Southern National Bancorp
Southern National Bancorp of Virginia Inc (Form: 10-Q, Received: 05/09/2017 09:04:19)

 

 

 

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, 2017

 

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   ¨   An emerging growth company ¨

 

(Do not check if a smaller reporting company)

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

 

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, 2017, there were 12,340,993 shares of common stock outstanding.

 

 

 

 
 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

March 31, 2017

 

INDEX

 

      PAGE
       
PART 1 - FINANCIAL INFORMATION
       
Item 1 - Financial Statements    
  Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016   2
  Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2017 and 2016   3
  Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2017   4
  Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016   5
  Notes to Consolidated Financial Statements   6-26
       
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations   26-36
     
Item 3 – Quantitative and Qualitative Disclosures about Market Risk   37-39
     
Item 4 – Controls and Procedures   40
       
PART II - OTHER INFORMATION
       
Item 1 – Legal Proceedings   40
     
Item 1A – Risk Factors   40
     
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds   40
     
Item 3 – Defaults Upon Senior Securities   40
     
Item 4 – Mine Safety Disclosures   40
     
Item 5 – Other Information   40
     
Item 6 – Exhibits   40
     
Signatures   42
     
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,  
    2017     2016  
ASSETS                
Cash and cash equivalents:                
Cash and due from financial institutions   $ 3,901     $ 4,656  
Interest-bearing deposits in other financial institutions     31,518       42,736  
Total cash and cash equivalents     35,419       47,392  
                 
Securities available for sale, at fair value     4,238       3,918  
                 
Securities held to maturity, at amortized cost (fair value of $87,054 and $83,344, respectively)     89,003       85,300  
                 
Covered loans     25,666       28,180  
Non-covered loans     948,556       902,235  
Total loans     974,222       930,415  
Less allowance for loan losses     (8,678 )     (8,610 )
Net loans     965,544       921,805  
                 
Stock in Federal Reserve Bank and Federal Home Loan Bank     8,917       7,929  
Equity investment in mortgage affiliate     4,150       4,629  
Preferred investment in mortgage affiliate     2,555       2,555  
Bank premises and equipment, net     8,083       8,227  
Goodwill     10,514       10,514  
Core deposit intangibles, net     825       874  
FDIC indemnification asset     1,920       2,111  
Bank-owned life insurance     23,989       23,826  
Other real estate owned     8,265       8,617  
Deferred tax assets, net     6,669       6,780  
Other assets     7,242       7,966  
                 
Total assets   $ 1,177,333     $ 1,142,443  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
                 
Noninterest-bearing demand deposits   $ 101,674     $ 88,783  
Interest-bearing deposits:                
NOW accounts     26,287       26,338  
Cash management accounts     10,252       9,658  
Money market accounts     127,052       129,835  
Savings accounts     53,949       52,755  
Time deposits     577,003       605,613  
Total interest-bearing deposits     794,543       824,199  
Total deposits     896,217       912,982  
                 
Federal Home Loan Bank (FHLB) advances - short term     116,000       95,000  
Subordinated notes     26,075       -  
Other liabilities     10,753       8,117  
Total liabilities     1,049,045       1,016,099  
                 
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, 12,330,043 shares at March 31, 2017 and 12,263,643 at December 31, 2016     123       123  
Additional paid in capital     105,544       104,884  
Retained earnings     23,195       22,126  
Accumulated other comprehensive loss     (574 )     (789 )
Total stockholders' equity     128,288       126,344  
                 
Total liabilities and stockholders' equity   $ 1,177,333     $ 1,142,443  

 

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,  
             
    2017     2016  
                 
Interest and dividend income :                
Interest and fees on loans   $ 11,761     $ 10,757  
Interest and dividends on taxable securities     538       681  
Interest and dividends on tax exempt securities     84       84  
Interest and dividends on other earning assets     162       151  
Total interest and dividend income     12,545       11,673  
Interest expense:                
Interest on deposits     2,160       1,812  
Interest on subordinated notes     329       -  
Interest on other borrowings     165       150  
Total interest expense     2,654       1,962  
                 
Net interest income     9,891       9,711  
                 
Provision for loan losses     550       625  
Net interest income after provision for loan losses     9,341       9,086  
                 
