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Primis Financial Corp. - Quarter Report: 2016 March (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2016

 

Commission File No. 001-33037

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)

 

Virginia 20-1417448
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)  

 

6830 Old Dominion Drive

McLean, Virginia 22101

(Address of principal executive offices) (zip code)

 

(703) 893-7400

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES  x     NO  ¨

 

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

 

YES  x     NO  ¨

 

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

 

Large accelerated filer ¨   Accelerated filer x Smaller reporting company ¨
       
Non-accelerated filer ¨ (Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No x

 

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

 

 

 

 

 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

March 31, 2016

 

INDEX

 

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

 

 

 

 

ITEM I - FINANCIAL INFORMATION

PART I - FINANCIAL STATEMENTS

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

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

 

   March 31,   December 31, 
   2016   2015 
ASSETS          
Cash and cash equivalents:          
Cash and due from financial institutions  $3,998   $3,972 
Interest-bearing deposits in other financial institutions   30,126    26,364 
Total cash and cash equivalents   34,124    30,336 
           
Securities available for sale, at fair value   3,871    4,209 
           
Securities held to maturity, at amortized cost (fair value of $99,583 and $96,464, respectively)   98,727    96,780 
           
Covered loans   33,159    34,373 
Non-covered loans   837,480    795,052 
Total loans   870,639    829,425 
Less allowance for loan losses   (8,690)   (8,421)
Net loans   861,949    821,004 
           
Stock in Federal Reserve Bank and Federal Home Loan Bank   7,589    6,929 
Equity investment in mortgage affiliate   4,539    4,459 
Preferred investment in mortgage affiliate   2,555    2,555 
Bank premises and equipment, net   8,744    8,882 
Goodwill   10,514    10,514 
Core deposit intangibles, net   1,031    1,093 
FDIC indemnification asset   2,705    2,922 
Bank-owned life insurance   23,300    23,126 
Other real estate owned   10,106    10,439 
Deferred tax assets, net   6,801    6,716 
Other assets   7,715    6,143 
           
Total assets  $1,084,270   $1,036,107 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Noninterest-bearing demand deposits  $85,217   $83,769 
Interest-bearing deposits:          
NOW accounts   27,623    28,080 
Money market accounts   126,578    131,731 
Savings accounts   51,244    49,939 
Time deposits   566,876    531,775 
Total interest-bearing deposits   772,321    741,525 
Total deposits   857,538    825,294 
           
Securities sold under agreements to repurchase   11,045    10,381 
Federal Home Loan Bank (FHLB) advances - short term   72,000    59,000 
Federal Home Loan Bank (FHLB) advances - long term   15,000    15,000 
Other liabilities   7,531    6,796 
Total liabilities   963,114    916,471 
           
Commitments and contingencies (See Note 5)   -    - 
           
Stockholders' equity:          
Preferred stock, $.01 par value. Authorized 5,000,000 shares; no shares issued and outstanding   -    - 
Common stock, $.01 par value. Authorized 45,000,000 shares; issued and outstanding, 12,244,943 shares at March 31, 2016 and 12,234,443 at December 31, 2015   122    122 
Additional paid in capital   104,543    104,389 
Retained earnings   17,321    15,735 
Accumulated other comprehensive loss   (830)   (610)
Total stockholders' equity   121,156    119,636 
           
Total liabilities and stockholders' equity  $1,084,270   $1,036,107 

 

See accompanying notes to consolidated financial statements.

 

 2

 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

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

 

   For the Three Months Ended 
   March 31, 
         
   2016   2015 
         
Interest and dividend income :          
Interest and fees on loans  $10,757   $9,551 
Interest and dividends on taxable securities   681    654 
Interest and dividends on tax exempt securities   84    101 
Interest and dividends on other earning assets   151    129 
Total interest and dividend income   11,673    10,435 
Interest expense:          
Interest on deposits   1,812    1,339 
Interest on borrowings   150    169 
Total interest expense   1,962    1,508 
           
Net interest income   9,711    8,927 
           
Provision for loan losses   625    525 
Net interest income after provision for loan losses   9,086    8,402 
           
Noninterest income:          
Account maintenance and deposit service fees   223    222 
Income from bank-owned life insurance   174    150 
Equity income (loss) from mortgage affiliate   80    (16)
Other   24    49 
           
Total noninterest income   501    405 
           
Noninterest expenses:          
Salaries and benefits   3,128    2,803 
Occupancy expenses   809    871 
Furniture and equipment expenses   189    210 
Amortization of core deposit intangible   62    65 
Virginia franchise tax expense   97    88 
FDIC assessment   146    172 
Data processing expense   172    164 
Telephone and communication expense   187    206 
Amortization of FDIC indemnification asset   216    129 
Net loss on other real estate owned   120    320 
Other operating expenses   907    793 
Total noninterest expenses   6,033    5,821 
Income before income taxes   3,554    2,986 
Income tax expense   989    982 
Net income  $2,565   $2,004 
Other comprehensive income:          
Unrealized gain (loss) on available for sale securities  $(337)  $23 
Non-credit component of other-than-temporary impairment on held-to-maturity securities   -    - 
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale   3    22 
Net unrealized gain (loss)   (334)   45 
Tax effect   114    (16)
Other comprehensive income (loss)   (220)   29 
Comprehensive income  $2,345   $2,033 
Earnings per share, basic and diluted  $0.21   $0.16 

 

See accompanying notes to consolidated financial statements.

 

 3

 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2016

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

 

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

 

See accompanying notes to consolidated financial statements.

 

 4

 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

(dollars in thousands) (Unaudited)

 

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

 

See accompanying notes to consolidated financial statements.

 

 5

 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2016

 

1.ACCOUNTING POLICIES

 

Southern National Bancorp of Virginia, Inc. (“Southern National” or “SNBV”) is a corporation formed on July 28, 2004 under the laws of the Commonwealth of Virginia and is the holding company for Sonabank (“Sonabank”) a Virginia state chartered bank which commenced operations on April 14, 2005. Sonabank provides a range of financial services to individuals and small and medium sized businesses. Sonabank has fifteen branches in Virginia, located in Fairfax County (Reston, McLean and Fairfax), in Charlottesville, Warrenton (2), Middleburg, Leesburg (2), South Riding, Front Royal, New Market, Haymarket, Richmond and Clifton Forge, and eight branches in Maryland, in Rockville, Shady Grove, Frederick, Bethesda, Upper Marlboro, Brandywine, Owings and Huntingtown.

 

The consolidated financial statements include the accounts of Southern National Bancorp of Virginia, Inc. and its subsidiary. Significant inter-company accounts and transactions have been eliminated in consolidation.

 

The unaudited consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles (“U. S. GAAP”) for interim financial information and instructions for Form 10-Q and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by U. S. GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in Southern National’s Form 10-K for the year ended December 31, 2015.

 

Use of Estimates

 

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

 

Recent Accounting Pronouncements

 

In September 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period. The amendments clarify the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. This ASU will not significantly impact SNBV.

 

 6

 

 

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

 

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

 

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

 

 7

 

 

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

 

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

 

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

 

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

 

 8

 

 

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

 

2.STOCK- BASED COMPENSATION

 

In 2004, the Board of Directors adopted a stock option plan that authorized the reservation of up to 302,500 shares of common stock and provided for the granting of stock options to certain directors, officers and employees. The 2010 Stock Awards and Incentive Plan was approved by the Board of Directors in January 2010 and approved by the stockholders at the Annual Meeting in April 2010. The 2010 plan authorized the reservation of an additional 700,000 shares of common stock for the granting of stock awards. The options granted to officers and employees are incentive stock options and the options granted to non-employee directors are non-qualified stock options. The purpose of the plan is to afford key employees an incentive to remain in the employ of Southern National and to assist in the attracting and retaining of non-employee directors by affording them an opportunity to share in Southern National’s future success. Under the plan, the option’s price cannot be less than the fair market value of the stock on the grant date. The maximum term of the options is ten years and options granted may be subject to a graded vesting schedule.

