Southern National Bancorp
Southern National Bancorp of Virginia Inc (Form: 10-Q, Received: 11/09/2016 10:06:54)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 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 October 25, 2016, there were 12,261,643 shares of common stock outstanding.

 

 

 

 

 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

September 30, 2016

 

INDEX

 

      PAGE
       
PART 1 - FINANCIAL INFORMATION
       
Item 1 - Financial Statements    
  Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015   2
  Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2016 and 2015   3
  Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2016   4
  Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015   5
  Notes to Consolidated Financial Statements   6-28
       
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations   29-41
     
Item 3 – Quantitative and Qualitative Disclosures about Market Risk   42-44
     
Item 4 – Controls and Procedures   45
       
PART II - OTHER INFORMATION
       
Item 1 – Legal Proceedings   45
     
Item 1A – Risk Factors   45
     
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds   45
     
Item 3 – Defaults Upon Senior Securities   45
     
Item 4 – Mine Safety Disclosures   45
     
Item 5 – Other Information   45
     
Item 6 - Exhibits   45
     
Signatures   47
     
Certifications  

 

 

 

 

ITEM I - FINANCIAL INFORMATION

PART I - FINANCIAL STATEMENTS

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

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

 

    September 30,     December 31,  
    2016     2015  
ASSETS                
Cash and cash equivalents:                
Cash and due from financial institutions   $ 4,121     $ 3,972  
Interest-bearing deposits in other financial institutions     46,285       26,364  
Total cash and cash equivalents     50,406       30,336  
                 
Securities available for sale, at fair value     3,908       4,209  
                 
Securities held to maturity, at amortized cost (fair value of $87,772 and $96,464, respectively)     86,958       96,780  
                 
Covered loans     29,561       34,373  
Non-covered loans     883,270       795,052  
Total loans     912,831       829,425  
Less allowance for loan losses     (8,469 )     (8,421 )
Net loans     904,362       821,004  
                 
Stock in Federal Reserve Bank and Federal Home Loan Bank     7,504       6,929  
Equity investment in mortgage affiliate     5,212       4,459  
Preferred investment in mortgage affiliate     2,555       2,555  
Bank premises and equipment, net     8,389       8,882  
Goodwill     10,514       10,514  
Core deposit intangibles, net     925       1,093  
FDIC indemnification asset     2,306       2,922  
Bank-owned life insurance     23,650       23,126  
Other real estate owned     9,341       10,439  
Deferred tax assets, net     6,784       6,716  
Other assets     12,622       6,143  
                 
Total assets   $ 1,135,436     $ 1,036,107  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
                 
Noninterest-bearing demand deposits   $ 91,567     $ 83,769  
Interest-bearing deposits:                
NOW accounts     31,197       28,080  
Cash management accounts     9,660       -  
Money market accounts     129,664       131,731  
Savings accounts     51,114       49,939  
Time deposits     602,069       531,775  
Total interest-bearing deposits     823,704       741,525  
Total deposits     915,271       825,294  
                 
Securities sold under agreements to repurchase     -       10,381  
Federal Home Loan Bank (FHLB) advances - short term     75,000       59,000  
Federal Home Loan Bank (FHLB) advances - long term     10,000       15,000  
Other liabilities     10,120       6,796  
Total liabilities     1,010,391       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, 12,261,643 shares at September 30, 2016 and 12,234,443 at December 31, 2015     123       122  
Additional paid in capital     104,805       104,389  
Retained earnings     20,915       15,735  
Accumulated other comprehensive loss     (798 )     (610 )
Total stockholders' equity     125,045       119,636  
                 
Total liabilities and stockholders' equity   $ 1,135,436     $ 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     For the Nine Months Ended  
    September 30,     September 30,  
                         
    2016     2015     2016     2015  
                         
Interest and dividend income :                                
Interest and fees on loans   $ 11,792     $ 10,099     $ 33,790     $ 29,620  
Interest and dividends on taxable securities     581       587       2,059       1,772  
Interest and dividends on tax exepmt securities     84       100       252       302  
Interest and dividends on other earning assets     162       362       482       621  
Total interest and dividend income     12,619       11,148       36,583       32,315  
Interest expense:                                
Interest on deposits     2,128       1,796       5,918       4,660  
Interest on borrowings     118       169       406       521  
Total interest expense     2,246       1,965       6,324       5,181  
                                 
