Southern National Bancorp
Southern National Bancorp of Virginia Inc (Form: 10-Q, Received: 05/10/2016 10:37:55)

 

 

 

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, 2016

 

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   ¨

 

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   ¨

 

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

 

Large accelerated filer ¨   Accelerated filer x 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 x

 

As of May 2, 2016, there were 12,248,943 shares of common stock outstanding.

 

 

 

 

 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

March 31, 2016

 

INDEX

 

    PAGE
PART 1 - FINANCIAL INFORMATION    
     
Item 1 - Financial Statements    
  Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015   2
  Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2016 and 2015   3
  Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2016   4
  Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015   5
  Notes to Consolidated Financial Statements   6- 24
       
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations   25-35  
     
Item 3 – Quantitative and Qualitative Disclosures about Market Risk   36-38
     
Item 4 – Controls and Procedures   39
     
PART II - OTHER INFORMATION    
     
Item 1 – Legal Proceedings   39
     
Item 1A – Risk Factors   39
     
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds   39
     
Item 3 – Defaults Upon Senior Securities   39
     
Item 4 – Mine Safety Disclosures   39
     
Item 5 – Other Information   39
     
Item 6 - Exhibits   39
     
Signatures   41
     
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)

 

    March 31,     December 31,  
    2016     2015  
ASSETS                
Cash and cash equivalents:                
Cash and due from financial institutions   $ 3,998     $ 3,972  
Interest-bearing deposits in other financial institutions     30,126       26,364  
Total cash and cash equivalents     34,124       30,336  
                 
Securities available for sale, at fair value     3,871       4,209  
                 
Securities held to maturity, at amortized cost (fair value of $99,583 and $96,464, respectively)     98,727       96,780  
                 
Covered loans     33,159       34,373  
Non-covered loans     837,480       795,052  
Total loans     870,639       829,425  
Less allowance for loan losses     (8,690 )     (8,421 )
Net loans     861,949       821,004  
                 
Stock in Federal Reserve Bank and Federal Home Loan Bank     7,589       6,929  
Equity investment in mortgage affiliate     4,539       4,459  
Preferred investment in mortgage affiliate     2,555       2,555  
Bank premises and equipment, net     8,744       8,882  
Goodwill     10,514       10,514  
Core deposit intangibles, net     1,031       1,093  
FDIC indemnification asset     2,705       2,922  
Bank-owned life insurance     23,300       23,126  
Other real estate owned     10,106       10,439  
Deferred tax assets, net     6,801       6,716  
Other assets     7,715       6,143  
                 
Total assets   $ 1,084,270     $ 1,036,107  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
                 
Noninterest-bearing demand deposits   $ 85,217     $ 83,769  
Interest-bearing deposits:                
NOW accounts     27,623       28,080  
Money market accounts     126,578       131,731  
Savings accounts     51,244       49,939  
Time deposits     566,876       531,775  
Total interest-bearing deposits     772,321       741,525  
Total deposits     857,538       825,294  
                 
Securities sold under agreements to repurchase     11,045       10,381  
Federal Home Loan Bank (FHLB) advances - short term     72,000       59,000  
Federal Home Loan Bank (FHLB) advances - long term     15,000       15,000  
Other liabilities     7,531       6,796  
Total liabilities     963,114       916,471  
                 
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, 12,244,943 shares at March 31, 2016 and 12,234,443 at December 31, 2015     122       122  
Additional paid in capital     104,543       104,389  
Retained earnings     17,321       15,735  
Accumulated other comprehensive loss     (830 )     (610 )
Total stockholders' equity     121,156       119,636  
                 
Total liabilities and stockholders' equity   $ 1,084,270     $ 1,036,107  

 

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,  
             
    2016     2015  
             
Interest and dividend income :                
Interest and fees on loans   $ 10,757     $ 9,551  
Interest and dividends on taxable securities     681       654  
Interest and dividends on tax exempt securities     84       101  
Interest and dividends on other earning assets     151       129  
Total interest and dividend income     11,673       10,435  
Interest expense:                
Interest on deposits     1,812       1,339  
Interest on borrowings     150       169  
Total interest expense     1,962       1,508  
                 
Net interest income     9,711       8,927  
                 
Provision for loan losses     625       525  
Net interest income after provision for loan losses     9,086       8,402  
                 
Noninterest income:                
Account maintenance and deposit service fees     223       222  
Income from bank-owned life insurance     174       150  
Equity income (loss) from mortgage affiliate     80       (16 )
Other     24       49  
                 
Total noninterest income     501       405  
                 
Noninterest expenses:                
Salaries and benefits     3,128       2,803  
Occupancy expenses     809       871  
Furniture and equipment expenses     189       210  
Amortization of core deposit intangible     62       65  
Virginia franchise tax expense     97       88  
FDIC assessment     146       172  
Data processing expense     172       164  
Telephone and communication expense     187       206  
Amortization of FDIC indemnification asset     216       129  
Net loss on other real estate owned     120       320  
Other operating expenses     907       793  
Total noninterest expenses     6,033       5,821  
Income before income taxes     3,554       2,986  
Income tax expense     989       982  
Net income   $ 2,565     $ 2,004  
Other comprehensive income:                
Unrealized gain (loss) on available for sale securities   $ (337 )   $ 23  
Non-credit component of other-than-temporary impairment on held-to-maturity securities     -       -  
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale     3       22  
Net unrealized gain (loss)     (334 )     45  
Tax effect     114       (16 )
Other comprehensive income (loss)     (220 )     29  
Comprehensive income   $ 2,345     $ 2,033  
Earnings per share, basic and diluted   $ 0.21     $ 0.16  

 

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, 2016

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

 

                      Accumulated        
          Additional           Other        
    Common     Paid in     Retained     Comprehensive        
    Stock     Capital     Earnings     Loss     Total  
                               
Balance - December 31, 2015   $ 122     $ 104,389     $ 15,735     $ (610 )   $ 119,636  
Comprehensive income:                                        
Net income                     2,565               2,565  
Change in unrealized loss on securities available for sale (net of tax benefit, $115)                             (222 )     (222 )
Change in unrecognized loss on securities  held to maturity for which a portion of OTTI  has been recognized (net of tax, $1 and  accretion, $2 and amounts recorded into  other comprehensive income at transfer)                             2       2  
Dividends on common stock ($.08 per share)                     (979 )             (979 )
Issuance of common stock under Stock Incentive Plan (10,500 shares)             75                       75  
Stock-based compensation expense             79                       79  
                                         
Balance - March 31, 2016   $ 122     $ 104,543     $ 17,321     $ (830 )   $ 121,156  