Noninterest income (loss):                
Account maintenance and deposit service fees     213       223  
Income from bank-owned life insurance     163       174  
Equity (loss) income from mortgage affiliate     (479 )     80  
Other     36       24  
                 
Total noninterest (loss) income     (67 )     501  
                 
Noninterest expenses:                
Salaries and benefits     2,898       3,128  
Occupancy expenses     791       809  
Furniture and equipment expenses     247       189  
Amortization of core deposit intangible     49       62  
Virginia franchise tax expense     111       97  
FDIC assessment     137       146  
Data processing expense     208       172  
Telephone and communication expense     162       187  
Amortization of FDIC indemnification asset     191       216  
Net loss on other real estate owned     53       120  
Merger expenses     323       -  
Other operating expenses     883       907  
Total noninterest expenses     6,053       6,033  
Income before income taxes     3,221       3,554  
Income tax expense     1,167       989  
Net income   $ 2,054     $ 2,565  
Other comprehensive income:                
Unrealized gain (loss) on available for sale securities   $ 322     $ (337 )
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       3  
Net unrealized gain (loss)     325       (334 )
Tax effect     (110 )     114  
Other comprehensive income (loss)     215       (220 )
Comprehensive income   $ 2,269     $ 2,345  
Earnings per share, basic   $ 0.17     $ 0.21  
Earnings per share, diluted   $ 0.16     $ 0.21  

 

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, 2017

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

 

                      Accumulated        
          Additional           Other        
    Common     Paid in     Retained     Comprehensive        
    Stock     Capital     Earnings     Loss     Total  
                               
Balance - December 31, 2016   $ 123     $ 104,884     $ 22,126     $ (789 )   $ 126,344  
Comprehensive income:                                        
Net income                     2,054               2,054  
Change in unrealized loss on securities available for sale (net of tax benefit, $109)                             213       213  
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)                     (985 )             (985 )
Issuance of common stock for warrants exercised (49,500 shares)             449                       449  
Issuance of common stock under Stock                                        
Incentive Plan (16,900 shares)             151                       151  
Stock-based compensation expense             60                       60  
                                         
Balance - March 31, 2017   $ 123     $ 105,544     $ 23,195     $ (574 )   $ 128,288  

 

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, 2017 AND 2016

(dollars in thousands) (Unaudited)

 

    2017     2016  
             
Operating activities:                
Net income   $ 2,054     $ 2,565  
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:                
Depreciation     179       208  
Amortization of core deposit intangible     49       62  
Other amortization, net     54       -  
Accretion of loan discount     (349 )     (502 )
Amortization of FDIC indemnification asset     191       216  
Provision for loan losses     550       625  
Earnings on bank-owned life insurance     (163 )     (174 )
Equity loss (income) on mortgage affiliate     479       (80 )
Stock based compensation expense     60       79  
Net loss on other real estate owned     53       120  
Net decrease (increase) in other assets     720       (1,549 )
Net increase in other liabilities     2,636       734  
Net cash and cash equivalents provided by operating activities     6,513       2,304  
Investing activities:                
Purchases of held to maturity securities     (9,950 )     (10,994 )
Proceeds from paydowns, maturities and calls of held to maturity securities     6,204       9,059  
Loan originations and payments, net     (43,940 )     (41,212 )
Net increase in stock in Federal Reserve Bank and Federal Home Loan Bank     (988 )     (660 )
Proceeds from sale of other real estate owned     298       357  
Purchases of bank premises and equipment     (35 )     (70 )
Net cash and cash equivalents used in investing activities     (48,411 )     (43,520 )
Financing activities:                
Net (decrease) increase in deposits     (16,765 )     32,244  
Cash dividends paid - common stock     (985 )     (979 )
Issuance of common stock for warrants exercised     449       -  
Issuance of common stock under Stock Incentive Plan     151       75  
Issuance of subordinated notes net of cost     26,075       -  
Net increase in short-term borrowings     21,000       13,664  
Net cash and cash equivalents provided by financing activities     29,925       45,004  
(Decrease) Increase in cash and cash equivalents     (11,973 )     3,788  
Cash and cash equivalents at beginning of period     47,392       30,336  
Cash and cash equivalents at end of period   $ 35,419     $ 34,124  
                 
Supplemental disclosure of cash flow information                
Cash payments for:                
Interest   $ 2,290     $ 1,903  
Income taxes     -       700  
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, 2017

 

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, 2016.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the carrying value of investment securities, other than temporary impairment of investment securities, the valuation of goodwill and intangible assets, the FDIC indemnification asset, mortgage servicing rights, other real estate owned and deferred tax assets.

