Southern National Bancorp
Southern National Bancorp of Virginia Inc (Form: 10-Q, Received: 11/09/2015 10:28:02)

 

 

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

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 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 ☒     NO ☐

 

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

 

YES ☒     NO ☐

 

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

       
Large accelerated filer ☐   Accelerated filer ☒ Smaller reporting company ☐
       
Non-accelerated filer ☐ (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 ☐ No ☒

 

As of November 3, 2015, there were 12,202,243 shares of common stock outstanding.

 

 
 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
FORM 10-Q
September 30, 2015

 

INDEX

       
      PAGE
       
  PART 1 - FINANCIAL INFORMATION    
       
Item 1 -  Financial Statements    
  Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014   2
  Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2015 and 2014   3
  Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2015   4
  Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014   5
  Notes to Consolidated Financial Statements   6- 26
       
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations   27- 40
       
Item 3 – Quantitative and Qualitative Disclosures about Market Risk   41-44
       
Item 4 – Controls and Procedures   45
       
  PART II - OTHER INFORMATION    
       
Item 1 – Legal Proceedings   45
       
Item 1A – Risk Factors   45
       
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds   45
       
Item 3 – Defaults Upon Senior Securities   46
       
Item 4 – Mine Safety Disclosures   46
       
Item 5 – Other Information   46
       
Item 6 - Exhibits   46
       
Signatures   47
       
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,
2015
  December 31,
2014
 
ASSETS              
Cash and cash equivalents:              
Cash and due from financial institutions   $ 3,772   $ 5,702  
Interest-bearing deposits in other financial institutions     47,764     32,618  
Total cash and cash equivalents     51,536     38,320  
               
Securities available for sale, at fair value     4,124     2,285  
               
Securities held to maturity, at amortized cost (fair value of $98,584 and $94,093, respectively)     98,574     94,058  
               
Covered loans     35,367     38,496  
Non-covered loans     754,188     664,976  
Total loans     789,555     703,472  
Less allowance for loan losses     (8,158 )   (7,414 )
Net loans     781,397     696,058  
               
Stock in Federal Reserve Bank and Federal Home Loan Bank     5,835     5,681  
Equity investment in mortgage affiliate     4,462     3,631  
Preferred investment in mortgage affiliate     2,555     1,805  
Bank premises and equipment, net     9,067     9,453  
Goodwill     10,514     10,514  
Core deposit intangibles, net     1,158     1,354  
FDIC indemnification asset     3,217     3,571  
Bank-owned life insurance     21,954     20,990  
Other real estate owned     11,259     13,051  
Deferred tax assets, net     6,747     10,083  
Other assets     5,488     5,791  
               
Total assets   $ 1,017,887   $ 916,645  
               
LIABILITIES AND STOCKHOLDERS’ EQUITY              
               
Noninterest-bearing demand deposits   $ 72,002   $ 69,560  
Interest-bearing deposits:              
NOW accounts     24,228     25,018  
Money market accounts     145,782     137,297  
Savings accounts     44,143     44,155  
Time deposits     544,548     466,395  
Total interest-bearing deposits     758,701     672,865  
Total deposits     830,703     742,425  
               
Securities sold under agreements to repurchase and other short-term borrowings     55,945     29,044  
Federal Home Loan Bank (FHLB) advances     5,000     25,000  
Other liabilities     5,934     6,197  
Total liabilities     897,582     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, 12,202,243 shares at September 30, 2015 and 12,216,669 at December 31, 2014     122     122  
Additional paid in capital     104,033     104,072  
Retained earnings     16,820     12,805  
Accumulated other comprehensive loss     (670 )   (3,020 )
Total stockholders’ equity     120,305     113,979  
               
Total liabilities and stockholders’ equity   $ 1,017,887   $ 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
September 30,
  For the Nine Months Ended
September 30,
 
           
    2015   2014   2015   2014  
                           
Interest and dividend income :                          
Interest and fees on loans   $ 10,099   $ 9,181   $ 29,620   $ 25,037  
Interest and dividends on taxable securities     587     551     1,772     1,634  
Interest and dividends on tax exempt securities     100     101     302     289  
Interest and dividends on other earning assets     362     151     621     591  
Total interest and dividend income     11,148     9,984     32,315     27,551  
Interest expense:                          
Interest on deposits     1,796     986     4,660     2,779  
Interest on borrowings     169     186     521     514  
Total interest expense     1,965     1,172     5,181     3,293  
                           
Net interest income     9,183     8,812     27,134     24,258  
                           
Provision for loan losses     850     975     2,875     2,344  
Net interest income after provision for loan losses     8,333     7,837     24,259     21,914  
                           
Noninterest income:                          
Account maintenance and deposit service fees     243     220     703     594  
Income from bank-owned life insurance     160     159     464     455  
Equity income from mortgage affiliate     492     176     1,270     507  
Gain on sale of other assets     -     -     7     202  
Net gain on sale of available for sale securities     -     -     520     -  
Total other-than-temporary impairment losses (OTTI)     -     -     -     (41 )
Portion of OTTI recognized in other comprehensive income (before taxes)     -     -     -     -  
Net credit related OTTI recognized in earnings     -     -     -     (41 )
Other     69     54     164     145  
                           