 

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, 2016 AND 2015

(dollars in thousands) (Unaudited)

 

    2016     2015  
             
Operating activities:                
Net income   $ 2,565     $ 2,004  
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:                
Depreciation     208       227  
Amortization of core deposit intangible     62       65  
Other amortization, net     -       (9 )
Accretion of loan discount     (502 )     (712 )
Amortization of FDIC indemnification asset     216       129  
Provision for loan losses     625       525  
Earnings on bank-owned life insurance     (174 )     (150 )
Equity (income) loss on mortgage affiliate     (80 )     16  
Stock based compensation expense     79       85  
Net loss on other real estate owned     120       320  
Net (increase) decrease in other assets     (1,549 )     255  
Net increase in other liabilities     734       573  
Net cash and cash equivalents provided by operating activities     2,304       3,328  
Investing activities:                
Purchases of held to maturity securities     (10,994 )     -  
Proceeds from paydowns, maturities and calls of held to maturity securities     9,059       2,054  
Loan originations and payments, net     (41,212 )     (25,238 )
Net (increase) decrease in stock in Federal Reserve Bank and Federal Home Loan Bank     (660 )     14  
Payments received on FDIC indemnification asset     -       3  
Proceeds from sale of other real estate owned     357       148  
Purchases of bank premises and equipment     (70 )     (129 )
Net cash and cash equivalents used in investing activities     (43,520 )     (23,148 )
Financing activities:                
Net increase in deposits     32,244       18,070  
Cash dividends paid - common stock     (979 )     (977 )
Issuance of common stock under Stock Incentive Plan     75       10  
Net increase in securities sold under agreement to repurchase and other short-term borrowings     13,664       814  
Net cash and cash equivalents provided by financing activities     45,004       17,917  
Increase (decrease) in cash and cash equivalents     3,788       (1,903 )
Cash and cash equivalents at beginning of period     30,336       38,320  
Cash and cash equivalents at end of period   $ 34,124     $ 36 ,417  
                 
Supplemental disclosure of cash flow information                
Cash payments for:                
Interest   $ 1,903     $ 1,486  
Income taxes     700       610  
Supplemental schedule of noncash investing and financing activities                
Transfer from covered loans to other real estate owned     144       -  

 

See accompanying notes to consolidated financial statements.

 

  5

 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016

 

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, 2015.

 

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 September 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. This ASU will not significantly impact SNBV.

 

  6

 

 

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. Under the ASU, an entity presents debt issuance costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. For public entities, the amendments in ASU 2015-03 were effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. SNBV has adopted the provisions of these amendments, and they have no impact on its financial reporting.

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis .  The amendments modify the evaluation reporting organizations must perform to determine if certain legal entities should be consolidated as VIEs. Specifically, the amendments: (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU No. 2015-02 became effective for interim and annual reporting periods beginning after December 15, 2015. SNBV has adopted the provisions of these amendments, and they have no impact on its financial reporting.

 

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments . The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date. The amendments also require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date.  The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. Adoption of these amendments had no impact on SNBV’s consolidated financial statements.

 

  7

 

 

In January 2016, the FASB issued ASU 2016-1, Financial Instruments Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities . The amendments in ASU 2016-1: (a) require equity investments (except for those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplify the impairment assessment of equity securities without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminate the requirement for public business entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (d) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (e) require an entity to present separately in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (f) require separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the notes to the financial statements; and (g) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. SNBV is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02,  Leases (Topic 842) . The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of this ASU is permitted for all entities. SNBV is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-07 , Investments – Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting . The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increase the level of ownership interest or degree of influence that result in the adoption of the equity method. Early adoption is permitted. SNBV is currently evaluating the impact of adopting the amendments on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-08 , Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard. ASU 2016-08 clarifies how an entity should identify the unit of accounting (i.e. the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The amendments in ASU 2016-08 affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606) , and have similar effective dates and transition requirements (i.e., effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein). SNBV is currently evaluating the impact of adopting the new revenue recognition guidance on its consolidated financial statements.

 

  8

 

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted. SNBV is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.

 

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 2016.

 

For the three months ended March 31, 2016 and 2015, stock-based compensation expense was $79 thousand and $85 thousand, respectively. As of March 31, 2016, unrecognized compensation expense associated with the stock options was $550 thousand, which is expected to be recognized over a weighted average period of 2.3 years.

 

A summary of the activity in the stock option plan during the three months ended March 31, 2016 follows (dollars in thousands):

 

                Weighted        
          Weighted     Average     Aggregate  
          Average     Remaining     Intrinsic  
          Exercise     Contractual     Value  
    Shares     Price     Term     (in thousands)  
Options outstanding, beginning of period     664,400     $ 9.00                  
Granted     -                          
Forfeited     -                          
Exercised     (10,500 )     7.15                  
Options outstanding, end of period     653,900     $ 9.03       6.8     $ 1,899  
                                 
Vested or expected to vest     653,900     $ 9.03       6.8     $ 1,899  
                                 
Exercisable at end of period     343,880     $ 7.91       5.3     $ 1,388  

 

  9

 

 

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, 2016   Cost     Gains     Losses     Value  
Obligations of states and political subdivisions   $ 2,286     $ 38     $ -     $ 2,324  
Trust preferred securities     2,590       -       (1,043 )     1,547  
    $ 4,876     $ 38     $ (1,043 )   $ 3,871  

 

    Amortized     Gross Unrealized     Fair  
December 31, 2015   Cost     Gains     Losses     Value  
Obligations of states and political subdivisions   $ 2,287     $ 25     $ -     $ 2,312  
Trust preferred securities     2,590       -       (693 )     1,897  
    $ 4,877     $ 25     $ (693 )   $ 4,209  

 

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, 2016   Cost     Gains     Losses     Value  
Residential government-sponsored mortgage-backed securities   $ 19,784     $ 640     $ (16 )     20,408  
Residential government-sponsored collateralized mortgage obligations     2,821       2       (16 )     2,807  
Government-sponsored agency securities     59,081       478       -       59,559  
Obligations of states and political subdivisions     12,772       245       (40 )     12,977  
Trust preferred securities     4,269       -       (437 )     3,832  
    $ 98,727     $ 1,365     $ (509 )   $ 99,583  

 

    Amortized     Gross Unrecognized     Fair  
December 31, 2015   Cost     Gains     Losses     Value  
Residential government-sponsored mortgage-backed securities   $ 20,751     $ 459     $ (22 )   $ 21,188  
Residential government-sponsored collateralized mortgage obligations     2,946       -       (66 )     2,880  
Government-sponsored agency securities     55,937       222       (618 )     55,541  
Obligations of states and political subdivisions     12,794       157       (67 )     12,884  
Trust preferred securities     4,352       -       (381 )     3,971  
    $ 96,780     $ 838     $ (1,154 )   $ 96,464  

 

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

 

The fair value and carrying amount, if different, of debt securities as of March 31, 2016, 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   $ 12,196     $ 12,324     $ -     $ -  
Due after ten years     63,926       64,044       4,876       3,871  
Residential government-sponsored mortgage-backed securities     19,784       20,408       -       -  
Residential government-sponsored collateralized mortgage obligations     2,821       2,807       -       -  
Total   $ 98,727     $ 99,583     $ 4,876     $ 3,871  

 

Securities with a carrying amount of approximately $94.8 million and $89.7 million at March 31, 2016 and December 31, 2015, 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”).