Net interest income     10,373       9,183       30,259       27,134  
                                 
Provision for loan losses     2,050       850       4,062       2,875  
Net interest income after provision for loan losses     8,323       8,333       26,197       24,259  
                                 
Noninterest income:                                
Account maintenance and deposit service fees     225       243       675       703  
Income from bank-owned life insurance     175       160       524       464  
Equity income from mortgage affiliate     749       492       1,381       1,270  
Gain on sale of other assets     -       -       -       7  
Net gain on sale of available for sale securities     -       -       -       520  
Other     26       69       88       164  
                                 
Total noninterest income     1,175       964       2,668       3,128  
                                 
Noninterest expenses:                                
Salaries and benefits     2,699       2,892       8,753       8,531  
Occupancy expenses     783       807       2,377       2,504  
Furniture and equipment expenses     283       194       720       628  
Amortization of core deposit intangible     44       66       168       196  
Virginia franchise tax expense     96       88       290       264  
FDIC assessment     165       174       478       502  
Data processing expense     184       164       533       498  
Telephone and communication expense     201       197       586       604  
Amortization of FDIC indemnification asset     187       105       606       351  
Net (gain) loss on other real estate owned     (9 )     97       74       360  
Other operating expenses     725       787       2,403       2,543  
Total noninterest expenses     5,358       5,571       16,988       16,981  
Income before income taxes     4,140       3,726       11,877       10,406  
Income tax expense     1,375       1,245       3,757       3,455  
Net income   $ 2,765     $ 2,481     $ 8,120     $ 6,951  
Other comprehensive income (loss):                                
Unrealized gain (loss) on available for sale securities   $ 188     $ (7 )   $ (296 )   $ (225 )
Realized amount on securities sold, net     -       -       -       (520 )
Non-credit component of other-than-temporary impairment on held-to-maturity securities     -       -       -       4,278  
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale     3       3       10       28  
Net unrealized gain (loss)     191       (4 )     (286 )     3,561  
Tax effect     (64 )     1       98       (1,211 )
Other comprehensive income (loss)     127       (3 )     (188 )     2,350  
Comprehensive income   $ 2,892     $ 2,478     $ 7,932     $ 9,301  
Earnings per share, basic   $ 0.23     $ 0.20     $ 0.66     $ 0.56  
Earnings per share, diluted   $ 0.22     $ 0.20     $ 0.65     $ 0.56  

 

See accompanying notes to consolidated financial statements.

 

  3  

 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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                     8,120               8,120  
Change in unrealized loss  on securities available for sale (net of tax benefit, $101)                             (195 )     (195 )
Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $3 and accretion, $7 and amounts recorded into other comprehensive income at transfer)                             7       7  
Dividends on common stock ($.24 per share)                     (2,940 )             (2,940 )
Issuance of common stock for warrants exercised (11,000 shares)     1       100                       101  
Issuance of common stock under Stock                                        
Incentive Plan (16,200 shares)             118                       118  
Stock-based compensation expense             198                       198  
                                         
Balance - September 30, 2016   $ 123     $ 104,805     $ 20,915     $ (798 )   $ 125,045  

 

See accompanying notes to consolidated financial statements.

 

  4  

 

  

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(dollars in thousands) (Unaudited)

 