Total noninterest income     964     609     3,128     1,862  
                           
Noninterest expenses:                          
Salaries and benefits     2,892     2,671     8,531     7,487  
Occupancy expenses     807     804     2,504     2,335  
Furniture and equipment expenses     194     195     628     571  
Amortization of core deposit intangible     66     61     196     151  
Virginia franchise tax expense     88     113     264     342  
Merger expenses     -     65     -     487  
FDIC assessment     174     149     502     401  
Data processing expense     164     146     498     406  
Telephone and communication expense     197     198     604     556  
Change in FDIC indemnification asset     105     403     351     837  
Net (gain) loss on other real estate owned     97     (194 )   360     (433 )
Other operating expenses     787     678     2,543     2,313  
Total noninterest expenses     5,571     5,289     16,981     15,453  
Income before income taxes     3,726     3,157     10,406     8,323  
Income tax expense     1,245     1,049     3,455     2,801  
Net income   $ 2,481   $ 2,108   $ 6,951   $ 5,522  
Other comprehensive income (loss):                          
Unrealized gain (loss) on available for sale securities   $ (7 ) $ 66   $ (225 ) $ 283  
Realized amount on securities sold, net     -     -     (520 )   -  
Non-credit component of other-than-temporary impairment on held-to-maturity securities     -     -     4,278     35  
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale     3     (17 )   28     (59 )
Net unrealized gain (loss)     (4 )   49     3,561     259  
Tax effect     1     (17 )   (1,211 )   (88 )
Other comprehensive income (loss)     (3 )   32     2,350     171  
Comprehensive income   $ 2,478   $ 2,140   $ 9,301   $ 5,693  
Earnings per share, basic   $ 0.20   $ 0.18   $ 0.56   $ 0.47  
Earnings per share, diluted   $ 0.20   $ 0.17   $ 0.56   $ 0.47  

 

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 SEPTEMBER 30, 2015
(dollars in thousands, except per share amounts) (Unaudited)

                                 
    Common
Stock
  Additional
Paid in
Capital
  Retained
Earnings
  Accumulated
Other
Comprehensive
Loss
  Total  
                                 
Balance - December 31, 2014   $ 122   $ 104,072   $ 12,805   $ (3,020 ) $ 113,979  
Comprehensive income:                                
Net income                 6,951           6,951  
Change in unrealized loss on securities available for sale (net of tax benefit, $253)                       (492 )   (492 )
Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $1,464 and accretion, $28 and amounts recorded into other comprehensive income at transfer)                       2,842     2,842  
Dividends on common stock ($.24 per share)                 (2,936 )         (2,936 )
Repurchase of common stock (62,177 shares)     -     (721 )               (721 )
Issuance of common stock under Stock Incentive Plan (47,750 shares)           430                 430  
Stock-based compensation expense           252                 252  
                                 
Balance - September 30, 2015   $ 122   $ 104,033   $ 16,820   $ (670 ) $ 120,305  

 

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, 2015 AND 2014
(dollars in thousands) (Unaudited)

               
    2015   2014  
               
Operating activities:              
Net income   $ 6,951   $ 5,522  
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:              
Depreciation     668     549  
Amortization of core deposit intangible     196     151  
Other amortization, net     119     143  
Accretion of loan discount     (1,941 )   (2,305 )
Amortization of FDIC indemnification asset     351     837  
Provision for loan losses     2,875     2,344  
Earnings on bank-owned life insurance     (464 )   (455 )
Equity income on mortgage affiliate     (1,270 )   (507 )
Stock based compensation expense     252     233  
Net gain on sale of available for sale securities     (520 )   -  
Impairment on securities     -     41  
Net (gain) loss on other real estate owned     360     (433 )
Net decrease in other assets     4,643     1,232  
Net increase (decrease) in other liabilities     (263 )   860  
Net cash and cash equivalents provided by operating activities     11,957     8,212  
Investing activities:              
Proceeds from sales of available for sale securities     3,966     -  
Purchases of held to maturity securities     (16,152 )   (12,243 )
Proceeds from paydowns, maturities and calls of held to maturity securities     9,826     4,616  
Loan originations and payments, net     (89,999 )   (62,358 )
Proceeds from sale of PGFSB loans     -     3,499  
Net cash received in PGFSB acquisition     -     22,430  
Purchase of bank-owned life insurance     (500 )   (2,000 )
Investment in mortgage affiliate     (311 )   (5,043 )
Net increase in stock in Federal Reserve Bank and Federal Home Loan Bank     (154 )   (123 )
Payments received on FDIC indemnification asset     3     1,018  
Proceeds from sale of other real estate owned     2,908     3,029  
Purchases of bank premises and equipment     (280 )   (664 )
Net cash and cash equivalents used in investing activities     (90,693 )   (47,839 )
Financing activities:              
Net increase in deposits     88,278     68,498  
Cash dividends paid - common stock     (2,937 )   (2,597 )
Repurchase of common stock     (721 )   -  
Issuance of common stock under Stock Incentive Plan     431     689  
Net increase (decrease) in securities sold under agreement to repurchase and other short-term borrowings     6,901     (2,016 )
Net cash and cash equivalents provided by financing activities     91,952     64,574  
Increase in cash and cash equivalents     13,216     24,947  
Cash and cash equivalents at beginning of period     38,320     20,856  
Cash and cash equivalents at end of period   $ 51,536   $ 45,803  
Supplemental disclosure of cash flow information              
Cash payments for:              
Interest   $ 4,898   $ 3,144  
Income taxes     2,337     2,238  
Supplemental schedule of noncash investing and financing activities              
Transfer from FHLB advances to securities sold under agreements to repurchase and other short-term borrowings     20,000     -  
Transfer from non-covered loans to other real estate owned     1,386     4,409  
Transfer from covered loans to other real estate owned     90     -  
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, 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.

 

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.

 

6
 

  

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 September 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.

 

In September 2014, the FASB issued ASU No. 2014-11,  Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The new guidance aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. The 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, which has resulted in outcomes referred to as off-balance-sheet accounting. The amendments in the ASU 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. The amendments in the ASU also require expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings (see Note 8 to the Consolidated Financial Statements). We adopted the amendments in this ASU effective January 1, 2015. As of September 30, 2015, all of our repurchase agreements were typical in nature (i.e., not repurchase-to-maturity transactions or repurchase agreements executed as a repurchase financing) and are accounted for as secured borrowings. As such, the adoption of ASU No. 2014-11 did not have a material impact on our consolidated financial statements.

