:43:07)



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, 2015
 
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 1, 2015, there were 12,263,420 shares of common stock outstanding.
 
 
 

 

 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
FORM 10-Q
March 31, 2015
 
INDEX
 
PAGE
       
PART 1 - FINANCIAL INFORMATION
       
Item 1 -
Financial Statements
   
 
Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014
 
2
 
Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2015 and 2014
 
3
 
Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2015
 
4
 
Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014
 
5
 
Notes to Consolidated Financial Statements
 
6- 25
       
Item 2 - Management’s Discussion and Analysis of  Financial Condition and Results of Operations
 
26- 37
       
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
 
37-40
       
Item 4 – Controls and Procedures
 
41
       
PART II - OTHER INFORMATION
       
Item 1 – Legal Proceedings
 
41
       
Item 1A – Risk Factors
 
41
       
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
 
41
       
Item 3 – Defaults Upon Senior Securities
 
41
       
Item 4 – Mine Safety Disclosures
 
41
       
Item 5 – Other Information
 
41
       
Item 6 - Exhibits
 
42
       
Signatures
 
43
       
Certifications
 
44-46
 
 
 

 

 
 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,
 
   
2015
   
2014
 
ASSETS
           
Cash and cash equivalents:
           
Cash and due from financial institutions
  $ 4,630     $ 5,702  
Interest-bearing deposits in other financial institutions
    31,787       32,618  
Total cash and cash equivalents
    36,417       38,320  
                 
Securities available for sale, at fair value
    2,306       2,285  
                 
 Securities held to maturity, at amortized cost
               
(fair value of $97,198 and $94,093, respectively)
    92,065       94,058  
                 
Covered loans
    37,437       38,496  
Non-covered loans
    691,787       664,976  
Total loans
    729,224       703,472  
Less allowance for loan losses
    (7,741 )     (7,414 )
Net loans
    721,483       696,058  
                 
Stock in Federal Reserve Bank and Federal Home Loan Bank
    5,667       5,681  
Equity investment in mortgage affiliate
    3,615       3,631  
Preferred investment in mortgage affiliate
    1,805       1,805  
Bank premises and equipment, net
    9,355       9,453  
Goodwill
    10,514       10,514  
Core deposit intangibles, net
    1,289       1,354  
FDIC indemnification asset
    3,439       3,571  
Bank-owned life insurance
    21,140       20,990  
Other real estate owned
    12,583       13,051  
Deferred tax assets, net
    10,068       10,083  
Other assets
    5,507       5,791  
                 
Total assets
  $ 937,253     $ 916,645  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Noninterest-bearing demand deposits
  $ 71,394     $ 69,560  
Interest-bearing deposits:
               
NOW accounts
    24,002       25,018  
Money market accounts
    138,777       137,297  
Savings accounts
    43,590       44,155  
Time deposits
    482,732       466,395  
Total interest-bearing deposits
    689,101       672,865  
Total deposits
    760,495       742,425  
                 
Securities sold under agreements to repurchase and other
               
short-term borrowings
    29,858       29,044  
Federal Home Loan Bank (FHLB) advances
    25,000       25,000  
Other liabilities
    6,770       6,197  
Total liabilities
    822,123       802,666  
                 
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, 12,217,770 shares at March 31, 2015 and 12,216,669 at December 31, 2014
    122       122  
Additional paid in capital
    104,167       104,072  
Retained earnings
    13,832       12,805  
Accumulated other comprehensive loss
    (2,991 )     (3,020 )
Total stockholders’ equity
    115,130       113,979  
                 
Total liabilities and stockholders’ equity
  $ 937,253     $ 916,645  
 
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,
 
             
   
2015
   
2014
 
             
 Interest and dividend income :
           
Interest and fees on loans
  $ 9,551     $ 7,756  
Interest and dividends on taxable securities
    654       513  
Interest and dividends on tax exempt securities
    101       92  
Interest and dividends on other earning assets
    129       280  
Total interest and dividend income
    10,435       8,641  
Interest expense:
               
Interest on deposits
    1,339       896  
Interest on borrowings
    169       158  
Total interest expense
    1,508       1,054  
                 
Net interest income
    8,927       7,587  
                 
Provision for loan losses
    525       1,175  
Net interest income after provision  for loan losses
    8,402       6,412  
                 
Noninterest income:
               