    2016     2015  
             
Operating activities:                
Net income   $ 8,120     $ 6,951  
Adjustments to reconcile net income to net cash and cash equivalents provided  by operating activities:                
Depreciation     613       668  
Amortization of core deposit intangible     168       196  
Other amortization, net     (61 )     119  
Accretion of loan discount     (1,465 )     (1,941 )
Amortization of FDIC indemnification asset     606       351  
Provision for loan losses     4,062       2,875  
Earnings on bank-owned life insurance     (524 )     (464 )
Equity income on mortgage affiliate     (1,381 )     (1,270 )
Stock based compensation expense     198       252  
Net gain on sale of available for sale securities     -       (520 )
Net loss on other real estate owned     74       360  
Net (increase) decrease in other assets     (1,694 )     4,643  
Net increase (decrease) in other liabilities     3,324       (263 )
Net cash and cash equivalents provided by operating activities     12,040       11,957  
Investing activities:                
Proceeds from sales of available for sale securities     -       3,966  
Purchases of  held to maturity securities     (46,055 )     (16,152 )
Proceeds from paydowns, maturities and calls of held to maturity securities     55,976       9,826  
Loan originations and payments, net     (90,875 )     (89,999 )
Purchase of bank-owned life insurance     -       (500 )
Investment in mortgage affiliate     -       (311 )
Distribution from mortgage affiliate     628       -  
Net increase in stock in Federal Reserve Bank and Federal Home Loan Bank     (575 )     (154 )
Payments received on FDIC indemnification asset     10       3  
Proceeds from sale of other real estate owned     1,166       2,908  
Purchases of bank premises and equipment     (120 )     (280 )
Net cash and cash equivalents used in investing activities     (79,845 )     (90,693 )
Financing activities:                
Net increase in deposits     79,596       88,278  
Cash dividends paid - common stock     (2,940 )     (2,937 )
Purchase of common stock     -       (721 )
Issuance of common stock under Stock Incentive Plan     118       431  
Issuance of common stock for warrants exercised     101       -  
Net increase  in securities sold under agreement to repurchase and other short-term and long-term borrowings     11,000       6,901  
Net cash and cash equivalents provided by financing activities     87,875       91,952  
Increase in cash and cash equivalents     20,070       13,216  
Cash and cash equivalents at beginning of period     30,336       38,320  
Cash and cash equivalents at end of period   $ 50,406     $ 51,536  
                 
Supplemental disclosure of cash flow information                
Cash payments for:                
Interest   $ 6,190     $ 4,898  
Income taxes     3,483       2,337  
Supplemental schedule of noncash investing and financing activities                
Transfer from long-term FHLB advances to short-term FHLB advances     5,000       20,000  
Transfer from non-covered loans to other real estate owned     -       1,386  
Transfer from covered loans to other real estate owned     144       90  
Transfer from securities sold under agreement to repurchase to deposits     10,381       -  

 

See accompanying notes to consolidated financial statements.

 

  5  

 

  

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 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 did 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.

 

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.

 

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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.

 

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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.

 

In June 2016 , the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments  ("ASU 2016-13"), which  sets forth a “current expected credit loss” ("CECL") model requiring the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. For public business entities that are U.S. Securities and Exchange Commission filers, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. SNBV is currently assessing the impact of the adoption of this ASU on its consolidated financial statements .

 

During August 2016, the FASB issued new guidance related to the  Statement of Cash Flows in ASU 2016-15. The new guidance clarifies the classification within the statement of cash flows for certain transactions, including debt extinguishment costs, zero-coupon debt, contingent consideration related to business combinations, insurance proceeds, equity method distributions and beneficial interests in securitizations. The guidance also clarifies that cash flows with aspects of multiple classes of cash flows or that cannot be separated by source or use should be classified based on the activity that is likely to be the predominant source or use of cash flows for the item. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the 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.

 

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Southern National granted 136,000 options during the first nine months of 2016. The fair value of each option granted is estimated on the date of grant using the Black-Scholes options-pricing model. The following weighted-average assumptions were used to value options granted in the nine months ended September 30, 2016:

 

Expected life     10 years  
Expected volatility     14.16 %
Risk-free interest rate     1.62 %
Weighted average fair value per option granted   $ 0.63  
Dividend yield     4.44 %

 

For the three and nine months ended September 30, 2016 and 2015, stock-based compensation expense was $62 thousand and $198 thousand, respectively, compared to $82 thousand and $252 thousand for the same periods last year. As of September 30, 2016, unrecognized compensation expense associated with the stock options was $513 thousand, which is expected to be recognized over a weighted average period of 2.6 years.