 

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 125,500 options during the first nine months of 2015. 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, 2015:

         
Expected life   10 years  
Expected volatility     14.71 %
Risk-free interest rate     2.26 %
Weighted average fair value per option granted   $ 0.51  
Dividend yield     5.51 %

  

For the three and nine months ended September 30, 2015 and 2014, stock-based compensation expense was $82 thousand and $252 thousand, respectively, compared to $82 thousand and $233 thousand for the same periods last year. As of September 30, 2015, unrecognized compensation expense associated with the stock options was $709 thousand, which is expected to be recognized over a weighted average period of 3.0 years.
 

8
 

 

A summary of the activity in the stock option plan during the nine months ended September 30, 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     125,500       11.43                  
Forfeited     -       -                  
Exercised     (47,750 )     9.09                  
Options outstanding, end of period     698,800     $ 8.98       6.8     $ 1,642  
                                 
Vested or expected to vest     698,800     $ 8.98       6.8     $ 1,642  
                                 
Exercisable at end of period     316,730     $ 7.85       4.8     $ 1,101  

  

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, 2015     Cost       Gains       Losses       Value  
 Obligations of states and political subdivisions   $ 2,289     $ 17     $ (19 )   $ 2,287  
 Trust preferred securities     2,590       -       (753 )     1,837  
    $ 4,879     $ 17     $ (772 )   $ 4,124  
                                 
      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  
September 30, 2015     Cost       Gains       Losses       Value  
 Residential government-sponsored mortgage-backed securities   $ 21,655     $ 658     $ (7 )   $ 22,306  
 Residential government-sponsored collateralized mortgage obligations     3,087       1       (29 )     3,059  
 Government-sponsored agency securities     53,930       363       (545 )     53,748  
 Obligations of states and political subdivisions     15,444       127       (150 )     15,421  
 Trust preferred securities     4,458       -       (408 )     4,050  
    $ 98,574     $ 1,149     $ (1,139 )   $ 98,584  
                                 
                                 
      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.

 

9
 

  

The fair value and carrying amount, if different, of debt securities as of September 30, 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   $ 13,355     $ 13,323     $ -     $ -  
Due after ten years     60,477       59,896       4,879       4,124  
Residential government-sponsored mortgage-backed securities     21,655       22,306       -       -  
Residential government-sponsored collateralized mortgage obligations     3,087       3,059       -       -  
      Total   $ 98,574     $ 98,584     $ 4,879     $ 4,124  

 

Securities with a carrying amount of approximately $84.4 million and $71.8 million at September 30, 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 September 30, 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 $46.0 million in the portfolio with the carrying value exceeding the estimated fair value that are considered temporarily impaired at September 30, 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 September 30, 2015. The following tables present information regarding securities in a continuous unrealized loss position as of September 30, 2015 and December 31, 2014 (in thousands) by duration of time in a loss position:

  

September 30, 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   $ 1,721     $ (19 )   $ -     $ -     $ 1,721     $ (19 )
Trust preferred securities     -       -       1,837       (753 )     1,837       (753 )
    $ 1,721     $ (19 )   $ 1,837     $ (753 )   $ 3,558     $ (772 )

                                     
    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   $ 1,155     $ (3 )   $ 648     $ (4 )   $ 1,803     $ (7 )
Residential government-sponsored collateralized mortgage obligations     -       -       2,505       (29 )     2,505       (29 )
Government-sponsored agency securities     19,632       (358 )     9,801       (187 )     29,433       (545 )
Obligations of states and political subdivisions     2,231       (12 )     2,443       (138 )     4,674       (150 )
Trust preferred securities     -       -       4,050       (408 )     4,050       (408 )
    $ 23,018     $ (373 )   $ 19,447     $ (766 )   $ 42,465     $ (1,139 )
                                                 

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 September 30, 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)  
Held to Maturity                           (in thousands)                  
ALESCO VII  A1B   Senior   Aaa     AAA     A3     BBB     $ 4,535     $ 4,143     $ 3,776       12 %   $  254  
MMCF III B   Senior Sub   A3     A-     Ba1     CC       321       315       274       30 %     6  
                                  4,856       4,458       4,050             $  260  
                                                                     
                                                                Cumulative OTTI  
Available for Sale                                                               Related to  
Other Than Temporarily Impaired:                                                           Credit Loss (2)  
TPREF FUNDING II   Mezzanine   A1     A-     Caa3     C       1,500       1,100       690       36 %     400  
ALESCO V C1   Mezzanine   A2     A     C     C       2,150       1,490       1,147       15 %     660  
                                  3,650       2,590       1,837             $ 1,060  
                                                                     
Total                               $ 8,506     $ 7,048     $ 5,887                  

 

(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 13% 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 nine months ended September 30, 2015 compared to OTTI charges related to credit on the trust preferred securities totaling $41 thousand during the during the nine months ended September 30, 2014.

 

11
 

 

The following table presents a roll forward of the credit losses on our securities previously classified as held to maturity and now classified as available for sale recognized in earnings for the nine months ended September 30, 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     -       41  
Reductions due to sales of securities for which an other-than-temporary impairment was previously recognized     (7,889 )     -  
Reductions due to realized losses     -       (3 )
                 
Amount of cumulative other-than-temporary impairment  related to credit loss as of September 30   $ 1,060     $ 8,949  

 

Changes in accumulated other comprehensive income by component for the three and nine months ended September 30, 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 September 30, 2015   Available for Sale     Held to Maturity            
      Securities     Securities     Total  
Beginning balance   $ (493 )   $ (174 )   $ (667 )
Other comprehensive income/(loss) before reclassifications     (5 )     2       (3 )
Amounts reclassified from accumulated other comprehensive income/(loss)     -       -       -  
Net current-period other comprehensive income/(loss)     (5 )     2       (3 )
Ending balance   $ (498 )   $ (172 )   $ (670 )
                         
                         
    Unrealized Holding                  
    Gains (Losses) on                  
For the nine months ended September 30, 2015   Available for Sale     Held to Maturity          
    Securities     Securities     Total  
Beginning balance   $ (6 )   $ (3,014 )   $ (3,020 )
Other comprehensive income/(loss) before reclassifications     (492 )     18       (474 )
Amounts reclassified from accumulated other comprehensive income/(loss)     -       2,824       2,824  
Net current-period other comprehensive income/(loss)     (492 )     2,842       2,350  
Ending balance   $ (498 )   $ (172 )   $ (670 )
                         