Account maintenance and deposit service fees
    222       178  
Income from bank-owned life insurance
    150       140  
Equity income (loss) from mortgage affiliate
    (16 )     -  
Gain on other assets
    -       202  
Total other-than-temporary impairment losses (OTTI)
    -       (16 )
Portion of OTTI recognized in other comprehensive  income (before taxes)
    -       -  
Net credit related OTTI recognized in earnings
    -       (16 )
Other
    49       37  
                 
Total noninterest income
    405       541  
                 
Noninterest expenses:
               
Salaries and benefits
    2,803       2,389  
Occupancy expenses
    871       772  
Furniture and equipment expenses
    210       187  
Amortization of core deposit intangible
    65       45  
Virginia franchise tax expense
    88       116  
Merger expenses
    -       213  
FDIC assessment
    172       125  
Data processing expense
    164       126  
Telephone and communication expense
    206       178  
Change in FDIC indemnification asset
    129       124  
Net (gain)  loss on other real estate owned
    320       (419 )
Other operating expenses
    793       663  
Total noninterest expenses
    5,821       4,519  
Income before income taxes
    2,986       2,434  
Income tax expense
    982       792  
Net income
  $ 2,004     $ 1,642  
Other comprehensive income:
               
Unrealized gain on available for sale securities
  $ 23     $ 143  
Non-credit component of other-than-temporary  impairment on held-to-maturity securities
    -       21  
Accretion of amounts previously recorded upon transfer to  held-to-maturity from available-for-sale
    22       (20 )
Net unrealized gain
    45       144  
Tax effect
    (16 )     (49 )
Other comprehensive income
    29       95  
Comprehensive income
  $ 2,033     $ 1,737  
Earnings per share, basic and diluted
  $ 0.16     $ 0.14  
 
See accompanying notes to consolidated financial statements.
 
3
 

 

 
 SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
 FOR THE THREE MONTHS ENDED MARCH 31, 2015
 (dollars in thousands, except per share amounts) (Unaudited)
 
                     
Accumulated
       
         
Additional
         
Other
       
   
Common
   
Paid in
   
Retained
   
Comprehensive
       
   
Stock
   
Capital
   
Earnings
   
Loss
   
Total
 
                               
Balance - December 31, 2014
  $ 122     $ 104,072     $ 12,805     $ (3,020 )   $ 113,979  
Comprehensive income:
                                       
Net income
                    2,004               2,004  
Change in unrealized loss  on securities  available for sale (net of tax benefit, $8)
                            15       15  
Change in unrecognized loss on securities  held to maturity for which a portion of OTTI has been recognized (net of tax, $7 and accretion, $22 and amounts recorded into other comprehensive income at transfer)
                            14       14  
Dividends on common stock ($.08 per share)
                    (977 )             (977 )
Issuance of common stock under Stock
                                       
Incentive Plan (1,100 shares)
            10                       10  
Stock-based compensation expense
            85                       85  
                                         
Balance - March 31, 2015
  $ 122     $ 104,167     $ 13,832     $ (2,991 )   $ 115,130  
 
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, 2015 AND 2014
(dollars in thousands) (Unaudited)
 
   
2015
   
2014
 
             
Operating activities:
           
Net income
  $ 2,004     $ 1,642  
Adjustments to reconcile net income to net cash and  cash equivalents provided by operating activities:
               
Depreciation
    227       172  
Amortization of core deposit intangible
    65       45  
Other amortization, net
    (9 )     47  
Accretion of loan discount
    (712 )     (706 )
Amortization of FDIC indemnification asset
    129       124  
Provision for loan losses
    525       1,175  
Earnings on bank-owned life insurance
    (150 )     (140 )
Equity (income) loss on mortgage affiliate
    16       -  
Stock based compensation expense
    85       77  
Impairment on securities
    -       16  
Net (gain) loss on other real estate owned
    320       (419 )
Net decrease in other assets
    255       121  
Net increase in other liabilities
    573       146  
Net cash and cash equivalents provided by operating activities
    3,328       2,300  
Investing activities:
               
Purchases of  held to maturity securities
    -       (5,000 )
Proceeds from paydowns, maturities and calls of held to maturity securities
    2,054       1,320  
Loan originations and payments, net
    (25,238 )     2,397  
Purchase of bank-owned life insurance
    -       (2,000 )
Net decrease in stock in Federal Reserve Bank and Federal Home Loan Bank
    14       1,122  
Payments received on FDIC indemnification asset
    3       638  
Proceeds from sale of other real estate owned
    148       2,778  
Purchases of bank premises and equipment
    (129 )     (112 )
Net cash and cash equivalents provided by (used in) investing activities
    (23,148 )     1,143  
Financing activities:
               