 

Recent Accounting Pronouncements

 

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.

 

  6

 

 

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. Management currently anticipates recognizing a right-of-use asset and a lease liability associated with its long-term operating leases and is in the process of inventorying and categorizing its lease agreements.

 

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. The adoption of the amendments did not have an effect on our consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606). These amendments affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g. insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The ASU allows for either full retrospective or modified retrospective adoption. In August 2015, the FASB issued ASU 2015-14, Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date. This ASU defers the effective date of ASU 2014-09, Revenue From Contracts With Customers (Topic 606) by one year. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2016. Our revenue is balanced between net interest income on financial assets and liabilities, which is explicitly excluded from the scope of the new standard, and noninterest income. The Company has begun to scope its general ledger revenue items and assess its contracts with customers to identify its performance obligations and will continue to evaluate the impact of adoption on our noninterest income and disclosures.

 

  7

 

 

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 adopted this guidance during the quarter with an immaterial effect.

 

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 and is collecting data that will be needed to produce historical inputs into any models created as a result of adopting this ASU .

 

In 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.

 

In January 2017, the FASB issued ASU No. 2017-04 , Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), which eliminates the second step of the previous FASB guidance for testing goodwill for impairment and is intended to reduce cost and complexity of goodwill impairment testing. The amendments in this ASU modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. After determining if the carrying amount of a reporting unit exceeds its fair value, the entity should take an impairment charge of the same amount to the goodwill for that reporting unit, not to exceed the total goodwill amount for that reporting unit. ASU 2017-04 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of adopting the new guidance on its consolidated financial statements.

 

  8

 

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which is intended to provide guidance in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses in order to provide stakeholders with more detailed reporting and less cost to analyze transactions. This ASU provides a screen to determine when a set of assets is not a business. It requires that when substantially all fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set of assets is not a business. If the screen is not met, the amendments in this update provide a framework to assist entities in evaluating whether both an input and a substantive process are present for the set to be a business. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. No disclosures are required at transition and early adoption is permitted. We are currently evaluating the impact of adopting the new guidance on our consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections  (Topic 250) and  Investments – Equity Method and Joint Ventures  (Topic 323)  – Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. ASU 2017-03 provides amendments that add paragraph 250-10-S99-6 which includes the text of "SEC Staff Announcement: Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of a Registrant When Such Standards Are Adopted in a Future Period” (in accordance with Staff Accounting Bulletin (SAB) Topic 11.M). Registrants are required to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. In cases where a registrant cannot reasonably estimate the impact of the adoption, then additional qualitative disclosures should be considered to assist the reader in assessing the significance of the standard's impact on its financial statements. SNBV has enhanced its disclosures regarding the impact of recently issued accounting standards adopted in a future period will have on its accounting and disclosures.

 

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities, which shorten the amortization period for certain callable debt securities held at a premium.  Specifically, the amendments require the premium to be amortized to the earliest call date.  The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.  ASU 2017-08 is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  SNBV is currently reviewing its portfolio of debt securities to determine the impact that this ASU will have 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.

 

  9

 

 

Southern National granted no options during the first three months of 2017.

 

For the three months ended March 31, 2017 and 2016, stock-based compensation expense was $60 thousand and $79 thousand, respectively. As of March 31, 2017, unrecognized compensation expense associated with the stock options was $390 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, 2017 follows (dollars in thousands):

 

                Weighted        
          Weighted     Average     Aggregate  
          Average     Remaining     Intrinsic  
          Exercise     Contractual     Value  
    Shares     Price     Term     (in thousands)  
Options outstanding, beginning of period     782,200     $ 9.56                  
Granted     -       -                  
Forfeited     (2,200 )     14.73                  
Exercised     (16,900 )     8.92                  
Options outstanding, end of period     763,100     $ 9.56       6.3     $ 5,627  
                                 
Vested or expected to vest     763,100     $ 9.56       6.3     $ 5,627  
                                 
Exercisable at end of period     410,630     $ 8.27       4.7     $ 3,552  

 