                         
    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 )

 

 

12
 

 

4.       LOANS AND ALLOWANCE FOR LOAN LOSSES

 

The following table summarizes the composition of our loan portfolio as of September 30, 2015 and December 31, 2014:

 

    Covered     Non-covered     Total     Covered     Non-covered     Total  
    Loans (1)     Loans     Loans     Loans (1)     Loans     Loans  
    September 30, 2015     December 31, 2014  
Loans secured by real estate:                                                
Commercial real estate - owner-occupied   $ -     $ 141,091     $ 141,091     $ -     $ 136,597     $ 136,597  
Commercial real estate - non-owner-occupied     -       249,665       249,665       -       200,517       200,517  
Secured by farmland     -       588       588       -       612       612  
Construction and land loans     -       59,317       59,317       -       57,938       57,938  
Residential 1-4 family     13,693       156,277       169,970       14,837       123,233       138,070  
Multi- family residential     -       19,528       19,528       -       21,832       21,832  
Home equity lines of credit     21,673       12,071       33,744       23,658       9,751       33,409  
Total real estate loans     35,366       638,537       673,903       38,495       550,480       588,975  
                                                 
Commercial loans     -       116,193       116,193       -       114,714       114,714  
Consumer loans     -       1,472       1,472       -       1,564       1,564  
Gross loans     35,366       756,202       791,568       38,495       666,758       705,253  
                                                 
Less deferred fees on loans     1       (2,014 )     (2,013 )     1       (1,782 )     (1,781 )
Loans, net of deferred fees   $ 35,367     $ 754,188     $ 789,555     $ 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 September 30, 2015, non-covered loans included $30.8 million of loans acquired in the HarVest acquisition and $53.6 million acquired in the PGFSB acquisition.

 

Accretable discount on the acquired Greater Atlantic loans, the PGFSB loans and the HarVest loans was $7.5 million and $9.3 million at September 30, 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):

 

September 30, 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   $ -     $ -     $ -     $ 7,157     $ 7,667     $ -     $ 7,157     $ 7,667     $ -  
Commercial real estate - non-owner occupied (2)     -       -       -       138       233       -       138       233       -  
Construction and land development     -       -       -       -       -       -       -       -       -  
Commercial loans     -       -       -       3,144       3,937       -       3,144       3,937       -  
Residential 1-4 family (4)     1,303       1,537       -       -       -       -       1,303       1,537       -  
Other consumer loans     -       -       -       -       -       -       -       -       -  
                                                                         
Total   $ 1,303     $ 1,537     $ -     $ 10,439     $ 11,837     $ -     $ 11,742     $ 13,374     $ -  
                                                                         
With an allowance recorded                                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ 752     $ 852     $ 202     $ 752     $ 852     $ 202  
Commercial real estate - non-owner occupied (2)     -       -       -       -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -       -       -       -  
Commercial loans     -       -       -       3,581       3,581       400       3,581       3,581       400  
Residential 1-4 family (4)     -       -       -       -       -       -       -       -       -  
Other consumer loans     -       -       -       -       -       -       -       -       -  
                                                                         
Total   $ -     $ -     $ -     $ 4,333     $ 4,433     $ 602     $ 4,333     $ 4,433     $ 602  
Grand total   $ 1,303     $ 1,537     $ -     $ 14,772     $ 16,270     $ 602     $ 16,075     $ 17,807     $ 602  

 

(1) Recorded investment is after cumulative prior charge offs of $1.4 million.  These loans also have aggregate SBA guarantees of $4.6 million.
(2) Includes loans secured by farmland and multi-family residential loans.
(3) The Bank recognizes loan impairment and may concurrently record a charge off to the allowance for loan losses.
(4) Includes home equity lines of credit.

 

December 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   $ -     $ -     $ -     $ 10,394     $ 10,394     $ -     $ 10,394     $ 10,394     $ -  
Commercial real estate - non-owner occupied (2)     -       -       -       1,859       2,118       -       1,859       2,118       -  
Construction and land development     -       -       -       -       -       -       -       -       -  
Commercial loans     -       -       -       4,998       4,999       -       4,998       4,999       -  
Residential 1-4 family (4)     1,740       2,053       -       -       -       -       1,740       2,053       -  
Other consumer loans     -       -       -       -       -       -       -       -       -  
                                                                         
Total   $ 1,740     $ 2,053     $ -     $ 17,251     $ 17,511     $ -     $ 18,991     $ 19,564     $ -  
                                                                         
With an allowance recorded                                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ 1,609     $ 2,231     $ 151     $ 1,609     $ 2,231     $ 151  
Commercial real estate - non-owner occupied (2)     -       -       -       -       -       -       -       -       -  
Construction and land development     -       -       -       467       740       120       467       740       120  
Commercial loans     -       -       -       3,141       3,944       134       3,141       3,944       134  
Residential 1-4 family (4)     -       -       -       1,344       1,465       300       1,344       1,465       300  
Other consumer loans     -       -       -       -       -       -       -       -       -  
                                                                         
Total   $ -     $ -     $ -     $ 6,561     $ 8,380     $ 705     $ 6,561     $ 8,380     $ 705  
Grand total   $ 1,740     $ 2,053     $ -     $ 23,812     $ 25,891     $ 705     $ 25,552     $ 27,944     $ 705  

 

(1) Recorded investment is after cumulative prior charge offs of $1.7 million.  These loans also have aggregate SBA guarantees of $4.7 million.
(2) Includes loans secured by farmland and multi-family residential loans.
(3) The Bank recognizes loan impairment and may concurrently record a charge off to the allowance for loan losses.
(4) Includes home equity lines of credit.