A summary of the activity in the stock option plan during the nine months ended September 30, 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     136,000       11.99                  
Forfeited     -       -                  
Exercised     (16,200 )     7.35                  
Options outstanding, end of period     784,200     $ 9.55       6.7     $ 2,748  
                                 
Vested or expected to vest     784,200     $ 9.55       6.7     $ 2,748  
                                 
Exercisable at end of period     402,950     $ 7.98       4.9     $ 1,910  

 

3.        SECURITIES

 

The amortized cost and fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows (in thousands):

 

    Amortized     Gross Unrealized     Fair  
September 30, 2016   Cost     Gains     Losses     Value  
Obligations of states and political subdivisions   $ 2,282     $ 54     $ -     $ 2,336  
Trust preferred securities     2,590       -       (1,018 )     1,572  
    $ 4,872     $ 54     $ (1,018 )   $ 3,908  

 

    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  

 

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The amortized cost, unrecognized gains and losses, and fair value of securities held to maturity were as follows (in thousands):

 

    Amortized     Gross Unrecognized     Fair  
September 30, 2016   Cost     Gains     Losses     Value  
Residential government-sponsored mortgage-backed securities   $ 19,648     $ 682     $ (8 )     20,322  
Residential government-sponsored collateralized mortgage obligations     2,538       2       (7 )     2,533  
Government-sponsored agency securities     47,974       246       (25 )     48,195  
Obligations of states and political subdivisions     12,728       282       (8 )     13,002  
Trust preferred securities     4,070       -       (350 )     3,720  
    $ 86,958     $ 1,212     $ (398 )   $ 87,772  

 

    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 September 30, 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   $ 7,190     $ 7,353     $ -     $ -  
Due after ten years     57,582       57,564       4,872       3,908  
Residential government-sponsored mortgage-backed securities     19,648       20,322       -       -  
Residential government-sponsored collateralized mortgage obligations     2,538       2,533       -       -  
Total   $ 86,958     $ 87,772     $ 4,872     $ 3,908  

 

Securities with a carrying amount of approximately $75.2 million and $89.7 million at September 30, 2016 and December 31, 2015, respectively, were pledged to secure public deposits, certain other deposits and a line of credit for advances from the Federal Home Loan Bank of Atlanta (“FHLB”).

 

Southern National monitors the portfolio for indicators of other than temporary impairment. At September 30, 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 $24.6 million in the portfolio with the carrying value exceeding the estimated fair value that are considered temporarily impaired at September 30, 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 September 30, 2016. The following tables present information regarding securities in a continuous unrealized loss position as of September 30, 2016 and December 31, 2015 (in thousands) by duration of time in a loss position:

 

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September 30, 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   $ -     $ -     $ 1,572     $ (1,018 )   $ 1,572     $ (1,018 )

 

    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   $ -     $ -     $ 461     $ (8 )   $ 461     $ (8 )
Residential government-sponsored collateralized mortgage obligations     1,025       (1 )     1,081       (6 )     2,106       (7 )
Government-sponsored agency securities     14,976       (25 )     -       -       14,976       (25 )
Obligations of states and political subdivisions     685       -       1,122       (8 )     1,807       (8 )
Trust preferred securities     -       -       3,721       (350 )     3,721       (350 )
    $ 16,686     $ (26 )   $ 6,385     $ (372 )   $ 23,071     $ (398 )

 

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 September 30, 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   $ 4,142     $ 3,802     $ 3,496       11 %   $ 242  
MMCF III B   Senior Sub   A3   A-   Ba1   BB     273       268       224       32 %     5  
                          4,415       4,070       3,720             $ 247  
                                                             
                                                Cumulative OTTI  
Available for Sale                                               Related to  
Other Than Temporarily Impaired:                                               Credit Loss (2)  
TPREF FUNDING II   Mezzanine   A1   A-   Caa3   C     1,500       1,099       623       37 %     400  
ALESCO V C1   Mezzanine   A2   A   Caa3   C     2,150       1,490       949       10 %     660  
                          3,650       2,589       1,572             $ 1,060  
                                                             
Total                       $ 8,065     $ 6,659     $ 5,292                  

 

(1) Pre-tax, and represents unrealized losses at date of transfer from available-for-sale to held-to-maturity, net of accretion
(2) Pre-tax

 

Each of these securities has been evaluated for other than temporary impairment. In performing a detailed cash flow analysis of each security, Sonabank works with independent third parties to estimate expected cash flows and assist with the evaluation of other than temporary impairment. The cash flow analyses performed included the following assumptions:

 

· .5% of the remaining performing collateral will default or defer per annum.
· Recoveries of 7% 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.