Net increase in deposits
    18,070       15,932  
Cash dividends paid - common stock
    (977 )     (811 )
Issuance of common stock under Stock Incentive Plan
    10       30  
Net increase (decrease) in securities sold under agreement to repurchase and  other short-term borrowings
    814       (20,068 )
Net cash and cash equivalents provided by (used in) financing activities
    17,917       (4,917 )
Decrease in cash and cash equivalents
    (1,903 )     (1,474 )
Cash and cash equivalents at beginning of period
    38,320       20,856  
Cash and cash equivalents at end of period
  $ 36,417     $ 19,382  
Supplemental disclosure of cash flow information
               
Cash payments for:
               
Interest
  $ 1,486     $ 1,035  
Income taxes
    610       918  
Supplemental schedule of noncash investing and financing activities
               
Transfer from non-covered loans to other real estate owned
    -       4,409  
 
See accompanying notes to consolidated financial statements.
 
5
 

 

 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2015
 
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.  Sonabank provides a range of financial services to individuals and small and medium sized businesses. Sonabank has fifteen branches in Virginia, located in Fairfax County (Reston, McLean and Fairfax), in Charlottesville, Warrenton (2), Middleburg, Leesburg (2), South Riding, Front Royal, New Market, Haymarket,  Richmond and Clifton Forge, and eight branches in Maryland, in Rockville, Shady Grove, 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, 2014.
 
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 did not to have a material impact on the Southern National’s Consolidated Financial Statements, but did add additional disclosures.
 
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, 2017, 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. 2014-11, “ Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. ” This ASU aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. The new guidance eliminates sale accounting for repurchase-to maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement. The amendments in the ASU also require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. Additional disclosures will be required for the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The amendments in this ASU are effective for the first interim or annual period beginning after December 15, 2014; however, the disclosure for transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early adoption is not permitted. The adoption of ASU No. 2014-11 is not expected to have a material impact on the Southern National’s Consolidated Financial Statements.
 
7
 

 

 
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.
 
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 no options during the first three months of 2015.
 
For the three months ended March 31, 2015 and 2014, stock-based compensation expense was $85 thousand and $77 thousand, respectively.  As of March 31, 2015, unrecognized compensation expense associated with the stock options was $815 thousand, which is expected to be recognized over a weighted average period of 3.1 years.
 
A summary of the activity in the stock option plan during the three months ended March 31, 2015 follows (dollars in thousands):
                         
               
Weighted
       
         
Weighted
   
Average
   
Aggregate
 
         
Average
   
Remaining
   
Intrinsic
 
         
Exercise
   
Contractual
   
Value
 
   
Shares
   
Price
   
Term
   
(in thousands)
 
Options outstanding, beginning of period
    621,050     $ 8.49              
Granted
    -       -              
Forfeited
    -       -              
Exercised
    (1,100 )     9.09              
Options outstanding, end of period
    619,950     $ 8.49       6.1     $ 1,952  
                                 
Vested or expected to vest
    619,950     $ 8.49       6.1     $ 1,952  
                                 
Exercisable at end of period
    344,820     $ 7.94       4.4     $ 1,279  
 
8
 

 

 
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, 2015
 
Cost
   
Gains
   
Losses
   
Value
 
Obligations of states and political subdivisions
  $ 2,293     $ 22     $ (9 )   $ 2,306  
                                 
   
Amortized
   
Gross Unrealized
   
Fair
 
December 31, 2014
 
Cost
   
Gains
   
Losses
   
Value
 
Obligations of states and political subdivisions
  $ 2,295     $ -     $ (10 )   $ 2,285  

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, 2015
 
Cost
   
Gains
   
Losses
   
Value
 
Residential government-sponsored mortgage-backed securities
  $ 21,883     $ 761     $ (7 )   $ 22,637  
Residential government-sponsored collateralized mortgage obligations
    3,403       1       (23 )     3,381  
Government-sponsored agency securities
    44,950       350       (373 )     44,927  
Obligations of states and political subdivisions
    15,502       136       (148 )     15,490  
Other residential collateralized mortgage obligations
    583       -       (1 )     582  
Trust preferred securities
    5,744       4,690       (253 )     10,181  
    $ 92,065     $ 5,938     $ (805 )   $ 97,198  
 
   
Amortized
   
Gross Unrecognized
   
Fair
 
December 31, 2014
 
Cost
   
Gains
   
Losses
   
Value
 
Residential government-sponsored mortgage-backed securities
  $ 22,897     $ 708     $ (8 )   $ 23,597  
Residential government-sponsored collateralized mortgage obligations
    3,564       -       (53 )     3,511  
Government-sponsored agency securities
    44,949       294       (822 )     44,421  
Obligations of states and political subdivisions
    15,531       108       (145 )     15,494  
Other residential collateralized mortgage obligations
    599       -       -       599  
Trust preferred securities
    6,518       1,527       (1,574 )     6,471  
    $ 94,058     $ 2,637     $ (2,602 )   $ 94,093  

The amortized cost amounts are net of recognized other than temporary impairment.