 

Southern National granted no options during the first three months of 2016.

 

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

 

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

 

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

 

 9

 

 

3.SECURITIES

 

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

 

   Amortized   Gross Unrealized   Fair 
March 31, 2016  Cost   Gains   Losses   Value 
Obligations of states and political subdivisions  $2,286   $38   $-   $2,324 
Trust preferred securities   2,590    -    (1,043)   1,547 
   $4,876   $38   $(1,043)  $3,871 

 

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

 

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

 

   Amortized   Gross Unrecognized   Fair 
March 31, 2016  Cost   Gains   Losses   Value 
Residential government-sponsored mortgage-backed securities  $19,784   $640   $(16)   20,408 
Residential government-sponsored collateralized mortgage obligations   2,821    2    (16)   2,807 
Government-sponsored agency securities   59,081    478    -    59,559 
Obligations of states and political subdivisions   12,772    245    (40)   12,977 
Trust preferred securities   4,269    -    (437)   3,832 
   $98,727   $1,365   $(509)  $99,583 

 

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

 

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

 

The fair value and carrying amount, if different, of debt securities as of March 31, 2016, by contractual maturity were as follows (in thousands). Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations, are shown separately.

 

   Held to Maturity   Available for Sale 
   Amortized       Amortized     
   Cost   Fair Value   Cost   Fair Value 
Due in five to ten years  $12,196   $12,324   $-   $- 
Due after ten years   63,926    64,044    4,876    3,871 
Residential government-sponsored mortgage-backed securities   19,784    20,408    -    - 
Residential government-sponsored collateralized mortgage obligations   2,821    2,807    -    - 
Total  $98,727   $99,583   $4,876   $3,871 

 

Securities with a carrying amount of approximately $94.8 million and $89.7 million at March 31, 2016 and December 31, 2015, respectively, were pledged to secure public deposits, repurchase agreements and a line of credit for advances from the Federal Home Loan Bank of Atlanta (“FHLB”).

 

 10

 

 

Southern National monitors the portfolio for indicators of other than temporary impairment. At March 31, 2016 and December 31, 2015, certain securities’ fair values were below cost. As outlined in the table below, there were securities with fair values totaling approximately $10.3 million in the portfolio with the carrying value exceeding the estimated fair value that are considered temporarily impaired at March 31, 2016. Because the decline in fair value is attributable to changes in interest rates and market illiquidity, and not credit quality, and because we do not have the intent to sell these securities and it is likely that we will not be required to sell the securities before their anticipated recovery, management does not consider these securities to be other-than-temporarily impaired as of March 31, 2016. The following tables present information regarding securities in a continuous unrealized loss position as of March 31, 2016 and December 31, 2015 (in thousands) by duration of time in a loss position:

 

March 31, 2016

 

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

 

   Less than 12 months   12 Months or More   Total 
Held to Maturity  Fair value   Unrecognized
Losses
   Fair value   Unrecognized
Losses
   Fair value   Unrecognized
Losses
 
Residential government-sponsored mortgage-backed securities  $-   $-   $529   $(16)  $529   $(16)
Residential government-sponsored collateralized mortgage obligations   -    -    2,318    (16)   2,318    (16)
Obligations of states and political subdivisions   -    -    2,032    (40)   2,032    (40)
Trust preferred securities   -    -    3,832    (437)   3,832    (437)
   $-   $-   $8,711   $(509)  $8,711   $(509)

 

December 31, 2015

 

   Less than 12 months   12 Months or More   Total 
Available for Sale  Fair value   Unrealized
Losses
   Fair value   Unrealized
Losses
   Fair value   Unrealized
Losses
 
Trust preferred securities  $-   $-   $1,897   $(693)  $1,897   $(693)

 

   Less than 12 months   12 Months or More   Total 
Held to Maturity  Fair value   Unrecognized
Losses
   Fair value   Unrecognized
Losses
   Fair value   Unrecognized
Losses
 
Residential government-sponsored mortgage-backed securities  $5,459   $(14)  $640   $(8)  $6,099   $(22)
Residential government-sponsored collateralized mortgage obligations   512    (5)   2,368    (61)   2,880    (66)
Government-sponsored agency securities   35,453    (507)   9,878    (111)   45,331    (618)
Obligations of states and political subdivisions   -    -    2,513    (67)   2,513    (67)
Trust preferred securities   -    -    3,971    (381)   3,971    (381)
   $41,424   $(526)  $19,370   $(628)  $60,794   $(1,154)

 

As of March 31, 2016, we owned pooled trust preferred securities as follows:

 

                        Previously 
                    % of Current   Recognized 
                    Defaults and   Cumulative 
      Ratings         Estimated   Deferrals to   Other 
   Tranche  When Purchased  Current Ratings      Fair   Total   Comprehensive 
Security  Level  Moody's  Fitch  Moody's  Fitch  Par Value   Book Value   Value   Collateral   Loss (1) 
Held to Maturity                 (in thousands)         
ALESCO VII A1B  Senior  Aaa  AAA  A1  A  $4,367   $3,998   $3,604    13%  $248 
MMCF III B  Senior Sub  A3  A-  Ba1  BB   276    271    228    32%   5 
                   4,643    4,269    3,832        $253 
                                         
                                       Cumulative OTTI 
Available for Sale                                      Related to 
Other Than Temporarily Impaired:                                      Credit Loss (2) 
TPREF FUNDING II  Mezzanine  A1  A-  Caa3  C   1,500    1,100    510    37%   400 
ALESCO V C1  Mezzanine  A2  A  Caa3  C   2,150    1,490    1,037    14%   660 
                   3,650    2,590    1,547        $1,060 
                                         
Total                 $8,293   $6,859   $5,379           

 

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

(2) Pre-tax

 

 11

 

 

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

 

·.5% of the remaining performing collateral will default or defer per annum.
·Recoveries of 12% with a two year lag on all defaults and deferrals.
·No prepayments for 10 years and then 1% per annum for the remaining life of the security.
·Our securities have been modeled using the above assumptions by independent third parties using the forward LIBOR curve to discount projected cash flows to present values.

 

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

 

The following table presents a roll forward of the credit losses on our securities previously classified as held to maturity and now classified as available for sale recognized in earnings for the three months ended March 31, 2016 and 2015 (in thousands):

 

   2016   2015 
         
Amount of cumulative other-than-temporary impairment  related to credit loss prior to January 1  $1,060   $8,949 
Amounts related to credit loss for which an   other-than-temporary impairment was not previously  recognized   -    - 
Amounts related to credit loss for which an   other-than-temporary impairment was previously  recognized   -    - 
Reductions due to realized losses   -    - 
Amount of cumulative other-than-temporary impairment  related to credit loss as of March 31  $1,060   $8,949 

 

Changes in accumulated other comprehensive income by component for the three months ended March 31, 2016 and 2015 are shown in the table below. All amounts are net of tax (in thousands).