 

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· 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 and nine months ended September 30, 2016 and the three and nine months ended September 30, 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 nine months ended September 30, 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 sales of securities for which an other-than-temporary impairment was previously recognized     -       (7,889 )
Reductions due to realized losses     -       -  
Amount of cumulative other-than-temporary impairment related to credit loss as of September 30   $ 1,060     $ 1,060  

 

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Changes in accumulated other comprehensive income by component for the three and nine months ended September 30, 2016 and 2015 are shown in the tables below. All amounts are net of tax (in thousands).

 

    Unrealized Holding              
    Gains (Losses) on              
For the three months ended September 30, 2016   Available for Sale     Held to Maturity        
    Securities     Securities     Total  
Beginning balance   $ (760 )   $ (165 )   $ (925 )
Other comprehensive income/(loss) before reclassifications     125       -       125  
Amounts reclassified from accumulated other comprehensive income/(loss)     -       2       2  
Net current-period other comprehensive income/(loss)     125       2       127  
Ending balance   $ (635 )   $ (163 )   $ (798 )

 

    Unrealized Holding              
    Gains (Losses) on              
For the nine months ended September 30, 2016   Available for Sale     Held to Maturity        
    Securities     Securities     Total  
Beginning balance   $ (440 )   $ (170 )   $ (610 )
Other comprehensive income/(loss) before reclassifications     (195 )     -       (195 )
Amounts reclassified from accumulated other comprehensive income/(loss)     -       7       7  
Net current-period other comprehensive income/(loss)     (195 )     7       (188 )
Ending balance   $ (635 )   $ (163 )   $ (798 )

 

    Unrealized Holding              
    Gains (Losses) on              
For the three months ended September 30, 2015   Available for Sale     Held to Maturity        
    Securities     Securities     Total  
Beginning balance   $ (493 )   $ (174 )   $ (667 )
Other comprehensive income/(loss) before reclassifications     (5 )     2       (3 )
Amounts reclassified from accumulated other comprehensive income/(loss)     -       -       -  
Net current-period other comprehensive income/(loss)     (5 )     2       (3 )
Ending balance   $ (498 )   $ (172 )   $ (670 )

 

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

 

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4. LOANS AND ALLOWANCE FOR LOAN LOSSES

 

The following table summarizes the composition of our loan portfolio as of September 30, 2016 and December 31, 2015:

 

    Covered     Non-covered     Total     Covered     Non-covered     Total  
    Loans (1)     Loans     Loans     Loans (1)     Loans     Loans  
    September 30, 2016     December 31, 2015  
Loans secured by real estate:                                                
Commercial real estate - owner-occupied   $ -     $ 141,969     $ 141,969     $ -     $ 141,521     $ 141,521  
Commercial real estate - non-owner-occupied     -       301,688       301,688       -       256,513       256,513  
Secured by farmland     -       552       552       -       578       578  
Construction and land loans     -       78,352       78,352       -       67,832       67,832  
Residential 1-4 family     11,421       202,526       213,947       12,994       165,077       178,071  
Multi- family residential     -       32,979       32,979       -       25,501       25,501  
Home equity lines of credit     18,140       10,682       28,822       21,379       13,798       35,177  
Total real estate loans     29,561       768,748       798,309       34,373       670,820       705,193  
                                                 
Commercial loans     -       115,590       115,590       -       124,985       124,985  
Consumer loans     -       916       916       -       1,366       1,366  
Gross loans     29,561       885,254       914,815       34,373       797,171       831,544  
                                                 
Less deferred fees on loans     -       (1,984 )     (1,984 )     -       (2,119 )     (2,119 )
Loans, net of deferred fees   $ 29,561     $ 883,270     $ 912,831     $ 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 September 30, 2016, non-covered loans included $24.6 million of loans acquired in the HarVest acquisition and $45.1 million acquired in the PGFSB acquisition.

 

Accretable discount on the acquired Greater Atlantic loans, the PGFSB loans and the HarVest loans was $6.6 million and $7.9 million at September 30, 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.