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, 2017   Cost     Gains     Losses     Value  
Obligations of states and political subdivisions   $ 2,279     $ 12     $ (20 )   $ 2,271  
Trust preferred securities     2,589       -       (622 )     1,967  
    $ 4,868     $ 12     $ (642 )   $ 4,238  

 

    Amortized     Gross Unrealized     Fair  
December 31, 2016   Cost     Gains     Losses     Value  
Obligations of states and political subdivisions   $ 2,280     $ 9     $ (30 )   $ 2,259  
Trust preferred securities     2,590       -       (931 )     1,659  
    $ 4,870     $ 9     $ (961 )   $ 3,918  

 

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

 

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    Amortized     Gross Unrecognized     Fair  
March 31, 2017   Cost     Gains     Losses     Value  
Residential government-sponsored mortgage-backed securities   $ 17,570     $ 292     $ (77 )     17,785  
Residential government-sponsored collateralized mortgage obligations     2,224       -       (49 )     2,175  
Government-sponsored agency securities     52,926       10       (2,023 )     50,913  
Obligations of states and political subdivisions     12,684       80       (87 )     12,677  
Trust preferred securities     3,599       -       (95 )     3,504  
    $ 89,003     $ 382     $ (2,331 )   $ 87,054  

 

    Amortized     Gross Unrecognized     Fair  
December 31, 2016   Cost     Gains     Losses     Value  
Residential government-sponsored mortgage-backed securities   $ 18,594     $ 308     $ (118 )   $ 18,784  
Residential government-sponsored collateralized mortgage obligations     2,371       -       (54 )     2,317  
Government-sponsored agency securities     47,975       28       (1,865 )     46,138  
Obligations of states and political subdivisions     12,706       53       (162 )     12,597  
Trust preferred securities     3,654       -       (146 )     3,508  
    $ 85,300     $ 389     $ (2,345 )   $ 83,344  

 

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, 2017, 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 one to five years   $ 1,458     $ 1,462     $ -     $ -  
Due in five to ten years     5,975       5,980       -       -  
Due after ten years     61,776       59,652       4,868       4,238  
Residential government-sponsored mortgage-backed securities     17,570       17,785       -       -  
Residential government-sponsored collateralized mortgage obligations     2,224       2,175       -       -  
Total   $ 89,003     $ 87,054     $ 4,868     $ 4,238  

 

Securities with a carrying amount of approximately $75.7 million and $73.9 million at March 31, 2017 and December 31, 2016, respectively, were pledged to secure public deposits, certain 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 March 31, 2017 and December 31, 2016, certain securities’ fair values were below cost. As outlined in the table below, there were securities with fair values totaling approximately $64.7 million in the portfolio with the carrying value exceeding the estimated fair value that are considered temporarily impaired at March 31, 2017. 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, 2017. The following tables present information regarding securities in a continuous unrealized loss position as of March 31, 2017 and December 31, 2016 (in thousands) by duration of time in a loss position:

 

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March 31, 2017

 

    Less than 12 months     12 Months or More     Total  
Available for Sale   Fair value     Unrealized
Losses
    Fair value     Unrealized
Losses
    Fair value     Unrealized
Losses
 
Obligations of states and political subdivisions   $ 1,715     $ (20 )   $ -     $ -     $ 1,715     $ (20 )
Trust preferred securities     -       -       1,966       (622 )     1,966       (622 )
    $ 1,715     $ (20 )   $ 1,966     $ (622 )   $ 3,681     $ (642 )

 

    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   $ 7,669     $ (68 )   $ 451     $ (9 )   $ 8,120     $ (77 )
Residential government-sponsored collateralized mortgage obligations     1,271       (27 )     904       (22 )     2,175       (49 )
Government-sponsored agency securities     43,953       (2,023 )     -       -       43,953       (2,023 )
Obligations of states and political subdivisions     2,175       (40 )     1,080       (47 )     3,255       (87 )
Trust preferred securities     -       -       3,504       (95 )     3,504       (95 )
    $ 55,068     $ (2,158 )   $ 5,939     $ (173 )   $ 61,007     $ (2,331 )

 

December 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
 
Obligations of states and political subdivisions   $ 1,706     $ (30 )   $ -     $ -     $ 1,706     $ (30 )
Trust preferred securities     -       -       1,658       (931 )     1,658       (931 )
    $ 1,706     $ (30 )   $ 1,658     $ (931 )   $ 3,364     $ (961 )