 

  10

 

 

Southern National monitors the portfolio for indicators of other than temporary impairment. At March 31, 2016 and December 31, 2015, certain securities’ fair values were below cost. As outlined in the table below, there were securities with fair values totaling approximately $10.3 million in the portfolio with the carrying value exceeding the estimated fair value that are considered temporarily impaired at March 31, 2016. 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, 2016. The following tables present information regarding securities in a continuous unrealized loss position as of March 31, 2016 and December 31, 2015 (in thousands) by duration of time in a loss position:

 

March 31, 2016

 

    Less than 12 months     12 Months or More     Total  
Available for Sale   Fair value     Unrealized
Losses
    Fair value     Unrealized
Losses
    Fair value     Unrealized
Losses
 
 Trust preferred securities   $ -     $ -     $ 1,547     $ (1,043 )   $ 1,547     $ (1,043 )

 

    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   $ -     $ -     $ 529     $ (16 )   $ 529     $ (16 )
Residential government-sponsored collateralized mortgage obligations     -       -       2,318       (16 )     2,318       (16 )
Obligations of states and political subdivisions     -       -       2,032       (40 )     2,032       (40 )
Trust preferred securities     -       -       3,832       (437 )     3,832       (437 )
    $ -     $ -     $ 8,711     $ (509 )   $ 8,711     $ (509 )

 

December 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
 
Trust preferred securities   $ -     $ -     $ 1,897     $ (693 )   $ 1,897     $ (693 )

 

    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   $ 5,459     $ (14 )   $ 640     $ (8 )   $ 6,099     $ (22 )
Residential government-sponsored collateralized mortgage obligations     512       (5 )     2,368       (61 )     2,880       (66 )
Government-sponsored agency securities     35,453       (507 )     9,878       (111 )     45,331       (618 )
Obligations of states and political subdivisions     -       -       2,513       (67 )     2,513       (67 )
Trust preferred securities     -       -       3,971       (381 )     3,971       (381 )
    $ 41,424     $ (526 )   $ 19,370     $ (628 )   $ 60,794     $ (1,154 )

 

As of March 31, 2016, 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   A1   A   $ 4,367     $ 3,998     $ 3,604       13%   $ 248  
MMCF III B   Senior Sub   A3   A-   Ba1   BB     276       271       228       32%     5  
                          4,643       4,269       3,832             $ 253  
                                                             
                                                          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       510       37%     400  
ALESCO V C1   Mezzanine   A2   A   Caa3   C     2,150       1,490       1,037       14%     660  
                          3,650       2,590       1,547             $ 1,060  
                                                             
Total                       $ 8,293     $ 6,859     $ 5,379                  

 

(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

 

  11

 

 

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 12% 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.
· Our securities have been modeled using the above assumptions by independent third parties using the forward LIBOR curve to discount projected cash flows to present values.

 

We recognized no OTTI charges during the three months ended March 31, 2016 and the three months ended March 31, 2015.

 

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 three months ended March 31, 2016 and 2015 (in thousands):

 

    2016     2015  
             
Amount of cumulative other-than-temporary impairment  related to credit loss prior to January 1   $ 1,060     $ 8,949  
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     -       -  
Reductions due to realized losses     -       -  
Amount of cumulative other-than-temporary impairment  related to credit loss as of March 31   $ 1,060     $ 8,949  

 

Changes in accumulated other comprehensive income by component for the three months ended March 31, 2016 and 2015 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, 2016   Available for Sale     Held to Maturity        
    Securities     Securities     Total  
Beginning balance   $ (440 )   $ (170 )   $ (610 )
Other comprehensive income/(loss) before reclassifications     (222 )     2       (220 )
Amounts reclassified from accumulated other comprehensive income/(loss)     -       -       -  
Net current-period other comprehensive income/(loss)     (222 )     2       (220 )
Ending balance   $ (662 )   $ (168 )   $ (830 )

 

    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 )

 

  12

 

 

4. LOANS AND ALLOWANCE FOR LOAN LOSSES

 

The following table summarizes the composition of our loan portfolio as of March 31, 2016 and December 31, 2015:

 

    Covered     Non-covered     Total     Covered     Non-covered     Total  
    Loans (1)     Loans     Loans     Loans (1)     Loans     Loans  
    March 31, 2016     December 31, 2015  
Loans secured by real estate:                                                
Commercial real estate - owner-occupied   $ -     $ 138,773     $ 138,773     $ -     $ 141,521     $ 141,521  
Commercial real estate - non-owner-occupied     -       282,464       282,464       -       256,513       256,513  
Secured by farmland     -       566       566       -       578       578  
Construction and land loans     -       69,574       69,574       -       67,832       67,832  
Residential 1-4 family     12,689       180,038       192,727       12,994       165,077       178,071  
Multi- family residential     -       31,373       31,373       -       25,501       25,501  
Home equity lines of credit     20,470       12,781       33,251       21,379       13,798       35,177  
Total real estate loans     33,159       715,569       748,728       34,373       670,820       705,193  
                                                 
Commercial loans     -       122,939       122,939       -       124,985       124,985  
Consumer loans     -       1,118       1,118       -       1,366       1,366  
Gross loans     33,159       839,626       872,785       34,373       797,171       831,544  
                                                 
Less deferred fees on loans     -       (2,146 )     (2,146 )     -       (2,119 )     (2,119 )
Loans, net of deferred fees   $ 33,159     $ 837,480     $ 870,639     $ 34,373     $ 795,052     $ 829,425  

 

(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, 2016, non-covered loans included $27.2 million of loans acquired in the HarVest acquisition and $48.9 million acquired in the PGFSB acquisition.