 

   Unrealized Holding         
   Gains (Losses) on         
For the three months ended March 31, 2016  Available for Sale   Held to Maturity     
   Securities   Securities   Total 
Beginning balance  $(440)  $(170)  $(610)
Other comprehensive income/(loss) before reclassifications   (222)   2    (220)
Amounts reclassified from accumulated other comprehensive income/(loss)   -    -    - 
Net current-period other comprehensive income/(loss)   (222)   2    (220)
Ending balance  $(662)  $(168)  $(830)

 

   Unrealized Holding         
   Gains (Losses) on         
For the three months ended March 31, 2015  Available for Sale   Held to Maturity     
   Securities   Securities   Total 
Beginning balance  $(6)  $(3,014)  $(3,020)
Other comprehensive income/(loss) before reclassifications   15    14    29 
Amounts reclassified from accumulated other comprehensive income/(loss)   -    -    - 
Net current-period other comprehensive income/(loss)   15    14    29 
Ending balance  $9   $(3,000)  $(2,991)

 

 12

 

 

4.LOANS AND ALLOWANCE FOR LOAN LOSSES

 

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

 

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

 

(1)Covered Loans were acquired in the Greater Atlantic transaction and are covered under an FDIC loss-share agreement. The agreement covering non-single family loans expired in December 2014.

 

Accounting policy related to the allowance for loan losses is considered a critical policy given the level of estimation, judgment, and uncertainty in the levels of the allowance required to account for the inherent probable losses in the loan portfolio and the material effect such estimation, judgment, and uncertainty can have on the consolidated financial results.

 

As part of the Greater Atlantic acquisition, the Bank and the FDIC entered into loss sharing agreements on approximately $143.4 million (contractual basis) of Greater Atlantic Bank’s assets.  There were two agreements with the FDIC, one for single family loans which is a 10-year agreement expiring in December 2019, and one for non-single family (commercial) assets which was a 5-year agreement which expired in December 2014. The Bank will share in the losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharing agreements; we refer to these assets collectively as “covered assets.”  Loans that are not covered in the loss sharing agreement are referred to as “non-covered loans”. As of March 31, 2016, non-covered loans included $27.2 million of loans acquired in the HarVest acquisition and $48.9 million acquired in the PGFSB acquisition.

 

Accretable discount on the acquired Greater Atlantic loans, the PGFSB loans and the HarVest loans was $7.4 million and $7.9 million at March 31, 2016 and December 31, 2015 respectively.

 

Credit-impaired covered loans are those loans which presented evidence of credit deterioration at the date of acquisition and it is probable that Southern National would not collect all contractually required principal and interest payments. Generally, acquired loans that meet Southern National’s definition for nonaccrual status fell within the definition of credit-impaired covered loans.

 

 13

 

 

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

 

March 31, 2016  Covered Loans   Non-covered Loans   Total Loans 
       Unpaid           Unpaid           Unpaid     
   Recorded   Principal   Related   Recorded   Principal   Related   Recorded   Principal   Related 
   Investment   Balance   Allowance   Investment (1)   Balance   Allowance   Investment   Balance   Allowance 
With no related allowance recorded                                             
Commercial real estate - owner occupied  $-   $-   $-   $5,027   $5,027   $-   $5,027   $5,027   $- 
Commercial real estate - non-owner occupied (2)   -    -    -    135    228    -    135    228    - 
Construction and land development   -    -    -    -    -    -    -    -    - 
Commercial loans   -    -    -    2,272    2,925    -    2,272    2,925    - 
Residential 1-4 family (4)   1,049    1,221    -    -    -    -    1,049    1,221    - 
Other consumer loans   -    -    -    -    -    -    -    -    - 
                                              
Total  $1,049   $1,221   $-   $7,434   $8,180   $-   $8,483   $9,401   $- 
                                              
With an allowance recorded                                             
Commercial real estate - owner occupied  $-   $-   $-   $1,355   $1,469   $427   $1,355   $1,469   $427 
Commercial real estate - non-owner occupied (2)   -    -    -    -    -    -    -    -    - 
Construction and land development   -    -    -    -    -    -    -    -    - 
Commercial loans   -    -    -    3,458    3,458    400    3,458    3,458    400 
Residential 1-4 family (4)   -    -    -                   -    -    - 
Other consumer loans   -    -    -    -    -    -    -    -    - 
                                              
Total  $-   $-   $-   $4,813   $4,927   $827   $4,813   $4,927   $827 
Grand total  $1,049   $1,221   $-   $12,247   $13,107   $827   $13,296   $14,328   $827 

 

(1) Recorded investment is after cumulative prior charge offs of $753 thousand. These loans also have aggregate SBA guarantees of $2.3 million.

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

(3) The Bank recognizes loan impairment and may concurrently record a charge off to the allowance for loan losses.

(4) Includes home equity lines of credit.

 

December 31, 2015  Covered Loans   Non-covered Loans   Total Loans 
       Unpaid           Unpaid           Unpaid     
   Recorded   Principal   Related   Recorded   Principal   Related   Recorded   Principal   Related 
   Investment   Balance   Allowance   Investment (1)   Balance   Allowance   Investment   Balance   Allowance 
With no related allowance recorded                                             
Commercial real estate - owner occupied  $-   $-   $-   $6,492   $6,986   $-   $6,492   $6,986   $- 
Commercial real estate - non-owner occupied (2)   -    -    -    136    230    -    136    230    - 
Construction and land development   -    -    -    -    -    -    -    -    - 
Commercial loans   -    -    -    2,102    2,698    -    2,102    2,698    - 
Residential 1-4 family (4)   1,066    1,243    -    -    -    -    1,066    1,243    - 
Other consumer loans   -    -    -    -    -    -    -    -    - 
                                              
Total  $1,066   $1,243   $-   $8,730   $9,914   $-   $9,796   $11,157   $- 
                                              
With an allowance recorded                                             
Commercial real estate - owner occupied  $-   $-   $-   $1,370   $1,484   $439   $1,370   $1,484   $439 
Commercial real estate - non-owner occupied (2)   -    -    -    -    -    -    -    -    - 
Construction and land development   -    -    -    -    -    -    -    -    - 
Commercial loans   -    -    -    3,382    3,382    400    3,382    3,382    400 
Residential 1-4 family (4)   -    -    -    -    -    -    -    -    - 
Other consumer loans   -    -    -    -    -    -    -    -    - 
                                              
Total  $-   $-   $-   $4,752   $4,866   $839   $4,752   $4,866   $839 
Grand total  $1,066   $1,243   $-   $13,482   $14,780   $839   $14,548   $16,023   $839 

 

(1)Recorded investment is after cumulative prior charge offs of $1.2 million. These loans also have aggregate SBA guarantees of $3.5 million.
(2)Includes loans secured by farmland and multi-family residential loans.
(3)The Bank recognizes loan impairment and may concurrently record a charge off to the allowance for loan losses.
(4)Includes home equity lines of credit.

 

 14

 

 

The following tables present the average recorded investment and interest income for impaired loans recognized by class of loans for the three months ended March 31, 2016 and 2015 (in thousands):

 

Three months ended March 31, 2016  Covered Loans   Non-covered Loans   Total Loans 
   Average   Interest   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized   Investment   Recognized 
With no related allowance recorded                              
Commercial real estate - owner occupied  $-   $-   $5,041   $73   $5,041   $73 
Commercial real estate - non-owner occupied (1)   -    -    135    3    135    3 
Construction and land development   -    -    -    -    -    - 
Commercial loans   -    -    2,020    -    2,020    - 
Residential 1-4 family (2)   986    8    -    -    986    8 
Other consumer loans   -    -    -    -    -    - 
                               
Total  $986   $8   $7,196   $76   $8,182   $84 
                               
With an allowance recorded                              
Commercial real estate - owner occupied  $-   $-   $1,364   $10   $1,364   $10 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    - 
Construction and land development   -    -    -    -    -    - 
Commercial loans   -    -    3,413    53    3,413    53 
Residential 1-4 family (2)   -    -    -    -    -    - 
Other consumer loans   -    -    -    -    -    - 
                               
Total  $-   $-   $4,777   $63   $4,777   $63 
Grand total  $986   $8   $11,973   $139   $12,959   $147 

 

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

(2) Includes home equity lines of credit.