 

    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   $ 10,238     $ (110 )   $ 457     $ (8 )   $ 10,695     $ (118 )
Residential government-sponsored collateralized mortgage obligations     1,346       (27 )     971       (27 )     2,317       (54 )
Government-sponsored agency securities                                     -       -  
Obligations of states and political subdivisions     41,110       (1,865 )     -       -       41,110       (1,865 )
Trust preferred securities     3,578       (98 )     1,065       (64 )     4,643       (162 )
      -       -       3,508       (146 )     3,508       (146 )
    $ 56,272     $ (2,100 )   $ 6,001     $ (245 )   $ 62,273     $ (2,345 )

 

As of March 31, 2017, 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   $ 3,624     $ 3,334     $ 3,271       11 %   $ 236  
MMCF III B   Senior Sub   A3   A-   Ba1   BB     269       265       233       32 %     4  
                          3,893       3,599       3,504             $ 240  
                                                             
                                                          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       675       37 %   $ 400  
ALESCO V C1   Mezzanine   A2   A   Caa3   C     2,150       1,490       1,292       10 %     660  
                          3,650       2,589       1,967             $ 1,060  
                                                             
Total                       $ 7,543     $ 6,188     $ 5,471                  

 

(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 9% with a two year lag on all defaults and deferrals.

 

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· 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, 2017 and the three months ended March 31, 2016.

 

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, 2017 and 2016 (in thousands):

 

    2017     2016  
             
Amount of cumulative other-than-temporary impairment related to credit loss prior to January 1   $ 1,060     $ 1,060  
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     $ 1,060  

 

Changes in accumulated other comprehensive income by component for the three months ended March 31, 2017 and 2016 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, 2017   Available for Sale     Held to Maturity        
    Securities     Securities     Total  
Beginning balance   $ (627 )   $ (162 )   $ (789 )
Other comprehensive income/(loss) before reclassifications     213       2       215  
Amounts reclassified from accumulated other comprehensive income/(loss)     -       -       -  
Net current-period other comprehensive income/(loss)     213       2       215  
Ending balance   $ (414 )   $ (160 )   $ (574 )

 

    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 )

 

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4. LOANS AND ALLOWANCE FOR LOAN LOSSES

 

The following table summarizes the composition of our loan portfolio as of March 31, 2017 and December 31, 2016:

 

    Covered     Non-covered     Total     Covered     Non-covered     Total  
    Loans (1)     Loans     Loans     Loans (1)     Loans     Loans  
    March 31, 2017     December 31, 2016  
Loans secured by real estate:                                    
Commercial real estate - owner-occupied   $ -     $ 154,041     $ 154,041     $ -     $ 154,807     $ 154,807  
Commercial real estate - non-owner-occupied     -       296,176       296,176       -       279,634       279,634  
Secured by farmland     -       438       438       -       541       541  
Construction and land loans     -       97,002       97,002       -       91,067       91,067  
Residential 1-4 family     9,957       248,108       258,065       10,519       220,291       230,810  
Multi- family residential     -       30,222       30,222       -       30,021       30,021  
Home equity lines of credit     15,709       11,539       27,248       17,661       11,542       29,203  
Total real estate loans     25,666       837,526       863,192       28,180       787,903       816,083  
                                                 
Commercial loans     -       111,957       111,957       -       115,365       115,365  
Consumer loans     -       804       804       -       856       856  
Gross loans     25,666       950,287       975,953       28,180       904,124       932,304  
                                                 
Less deferred fees on loans     -       (1,731 )     (1,731 )     -       (1,889 )     (1,889 )
Loans, net of deferred fees   $ 25,666     $ 948,556     $ 974,222     $ 28,180     $ 902,235     $ 930,415  

 

(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, 2017, non-covered loans included $22.3 million of loans acquired in the HarVest acquisition and $39.6 million acquired in the PGFSB acquisition.