 

Accretable discount on the acquired Greater Atlantic loans, the PGFSB loans and the HarVest loans was $7.4 million and $7.9 million at March 31, 2016 and December 31, 2015 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, 2016   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   $ -     $ -     $ -     $ 5,027     $ 5,027     $ -     $ 5,027     $ 5,027     $ -  
Commercial real estate - non-owner occupied (2)     -       -       -       135       228       -       135       228       -  
Construction and land development     -       -       -       -       -       -       -       -       -  
Commercial loans     -       -       -       2,272       2,925       -       2,272       2,925       -  
Residential 1-4 family (4)     1,049       1,221       -       -       -       -       1,049       1,221       -  
Other consumer loans     -       -       -       -       -       -       -       -       -  
                                                                         
Total   $ 1,049     $ 1,221     $ -     $ 7,434     $ 8,180     $ -     $ 8,483     $ 9,401     $ -  
                                                                         
With an allowance recorded                                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ 1,355     $ 1,469     $ 427     $ 1,355     $ 1,469     $ 427  
Commercial real estate - non-owner occupied (2)     -       -       -       -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -       -       -       -  
Commercial loans     -       -       -       3,458       3,458       400       3,458       3,458       400  
Residential 1-4 family (4)     -       -       -                               -       -       -  
Other consumer loans     -       -       -       -       -       -       -       -       -  
                                                                         
Total   $ -     $ -     $ -     $ 4,813     $ 4,927     $ 827     $ 4,813     $ 4,927     $ 827  
Grand total   $ 1,049     $ 1,221     $ -     $ 12,247     $ 13,107     $ 827     $ 13,296     $ 14,328     $ 827  

 

(1) Recorded investment is after cumulative prior charge offs of $753 thousand. These loans also have aggregate SBA guarantees of $2.3 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, 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   $ -     $ -     $ -     $ 6,492     $ 6,986     $ -     $ 6,492     $ 6,986     $ -  
Commercial real estate - non-owner occupied (2)     -       -       -       136       230       -       136       230       -  
Construction and land development     -       -       -       -       -       -       -       -       -  
Commercial loans     -       -       -       2,102       2,698       -       2,102       2,698       -  
Residential 1-4 family (4)     1,066       1,243       -       -       -       -       1,066       1,243       -  
Other consumer loans     -       -       -       -       -       -       -       -       -  
                                                                         
Total   $ 1,066     $ 1,243     $ -     $ 8,730     $ 9,914     $ -     $ 9,796     $ 11,157     $ -  
                                                                         
With an allowance recorded                                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ 1,370     $ 1,484     $ 439     $ 1,370     $ 1,484     $ 439  
Commercial real estate - non-owner occupied (2)     -       -       -       -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -       -       -       -  
Commercial loans     -       -       -       3,382       3,382       400       3,382       3,382       400  
Residential 1-4 family (4)     -       -       -       -       -       -       -       -       -  
Other consumer loans     -       -       -       -       -       -       -       -       -  
                                                                         
Total   $ -     $ -     $ -     $ 4,752     $ 4,866     $ 839     $ 4,752     $ 4,866     $ 839  
Grand total   $ 1,066     $ 1,243     $ -     $ 13,482     $ 14,780     $ 839     $ 14,548     $ 16,023     $ 839  

 

(1) Recorded investment is after cumulative prior charge offs of $1.2 million. These loans also have aggregate SBA guarantees of $3.5 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 months ended March 31, 2016 and 2015 (in thousands):

 

Three months ended March 31, 2016   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   $ -     $ -     $ 5,041     $ 73     $ 5,041     $ 73  
Commercial real estate - non-owner occupied (1)     -       -       135       3       135       3  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       2,020       -       2,020       -  
Residential 1-4 family (2)     986       8       -       -       986       8  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ 986     $ 8     $ 7,196     $ 76     $ 8,182     $ 84  
                                                 
With an allowance recorded                                                
Commercial real estate - owner occupied   $ -     $ -     $ 1,364     $ 10     $ 1,364     $ 10  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       3,413       53       3,413       53  
Residential 1-4 family (2)     -       -       -       -       -       -  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ -     $ -     $ 4,777     $ 63     $ 4,777     $ 63  
Grand total   $ 986     $ 8     $ 11,973     $ 139     $ 12,959     $ 147  

 

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

(2) Includes home equity lines of credit.

 

Three months ended March 31, 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   $ -     $ -     $ 5,122     $ 74     $ 5,122     $ 74  
Commercial real estate - non-owner occupied (1)     -       -       1,851       29       1,851       29  
Construction and land development     -       -       450       9       450       9  
Commercial loans     -       -       3,655       53       3,655       53  
Residential 1-4 family (2)     1,658       11       -       -       1,658       11  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ 1,658     $ 11     $ 11,078     $ 165     $ 12,736     $ 176  
                                                 
With an allowance recorded                                                
Commercial real estate - owner occupied   $ -     $ -     $ 6,837     $ 90     $ 6,837     $ 90  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       4,050       21       4,050       21  
Residential 1-4 family (2)     -       -       734       -       734       -  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ -     $ -     $ 11,621     $ 111     $ 11,621     $ 111  
Grand total   $ 1,658     $ 11     $ 22,699     $ 276     $ 24,357     $ 287  

 

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

 

  15

 

 

The following tables present the aging of the recorded investment in past due loans by class of loans as of March 31, 2016 and December 31, 2015 (in thousands):

 

March 31, 2016   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)     43       -       -       43       640       32,476       33,159  
Other consumer loans     -       -       -       -       -       -       -  
                                                         
Total   $ 43     $ -     $ -     $ 43     $ 640     $ 32,476     $ 33,159  
                                                         
Non-covered loans:                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ -     $ 632     $ 138,141     $ 138,773  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       314,403       314,403  
Construction and land development     -       -       -       -       -       69,574       69,574  
Commercial loans     321       -       -       321       2,272       120,346       122,939  
Residential 1-4 family (2)     62       -       -       62       -       192,757       192,819  
Other consumer loans     -       -       -       -       -       1,118       1,118  
                                                         
Total   $ 383     $ -     $ -     $ 383     $ 2,904     $ 836,339     $ 839,626  
                                                         
Total loans:                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ -     $ 632     $ 138,141     $ 138,773  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       314,403       314,403  
Construction and land development     -       -       -       -       -       69,574       69,574  
Commercial loans     321       -       -       321       2,272       120,346       122,939  
Residential 1-4 family (2)     105       -       -       105       640       225,233       225,978  
Other consumer loans     -       -       -       -       -       1,118       1,118  
                                                         