 

Three months ended March 31, 2015  Covered Loans   Non-covered Loans   Total Loans 
   Average   Interest   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized   Investment   Recognized 
With no related allowance recorded                              
Commercial real estate - owner occupied  $-   $-   $5,122   $74   $5,122   $74 
Commercial real estate - non-owner occupied (1)   -    -    1,851    29    1,851    29 
Construction and land development   -    -    450    9    450    9 
Commercial loans   -    -    3,655    53    3,655    53 
Residential 1-4 family (2)   1,658    11    -    -    1,658    11 
Other consumer loans   -    -    -    -    -    - 
                               
Total  $1,658   $11   $11,078   $165   $12,736   $176 
                               
With an allowance recorded                              
Commercial real estate - owner occupied  $-   $-   $6,837   $90   $6,837   $90 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    - 
Construction and land development   -    -    -    -    -    - 
Commercial loans   -    -    4,050    21    4,050    21 
Residential 1-4 family (2)   -    -    734    -    734    - 
Other consumer loans   -    -    -    -    -    - 
                               
Total  $-   $-   $11,621   $111   $11,621   $111 
Grand total  $1,658   $11   $22,699   $276   $24,357   $287 

 

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

 

 15

 

 

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

 

March 31, 2016  30 - 59   60 - 89                     
   Days   Days   90 Days   Total   Nonaccrual   Loans Not   Total 
   Past Due   Past Due   or More   Past Due   Loans   Past Due   Loans 
Covered loans:                                   
Commercial real estate - owner occupied  $-   $-   $-   $-   $-   $-   $- 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    -    - 
Construction and land development   -    -    -    -    -    -    - 
Commercial loans   -    -    -    -    -    -    - 
Residential 1-4 family (2)   43    -    -    43    640    32,476    33,159 
Other consumer loans   -    -    -    -    -    -    - 
                                    
Total  $43   $-   $-   $43   $640   $32,476   $33,159 
                                    
Non-covered loans:                                   
Commercial real estate - owner occupied  $-   $-   $-   $-   $632   $138,141   $138,773 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    314,403    314,403 
Construction and land development   -    -    -    -    -    69,574    69,574 
Commercial loans   321    -    -    321    2,272    120,346    122,939 
Residential 1-4 family (2)   62    -    -    62    -    192,757    192,819 
Other consumer loans   -    -    -    -    -    1,118    1,118 
                                    
Total  $383   $-   $-   $383   $2,904   $836,339   $839,626 
                                    
Total loans:                                   
Commercial real estate - owner occupied  $-   $-   $-   $-   $632   $138,141   $138,773 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    314,403    314,403 
Construction and land development   -    -    -    -    -    69,574    69,574 
Commercial loans   321    -    -    321    2,272    120,346    122,939 
Residential 1-4 family (2)   105    -    -    105    640    225,233    225,978 
Other consumer loans   -    -    -    -    -    1,118    1,118 
                                    
Total  $426   $-   $-   $426   $3,544   $868,815   $872,785 

 

December 31, 2015  30 - 59   60 - 89                     
   Days   Days   90 Days   Total   Nonaccrual   Loans Not   Total 
   Past Due   Past Due   or More   Past Due   Loans   Past Due   Loans 
Covered loans:                                   
Commercial real estate - owner occupied  $-   $-   $-   $-   $-   $-   $- 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    -    - 
Construction and land development   -    -    -    -    -    -    - 
Commercial loans   -    -    -    -    -    -    - 
Residential 1-4 family (2)   119    43    -    162    698    33,513    34,373 
Other consumer loans   -    -    -    -    -    -    - 
                                    
Total  $119   $43   $-   $162   $698   $33,513   $34,373 
                                    
Non-covered loans:                                   
Commercial real estate - owner occupied  $561   $-   $-   $561   $2,071   $138,889   $141,521 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    282,592    282,592 
Construction and land development   -    -    -    -    -    67,832    67,832 
Commercial loans   267    -    -    267    2,102    122,616    124,985 
Residential 1-4 family (2)   85    -    -    85    -    178,790    178,875 
Other consumer loans   1    -    -    1    -    1,365    1,366 
                                    
Total  $914   $-   $-   $914   $4,173   $792,084   $797,171 
                                    
Total loans:                                   
Commercial real estate - owner occupied  $561   $-   $-   $561   $2,071   $138,889   $141,521 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    282,592    282,592 
Construction and land development   -    -    -    -    -    67,832    67,832 
Commercial loans   267    -    -    267    2,102    122,616    124,985 
Residential 1-4 family (2)   204    43    -    247    698    212,303    213,248 
Other consumer loans   1    -    -    1    -    1,365    1,366 
                                    
Total  $1,033   $43   $-   $1,076   $4,871   $825,597   $831,544 

 

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

 

 16

 

 

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

 

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

 

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

 

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

 

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

 

   Commercial   Commercial                         
   Real Estate   Real Estate   Construction           Other         
Covered loans:  Owner   Non-owner   and Land   Commercial   1-4 Family   Consumer         
Three months ended March 31, 2016  Occupied   Occupied (1)   Development   Loans   Residential (3)   Loans   Unallocated   Total 
Allowance for loan losses:                                        
Beginning balance  $-   $-   $-   $-   $-   $-   $-   $- 
Charge offs   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    - 
Adjustments (2)   -    -    -    -    -    -    -    - 
Provision   -    -    -    -    -    -    -    - 
Ending balance  $-   $-   $-   $-   $-   $-   $-   $- 
                                         
Three months ended March 31, 2015                                        
Allowance for loan losses:                                        
Beginning balance  $-   $-   $-   $-   $17   $4   $-   $21 
Charge offs   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    - 
Adjustments (2)   -    -    -    -    -    -    -    - 
Provision   -    -    -    -    -    -    -    - 
Ending balance  $-   $-   $-   $-   $17   $4   $-   $21 

 

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

 

 17

 

 

The following tables present the balance in the allowance for loan losses and the recorded investment in non-covered loans by portfolio segment and based on impairment method as of March 31, 2016 and December 31, 2015 (in thousands):

 

   Commercial   Commercial                         
   Real Estate   Real Estate   Construction           Other         
   Owner   Non-owner   and Land   Commercial   1-4 Family   Consumer         
Non-covered loans:  Occupied   Occupied (1)   Development   Loans   Residential (2)   Loans   Unallocated   Total 
March 31, 2016                                        
Ending allowance balance attributable to loans:                                        
Individually evaluated for impairment  $427   $-   $-   $400   $-   $-   $-   $827 
Collectively evaluated for impairment   824    1,553    716    2,492    1,556    82    640    7,863 
Total ending allowance  $1,251   $1,553   $716   $2,892   $1,556   $82   $640   $8,690 
                                         
Loans:                                        
Individually evaluated for impairment  $6,382   $135   $-   $5,730   $-   $-   $-   $12,247 
Collectively evaluated for impairment   132,391    314,268    69,574    117,209    192,819    1,118    -    827,379 
Total ending loan balances  $138,773   $314,403   $69,574   $122,939   $192,819   $1,118   $-   $839,626 
                                         
December 31, 2015                                        
Ending allowance balance attributable to loans:                                        
Individually evaluated for impairment  $439   $-   $-   $400   $-   $-   $-   $839 
Collectively evaluated for impairment   746    1,222    865    2,641    1,408    48    652    7,582 
Total ending allowance  $1,185   $1,222   $865   $3,041   $1,408   $48   $652   $8,421 
                                         
Loans:                                        
Individually evaluated for impairment  $7,862   $136   $-   $5,484   $-   $-   $-   $13,482 
Collectively evaluated for impairment   133,659    282,456    67,832    119,501    178,875    1,366    -    783,689 
Total ending loan balances  $141,521   $282,592   $67,832   $124,985   $178,875   $1,366   $-   $797,171 