 

Accretable discount on the acquired Greater Atlantic loans, the PGFSB loans and the HarVest loans was $6.2 million and $6.5 million at March 31, 2017 and December 31, 2016 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):

 

March 31, 2017   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   $ -     $ -     $ -                     $ -     $ -     $ -     $ -  
Commercial real estate - non-owner occupied (2)     -       -       -                       -       -       -       -  
Construction and land development     -       -       -                       -       -       -       -  
Commercial loans     -       -       -       2,060       2,632       -       2,060       2,632       -  
Residential 1-4 family (4)     1,288       1,499       -       -       -       -       1,288       1,499       -  
Other consumer loans     -       -       -       -       -       -       -       -       -  
                                                                         
Total   $ 1,288     $ 1,499     $ -     $ 2,060     $ 2,632     $ -     $ 3,348     $ 4,131     $ -  
                                                                         
With an allowance recorded                                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ 1,322     $ 1,331     $ 250     $ 1,322     $ 1,331     $ 250  
Commercial real estate - non-owner occupied (2)     -       -       -       -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -       -       -       -  
Commercial loans     -       -       -       482       3,402       350       482       3,402       350  
Residential 1-4 family (4)     -       -       -       484       517       100       484       517       100  
Other consumer loans     -       -       -       -       -       -       -       -       -  
                                                                         
Total   $ -     $ -     $ -     $ 2,288     $ 5,250     $ 700     $ 2,288     $ 5,250     $ 700  
Grand total   $ 1,288     $ 1,499     $ -     $ 4,348     $ 7,882     $ 700     $ 5,636     $ 9,381     $ 700  

 

(1) Recorded investment is after cumulative prior charge offs of $3.5 million. These loans also have aggregate SBA guarantees of $2.1 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, 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   $ -     $ -     $ -     $ 5,583     $ 5,592     $ -     $ 5,583     $ 5,592     $ -  
Commercial real estate - non-owner occupied (2)     -       -       -       -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -       -       -       -  
Commercial loans     -       -       -       3,002       3,603       -       3,002       3,603       -  
Residential 1-4 family (4)     963       1,113       -       -       -       -       963       1,113       -  
Other consumer loans     -       -       -       -       -       -       -       -       -  
                                                                         
Total   $ 963     $ 1,113     $ -     $ 8,585     $ 9,195     $ -     $ 9,548     $ 10,308     $ -  
                                                                         
With an allowance recorded                                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ 688     $ 688     $ 150     $ 688     $ 688     $ 150  
Commercial real estate - non-owner occupied (2)     -       -       -       -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -       -       -       -  
Commercial loans     -       -       -       3,378       5,798       750       3,378       5,798       750  
Residential 1-4 family (4)     -       -       -       -       -               -       -       -  
Other consumer loans     -       -       -       -       -       -       -       -       -  
                                                                         
Total   $ -     $ -     $ -     $ 4,066     $ 6,486     $ 900     $ 4,066     $ 6,486     $ 900  
Grand total   $ 963     $ 1,113     $ -     $ 12,651     $ 15,681     $ 900     $ 13,614     $ 16,794     $ 900  

 

(1) Recorded investment is after cumulative prior charge offs of $3.0 million. These loans also have aggregate SBA guarantees of $2.2 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.

 

  15

 

 

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, 2017 and 2016 (in thousands):

 

Three months ended March 31, 2017   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   $ -     $ -     $ -     $ -     $ -     $ -  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       2,117       -       2,117       -  
Residential 1-4 family (2)     1,290       8       -       -       1,290       8  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ 1,290     $ 8     $ 2,117     $ -     $ 3,407     $ 8  
                                                 
With an allowance recorded                                                
Commercial real estate - owner occupied   $ -     $ -     $ 1,324     $ 8     $ 1,324     $ 8  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       -  
Construction and land development     -       -       -       -       -       -  
Commercial loans     -       -       859       -       859       -  
Residential 1-4 family (2)     -       -       242       -       242       -  
Other consumer loans     -       -       -       -       -       -  
                                                 
Total   $ -     $ -     $ 2,425     $ 8     $ 2,425     $ 8  
Grand total   $ 1,290     $ 8     $ 4,542     $ 8     $ 5,832     $ 16  

 

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

(2) Includes home equity lines of credit.

 

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.