Prior to the quarter ended March 31, 2015, due to market conditions as well as the limited trading activity of the trust preferred securities, the market value of these securities was highly sensitive to assumption changes and market volatility.  We had determined that our trust preferred securities were classified within Level 3 of the fair value hierarchy.  Market conditions and trading activity has improved significantly for trust preferred securities, and the fair value as of March 31, 2015 was estimated within Level 2 of the fair value hierarchy, as the fair value is based on either pricing models, quoted market prices of securities with similar characteristics, or discounted cash flows.
 
9
 

 


The fair value and carrying amount, if different, of debt securities as of March 31, 2015, 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
  $ 13,379     $ 13,418     $ -     $ -  
                                 
Due after ten years
    52,817       57,180       2,293       2,306  
Residential government-sponsored mortgage-backed securities
    21,883       22,637       -       -  
Residential government-sponsored collateralized mortgage obligations
    3,403       3,381       -       -  
Other residential  collateralized mortgage obligations
    583       582       -       -  
Total
  $ 92,065     $ 97,198     $ 2,293     $ 2,306  
 
Securities with a carrying amount of approximately $70.6 million and $71.8 million at March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014, certain securities’ fair values were below cost. As outlined in the table below, there were securities with fair values totaling approximately $44.1 million in the portfolio with the carrying value exceeding the estimated fair value that are considered temporarily impaired at March 31, 2015.  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, 2015. The following tables present information regarding securities in a continuous unrealized loss position as of March 31, 2015 and December 31, 2014 (in thousands) by duration of time in a loss position:

March 31, 2015
                                   
   
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
  $ 1,732     $ (9 )   $ -     $ -     $ 1,732     $ (9 )
                                                 
   
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
  $ 818     $ (7 )   $ -     $ -     $ 818     $ (7 )
Residential government-sponsored collateralized mortgage obligations
    -       -       2,733       (23 )     2,733       (23 )
Government-sponsored agency securities
    19,715       (274 )     9,887       (99 )     29,602       (373 )
Obligations of states and political subdivisions
    2,362       (41 )     1,974       (107 )     4,336       (148 )
Other residential collateralized mortgage obligations
    582       (1 )     -       -       582       (1 )
Trust preferred securities
    -       -       4,273       (253 )     4,273       (253 )
    $ 23,477     $ (323 )   $ 18,867     $ (482 )   $ 42,344     $ (805 )
                                                 
                                                 
December 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
  $ 485     $ (1 )   $ 1,800     $ (9 )   $ 2,285     $ (10 )
                                                 
   
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
  $ 3,506     $ (8 )   $ -     $ -     $ 3,506     $ (8 )
Residential government-sponsored collateralized mortgage obligations
    692       (3 )     2,819       (50 )     3,511       (53 )
Government-sponsored agency securities
    -       -       29,154       (822 )     29,154       (822 )
Obligations of states and political subdivisions
    485       (20 )     8,139       (125 )     8,624       (145 )
Trust preferred securities
    -       -       4,233       (1,574 )     4,233       (1,574 )
    $ 4,683     $ (31 )   $ 44,345     $ (2,571 )   $ 49,028     $ (2,602 )
 
10
 

 

 
As of March 31, 2015, 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
    $ 4,612     $ 4,203     $ 3,997       12 %   $ 262        
MMCF III B
Senior Sub
  A3     A-    
Ba1
   
CC
      328       323       276       34 %     5        
                                4,940       4,526       4,273             $ 267        
                                                                         
                                                             
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       705       39 %     591     $ 400  
TRAP 2007-XII C1
Mezzanine
  A3     A     C     C       2,185       57       1,058       22 %     835       1,293  
TRAP 2007-XIII D
Mezzanine
 
NR
    A-    
NR
    C       2,039       -       949       16 %     7       2,032  
MMC FUNDING XVIII
Mezzanine
  A3     A-    
Ca
    C       1,095       27       570       20 %     377       691  
ALESCO V C1
Mezzanine
  A2     A     C     C       2,150       475       1,292       15 %     1,014       661  
ALESCO XV C1
Mezzanine
  A3     A-     C     C       3,291       31       245       27 %     701       2,559  
ALESCO XVI  C
Mezzanine
  A3     A-     C     C       2,145       119       1,089       10 %     846       1,180  
                                14,405       1,218       5,908             $ 4,371     $ 8,816  
                                                                           
Total
                            $ 19,345     $ 5,744     $ 10,181                          
 
(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 10% 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 first quarter of 2015 compared to OTTI charges related to credit on the trust preferred securities totaling $16 thousand during the first quarter of 2014.