 

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

 

The following tables present the balance in the allowance for covered loan losses and the recorded investment in covered loans by portfolio segment and based on impairment method as of March 31, 2016 and December 31, 2015 (in thousands):

 

   Commercial   Commercial                         
   Real Estate   Real Estate   Construction           Other         
   Owner   Non-owner   and Land   Commercial   1-4 Family   Consumer         
Covered loans:  Occupied   Occupied (1)   Development   Loans   Residential (2)   Loans   Unallocated   Total 
March 31, 2016                                        
Ending allowance balance attributable to loans:                                        
Individually evaluated for impairment  $-   $-   $-   $-   $-   $-   $-   $- 
Collectively evaluated for impairment   -    -    -    -    -    -    -    - 
Total ending allowance  $-   $-   $-   $-   $-   $-   $-   $- 
                                         
Loans:                                        
Individually evaluated for impairment  $-   $-   $-   $-   $1,049   $-   $-   $1,049 
Collectively evaluated for impairment   -    -    -    -    32,110    -    -    32,110 
Total ending loan balances  $-   $-   $-   $-   $33,159   $-   $-   $33,159 
                                         
December 31, 2015                                        
Ending allowance balance attributable to loans:                                        
Individually evaluated for impairment  $-   $-   $-   $-   $-   $-   $-   $- 
Collectively evaluated for impairment   -    -    -    -    -    -    -    - 
Total ending allowance  $-   $-   $-   $-   $-   $-   $-   $- 
                                         
Loans:                                        
Individually evaluated for impairment  $-        $-   $-   $1,066   $-        $1,066 
Collectively evaluated for impairment   -    -    -    -    33,307    -    -    33,307 
Total ending loan balances  $-   $-   $-   $-   $34,373   $-   $-   $34,373 

 

 

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

 

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

 

During the three months ending March 31, 2015, there were no loans modified in troubled debt restructurings. No TDRs defaulted during the three months ending March 31, 2015, which had been modified in the previous 12 months.

 

Credit Quality Indicators

 

Through its system of internal controls Southern National evaluates and segments loan portfolio credit quality on a quarterly basis using regulatory definitions for Special Mention, Substandard and Doubtful. Special Mention loans are considered to be criticized. Substandard and Doubtful loans are considered to be classified. Southern National had no loans classified Doubtful at March 31, 2016 or December 31, 2015.

 

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

 

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

 

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

 

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

 

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

 

December 31, 2015  Covered Loans   Non-covered Loans   Total Loans 
   Classified/           Special               Classified/         
   Criticized (1)   Pass   Total   Mention   Substandard (3)   Pass   Total   Criticized   Pass   Total 
Commercial real estate - owner occupied  $-   $-   $-   $$3,666   $7,862   $129,993   $141,521   $11,528   $129,993   $141,521 
Commercial real estate - non-owner occupied (2)   -    -    -    -    136    282,456    282,592    136    282,456    282,592 
Construction and land development   -    -    -    552    -    67,280    67,832    552    67,280    67,832 
Commercial loans   -    -    -    4,014    5,484    115,487    124,985    9,498    115,487    124,985 
Residential 1-4 family (4)   1,066    33,307    34,373    -    -    178,875    178,875    1,066    212,182    213,248 
Other consumer loans   -    -    -    -    -    1,366    1,366    -    1,366    1,366 
                                                   
Total  $1,066   $33,307   $34,373   $8,232   $13,482   $775,457   $797,171   $22,780   $808,764   $831,544 

 

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

 

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

 

5.FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

 

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

 

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

 

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

 

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

 

 20

 

 

6.Earnings Per Share

 

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

 

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

 

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

 

7.FAIR VALUE

 

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

 

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

 

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

 

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

 

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

 

Securities Available for Sale

 

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

 

 21

 

 

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

 

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

 

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

 

Assets and Liabilities Measured on a Non-recurring Basis:

 

Trust Preferred Securities Classified as Held-to-Maturity

 

Prior to the quarter ended March 31, 2015, due to market conditions as well as the limited trading activity of these securities, the market value of the securities was highly sensitive to assumption changes and market volatility. We had determined that our trust preferred securities were classified within Level 3 of the fair value hierarchy. Market conditions and trading activity has improved significantly for trust preferred securities, and the fair value as of March 31, 2016 was estimated within Level 2 of the fair value hierarchy, as the fair value is based on either pricing models, quoted market prices of securities with similar characteristics, or discounted cash flows.

 

Impaired Loans

 

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

 

Other Real Estate Owned (OREO)

 

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

 

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

 

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

 

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

 

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

 

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Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

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

 

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

 

OVERVIEW

 

Southern National Bancorp of Virginia, Inc. (“Southern National” or “SNBV”) is a corporation formed on July 28, 2004 under the laws of the Commonwealth of Virginia and is the holding company for Sonabank (“Sonabank”) a Virginia state chartered bank which commenced operations on April 14, 2005. Sonabank provides a range of financial services to individuals and small and medium sized businesses. Sonabank has fifteen branches in Virginia, located in Fairfax County (Reston, McLean and Fairfax), in Charlottesville, Warrenton (2), Middleburg, Leesburg (2), South Riding, Front Royal, New Market, Haymarket, Richmond and Clifton Forge, and eight branches in Maryland, in Rockville, Shady Grove, Frederick, Bethesda, Upper Marlboro, Brandywine, Owings and Huntingtown We have administrative offices in Warrenton and an executive office in Georgetown, Washington, D.C where senior management is located.

 

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RESULTS OF OPERATIONS

 

Net Income

 

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

 

Net Interest Income

 

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

 

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

 

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

 

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   Average  Balance Sheets and Net Interest 
   Analysis  For the Three Months Ended 
   3/31/2016   3/31/2015 
       Interest           Interest     
   Average   Income/   Yield/   Average   Income/   Yield/ 
   Balance   Expense   Rate   Balance   Expense   Rate 
   (Dollar amounts in thousands) 
Assets                              
Interest-earning assets:                              
Loans, net  of deferred fees (1) (2)  $843,166   $10,757    5.13%  $713,587   $9,551    5.43%
Investment securities   100,907    765    3.03%   95,766    755    3.15%
Other earning assets   18,661    151    3.23%   32,666    129    1.60%
                               
Total earning assets   962,734    11,673    4.88%   842,019    10,435    5.03%
Allowance for loan losses   (8,612)             (7,675)          
Total non-earning assets   81,353              85,205           
Total assets  $1,035,475             $919,549           
                               
Liabilities and stockholders' equity                              
Interest-bearing liabilities:                              
NOW accounts  $27,566    7    0.10%  $24,505    6    0.10%
Money market accounts   127,776    108    0.34%   138,559    116    0.34%
Savings accounts   50,676    86    0.68%   44,435    66    0.60%
Time deposits   539,288    1,611    1.20%   466,169    1,151    1.00%
Total interest-bearing deposits   745,306    1,812    0.98%   673,668    1,339    0.81%
Borrowings   82,161    150    0.73%   53,614    169    1.28%
Total interest-bearing liabilities   827,467    1,962    0.95%   727,282    1,508    0.84%
Noninterest-bearing liabilities:                              
Demand deposits   80,285              71,269           
Other liabilities   7,234              6,278           
Total liabilites   914,986              804,829           
Stockholders' equity   120,489              114,720           
                               
Total liabilities and stockholders' equity  $1,035,475             $919,549           
Net interest income       $9,711             $8,927      
Interest rate spread             3.93%             4.19%
Net interest margin             4.06%             4.30%

 

(1) Includes loan fees in both interest income and the calculation of the yield on loans.

(2) Calculations include non-accruing loans in average loan amounts outstanding.