Total   $ 426     $ -     $ -     $ 426     $ 3,544     $ 868,815     $ 872,785  

 

December 31, 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)     119       43       -       162       698       33,513       34,373  
Other consumer loans     -       -       -       -       -       -       -  
                                                         
Total   $ 119     $ 43     $ -     $ 162     $ 698     $ 33,513     $ 34,373  
                                                         
Non-covered loans:                                                        
Commercial real estate - owner occupied   $ 561     $ -     $ -     $ 561     $ 2,071     $ 138,889     $ 141,521  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       282,592       282,592  
Construction and land development     -       -       -       -       -       67,832       67,832  
Commercial loans     267       -       -       267       2,102       122,616       124,985  
Residential 1-4 family (2)     85       -       -       85       -       178,790       178,875  
Other consumer loans     1       -       -       1       -       1,365       1,366  
                                                         
Total   $ 914     $ -     $ -     $ 914     $ 4,173     $ 792,084     $ 797,171  
                                                         
Total loans:                                                        
Commercial real estate - owner occupied   $ 561     $ -     $ -     $ 561     $ 2,071     $ 138,889     $ 141,521  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       282,592       282,592  
Construction and land development     -       -       -       -       -       67,832       67,832  
Commercial loans     267       -       -       267       2,102       122,616       124,985  
Residential 1-4 family (2)     204       43       -       247       698       212,303       213,248  
Other consumer loans     1       -       -       1       -       1,365       1,366  
                                                         
Total   $ 1,033     $ 43     $ -     $ 1,076     $ 4,871     $ 825,597     $ 831,544  

 

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

 

  16

 

 

Non-covered nonaccrual loans include SBA guaranteed amounts totaling $2.3 million and $3.5 million at March 31, 2016 and December 31, 2015, respectively.

 

Activity in the allowance for non-covered loan and lease losses for the three months ended March 31, 2016 and 2015 is summarized below (in thousands):

 

    Commercial     Commercial                                      
    Real Estate     Real Estate     Construction                 Other              
Non-covered loans:   Owner     Non-owner     and Land     Commercial     1-4 Family     Consumer              
Three months ended March 31, 2016   Occupied     Occupied (1)     Development     Loans     Residential (2)     Loans     Unallocated     Total  
Allowance for loan losses:                                                                
Beginning balance   $ 1,185     $ 1,222     $ 865     $ 3,041     $ 1,408     $ 48     $ 652     $ 8,421  
Charge offs     -       -       -       (114 )     -       (253 )     -       (367 )
Recoveries     -       -       -       8       2       1       -       11  
Provision     66       331       (149 )     (43 )     146       286       (12 )     625  
Ending balance   $ 1,251     $ 1,553     $ 716     $ 2,892     $ 1,556     $ 82     $ 640     $ 8,690  
                                                                 
Three months ended March 31, 2015                                                                
Allowance for loan losses:                                                                
Beginning balance   $ 855     $ 1,123     $ 1,644     $ 2,063     $ 1,322     $ 49     $ 337     $ 7,393  
Charge offs     -       -       -       (353 )     -       (2 )     -       (355 )
Recoveries     1       6       139       9       2       -       -       157  
Provision     568       59       (432 )     330       (109 )     (4 )     113       525  
Ending balance   $ 1,424     $ 1,188     $ 1,351     $ 2,049     $ 1,215     $ 43     $ 450     $ 7,720  

 

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

 

Activity in the allowance for covered loan and lease losses by class of loan for the three months ended March 31, 2016 and 2015 is summarized below (in thousands):

 

    Commercial     Commercial                                      
    Real Estate     Real Estate     Construction                 Other              
Covered loans:   Owner     Non-owner     and Land     Commercial     1-4 Family     Consumer              
Three months ended March 31, 2016   Occupied     Occupied (1)     Development     Loans     Residential (3)     Loans     Unallocated     Total  
Allowance for loan losses:                                                                
Beginning balance   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
Charge offs     -       -       -       -       -       -       -       -  
Recoveries     -       -       -       -       -       -       -       -  
Adjustments (2)     -       -       -       -       -       -       -       -  
Provision     -       -       -       -       -       -       -       -  
Ending balance   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                                 
Three months ended March 31, 2015                                                                
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.

 

  17

 

 

The following tables present the balance in the allowance for loan losses and the recorded investment in non-covered loans by portfolio segment and based on impairment method as of March 31, 2016 and December 31, 2015 (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  
March 31, 2016                                                                
Ending allowance balance attributable to loans:                                                                
Individually evaluated for impairment   $ 427     $ -     $ -     $ 400     $ -     $ -     $ -     $ 827  
Collectively evaluated for impairment     824       1,553       716       2,492       1,556       82       640       7,863  
Total ending allowance   $ 1,251     $ 1,553     $ 716     $ 2,892     $ 1,556     $ 82     $ 640     $ 8,690  
                                                                 
Loans:                                                                
Individually evaluated for impairment   $ 6,382     $ 135     $ -     $ 5,730     $ -     $ -     $ -     $ 12,247  
Collectively evaluated for impairment     132,391       314,268       69,574       117,209       192,819       1,118       -       827,379  
Total ending loan balances   $ 138,773     $ 314,403     $ 69,574     $ 122,939     $ 192,819     $ 1,118     $ -     $ 839,626  
                                                                 
December 31, 2015                                                                
Ending allowance balance attributable to loans:                                                                
Individually evaluated for impairment   $ 439     $ -     $ -     $ 400     $ -     $ -     $ -     $ 839  
Collectively evaluated for impairment     746       1,222       865       2,641       1,408       48       652       7,582  
Total ending allowance   $ 1,185     $ 1,222     $ 865     $ 3,041     $ 1,408     $ 48     $ 652     $ 8,421  
                                                                 
Loans:                                                                
Individually evaluated for impairment   $ 7,862     $ 136     $ -     $ 5,484     $ -     $ -     $ -     $ 13,482  
Collectively evaluated for impairment     133,659       282,456       67,832       119,501       178,875       1,366       -       783,689  
Total ending loan balances   $ 141,521     $ 282,592     $ 67,832     $ 124,985     $ 178,875     $ 1,366     $ -     $ 797,171  

 

(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 March 31, 2016 and December 31, 2015 (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  
March 31, 2016                                                                
Ending allowance balance attributable to loans:                                                                
Individually evaluated for impairment   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
Collectively evaluated for impairment     -       -       -       -       -       -       -       -  
Total ending allowance   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                                 
Loans:                                                                
Individually evaluated for impairment   $ -     $ -     $ -     $ -     $ 1,049     $ -     $ -     $ 1,049  
Collectively evaluated for impairment     -       -       -       -       32,110       -       -       32,110  
Total ending loan balances   $ -     $ -     $ -     $ -     $ 33,159     $ -     $ -     $ 33,159  
                                                                 