 

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

 

September 30, 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 (1)     Balance     Allowance  
With no related allowance recorded                                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ 5,610     $ 5,619     $ -     $ 5,610     $ 5,619     $ -  
Commercial real estate - non-owner occupied (2)     -       -       -       131       223       -       131       223       -  
Construction and land development     -       -       -       -       -       -       -       -       -  
Commercial loans     -       -       -       2,535       2,990       -       2,535       2,990       -  
Residential 1-4 family (4)     958       1,115       -       -       -       -       958       1,115       -  
Other consumer loans     -       -       -       -       -       -       -       -       -  
                                                                         
Total   $ 958     $ 1,115     $ -     $ 8,276     $ 8,832     $ -     $ 9,234     $ 9,947     $ -  
                                                                         
With an allowance recorded                                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ 692     $ 692     $ 150     $ 692     $ 692     $ 150  
Commercial real estate - non-owner occupied (2)     -       -       -       -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -       -       -       -  
Commercial loans     -       -       -       3,977       5,897       650       3,977       5,897       650  
Residential 1-4 family (4)     -       -       -       -       -       -       -       -       -  
Other consumer loans     -       -       -       -       -       -       -       -       -  
                                                                         
Total   $ -     $ -     $ -     $ 4,669     $ 6,589     $ 800     $ 4,669     $ 6,589     $ 800  
Grand total   $ 958     $ 1,115     $ -     $ 12,945     $ 15,421     $ 800     $ 13,903     $ 16,536     $ 800  

 

(1) Recorded investment is after cumulative prior charge offs of $2.4 million. These loans also have aggregate SBA guarantees of $1.7 million.
(2) Includes loans secured by farmland and multi-family residential loans.
(3) The Bank recognizes loan impairment and may concurrently record a charge off to the allowance for loan losses.
(4) Includes home equity lines of credit.

 

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 (1)     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.

 

  16  

 

 

The following tables present the average recorded investment and interest income for impaired loans recognized by class of loans for the three and nine months ended September 30, 2016 and 2015 (in thousands):

 

Three months ended September 30, 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   $ -     $ -     $ 7,984     $ 73     $ 7,984     $ 73  
Commercial real estate - non-owner occupied (1)     -       -       132       3       132       3  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       2,600       13       2,600       13  
Residential 1-4 family (2)     959       7       -       -       959       7  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ 959     $ 7     $ 10,716     $ 89     $ 11,675     $ 96  
                                                 
With an allowance recorded                                                
Commercial real estate - owner occupied   $ -     $ -     $ 693     $ 8     $ 693     $ 8  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       4,140       39       4,140       39  
Residential 1-4 family (2)     -       -       -       -       -       -  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ -     $ -     $ 4,833     $ 47     $ 4,833     $ 47  
Grand total   $ 959     $ 7     $ 15,549     $ 136     $ 16,508     $ 143  

 

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

 

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

 

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

 

  17  

 

  

Nine months ended September 30, 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   $ -     $ -     $ 6,711     $ 220     $ 6,711     $ 220  
Commercial real estate - non-owner occupied (1)     -       -       134       8       134       8  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       2,852       41       2,852       -  
Residential 1-4 family (2)     996       24       -       -       996       24  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ 996     $ 24     $ 9,697     $ 269     $ 10,693     $ 252  
                                                 
With an allowance recorded                                                
Commercial real estate - owner occupied   $ -     $ -     $ 696     $ 24     $ 696     $ 24  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       3,301       117       3,301       117  
Residential 1-4 family (2)     -       -       -       -       -       -  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ -     $ -     $ 3,997     $ 141     $ 3,997     $ 141  
Grand total   $ 996     $ 24     $ 13,694     $ 410     $ 14,690     $ 393  

 

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

 

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

 

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

 

  18  

 

   

The following tables present the aging of the recorded investment in past due loans by class of loans as of September 30, 2016 and December 31, 2015 (in thousands):

 

September 30, 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)     -       333       -       333       512       28,716       29,561  
Other consumer loans     -       -       -       -       -       -       -  
                                                         
Total   $ -     $ 333     $ -     $ 333     $ 512     $ 28,716     $ 29,561  
                                                         
Non-covered loans:                                                        
Commercial real estate - owner occupied   $ 269     $ -     $ -     $ 269     $ 638     $ 141,062     $ 141,969  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       335,219       335,219  
Construction and land development     -       -       -       -       -       78,352       78,352  
Commercial loans     191       688       -       879       3,284       111,427       115,590  
Residential 1-4 family (2)     126       107       -       233       -       212,975       213,208  
Other consumer loans     -       -       -       -       -       916       916  
                                                         
Total   $ 586     $ 795     $ -     $ 1,381     $ 3,922     $ 879,951     $ 885,254  
                                                         
Total loans:                                                        
Commercial real estate - owner occupied   $ 269     $ -     $ -     $ 269     $ 638     $ 141,062     $ 141,969  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       335,219       335,219  
Construction and land development     -       -       -       -       -       78,352       78,352  
Commercial loans     191       688       -       879       3,284       111,427       115,590  
Residential 1-4 family (2)     126       440       -       566       512       241,691       242,769  
Other consumer loans     -       -       -       -       -       916       916  
                                                         
Total   $ 586     $ 1,128     $ -     $ 1,714     $ 4,434     $ 908,667     $ 914,815  

 

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.