14
 

 

The following tables present the average recorded investment and interest income for impaired loans recognized by class of loans for the three and nine months ended September 30, 2015 and 2014 (in thousands): 

                                     
Three months ended September 30, 2015   Covered Loans     Non-covered Loans     Total Loans  
    Average     Interest     Average     Interest     Average     Interest  
    Recorded     Income     Recorded     Income     Recorded     Income  
    Investment     Recognized     Investment     Recognized     Investment     Recognized  
With no related allowance recorded                                                
Commercial real estate - owner occupied   $ -     $ -     $ 6,747     $ 75       6,747     $ 75  
Commercial real estate - non-owner occupied (1)     -       -       138       3       138       3  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       2,992       -       2,992       -  
Residential 1-4 family (2)     1,303       4       -       -       1,303       4  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ 1,303     $ 4     $ 9,877     $ 78     $ 11,180     $ 82  
                                                 
With an allowance recorded                                                
Commercial real estate - owner occupied   $ -     $ -     $ 757     $ 10       757     $ 10  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       3,564       54       3,564       54  
Residential 1-4 family (2)     -       -       -       -       -       -  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ -     $ -     $ 4,321     $ 64     $ 4,321     $ 64  
Grand total   $ 1,303     $ 4     $ 14,198     $ 142     $ 15,501     $ 146  

 

(1) Includes loans secured by farmland and multi-family residential loans.
(2) Includes home equity lines of credit.

                                     
Three months ended September 30, 2014   Covered Loans     Non-covered Loans     Total Loans  
    Average     Interest     Average     Interest     Average     Interest  
    Recorded     Income     Recorded     Income     Recorded     Income  
    Investment     Recognized     Investment     Recognized     Investment     Recognized  
With no related allowance recorded                                                
Commercial real estate - owner occupied   $ 756     $ 13     $ 10,903     $ 175     $ 11,659     $ 188  
Commercial real estate - non-owner occupied (1)     1,884       67       -       -       1,884       67  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       8,563       95       8,563       95  
Residential 1-4 family (2)     1,208       10       15       -       1,223       10  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ 3,848     $ 90     $ 19,481     $ 270     $ 23,329     $ 360  
                                                 
With an allowance recorded                                                
Commercial real estate - owner occupied   $ -     $ -     $ 95     $ 3     $ 95     $ 3  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       -       -       -       -  
Residential 1-4 family (2)     -       -       5,811       79       5,811       79  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ -     $ -     $ 5,906     $ 82     $ 5,906     $ 82  
Grand total   $ 3,848     $ 90     $ 25,387     $ 352     $ 29,235     $ 442  

 

(1) Includes loans secured by farmland and multi-family residential loans.
(2) Includes home equity lines of credit.

 

15
 

 

Nine months ended September 30, 2015                                                
      Covered Loans   Non-covered Loans     Total Loans  
    Average     Interest     Average     Interest     Average     Interest  
    Recorded     Income     Recorded     Income     Recorded     Income  
    Investment     Recognized     Investment     Recognized     Investment     Recognized  
With no related allowance recorded                                                
Commercial real estate - owner occupied   $ -     $ -     $ 6,625     $ 223       6,625       223  
Commercial real estate - non-owner occupied (1)     -       -       139       8       139       8  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       2,692       -       2,692       -  
Residential 1-4 family (2)     1,305       20       -       -       1,305       20  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ 1,305     $ 20     $ 9,456     $ 231     $ 10,761     $ 251  
                                                 
With an allowance recorded                                                
Commercial real estate - owner occupied   $ -     $ -     $ 771     $ 32       771       32  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       3,618       161       3,618       161  
Residential 1-4 family (2)     -       -       -       -       -       -  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ -     $ -     $ 4,389     $ 193     $ 4,389     $ 193  
Grand total   $ 1,305     $ 20     $ 13,845     $ 424     $ 15,150     $ 444  

 

(1) Includes loans secured by farmland and multi-family residential loans.
(2) Includes home equity lines of credit.

 

Nine months ended September 30, 2014                                    
    Covered Loans     Non-covered Loans     Total Loans  
    Average   Interest   Average   Interest   Average   Interest  
    Recorded   Income   Recorded   Income   Recorded   Income  
    Investment   Recognized   Investment   Recognized   Investment   Recognized  
With no related allowance recorded                                                
Commercial real estate - owner occupied   $ 746     $ 40     $ 7,942     $ 372     $ 8,688     $ 412  
Commercial real estate - non-owner occupied (1)     1,889       91       -       -       1,889       91  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       5,195       137       5,195       137  
Residential 1-4 family (2)     1,212       31       5       -       1,217       31  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ 3,847     $ 162     $ 13,142     $ 509     $ 16,989     $ 671  
                                                 
With an allowance recorded                                                
Commercial real estate - owner occupied   $ -     $ -     $ 106     $ 11     $ 106     $ 11  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       -       -       -       -  
Residential 1-4 family (2)     -       -       5,598       236       5,598       236  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ -     $ -     $ 5,704     $ 247     $ 5,704     $ 247  
Grand total   $ 3,847     $ 162     $ 18,846     $ 756     $ 22,693     $ 918  

 

(1) Includes loans secured by farmland and multi-family residential loans.
(2) Includes home equity lines of credit.

 

16
 

 

The following tables present the aging of the recorded investment in past due loans by class of loans as of September 30, 2015 and December 31, 2014 (in thousands):

 

September 30, 2015   30 - 59     60 - 89                                
    Days     Days     90 Days     Total     Nonaccrual     Loans Not     Total  
    Past Due     Past Due     or More     Past Due     Loans     Past Due     Loans  
Covered loans:                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ -     $ -     $ -     $ -  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -       -  
Commercial loans     -       -       -       -       -       -       -  
Residential 1-4 family (2)     -       -       -       -       891       34,475       35,366  
Other consumer loans     -       -       -       -       -       -       -  
                                                         