 

Provision for Loan Losses

 

The provision for loan losses is a current charge to earnings made in order to increase the allowance for loan losses to a level for inherent probable losses in the loan portfolio based on an evaluation of the loan portfolio, current economic conditions, changes in the nature and volume of lending, historical loan experience and other known internal and external factors affecting loan collectability. Our loan loss allowance is calculated by segmenting the loan portfolio by loan type and applying risk factors to each segment. The risk factors are determined by considering historical loss data, peer data, as well as applying management’s judgment.

 

The loan loss provision for the quarter ended March 31, 2016 was $625 thousand, compared to $525 thousand for the same period last year. Net charge offs for the three months ended March 31, 2016 were $356 thousand, compared to $198 thousand for the same period in 2015.

 

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Noninterest Income

 

The following table presents the major categories of noninterest income for the three months ended March 31, 2016 and 2015:

 

   For the Three Months Ended 
   March 31, 
   2016   2015   Change 
   (dollars in thousands) 
Account maintenance and deposit service fees  $223   $222   $1 
Income from bank-owned life insurance   174    150    24 
Equity income (loss) from mortgage affiliate   80    (16)   96 
Other   24    49    (25)
Total noninterest income  $501   $405   $96 

 

Noninterest income was $501 thousand during the first quarter of 2016, compared to $405 thousand during the same quarter of 2015. Non-interest income during the first quarter of 2016 included income attributable to our 44% ownership of STM of $80 thousand, compared to a loss of $16 thousand in the same quarter last year.

 

Noninterest Expense

 

The following table presents the major categories of noninterest expense for the three months ended March 31, 2016 and 2015:

 

   For the Three Months Ended 
   March 31, 
   2016   2015   Change 
   (dollars in thousands) 
Salaries and benefits  $3,128   $2,803   $325 
Occupancy expenses   809    871    (62)
Furniture and equipment expenses   189    210    (21)
Amortization of core deposit intangible   62    65    (3)
Virginia franchise tax expense   97    88    9 
FDIC assessment   146    172    (26)
Data processing expense   172    164    8 
Telephone and communication expense   187    206    (19)
Amortization of FDIC indemnification asset   216    129    87 
Net loss on other real estate owned   120    320    (200)
Other operating expenses   907    793    114 
Total noninterest expense  $6,033   $5,821   $212 

 

Noninterest expense was $6.0 million for the first quarter of 2016 compared to $5.8 million for the first quarter of 2015. During the first quarter of 2016 we sold two real estate owned (OREO) properties recognizing gains of $155 thousand, and we recognized impairment in the amount of $275 thousand on three OREO properties resulting in a net loss of $120 thousand. This compared to a loss on OREO of $320 thousand for the first quarter of 2015 as a result of recognizing impairment on two OREO properties. Employee compensation increased by $325 thousand compared to the first quarter of 2015, due to increases in the normal course of business.

 

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The efficiency ratio improved from 58.95% during the quarter ended March 31, 2015 to 57.94% during the first quarter of 2016.

 

FINANCIAL CONDITION

 

Balance Sheet Overview

 

Total assets were $1.1 billion as of March 31, 2016 compared to $1.0 billion as of December 31, 2015. Net loans receivable increased from $821.0 million at the end of 2015 to $861.9 million at March 31, 2016.

 

Total deposits were $857.5 million at March 31, 2016 compared to $825.3 million at December 31, 2015. Certificates of deposit increased $35.1 million during the three months. Noninterest-bearing deposits were $85.2 million at March 31, 2016 and $83.8 million at December 31, 2015.

 

Loan Portfolio

 

As part of the Greater Atlantic acquisition, the Bank and the FDIC entered into loss sharing agreements on approximately $143.4 million (contractual basis) of Greater Atlantic Bank’s assets.  There were two agreements with the FDIC, one for single family loans which is a 10-year agreement expiring in December 2019, and one for non-single family (commercial) assets which was a 5-year agreement which expired in December 2014. The Bank will share in the losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharing agreements; we refer to these assets collectively as “covered assets.”  Loans that are not covered in the loss sharing agreement are referred to as “non-covered loans”. As of March 31, 2016, non-covered loans included $27.2 million of loans acquired in the HarVest acquisition and $48.9 million acquired in the PGFSB acquisition.

 

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

 

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

 

(1)Covered Loans were acquired in the Greater Atlantic transaction and are covered under an FDIC loss-share agreement. The agreement covering non-single family loans expired in December 2014.

 

As of March 31, 2016 and December 31, 2015, substantially all of our loans were to customers located in Virginia and Maryland. We are not dependent on any single customer or group of customers whose insolvency would have a material adverse effect on operations.

 

Net loan growth in the first quarter of 2016 was a robust $41.2 million. $11.9 million of that amount were residential mortgages purchased for our portfolio from Southern Trust Mortgage. Non-owner occupied commercial real estate loans increased from $256.5 million as of December 31, 2015, to $282.5 million as of March 31, 2016. Multi-family residential loans increased from $25.5 million as of the end of 2015 to $31.4 million as of March 31, 2016.

 

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Asset Quality

 

We will generally place a loan on nonaccrual status when it becomes 90 days past due. Loans will also be placed on nonaccrual status in cases where we are uncertain whether the borrower can satisfy the contractual terms of the loan agreement. Cash payments received while a loan is categorized as nonaccrual will be recorded as a reduction of principal as long as doubt exists as to future collections.

 

We maintain appraisals on loans secured by real estate, particularly those categorized as nonperforming loans and potential problem loans. In instances where appraisals reflect reduced collateral values, we make an evaluation of the borrower’s overall financial condition to determine the need, if any, for impairment or write-down to their fair values. If foreclosure occurs, we record other real estate owned at the lower of our recorded investment in the loan or fair value less our estimated costs to sell.

 

Our loss and delinquency experience on our loan portfolio has been limited by a number of factors, including our underwriting standards and the relatively short period of time since the loans were originated. Whether our loss and delinquency experience in the area of our portfolio will increase significantly depends upon the value of the real estate securing loans and economic factors such as the overall economy of the region.

 

Non-covered Loans and Assets

 

Non-covered OREO as of March 31, 2016 was $9.8 million compared to $10.1 million as of the end of the previous year. During the first quarter of 2016 we sold two real estate owned (OREO) properties recognizing gains of $155 thousand, and we recognized impairment in the amount of $275 thousand on three OREO properties resulting in a net loss of $120 thousand. This compared to a loss on OREO of $320 thousand for the first quarter of 2015 as a result of recognizing impairment on two OREO properties.

 

Non-covered nonaccrual loans were $2.9 million ($2.3 million of which were fully covered by SBA guarantees) at March 31, 2016, compared to $4.2 million ($3.5 million of which were loans fully covered by SBA guarantees) at the end of last year. The ratio of non-covered non-performing assets (excluding the SBA guaranteed loans) to non-covered assets improved from 1.07% at the end of 2015 to 0.99% at March 31, 2016. The portions of these SBA loans that were unguaranteed were charged off.

 

We have an internal loan review and a loan committee, both of which provide on-going monitoring to identify and address issues with problem loans. The loan loss provision is determined after consideration of all known relevant internal and external factors affecting loan collectability to maintain the allowance for loan and lease losses at a level necessary to absorb estimated credit losses. Our allowance for loan losses as a percentage of non-covered total loans at March 31, 2016 was 1.04%, compared to 1.06% at the end of 2015. Management believes the allowance is adequate at this time but continues to monitor trends in environmental factors which may potentially affect future losses.