December 31, 2015                                                                
Ending allowance balance attributable to loans:                                                                
Individually evaluated for impairment   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
Collectively evaluated for impairment     -       -       -       -       -       -       -       -  
Total ending allowance   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                                 
Loans:                                                                
Individually evaluated for impairment   $ -             $ -     $ -     $ 1,066     $ -             $ 1,066  
Collectively evaluated for impairment     -       -       -       -       33,307       -       -       33,307  
Total ending loan balances   $ -     $ -     $ -     $ -     $ 34,373     $ -     $ -     $ 34,373  

 

 

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

 

  18

 

 

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 months ending March 31, 2016, there were no loans modified in troubled debt restructurings. One TDR which had been modified in 2013 defaulted during the second quarter of 2015. This loan, in the amount of $696 thousand, was current as of March 31, 2016.

 

During the three months ending March 31, 2015, there were no loans modified in troubled debt restructurings. No TDRs defaulted during the three months ending March 31, 2015, 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 March 31, 2016 or December 31, 2015.

 

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.

 

As of March 31, 2016 and December 31, 2015, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):

 

  19

 

 

March 31, 2016   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   $ -     $ -     $ -     $ 3,629     $ 6,382     $ 128,762     $ 138,773     $ 10,011     $ 128,762     $ 138,773  
Commercial real estate - non-owner occupied (2)     -       -       -       -       135       314,268       314,403       135       314,268       314,403  
Construction and land development     -       -       -       -       -       69,574       69,574       -       69,574       69,574  
Commercial loans     -       -       -       3,993       5,730       113,216       122,939       9,723       113,216       122,939  
Residential 1-4 family (4)     1,049       32,110       33,159       -       -       192,819       192,819       1,049       224,929       225,978  
Other consumer loans     -       -       -       -       -       1,118       1,118       -       1,118       1,118  
                                                                                 
Total   $ 1,049     $ 32,110     $ 33,159     $ 7,622     $ 12,247     $ 819,757     $ 839,626     $ 20,918     $ 851,867     $ 872,785  

 

December 31, 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   $ -     $ -     $ -     $ $3,666     $ 7,862     $ 129,993     $ 141,521     $ 11,528     $ 129,993     $ 141,521  
Commercial real estate - non-owner occupied (2)     -       -       -       -       136       282,456       282,592       136       282,456       282,592  
Construction and land development     -       -       -       552       -       67,280       67,832       552       67,280       67,832  
Commercial loans     -       -       -       4,014       5,484       115,487       124,985       9,498       115,487       124,985  
Residential 1-4 family (4)     1,066       33,307       34,373       -       -       178,875       178,875       1,066       212,182       213,248  
Other consumer loans     -       -       -       -       -       1,366       1,366       -       1,366       1,366  
                                                                                 
Total   $ 1,066     $ 33,307     $ 34,373     $ 8,232     $ 13,482     $ 775,457     $ 797,171     $ 22,780     $ 808,764     $ 831,544  

 

(1) Credit quality is enhanced by a loss sharing agreement with the FDIC in the covered portfolio. The same credit quality indicators used in the non-covered portfolio are combined.
(2) Includes loans secured by farmland and multi-family residential loans.
(3) Includes SBA guarantees of $2.3 million and $3.5 million as of March 31, 2016 and December 31, 2015.
(4) Includes home equity lines of credit.

 

The amount of foreclosed residential real estate property held at March 31, 2016 was $4.0 million. The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was $544 thousand at March 31, 2016.

 

5. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

 

Southern National is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve elements of credit and funding risk in excess of the amount recognized in the consolidated balance sheet. Letters of credit are written conditional commitments issued by Southern National to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. We had letters of credit outstanding totaling $7.5 million and $6.7 million as of March 31, 2016 and December 31, 2015, respectively.

 

Our exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit is based on the contractual amount of these instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Unless noted otherwise, we do not require collateral or other security to support financial instruments with credit risk.

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments are made predominately for adjustable rate loans, and generally have fixed expiration dates of up to three months or other termination clauses and usually require payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer's creditworthiness on a case-by-case basis.

 

At March 31, 2016 and December 31, 2015, we had unfunded lines of credit and undisbursed construction loan funds totaling $122.5 million and $132.3 million, respectively. We had approved loan commitments of $2.0 million and $2.7 million at March 31, 2016, and December 31, 2015, respectively. Virtually all of our unfunded lines of credit, undisbursed construction loan funds and approved loan commitments are variable rate.

 

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6. Earnings Per Share

 

The following is a reconciliation of the denominators of the basic and diluted earnings per share (“EPS”) computations (dollars in thousands, except per share data):

 

          Weighted        
          Average        
    Income     Shares     Per Share  
    (Numerator)     (Denominator)     Amount  
For the three months ended March 31, 2016                        
Basic EPS   $ 2,565       12,237     $ 0.21  
Effect of dilutive stock options and warrants     -       165       -  
Diluted EPS   $ 2,565       12,402     $ 0.21  
                         
For the three months ended March 31, 2015                        
Basic EPS   $ 2,004       12,217     $ 0.16  
Effect of dilutive stock options and warrants     -       124       -  
Diluted EPS   $ 2,004       12,341     $ 0.16  

 

There were 571,159 and 578,348 anti-dilutive options and warrants for the three months ended March 31, 2016, and March 31, 2015, respectively.

 

7. FAIR VALUE

 

ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data

 

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability

 

The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

 

Securities Available for Sale

 

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U. S. agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of Southern National’s available-for-sale debt securities are considered to be Level 2 securities.

 

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Assets measured at fair value on a recurring basis are summarized below:

 

          Fair Value Measurements Using  
                Significant        
          Quoted Prices in     Other     Significant  
          Active Markets for     Observable     Unobservable  
    Total at     Identical Assets     Inputs     Inputs  
(dollars in thousands)   March 31, 2016     (Level 1)     (Level 2)     (Level 3)  
Financial assets:                                
Available for sale securities Obligations of states and political subdivisions   $ 2,324     $ -     $ 2,324     $ -  
Trust preferred securities     1,547       -       1,547       -  
    $ 3,871     $ -     $ 3,871     $ -  

 

          Fair Value Measurements Using  
                Significant        
          Quoted Prices in     Other     Significant  
          Active Markets for     Observable     Unobservable  
    Total at     Identical Assets     Inputs     Inputs  
(dollars in thousands)   December 31, 2015     (Level 1)     (Level 2)     (Level 3)  
Financial assets:                                
Available for sale securities Obligations of states and political subdivisions   $ 2,312     $ -     $ 2,312     $ -  
Trust preferred securities     1,897       -       1,897       -  
    $ 4,209     $ -     $ 4,209     $ -  

 

Assets and Liabilities Measured on a Non-recurring Basis:

 

Trust Preferred Securities Classified as Held-to-Maturity

 

Prior to the quarter ended March 31, 2015, due to market conditions as well as the limited trading activity of these securities, the market value of the 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, 2016 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.