Total   $ -     $ -     $ -     $ -     $ 891     $ 34,475     $ 35,366  
                                                         
Non-covered loans:                                                        
Commercial real estate - owner occupied   $ 632     $ -     $ -     $ 632     $ 1,445     $ 139,014     $ 141,091  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       269,781       269,781  
Construction and land development     -       -       -       -       -       59,317       59,317  
Commercial loans     -       259       -       259       3,144       112,790       116,193  
Residential 1-4 family (2)     770       8       -       778       -       167,570       168,348  
Other consumer loans     1       -       -       1       -       1,471       1,472  
                                                         
Total   $ 1,403     $ 267     $ -     $ 1,670     $ 4,589     $ 749,943     $ 756,202  
                                                         
Total loans:                                                        
Commercial real estate - owner occupied   $ 632     $ -     $ -     $ 632     $ 1,445     $ 139,014     $ 141,091  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       269,781       269,781  
Construction and land development     -       -       -       -       -       59,317       59,317  
Commercial loans     -       259       -       259       3,144       112,790       116,193  
Residential 1-4 family (2)     770       8       -       778       891       202,045       203,714  
Other consumer loans     1       -       -       1       -       1,471       1,472  
                                                         
Total   $ 1,403     $ 267     $ -     $ 1,670     $ 5,480     $ 784,418     $ 791,568  
                                                         
December 31, 2014   30 - 59     60 - 89                                
    Days     Days     90 Days     Total     Nonaccrual     Loans Not     Total  
    Past Due     Past Due     or More     Past Due     Loans     Past Due     Loans  
Covered loans:                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ -     $ -     $ -     $ -  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -       -  
Commercial loans     -       -       -       -       -       -       -  
Residential 1-4 family (2)     10       148       -       158       859       37,478       38,495  
Other consumer loans     -       -       -       -       -       -       -  
                                                         
Total   $ 10     $ 148     $ -     $ 158     $ 859     $ 37,478     $ 38,495  
                                                         
Non-covered loans:                                                        
Commercial real estate - owner occupied   $ -             $ -     $ -     $ 1,524     $ 135,073     $ 136,597  
Commercial real estate - non-owner occupied (1)     4,128       -       -       4,128       -       218,833       222,961  
Construction and land development     -       -       -       -       467       57,471       57,938  
Commercial loans     -       -       -       -       3,140       111,574       114,714  
Residential 1-4 family (2)     319       586       -       905       521       131,558       132,984  
Other consumer loans     6       -       -       6       -       1,558       1,564  
                                                         
Total   $ 4,453     $ 586     $ -     $ 5,039     $ 5,652     $ 656,067     $ 666,758  
                                                         
Total loans:                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ -     $ 1,524     $ 135,073     $ 136,597  
Commercial real estate - non-owner occupied (1)     4,128       -       -       4,128       -       218,833       222,961  
Construction and land development     -       -       -       -       467       57,471       57,938  
Commercial loans     -       -       -       -       3,140       111,574       114,714  
Residential 1-4 family (2)     329       734       -       1,063       1,380       169,036       171,479  
Other consumer loans     6       -       -       6       -       1,558       1,564  
                                                         
Total   $ 4,463     $ 734     $ -     $ 5,197     $ 6,511     $ 693,545     $ 705,253  

 

(1) Includes loans secured by farmland and multi-family residential loans.
(2) Includes home equity lines of credit.

 

Non-covered nonaccrual loans include SBA guaranteed amounts totaling $4.6 million and $4.7 million at September 30, 2015 and December 31, 2014, respectively.

 

17
 

 

Activity in the allowance for non-covered loan and lease losses for the three and nine months ended September 30, 2015 and 2014 is summarized below (in thousands): 

                                                 
Non-covered loans:
Three months ended September 30, 2015
  Commercial
Real Estate
Owner
Occupied
    Commercial
Real Estate
Non-owner
Occupied (1)
    Construction
and Land
Development
    Commercial
Loans
    1-4 Family
Residential (2)
    Other
Consumer
Loans
    Unallocated     Total  
Allowance for loan losses:                                                                
Beginning balance   $ 1,054     $ 1,524     $ 1,052     $ 2,421     $ 1,224     $ 46     $ 652     $ 7,973  
Charge offs     (66 )     -       -       (448 )     (250 )     (2 )     -       (766 )
Recoveries     12       6       -       60       2       -               80  
Provision     3       (244 )     (79 )     908       186       4       72       850  
Ending balance   $ 1,003     $ 1,286     $ 973     $ 2,941     $ 1,162     $ 48     $ 724     $ 8,137  
                                                                 
Three months ended September 30, 2014                                                                
Allowance for loan losses:                                                                
Beginning balance   $ 596     $ 933     $ 1,400     $ 2,926     $ 785     $ 59     $ 616     $ 7,315  
Charge offs     (2 )     -       -       (1,057 )     (149 )     -       -       (1,209 )
Recoveries     2       5       4       9       2       -       -       22  
Provision     21       16       78       592       441       (6 )     (168 )     975  
Ending balance   $ 617     $ 954     $ 1,482     $ 2,470     $ 1,079     $ 53     $ 448     $ 7,103  

 

(1) Includes loans secured by farmland and multi-family residential loans.
(2) Includes home equity lines of credit.

 

                                                 
Non-covered loans:
Nine months ended September 30, 2015
  Commercial
Real Estate
Owner
Occupied
    Commercial
Real Estate
Non-owner
Occupied (1)
    Construction
and Land
Development
    Commercial
Loans
    1-4 Family
Residential
    Other
Consumer
Loans
    Unallocated     Total  
Allowance for loan losses:                                                                
Beginning balance   $ 855     $ 1,123     $ 1,644     $ 2,063     $ 1,322     $ 49     $ 337     $ 7,393  
Charge offs     (1,067 )     -       -       (1,067 )     (250 )     (6 )     -       (2,390 )
Recoveries     16       18       139       79       7       -       -       259  
Provision     1,199       145       (810 )     1,866       83       5       387       2,875  
Ending balance   $ 1,003     $ 1,286     $ 973     $ 2,941     $ 1,162     $ 48     $ 724     $ 8,137  
                                                                 
Nine months ended September 30, 2014                                                                
Allowance for loan losses:                                                                
Beginning balance   $ 814     $ 985     $ 1,068     $ 2,797     $ 1,302     $ 54     $ 19     $ 7,039  
Charge offs     (73 )     -       -       (1,905 )     (449 )     -       -       (2,427 )
Recoveries     10       17       4       101       4       5       -       141  
Provision     (134 )     (48 )     410       1,477       222       (6 )     429       2,350  
Ending balance   $ 617     $ 954     $ 1,482     $ 2,470     $ 1,079     $ 53     $ 448     $ 7,103  

 

(1) Includes loans secured by farmland and multi-family residential loans.
(2) Includes home equity lines of credit.