 

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The following table presents a comparison of non-covered nonperforming assets as of March 31, 2016 and December 31, 2015 (in thousands):

 

   March 31,   December 31, 
   2016   2015 
         
Nonaccrual loans  $2,904   $4,173 
Loans past due 90 days and accruing interest   -    - 
Total nonperforming loans   2,904    4,173 
Other real estate owned   9,762    10,096 
Total nonperforming assets  $12,666   $14,269 
           
SBA guaranteed amounts included in nonaccrual loans  $2,272   $3,541 
           
Allowance for loan losses to nonperforming loans   299.24%   201.80%
Allowance for loan losses to total non-covered loans   1.04%   1.06%
Nonperforming assets excluding SBA guaranteed loans to total non-covered assets   0.99%   1.07%

 

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

 

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

 

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

 

During the three months ending March 31, 2015, there were no loans modified in troubled debt restructurings. No TDRs defaulted during the three months ending March 31, 2015, which had been modified in the previous 12 months.

 

Covered Loans and Assets

 

Covered loans identified as impaired totaled $1.0 million as of March 31, 2016 and $1.2 million as of December 31, 2015. Nonaccrual loans were $640 thousand and $698 thousand at March 31, 2016 and December 31, 2015, respectively. At March 31, 2016 and December 31, 2015, there were no loans past due 90 days or more and accruing interest.

 

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Securities

 

Investment securities, available for sale and held to maturity, were $102.6 million at March 31, 2016 up from $101.0 million at December 31, 2015.

 

Securities in our investment portfolio as of March 31, 2016 were as follows:

 

·residential government-sponsored mortgage-backed securities in the amount of $19.8 million and residential government-sponsored collateralized mortgage obligations totaling $2.8 million

 

·callable agency securities in the amount of $59.1 million

 

·municipal bonds in the amount of $15.1 million with a taxable equivalent yield of 3.32% and ratings as follows:

 

Rating     Amount 
Service  Rating  (in thousands) 
Moody's  Aaa  $505 
Moody's  Aa2   3,621 
Moody's  Aa3   710 
Standard & Poor's  AAA   3,087 
Standard & Poor's  AA+   591 
Standard & Poor's  AA   5,984 
Standard & Poor's  AA-   598 
      $15,096 

 

·trust preferred securities in the amount of $5.8 million, $4.0 million of which is Alesco VII A1B which is rated A1 (Moody’s), BBB+ (Standard and Poor’s) and A (Fitch)

 

During the first quarter of 2016, we purchased $11.0 million of callable agency securities. Three callable agency securities in the amount of $7.9 million were called.

 

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At March 31, 2016, we owned pooled trust preferred securities as follows (in thousands):

 

                                  Previously 
                              % of Current   Recognized 
                              Defaults and   Cumulative 
      Ratings                Estimated   Deferrals to   Other 
   Tranche  When Purchased  Current Ratings      Fair   Total   Comprehensive 
Security  Level  Moody's  Fitch  Moody's  Fitch  Par Value   Book Value   Value   Collateral   Loss (1) 
Held to Maturity                 (in thousands)         
ALESCO VII  A1B  Senior  Aaa  AAA  A1  A  $4,367   $3,998   $3,604    13%  $248 
MMCF III B  Senior Sub  A3  A-  Ba1  BB   276    271    228    32%   5 
                   4,643    4,269    3,832        $253 
                                           
                                  Cumulative OTTI 
Available for Sale                                 Related to 
Other Than Temporarily Impaired:                        Credit Loss (2) 
TPREF FUNDING II  Mezzanine  A1  A-  Caa3  C   1,500    1,100    510    37%   400 
ALESCO V C1  Mezzanine  A2  A  Caa3  C   2,150    1,490    1,037    14%   660 
                   3,650    2,590    1,547        $1,060 
                                         
Total                 $8,293   $6,859   $5,379           

 

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

(2)  Pre-tax

 

Each of these securities has been evaluated for potential impairment under accounting guidelines. In performing a detailed cash flow analysis of each security, Sonabank works with independent third parties to identify the most reflective estimate of the cash flow estimated to be collected. If this estimate results in a present value of expected cash flows that is less than the amortized cost basis of a security (that is, credit loss exists), an OTTI is considered to have occurred. If there is no credit loss, any impairment is considered temporary.

 

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

 

Liquidity and Funds Management

 

The objective of our liquidity management is to assure the ability to meet our financial obligations. These obligations include the payment of deposits on demand or at maturity, the repayment of borrowings at maturity and the ability to fund commitments and other new business opportunities. We obtain funding from a variety of sources, including customer deposit accounts, customer certificates of deposit and payments on our loans and investments. Historically, our level of core deposits has been insufficient to fully fund our lending activities. As a result, we have sought funding from additional sources, including institutional certificates of deposit and the sale of available-for-sale investment securities. In addition, we maintain lines of credit from the Federal Home Loan Bank of Atlanta and utilize securities sold under agreements to repurchase and reverse repurchase agreement borrowings from approved securities dealers.

 

We prepare a cash flow forecast for one year with the first three months prepared on a weekly basis and on a monthly basis thereafter. The projections incorporate expected cash flows on loans, investments securities, and deposits based on data used to prepare our interest rate risk analyses. To estimate loan growth over the one year period, the projection incorporates the scheduled loan closings in the Loan Pipeline Report along with other management estimates.

 

We recently purchased liquidity risk software with which we can monitor our liquidity risk at a point in time and prepare cash flow and funds availability projections over a two year period. The projections can be run using a base case and several stress levels.

 

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During the three months ended March 31, 2016, we funded our financial obligations with deposits, securities sold under agreements to repurchase and borrowings from the Federal Home Loan Bank of Atlanta. At March 31, 2016, we had $122.5 million of unfunded lines of credit and undisbursed construction loan funds. Our approved loan commitments were $2.0 million at March 31, 2016. Management anticipates that funding requirements for these commitments can be met from the normal sources of funds.

 

Capital Resources

 

The following table provides a comparison of our leverage and risk-weighted capital ratios and the leverage and risk-weighted capital ratios of the bank at the dates indicated to the minimum and well-capitalized regulatory standards (dollars in thousands):

 

           Required     
           For Capital   To Be Categorized as 
   Actual   Adequacy Purposes   Well Capitalized 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
March 31, 2016                              
Southern National                              
Common equity tier 1 capital ratio  $111,043    12.79%  $39,077    4.50%  $56,445    6.50%
Tier 1 risk-based capital ratio   111,043    12.79%   52,103    6.00%   69,470    8.00%
Total risk-based capital ratio   119,734    13.79%   69,470    8.00%   86,838    10.00%
Leverage ratio   111,043    10.83%   41,025    4.00%   51,281    5.00%
Sonabank                              
Common equity tier 1 capital ratio  $109,779    12.65%  $39,057    4.50%  $56,416    6.50%
Tier 1 risk-based capital ratio   109,779    12.65%   52,076    6.00%   69,435    8.00%
Total risk-based capital ratio   118,469    13.65%   69,435    8.00%   86,794    10.00%
Leverage ratio   109,779    10.71%   41,008    4.00%   51,260    5.00%
                               
December 31, 2015                              
Southern National                              
Common equity tier 1 capital ratio  $109,276    13.13%  $37,254    4.50%  $54,101    6.50%
Tier 1 risk-based capital ratio   109,276    13.13%   49,939    6.00%   66,585    8.00%
Total risk-based capital ratio   117,697    14.14%   66,585    8.00%   83,232    10.00%
Leverage ratio   109,276    11.06%   39,509    4.00%   49,386    5.00%
Sonabank                              
Common equity tier 1 capital ratio  $108,054    12.99%  $37,436    4.50%  $54,075    6.50%
Tier 1 risk-based capital ratio   108,054    12.99%   49,915    6.00%   66,553    8.00%
Total risk-based capital ratio   116,475    14.00%   66,553    8.00%   83,192    10.00%
Leverage ratio   108,054    10.94%   39,493    4.00%   49,366    5.00%

 

The most recent regulatory notification categorized Sonabank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed Sonabank’s category.