 

Impaired Loans

 

Generally, we measure the impairment for impaired loans considering the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral is determined by an independent appraisal or evaluation less estimated costs related to selling the collateral. In some cases appraised value is net of costs to sell. Estimated selling costs range from 6% to 10% of collateral valuation at March 31, 2016 and December 31, 2015. Fair value is classified as Level 3 in the fair value hierarchy. Non-covered loans identified as impaired totaled $12.2 million (including SBA guarantees of $2.3 million) as of March 31, 2016 with an allocated allowance for loan losses totaling $827 thousand compared to a carrying amount of $13.5 million (including SBA guarantees of $3.5 million) with an allocated allowance for loan losses totaling $839 thousand at December 31, 2015.

 

Other Real Estate Owned (OREO)

 

OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or evaluation less cost to sell. In some cases appraised value is net of costs to sell. Selling costs have been in the range from 6% to 7.6% of collateral valuation at March 31, 2016 and December 31, 2015. Fair value is classified as Level 3 in the fair value hierarchy. OREO is further evaluated quarterly for any additional impairment. At March 31, 2016, the total amount of non-covered OREO was $9.8 million and covered OREO was $343 thousand. As of December 31, 2015, the total amount of OREO was $10.1 million, and covered OREO was $343 thousand.

 

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Assets measured at fair value on a non-recurring basis are summarized below: 

 

          Fair Value Measurements Using  
                Significant        
          Quoted Prices in     Other     Significant  
          Active Markets for     Observable     Unobservable  
    Total at     Identical Assets     Inputs     Inputs  
(dollars in thousands)   March 31, 2016     (Level 1)     (Level 2)     (Level 3)  
Impaired non-covered loans:                                
Commercial real estate - owner occupied   $ 5,955                 $ 5,955  
Commercial real estate - non-owner occupied (1)     135                       135  
Commercial loans     5,330                       5,330  
Impaired covered loans:                                
Residential 1-4 family     1,049                       1,049  
Non-covered other real estate owned:                                
Commercial real estate - owner occupied     1,110                       1,110  
Commercial real estate - non-owner occupied (1)     237                       237  
Construction and land development     4,749                       4,749  
Residential 1-4 family     3,666                       3,666  
Covered other real estate owned:                                
Residential 1-4 family     343                       343  

 

          Fair Value Measurements Using  
                Significant        
          Quoted Prices in     Other     Significant  
          Active Markets for     Observable     Unobservable  
    Total at     Identical Assets     Inputs     Inputs  
(dollars in thousands)   December 31, 2015     (Level 1)     (Level 2)     (Level 3)  
Impaired non-covered loans:                                
Commercial real estate - owner occupied   $ 7,423                 $ 7,423  
Commercial real estate - non-owner occupied (1)     136                       136  
Commercial loans     5,084                       5,084  
Impaired covered loans:                                
Residential 1-4 family     1,066                       1,066  
Non-covered other real estate owned:                                
Commercial real estate - owner occupied     1,110                       1,110  
Commercial real estate - non-owner occupied (1)     237                       237  
Construction and land development     5,007                       5,007  
Residential 1-4 family     3,741                       3,741  
Covered other real estate owned:                                
Residential 1-4 family     343                       343  

 

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

 

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Fair Value of Financial Instruments

 

The carrying amount, estimated fair values and fair value hierarchy levels (previously defined) of financial instruments were as follows (in thousands):

 

        March 31, 2016     December 31, 2015  
    Fair Value   Carrying     Fair     Carrying     Fair  
    Hierarchy Level   Amount     Value     Amount     Value  
                             
Financial assets:                                    
Cash and cash equivalents   Level 1   $ 34,124     $ 34,124     $ 30,336     $ 30,336  
Securities available for sale   See previous table     3,871       3,871       4,209       4,209  
Securities held to maturity   Level 2     98,727       99,583       96,780       96,464  
Stock in Federal Reserve Bank and Federal Home Loan Bank   n/a     7,589       n/a       6,929       n/a  
Equity investment in mortgage affiliate   Level 3     4,539       4,539       4,459       4,459  
Preferred investment in mortgage affiliate   Level 3     2,555       2,555       2,555       2,555  
Net non-covered loans   Level 3     828,790       836,564       786,631       793,541  
Net covered loans   Level 3     33,159       37,413       34,373       38,077  
Accrued interest receivable   Level 2 & Level 3     2,873       2,873       2,914       2,914  
FDIC indemnification asset   Level 3     2,705       745       2,922       745  
Financial liabilities:                                    
Demand deposits   Level 1     112,840       112,840       111,849       111,849  
Money market and savings accounts   Level 1     177,822       177,822       181,670       181,670  
Certificates of deposit   Level 3     566,876       569,155       531,775       531,456  
Securities sold under agreements to repurchase and other short-term borrowings   Level 1     83,045       83,045       69,381       69,381  
FHLB advances   Level 3     15,000       15,065       15,000       15,041  
Accrued interest payable   Level 1 & Level 3     905       905       846       846  

 

Carrying amount is the estimated fair value for cash and cash equivalents, equity investment in mortgage affiliate, preferred investment in mortgage affiliate, accrued interest receivable and payable, demand deposits, savings accounts, money market accounts, short-term debt, and variable rate loans that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life. A discount for liquidity risk was not considered necessary in estimating the fair value of loans. It was not practicable to determine the fair value of Federal Reserve Bank and Federal Home Loan Bank stock due to restrictions placed on its transferability. Carrying amount is the estimated fair value for the equity investment and the preferred investment in the mortgage affiliate. Fair value of long-term debt is based on current rates for similar financing. The fair value of the FDIC indemnification asset was determined by discounting estimated future cash flows using the long-term risk free rate plus a premium and represents the present value of our current expectation for recoveries from the FDIC on covered loans. The fair value of off-balance-sheet items is not considered material. The fair value of loans is not presented on an exit price basis.