 

  16

 

 

The following tables present the aging of the recorded investment in past due loans by class of loans as of March 31, 2017 and December 31, 2016 (in thousands):

 

 

March 31, 2017   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)     88       44       -       132       850       24,684       25,666  
Other consumer loans     -       -       -       -       -       -       -  
                                                         
Total   $ 88     $ 44     $ -     $ 132     $ 850     $ 24,684     $ 25,666  
                                                         
Non-covered loans:                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ -     $ 637     $ 153,404     $ 154,041  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       326,836       326,836  
Construction and land development     -       -       -       -       -       97,002       97,002  
Commercial loans     315       -       -       315       2,542       109,100       111,957  
Residential 1-4 family (2)     336       503       -       839       484       258,324       259,647  
Other consumer loans     28       -       -       28       -       776       804  
                                                         
Total   $ 679     $ 503     $ -     $ 1,182     $ 3,663     $ 945,442     $ 950,287  
                                                         
Total loans:                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ -     $ 637     $ 153,404     $ 154,041  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       326,836       326,836  
Construction and land development     -       -       -       -       -       97,002       97,002  
Commercial loans     315       -       -       315       2,542       109,100       111,957  
Residential 1-4 family (2)     424       547       -       971       1,334       283,008       285,313  
Other consumer loans     28       -       -       28       -       776       804  
                                                         
Total   $ 767     $ 547     $ -     $ 1,314     $ 4,513     $ 970,126     $ 975,953  

 

December 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)     221       95       -       316       850       27,014       28,180  
Other consumer loans     -       -       -       -       -       -       -  
                                                         
Total   $ 221     $ 95     $ -     $ 316     $ 850     $ 27,014     $ 28,180  
                                                         
Non-covered loans:                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ -     $ 637     $ 154,170     $ 154,807  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       310,196       310,196  
Construction and land development     -       -       -       -       -       91,067       91,067  
Commercial loans     1,349       -       -       1,349       3,158       110,858       115,365  
Residential 1-4 family (2)     1,011       -       -       1,011       -       230,822       231,833  
Other consumer loans             -       -       -       -       856       856  
                                                         
Total   $ 2,360     $ -     $ -     $ 2,360     $ 3,795     $ 897,969     $ 904,124  
                                                         
Total loans:                                                        
Commercial real estate - owner occupied   $ -     $ -     $ -     $ -     $ 637     $ 154,170     $ 154,807  
Commercial real estate - non-owner occupied (1)     -       -       -       -       -       310,196       310,196  
Construction and land development     -       -       -       -       -       91,067       91,067  
Commercial loans     1,349       -       -       1,349       3,158       110,858       115,365  
Residential 1-4 family (2)     1,232       95       -       1,327       850       257,836       260,013  
Other consumer loans     -       -       -       -       -       856       856  
                                                         
Total   $ 2,581     $ 95     $ -     $ 2,676     $ 4,645     $ 924,983     $ 932,304  

 

(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 $2.1 million and $2.2 million at March 31, 2017 and December 31, 2016, respectively.

 

  17

 

 

Activity in the allowance for non-covered loan and lease losses for the three months ended March 31, 2017 and 2016 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, 2017   Occupied     Occupied (1)     Development     Loans     Residential (2)     Loans     Unallocated     Total  
Allowance for loan losses:                                                                
Beginning balance   $ 905     $ 1,484     $ 752     $ 3,366     $ 1,279     $ 78     $ 746     $ 8,610  
Charge offs     -       -       -       (500 )     (12 )     -       -       (512 )
Recoveries     10       -       -       16       2       2       -       30  
Provision     273       62       49       125       (15 )     (6 )     62       550  
Ending balance   $ 1,188     $ 1,546     $ 801     $ 3,007     $ 1,254     $ 74     $ 808     $ 8,678  
                                                                 
Three months ended March 31, 2016                                                                
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  

 

(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, 2017 and 2016 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, 2017     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, 2016                                                                
Allowance for loan losses:                                                                
Beginning balance   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
Charge offs     -       -       -       -       -       -       -       -  
Recoveries     -       -       -       -       -       -       -       -  
Adjustments (2)     -       -       -       -       -       -       -       -  
Provision     -       -       -       -       -       -       -       -  
Ending balance   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  

 

(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.