 

Beginning on January 1, 2016, SNBV and Sonabank must maintain a capital conservation buffer to avoid restrictions on capital distributions or discretionary bonus payments.  This buffer must consist solely of Common Equity Tier 1 Capital, but the buffer applies to all three measurements (Common Equity Tier 1, Tier 1 capital and total capital) in addition to the minimum risk-based capital requirements.  The capital conservation buffer required for 2016 is common equity equal to .625% of risk-weighted assets and will increase by .625% per year until reaching 2.5% beginning January 1, 2019.  

 

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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are engaged primarily in the business of investing funds obtained from deposits and borrowings into interest-earning loans and investments. Consequently, our earnings depend to a significant extent on our net interest income, which is the difference between the interest income on loans and other investments and the interest expense on deposits and borrowings. To the extent that our interest-bearing liabilities do not reprice or mature at the same time as our interest-earning assets, we are subject to interest rate risk and corresponding fluctuations in net interest income. We have employed asset/liability management policies that seek to manage our interest income, without having to incur unacceptable levels of credit or investment risk.

 

We use simulation modeling to manage our interest rate risk, and we review quarterly interest sensitivity reports prepared for us by FTN Financial using the Sendero ALM Analysis System. This approach uses a model which generates estimates of the change in our economic value of equity (EVE) over a range of interest rate scenarios. EVE is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts using assumptions about estimated loan prepayment rates, reinvestment rates and deposit decay rates.

 

The following tables are based on an analysis prepared by FTN Financial setting forth an analysis of our interest rate risk as measured by the estimated change in EVE resulting from instantaneous and sustained parallel shifts in the yield curve (plus 400 basis points or minus 200 basis points, measured in 100 basis point increments) as of March 31, 2016 and as of December 31, 2015, and all changes are within our ALM Policy guidelines except for the changes resulting from the 400 basis point increase in interest rates at March 31, 2016. We have determined that the main factor contributing to the greater EVE sensitivity is growth in shorter term funding. However, the solution would cause a large decrease in net interest income in the short term.

 

   Sensitivity of Economic Value of Equity 
   As of March 31, 2016 
                     
               Economic Value of 
Change in  Economic Value of Equity   Equity as a % of 
Interest Rates                    
in Basis Points      $ Change   % Change   Total   Equity 
(Rate Shock)  Amount   From Base   From Base   Assets   Book Value 
   (Dollar amounts in thousands) 
                     
Up 400  $103,899   $(36,564)   -26.03%   9.58%   85.76%
Up 300   112,573    (27,890)   -19.86%   10.38%   92.92%
Up 200   121,900    (18,563)   -13.22%   11.24%   100.61%
Up 100   131,990    (8,473)   -6.03%   12.17%   108.94%
Base   140,463    -    0.00%   12.95%   115.94%
Down 100   126,676    (13,787)   -9.82%   11.68%   104.56%
Down 200   121,581    (18,882)   -13.44%   11.21%   100.35%

 

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   Sensitivity of Economic Value of Equity 
   As of December 31, 2015 
                     
               Economic Value of 
Change in  Economic Value of Equity   Equity as a % of 
Interest Rates                    
in Basis Points      $ Change   % Change   Total   Equity 
(Rate Shock)  Amount   From Base   From Base   Assets   Book Value 
   (Dollar amounts in thousands) 
                     
Up 400  $108,441   $(34,579)   -24.18%   10.47%   90.64%
Up 300   115,906    (27,114)   -18.96%   11.19%   96.88%
Up 200   124,098    (18,922)   -13.23%   11.98%   103.73%
Up 100   133,386    (9,634)   -6.74%   12.87%   111.49%
Base   143,020    -    0.00%   13.80%   119.55%
Down 100   130,510    (12,510)   -8.75%   12.60%   109.09%
Down 200   122,637    (20,383)   -14.25%   11.84%   102.51%

 

Our interest rate sensitivity is also monitored by management through the use of a model run by FTN Financial that generates estimates of the change in the net interest income over a range of interest rate scenarios. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. In this regard, the model assumes that the composition of our interest sensitive assets and liabilities existing at March 31, 2016 and December 31, 2015 remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. All changes are within our ALM Policy guidelines.

 

   Sensitivity of Net Interest Income 
   As of March 31, 2016 
             
Change in  Adjusted Net Interest Income   Net Interest Margin 
Interest Rates                
in Basis Points      $ Change       % Change 
(Rate Shock)  Amount   From Base   Percent   From Base 
   (Dollar amounts in thousands) 
                 
Up 400  $39,556   $3,762    3.81%   0.35%
Up 300   38,604    2,810    3.72%   0.26%
Up 200   37,678    1,884    3.64%   0.18%
Up 100   36,854    1,060    3.56%   0.10%
Base   35,794    -    3.46%   0.00%
Down 100   36,494    700    3.53%   0.07%
Down 200   36,599    805    3.54%   0.08%

 

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   Sensitivity of Net Interest Income 
   As of December 31, 2015 
             
Change in  Adjusted Net Interest Income   Net Interest Margin 
Interest Rates                
in Basis Points      $ Change       % Change 
(Rate Shock)  Amount   From Base   Percent   From Base 
   (Dollar amounts in thousands) 
                 
Up 400  $39,018   $3,252    3.94%   0.32%
Up 300   38,030    2,264    3.84%   0.22%
Up 200   37,064    1,298    3.75%   0.13%
Up 100   36,220    454    3.66%   0.04%
Base   35,766    -    3.62%   0.00%
Down 100   35,646    (120)   3.60%   -0.02%
Down 200   35,504    (262)   3.59%   -0.03%

 

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in EVE requires the making of certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. Accordingly, although the EVE tables and Sensitivity of Net Interest Income (NII) tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net worth and net interest income. Sensitivity of EVE and NII are modeled using different assumptions and approaches. In the low interest rate environment that currently exists, limitations on downward adjustments for interest rates, particularly as they apply to deposits, can and do result in anomalies in scenarios that are unlikely to occur due to the current low interest rate environment.

 

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ITEM 4 – CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this quarterly report on Form 10-Q, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d -15(c) under the Securities Exchange Act of 1934). Based upon that evaluation, our chief executive officer and chief financial officer have concluded that these controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

 

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

(b) Changes in Internal Control over Financial Reporting. There have been no changes in Southern National’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1 – LEGAL PROCEEDINGS

 

Southern National and Sonabank may, from time to time, be a party to various legal proceedings arising in the ordinary course of business. There are no proceedings pending, or to management’s knowledge, threatened, against Southern National or Sonabank as of March 31, 2016.

 

ITEM 1A – RISK FACTORS

 

As of March 31, 2016 there were no material changes to the risk factors previously disclosed on our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Item 2. – Unregistered Sales of Equity Securities and Use of Proceeds

 

Not applicable

 

Item 3. – Defaults Upon Senior Securities

 

Not applicable

 

Item 4. – MINE SAFETY DISCLOSURES

 

Not applicable

 

Item 5. – Other Information

 

Not applicable

 

ITEM 6 - EXHIBITS

 

(a) Exhibits.

 

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  Exhibit No.   Description

 

  31.1*   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
  31.2*   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
  32.1**   Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*   Filed with this Quarterly Report on Form 10-Q
**   Furnished with this Quarterly Report on Form 10-Q

 

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Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Southern National Bancorp of Virginia, Inc.
  (Registrant)

 

May 10, 2016   /s/ Georgia S. Derrico  
(Date)   Georgia S. Derrico,  
    Chairman of the Board and Chief Executive Officer
       
May 10, 2016   /s/ William H. Lagos  
(Date)   William H. Lagos,  
    Senior Vice President and Chief Financial Officer

  

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