11
 

 

 
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, 2015 and 2014 (in thousands):

   
2015
   
2014
 
             
Amount of cumulative other-than-temporary impairment related to credit loss prior to January 1
  $ 8,949     $ 8,911  
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  
Reductions due to realized losses
    -       (2 )
Amount of cumulative other-than-temporary impairment related to credit loss as of March 31
  $ 8,949     $ 8,925  
 
Changes in accumulated other comprehensive income by component for the three months ended March 31, 2015 and 2014 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, 2015
 
Available for Sale
   
Held to Maturity
       
   
Securities
   
Securities
   
Total
 
Beginning balance
  $ (6 )   $ (3,014 )   $ (3,020 )
Other comprehensive income/(loss) before reclassifications
    15       14       29  
Amounts reclassified from accumulated other comprehensive income/(loss)
    -       -       -  
Net current-period other comprehensive income/(loss)
    15       14       29  
Ending balance
  $ 9     $ (3,000 )   $ (2,991 )
                         
                         
   
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 )

12
 

 

4.             LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The following table summarizes the composition of our loan portfolio as of March 31, 2015 and December 31, 2014:

   
Covered
   
Non-covered
   
Total
   
Covered
   
Non-covered
   
Total
 
   
Loans (1)
   
Loans
   
Loans
   
Loans (1)
   
Loans
   
Loans
 
   
March 31, 2015
   
December 31, 2014
 
Loans secured by real estate:
                                   
Commercial real estate - owner-occupied
  $ -     $ 142,202     $ 142,202     $ -     $ 136,597     $ 136,597  
Commercial real estate - non-owner-occupied
    -       212,748       212,748       -       200,517       200,517  
Secured by farmland
    -       606       606       -       612       612  
Construction and land loans
    -       53,014       53,014       -       57,938       57,938  
Residential 1-4 family
    14,537       129,915       144,452       14,837       123,233       138,070  
Multi- family residential
    -       21,753       21,753       -       21,832       21,832  
Home equity lines of credit
    22,900       10,425       33,325       23,658       9,751       33,409  
Total real estate loans
    37,437       570,663       608,100       38,495       550,480       588,975  
                                                 
Commercial loans
    -       121,465       121,465       -       114,714       114,714  
Consumer loans
    -       1,452       1,452       -       1,564       1,564  
Gross loans
    37,437       693,580       731,017       38,495       666,758       705,253  
                                                 
Less deferred fees on loans
    -       (1,793 )     (1,793 )     1       (1,782 )     (1,781 )
Loans, net of deferred fees
  $ 37,437     $ 691,787     $ 729,224     $ 38,496     $ 664,976     $ 703,472  

(1)
Covered Loans were acquired in the Greater Atlantic transaction and are covered under an FDIC loss-share agreement. The agreement covering non-single family loans expired in December 2014.
 
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 were two agreements with the 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 was a 5-year agreement which expired 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”. As of March 31, 2015, non-covered loans included $31.9 million of loans acquired in the HarVest acquisition and $57.8 million acquired in the PGFSB acquisition.

Accretable discount on the acquired covered loans, the PGFSB loans and the HarVest loans was $8.6 million and $9.3 million at March 31, 2015 and December 31, 2014 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.

13
 

 


Impaired loans for the covered and non-covered portfolios were as follows (in thousands):

March 31, 2015
 
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
  $ -     $ -     $ -     $ 5,116     $ 5,116     $ -     $ 5,116     $ 5,116     $ -  
Commercial real estate - non-owner occupied (2)
    -       -       -       1,841       2,099       -       1,841       2,099       -  
Construction and land development
    -       -       -       447       576       -       447       576       -  
Commercial loans
    -       -       -       3,569       3,569       -       3,569       3,569       -  
Residential 1-4 family (4)
    1,656       1,951       -       -       -       -       1,656       1,951       -  
Other consumer loans
    -       -       -       -       -       -       -       -       -  
                                                                         
Total
  $ 1,656     $ 1,951     $ -     $