 

  18

 

 

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, 2017 and December 31, 2016 (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, 2017                                                                
Ending allowance balance attributable to loans:                                                                
Individually evaluated for impairment   $ 250     $ -     $ -     $ 350     $ 100     $ -     $ -     $ 700  
Collectively evaluated for impairment     938       1,546       801       2,657       1,154       74       808       7,978  
Total ending allowance   $ 1,188     $ 1,546     $ 801     $ 3,007     $ 1,254     $ 74     $ 808     $ 8,678  
                                                                 
Loans:                                                                
Individually evaluated for impairment   $ 1,322     $ -     $ -     $ 2,542     $ 484     $ -     $ -     $ 4,348  
Collectively evaluated for impairment     152,719       326,836       97,002       109,415       259,163       804       -       945,939  
Total ending loan balances   $ 154,041     $ 326,836     $ 97,002     $ 111,957     $ 259,647     $ 804     $ -     $ 950,287  
                                                                 
December 31, 2016                                                                
Ending allowance balance attributable to loans:                                                                
Individually evaluated for impairment   $ 150     $ -     $ -     $ 750     $ -     $ -     $ -     $ 900  
Collectively evaluated for impairment     755       1,484       752       2,616       1,279       78       746       7,710  
Total ending allowance   $ 905     $ 1,484     $ 752     $ 3,366     $ 1,279     $ 78     $ 746     $ 8,610  
                                                                 
Loans:                                                                
Individually evaluated for impairment   $ 6,271     $ -     $ -     $ 6,380     $ -     $ -     $ -     $ 12,651  
Collectively evaluated for impairment     148,536       310,196       91,067       108,985       231,833       856       -       891,473  
Total ending loan balances   $ 154,807     $ 310,196     $ 91,067     $ 115,365     $ 231,833     $ 856     $ -     $ 904,124  

 

(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, 2017 and December 31, 2016 (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, 2017                                                                
Ending allowance balance attributable to loans:                                                                
Individually evaluated for impairment   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
Collectively evaluated for impairment     -       -       -       -       -       -       -       -  
Total ending allowance   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                                 
Loans:                                                                
Individually evaluated for impairment   $ -     $ -     $ -     $ -     $ 1,288     $ -     $ -     $ 1,288  
Collectively evaluated for impairment     -       -       -       -       24,378       -       -       24,378  
Total ending loan balances   $ -     $ -     $ -     $ -     $ 25,666     $ -     $ -     $ 25,666  
                                                                 
December 31, 2016                                                                
Ending allowance balance attributable to loans:                                                                
Individually evaluated for impairment   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
Collectively evaluated for impairment     -       -       -       -       -       -       -       -  
Total ending allowance   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                                 
Loans:                                                                
Individually evaluated for impairment   $ -             $ -     $ -     $ 963     $ -             $ 963  
Collectively evaluated for impairment     -       -       -       -       27,217       -       -       27,217  
Total ending loan balances   $ -     $ -     $ -     $ -     $ 28,180     $ -     $ -     $ 28,180  

 

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

(2) Includes home equity lines of credit.

 

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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, 2017, 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 $683 thousand, was current as of March 31, 2017.

 

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.

 

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, 2017 or December 31, 2016.

 

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, 2017 and December 31, 2016, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):

 

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March 31, 2017   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   $ -     $ -     $ -     $ 4,916     $ 1,322     $ 147,803     $ 154,041     $ 6,238     $ 147,803     $ 154,041  
Commercial real estate - non-owner occupied (2)     -       -       -       -       -       326,836       326,836       -       326,836       326,836  
Construction and land development     -       -       -       -       -       97,002       97,002       -       97,002       97,002  
Commercial loans     -       -       -       3,365       2,542       106,050       111,957       5,907       106,050       111,957  
Residential 1-4 family (4)     1,288       24,378       25,666       -       484       259,163       259,647       1,772       283,541       285,313  
Other consumer loans     -       -       -       -       -       804       804       -       804       804  
                                                                                 
Total   $ 1,288     $ 24,378     $ 25,666     $ 8,281     $ 4,348     $ 937,658     $ 950,287     $ 13,917     $ 962,036     $ 975,953  

 

December 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   $ -     $ -     $ -     $ -     $ 6,271     $ 148,536     $ 154,807     $ 6,271     $ 148,536     $ 154,807  
Commercial real estate - non-owner occupied (2)     -       -       -       -       -       310,196       310,196       -       310,196       310,196  
Construction and land development     -       -       -       -       -       91,067       91,067       -       91,067       91,067  
Commercial loans     -