 

8.      SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM BORROWINGS

 

Other short-term borrowings can consist of Federal Home Loan Bank (FHLB) overnight advances, other FHLB advances maturing within one year, federal funds purchased and securities sold under agreements to repurchase that mature within one year, which are secured transactions with customers. To support the $11.0 million in repurchase agreements at March 31, 2016, we have provided collateral in the form of investment securities.  At March 31, 2016, we have pledged callable agency securities, residential government-sponsored mortgage-backed securities and collateralized mortgage obligations with a fair value of $25.6 million to customers who require collateral for overnight repurchase agreements and other deposits. 

 

For our repurchase agreements with customers, we hold the collateral in a segregated custodial account. We are required to maintain adequate collateral levels. In the event the collateral fair value falls below stipulated levels, we will pledge additional securities. We closely monitor collateral levels to ensure adequate levels are maintained, while mitigating the potential risk of over-collateralization.

 

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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of SNBV. This discussion and analysis should be read with the consolidated financial statements, the footnotes thereto, and the other financial data included in this report and in our annual report on Form 10-K for the year ended December 31, 2015. Results of operations for the three month period ended March 31, 2016 are not necessarily indicative of results that may be attained for any other period.

 

FORWARD-LOOKING STATEMENTS

 

Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and involve a number of risks and uncertainties, many of which are beyond our control. The words “believe,” “may,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “continue,” “would,” “could,” “hope,” “might,” “assume,” “objective,” “seek,” “plan,” “strive” and similar words, or the negatives of these words, are intended to identify forward-looking statements.

 

Many possible events or factors could affect our future financial results and performance and could cause our actual results to differ materially from the expectations of future results we express or imply in any forward-looking statements. In addition to the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015, factors that could contribute to those differences include, but are not limited to:

 

the effects of future economic, business and market conditions and changes, domestic and foreign;
changes in the local economies in our market areas adversely affect our customers and their ability to transact profitable business with us, including the ability of our borrowers to repay their loans according to their terms or a change in the value of the related collateral;
changes in the availability of funds resulting in increased costs or reduced liquidity;
a deterioration or downgrade in the credit quality and credit agency ratings of the securities in our securities portfolio;
impairment concerns and risks related to our investment portfolio of collateralized mortgage obligations, agency mortgage-backed securities, obligations of states and political subdivisions and pooled trust preferred securities;
the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations;
increased credit risk in our assets and increased operating risk caused by a material change in commercial, consumer and/or real estate loans as a percentage of our total loan portfolio;
the concentration of our loan portfolio in loans collateralized by real estate;
our level of construction and land development and commercial real estate loans;
changes in the levels of loan prepayments and the resulting effects on the value of our loan portfolio;
the failure of assumptions and estimates underlying the establishment of and provisions made to the allowance for loan losses;
our ability to expand and grow our business and operations, including the establishment of additional branches and acquisition of additional branches and banks, and our ability to realize the cost savings and revenue enhancements we expect from such activities;

 

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changes in governmental monetary and fiscal policies, including interest rate policies of the Board of Governors of the Federal Reserve System, or changes in interest rates and market prices, which could reduce our net interest margins, asset valuations and expense expectations;
increased competition for deposits and loans adversely affecting rates and terms;
the continued service of key management personnel;
the potential payment of interest on demand deposit accounts to effectively compete for customers;
potential environmental liability risk associated with lending activities;
increased asset levels and changes in the composition of assets and the resulting impact on our capital levels and regulatory capital ratios;
risks of mergers and acquisitions, including the related time and cost of implementing transactions and the potential failure to achieve expected gains, revenue growth or expense savings;
legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators, including those associated with the Dodd Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and changes in the scope and cost of Federal Deposit Insurance Corporation (“FDIC”) insurance and other coverage;
increases in regulatory capital requirements for banking organizations generally, which may adversely affect our ability to expand our business or could cause us to shrink our business;
the effects of war or other conflicts, acts of terrorism or other catastrophic events that may affect general economic conditions;
changes in accounting policies, rules and practices and applications or determinations made thereunder;
the risk that our deferred tax assets could be reduced if future taxable income is less than currently estimated, if corporate tax rates in the future are less than current rates, or if sales of our capital stock trigger limitations on the amount of net operating loss carryforwards that we may utilize for income tax purposes; and
other factors and risks described under “Risk Factors” herein and in any of our subsequent reports that we make with the Securities and Exchange Commission (the “Commission” or “SEC”) under the Exchange Act.

 

Forward-looking statements are not guarantees of performance or results. A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe we have chosen these assumptions or bases in good faith and that they are reasonable. We caution you, however, that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Quarterly Report on Form 10-Q. These statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by applicable law, we undertake no obligation to update publicly these statements in light of new information or future events.

 

OVERVIEW

 

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 We have administrative offices in Warrenton and an executive office in Georgetown, Washington, D.C where senior management is located.

 

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RESULTS OF OPERATIONS

 

Net Income

 

Net income for the quarter ended March 31, 2016 was $2.6 million compared to $2.0 million during the quarter ended March 31, 2015.

 

Net Interest Income

 

Our operating results depend primarily on our net interest income, which is the difference between interest and dividend income on interest-earning assets such as loans and investments, and interest expense on interest-bearing liabilities such as deposits and borrowings.

 

During the first quarter of 2016, net interest income before the provision for loan losses was $9.7 million, up from $8.9 million during the first quarter of 2015. Average loans during the first quarter of 2016 were $843.2 million compared to $713.6 million during the same period last year. The net interest margin was 4.06% in the first quarter of 2016, down from 4.30% in the first quarter of 2015 and down slightly from 4.07% in the fourth quarter of 2015.The loan discount accretions on our three acquisitions were $551 thousand in the first quarter of 2016 compared to $728 thousand in the same quarter last year.

 

The following tables detail average balances of interest-earning assets and interest-bearing liabilities, the amount of interest earned/paid on such assets and liabilities, and the yield/rate for the periods indicated:

 

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    Average  Balance Sheets and Net Interest  
    Analysis  For the Three Months Ended  
    3/31/2016     3/31/2015  
          Interest                 Interest        
    Average     Income/     Yield/     Average     Income/     Yield/  
    Balance     Expense     Rate     Balance     Expense     Rate  
    (Dollar amounts in thousands)  
Assets                                                
Interest-earning assets:                                                
Loans, net  of deferred fees (1) (2)   $ 843,166     $ 10,757       5.13 %   $ 713,587     $ 9,551       5.43 %
Investment securities     100,907       765       3.03 %     95,766       755       3.15 %
Other earning assets     18,661       151       3.23 %     32,666