 

Non-covered nonaccrual loans include SBA guaranteed amounts totaling $1.7 million and $3.5 million at September 30, 2016 and December 31, 2015, respectively.

 

  19  

 

  

Activity in the allowance for non-covered loan and lease losses for the three and nine months ended September 30, 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 September 30, 2016   Occupied     Occupied (1)     Development     Loans     Residential (2)     Loans     Unallocated     Total  
Allowance for loan losses:                                                                
Beginning balance   $ 721     $ 1,403     $ 855     $ 3,345     $ 1,262     $ 122     $ 713     $ 8,421  
Charge offs     (798 )     -       -       (1,363 )     -       -       -       (2,161 )
Recoveries     -       -       120       33       4       2       -       159  
Provision     916       196       (328 )     1,257       95       (41 )     (45 )     2,050  
Ending balance   $ 839     $ 1,599     $ 647     $ 3,272     $ 1,361     $ 83     $ 668     $ 8,469  
                                                                 
Three months ended September 30, 2015                                                                
Allowance for loan losses:                                                                
Beginning balance   $ 1,054     $ 1,524     $ 1,052     $ 2,421     $ 1,224     $ 46     $ 652     $ 7,973  
Charge offs     (66 )     -       -       (448 )     (250 )     (2 )     -       (766 )
Recoveries     12       6       -       60       2       -               80  
Provision     3       (244 )     (79 )     908       186       4       72       850  
Ending balance   $ 1,003     $ 1,286     $ 973     $ 2,941     $ 1,162     $ 48     $ 724     $ 8,137  

 

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

(2) Includes home equity lines of credit.

 

    Commercial     Commercial                                      
    Real Estate     Real Estate     Construction                 Other              
Non-covered loans:   Owner     Non-owner     and Land     Commercial     1-4 Family     Consumer              
Nine months ended September 30, 2016   Occupied     Occupied (1)     Development     Loans     Residential     Loans     Unallocated     Total  
Allowance for loan losses:                                                                
Beginning balance   $ 1,185     $ 1,222     $ 865     $ 3,041     $ 1,408     $ 48     $ 652     $ 8,421  
Charge offs     (798 )     -       (450 )     (2,633 )     (22 )     (322 )     -       (4,225 )
Recoveries     -       1       120       78       8       4       -       211  
Provision     452       376       112       2,786       (33 )     353       16       4,062  
Ending balance   $ 839     $ 1,599     $ 647     $ 3,272     $ 1,361     $ 83     $ 668     $ 8,469  
                                                                 
Nine months ended September 30, 2015                                                                
Allowance for loan losses:                                                                
Beginning balance   $ 855     $ 1,123     $ 1,644     $ 2,063     $ 1,322     $ 49     $ 337     $ 7,393  
Charge offs     (1,067 )     -       -       (1,067 )     (250 )     (6 )     -       (2,390 )
Recoveries     16       18       139       79       7       -       -       259  
Provision     1,199       145       (810 )     1,866       83       5       387       2,875  
Ending balance   $ 1,003     $ 1,286     $ 973     $ 2,941     $ 1,162     $ 48     $ 724     $ 8,137  

 

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

(2) Includes home equity lines of credit.

 

  20  

 

  

Activity in the allowance for covered loan and lease losses by class of loan for the three and nine months ended September 30, 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 September 30, 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 September 30, 2015                                                                
Allowance for loan losses:                                                                
Beginning balance   $ -     $ -     $ -     $ -     $ 17     $ 4     $ -     $ 21  
Charge offs     -       -       -       -       -       -       -       -  
Recoveries     -       -       -       -       -       -       -       -  
Adjustments (2)     -       -       -       -       -       -       -       -  
Provision