 

18
 

 

Activity in the allowance for covered loan and lease losses by class of loan for the three and nine months ended September 30, 2015 and 2014 is summarized below (in thousands): 

                                                 
Covered loans:
Three months ended September 30, 2015
  Commercial
Real Estate
Owner
Occupied
    Commercial
Real Estate
Non-owner
Occupied (1)
    Construction
and Land
Development
    Commercial
Loans
    1-4 Family
Residential (3)
    Other
Consumer
Loans
    Unallocated     Total  
Allowance for loan losses:                                                                
Beginning balance   $ -     $ -     $ -     $ -     $ 17     $ 4     $ -     $ 21  
Charge offs     -       -       -       -       -       -       -       -  
Recoveries     -       -       -       -       -       -       -       -  
Adjustments (2)     -       -       -       -       -       -       -       -  
Provision     -       -       -       -       -       -       -       -  
Ending balance   $ -     $ -     $ -     $ -     $ 17     $ 4     $ -     $ 21  
                                                                 
Three months ended September 30, 2014                                                                
Allowance for loan losses:                                                                
Beginning balance   $ -     $ -     $ -     $ -     $ 17     $ 4     $ -     $ 21  
Charge offs     -       -       -       -       -       -       -       -  
Recoveries     -       -       -       -       -       -       -       -  
Adjustments (2)     -       -       -       -       -       -       -       -  
Provision     -       -       -       -       -       -       -       -  
Ending balance   $ -     $ -     $ -     $ -     $ 17     $ 4     $ -     $ 21  

 

(1) Includes loans secured by farmland and multi-family residential loans.
(2) Represents the portion of increased expected losses which is covered by the loss sharing agreement with the FDIC.
(3) Includes home equity lines of credit.

 

                                                 
Covered loans:
Nine months ended September 30, 2015
  Commercial
Real Estate
Owner
Occupied
    Commercial
Real Estate
Non-owner
Occupied (1)
    Construction
and Land
Development
    Commercial
Loans
    1-4 Family
Residential (3)
    Other
Consumer
Loans
    Unallocated     Total  
Allowance for loan losses:                                                                
Beginning balance   $ -     $ -     $ -     $ -     $ 17     $ 4     $ -     $ 21  
Charge offs     -       -       -       -       -       -       -       -  
Recoveries     -       -       -       -       -       -       -       -  
Adjustments (2)     -       -       -       -       -       -       -       -  
Provision     -       -       -       -       -       -       -       -  
Ending balance   $ -     $ -     $ -     $ -     $ 17     $ 4     $ -     $ 21  
                                                                 
Nine months ended September 30, 2014                                                                
Allowance for loan losses:                                                                
Beginning balance   $ -     $ 45     $ -     $ -     $ -     $ 6     $ -     $ 51  
Charge offs     -       -       -       -       -       -       -       -  
Recoveries     -       -       -       -       -       -       -       -  
Adjustments (2)     -       (36 )     -       -       14       (2 )     -       (24 )
Provision     -       (9 )     -       -       3       -       -       (6 )
Ending balance   $ -     $ -     $ -     $ -     $ 17     $ 4     $ -     $ 21  

 

(1) Includes loans secured by farmland and multi-family residential loans.
(2) Represents the portion of increased expected losses which is covered by the loss sharing agreement with the FDIC.
(3) Includes home equity lines of credit.

 

19
 

 

The following tables present the balance in the allowance for loan losses and the recorded investment in non-covered loans by portfolio segment and based on impairment method as of September 30, 2015 and December 31, 2014 (in thousands):

 

    Commercial     Commercial                                      
    Real Estate     Real Estate     Construction                 Other              
    Owner     Non-owner     and Land     Commercial     1-4 Family     Consumer              
Non-covered loans:   Occupied     Occupied (1)     Development     Loans     Residential (2)     Loans     Unallocated     Total  
September 30, 2015                                                                
Ending allowance balance attributable to loans:                                                                
Individually evaluated for impairment   $ 202     $ -     $ -     $ 400     $ -     $ -     $ -     $ 602  
Collectively evaluated for impairment     801       1,286       973       2,541       1,162       48       724       7,535  
Total ending allowance   $ 1,003     $ 1,286     $ 973     $ 2,941     $ 1,162     $ 48     $ 724     $ 8,137  
                                                                 
Loans:                                                                
Individually evaluated for impairment   $ 7,909     $ 138     $ -     $ 6,725     $ -     $ -     $ -     $ 14,772  
Collectively evaluated for impairment     133,182       269,643       59,317       109,468       168,348       1,472       -       741,430  
Total ending loan balances   $ 141,091     $ 269,781     $ 59,317     $ 116,193     $ 168,348     $ 1,472     $ -     $ 756,202  
                                                                 
December 31, 2014                                                                
Ending allowance balance attributable to loans:                                                                
Individually evaluated for impairment   $ 151     $ -     $ 120     $ 134     $ 300     $ -     $ -     $ 705  
Collectively evaluated for impairment     704       1,123       1,524       1,929       1,022       49       337       6,688  
Total ending allowance   $ 855     $ 1,123     $ 1,644     $ 2,063     $ 1,322     $ 49     $ 337     $ 7,393  
                                                                 
Loans:                                                                
Individually evaluated for impairment   $ 12,003     $ 1,859     $ 467     $ 8,139     $ 1,344     $ -     $ -     $ 23,812  
Collectively evaluated for impairment     124,594       221,102       57,471       106,575       131,640       1,564       -       642,946  
Total ending loan balances   $ 136,597     $ 222,961     $ 57,938     $ 114,714     $ 132,984     $ 1,564     $ -     $ 666,758  

 

(1) Includes loans secured by farmland and multi-family residential loans.
(2) Includes home equity lines of credit.

 

The following tables present the balance in the allowance for covered loan losses and the recorded investment in covered loans by portfolio segment and based on impairment method as of September 30, 2015 and December 31, 2014 (in thousands):

 

    Commercial     Commercial                                      
    Real Estate     Real Estate     Construction                 Other              
    Owner     Non-owner     and Land     Commercial     1-4 Family     Consumer              
Covered loans:   Occupied     Occupied (1)     Development     Loans     Residential (2)     Loans     Unallocated     Total  
September 30, 2015                                                                
Ending allowance balance attributable to loans:                                                                
Individually evaluated for impairment   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
Collectively evaluated for impairment     -       -       -       -       17       4       -       21  
Total ending allowance   $ -     $ -     $ -     $ -     $ 17     $ 4     $ -     $ 21  
                                                                 
Loans:                                                                
Individually evaluated for impairment   $ -     $ -     $ -     $ -     $ 1,303     $ -     $ -     $ 1,303  
Collectively evaluated for impairment     -       -       -       -       34,063       -       -       34,063  
Total ending loan balances   $ -     $ -     $ -     $ -     $ 35,366     $ -     $ -     $ 35,366  
                                                                 
December 31, 2014                                                                
Ending allowance balance attributable to loans:                                                                
Individually evaluated for impairment   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
Collectively evaluated for impairment     -       -       -       -       17       4       -       21  
Total ending allowance   $ -     $ -     $ -     $ -     $ 17     $ 4     $ -     $ 21  
                                                                 
Loans:                                                                
Individually evaluated for impairment   $ -     $ -     $ -     $ -     $ 1,740     $ -     $ -     $ 1,740  
Collectively evaluated for impairment                                     36,755               -       36,755  
Total ending loan balances   $ -     $ -     $ -     $ -     $ 38,495     $ -     $ -     $ 38,495  

 

(1) Includes loans secured by farmland and multi-family residential loans.
(2) Includes home equity lines of credit.

 

 

20
 

 

Troubled Debt Restructurings

 

A modification is classified as a troubled debt restructuring (“TDR”) if both of the following exist: (1) the borrower is experiencing financial difficulty and (2) the Bank has granted a concession to the borrower. The Bank determines that a borrower may be experiencing financial difficulty if the borrower is currently delinquent on any of its debt, or if the Bank is concerned that the borrower may not be able to perform in accordance with the current terms of the loan agreement in the foreseeable future. Many aspects of the borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty, particularly as it relates to commercial borrowers due to the complex nature of the loan structure, business/industry risk and borrower/guarantor structures. Concessions may include the reduction of an interest rate at a rate lower than current market rate for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, or principal forgiveness. When evaluating whether a concession has been granted, the Bank also considers whether the borrower has provided additional collateral or guarantors and whether such additions adequately compensate the Bank for the restructured terms, or if the revised terms are consistent with those currently being offered to new loan customers. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty and whether a concession has been granted is subjective in nature and management’s judgment is required when determining whether a modification is a TDR.

 

Although each occurrence is unique to the borrower and is evaluated separately, for all portfolio segments, TDRs are typically modified through reduction in interest rates, reductions in payments, changing the payment terms from principal and interest to interest only, and/or extensions in term maturity.

 

During the three and nine months ending September 30, 2015, there were no loans modified in troubled debt restructurings. One TDR which had been modified in the previous 12 months defaulted during the second quarter of 2015. This loan, in the amount of $700 thousand, was 30 – 59 days delinquent as of June 30, 2015, but is current as of September 30, 2015.

  

During the three and nine months ending September 30, 2014, there were no loans modified in troubled debt restructurings. No TDRs defaulted during the three and nine months ending September 30, 2014, which had been modified in the previous 12 months.

 

Credit Quality Indicators

 

Through its system of internal controls Southern National evaluates and segments loan portfolio credit quality on a quarterly basis using regulatory definitions for Special Mention, Substandard and Doubtful. Special Mention loans are considered to be criticized. Substandard and Doubtful loans are considered to be classified. Southern National had no loans classified Doubtful at September 30, 2015 or December 31, 2014.

 

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

 

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

 

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

 

21
 

 

As of September 30, 2015 and December 31, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):

                                                               
September 30, 2015     Covered Loans     Non-covered Loans     Total Loans  
      Classified/                 Special                       Classified/              
      Criticized (1)     Pass     Total     Mention     Substandard (3)     Pass     Total     Criticized     Pass     Total  
Commercial real estate - owner occupied   $ -   $ -   $ -   $ 3,768   $ 7,909   $ 129,414   $ 141,091   $ 11,677   $ 129,414   $ 141,091  
Commercial real estate - non-owner occupied (2)     -     -     -     218     138     269,425     269,781     356     269,425     269,781  
Construction and land development     -     -     -     1,196     -     58,121     59,317     1,196     58,121     59,317  
Commercial loans     -     -     -     3,919     6,725     105,549     116,193     10,644     105,549     116,193  
Residential 1-4 family (4)     1,303     34,063     35,366     560     -     167,788     168,348     1,863     201,851     203,714  
Other consumer loans     -     -     -     -     -     1,472     1,472     -     1,472     1,472  
                                                               
Total   $ 1,303   $ 34,063   $ 35,366   $ 9,661   $ 14,772   $ 731,769   $ 756,202   $ 25,736   $ 765,832   $ 791,568  
                                                               
December 31, 2014     Covered Loans           Non-covered Loans     Total Loans  
      Classified/                 Special                       Classified/              
      Criticized (1)     Pass     Total     Mention     Substandard (3)     Pass     Total     Criticized     Pass </