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EX-32.1 - EXHIBIT 32.1 - Southern National Bancorp of Virginia Inct1600705_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Southern National Bancorp of Virginia Inct1600705_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Southern National Bancorp of Virginia Inct1600705_ex31-1.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2016

 

Commission File No. 001-33037

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)

 

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

 

6830 Old Dominion Drive

McLean, Virginia 22101

(Address of principal executive offices) (zip code)

 

(703) 893-7400

(Registrant’s telephone number, including area code)

 

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

 

YES x              NO ¨

 

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

 

YES x              NO ¨

 

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

 

Large accelerated filer   ¨        Accelerated filer x   Smaller reporting company ¨

 

Non-accelerated filer   ¨  (Do not check if a smaller reporting company)

 

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

 

As of October 25, 2016, there were 12,261,643 shares of common stock outstanding.

 

 

 

 

 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

September 30, 2016

 

INDEX

 

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

 

 

 

 

ITEM I - FINANCIAL INFORMATION

PART I - FINANCIAL STATEMENTS

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

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

 

   September 30,   December 31, 
   2016   2015 
ASSETS          
Cash and cash equivalents:          
Cash and due from financial institutions  $4,121   $3,972 
Interest-bearing deposits in other financial institutions   46,285    26,364 
Total cash and cash equivalents   50,406    30,336 
           
Securities available for sale, at fair value   3,908    4,209 
           
Securities held to maturity, at amortized cost (fair value of $87,772 and $96,464, respectively)   86,958    96,780 
           
Covered loans   29,561    34,373 
Non-covered loans   883,270    795,052 
Total loans   912,831    829,425 
Less allowance for loan losses   (8,469)   (8,421)
Net loans   904,362    821,004 
           
Stock in Federal Reserve Bank and Federal Home Loan Bank   7,504    6,929 
Equity investment in mortgage affiliate   5,212    4,459 
Preferred investment in mortgage affiliate   2,555    2,555 
Bank premises and equipment, net   8,389    8,882 
Goodwill   10,514    10,514 
Core deposit intangibles, net   925    1,093 
FDIC indemnification asset   2,306    2,922 
Bank-owned life insurance   23,650    23,126 
Other real estate owned   9,341    10,439 
Deferred tax assets, net   6,784    6,716 
Other assets   12,622    6,143 
           
Total assets  $1,135,436   $1,036,107 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Noninterest-bearing demand deposits  $91,567   $83,769 
Interest-bearing deposits:          
NOW accounts   31,197    28,080 
Cash management accounts   9,660    - 
Money market accounts   129,664    131,731 
Savings accounts   51,114    49,939 
Time deposits   602,069    531,775 
Total interest-bearing deposits   823,704    741,525 
Total deposits   915,271    825,294 
           
Securities sold under agreements to repurchase   -    10,381 
Federal Home Loan Bank (FHLB) advances - short term   75,000    59,000 
Federal Home Loan Bank (FHLB) advances - long term   10,000    15,000 
Other liabilities   10,120    6,796 
Total liabilities   1,010,391    916,471 
           
Commitments and contingencies (See Note 5)   -    - 
           
Stockholders' equity:          
Preferred stock, $.01 par value.  Authorized 5,000,000 shares; no shares issued and outstanding   -    - 
Common stock, $.01 par value.  Authorized 45,000,000 shares; issued and outstanding, 12,261,643 shares at September 30, 2016 and 12,234,443 at December 31, 2015   123    122 
Additional paid in capital   104,805    104,389 
Retained earnings   20,915    15,735 
Accumulated other comprehensive loss   (798)   (610)
Total stockholders' equity   125,045    119,636 
           
Total liabilities and stockholders' equity  $1,135,436   $1,036,107 

 

See accompanying notes to consolidated financial statements.

 

 2 

 

  

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

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

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
                 
   2016   2015   2016   2015 
                 
Interest and dividend income :                    
Interest and fees on loans  $11,792   $10,099   $33,790   $29,620 
Interest and dividends on taxable securities   581    587    2,059    1,772 
Interest and dividends on tax exepmt securities   84    100    252    302 
Interest and dividends on other earning assets   162    362    482    621 
Total interest and dividend income   12,619    11,148    36,583    32,315 
Interest expense:                    
Interest on deposits   2,128    1,796    5,918    4,660 
Interest on borrowings   118    169    406    521 
Total interest expense   2,246    1,965    6,324    5,181 
                     
Net interest income   10,373    9,183    30,259    27,134 
                     
Provision for loan losses   2,050    850    4,062    2,875 
Net interest income after provision for loan losses   8,323    8,333    26,197    24,259 
                     
Noninterest income:                    
Account maintenance and deposit service fees   225    243    675    703 
Income from bank-owned life insurance   175    160    524    464 
Equity income from mortgage affiliate   749    492    1,381    1,270 
Gain on sale of other assets   -    -    -    7 
Net gain on sale of available for sale securities   -    -    -    520 
Other   26    69    88    164 
                     
Total noninterest income   1,175    964    2,668    3,128 
                     
Noninterest expenses:                    
Salaries and benefits   2,699    2,892    8,753    8,531 
Occupancy expenses   783    807    2,377    2,504 
Furniture and equipment expenses   283    194    720    628 
Amortization of core deposit intangible   44    66    168    196 
Virginia franchise tax expense   96    88    290    264 
FDIC assessment   165    174    478    502 
Data processing expense   184    164    533    498 
Telephone and communication expense   201    197    586    604 
Amortization of FDIC indemnification asset   187    105    606    351 
Net (gain) loss on other real estate owned   (9)   97    74    360 
Other operating expenses   725    787    2,403    2,543 
Total noninterest expenses   5,358    5,571    16,988    16,981 
Income before income taxes   4,140    3,726    11,877    10,406 
Income tax expense   1,375    1,245    3,757    3,455 
Net income  $2,765   $2,481   $8,120   $6,951 
Other comprehensive income (loss):                    
Unrealized gain (loss) on available for sale securities  $188   $(7)  $(296)  $(225)
Realized amount on securities sold, net   -    -    -    (520)
Non-credit component of other-than-temporary impairment on held-to-maturity securities   -    -    -    4,278 
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale   3    3    10    28 
Net unrealized gain (loss)   191    (4)   (286)   3,561 
Tax effect   (64)   1    98    (1,211)
Other comprehensive income (loss)   127    (3)   (188)   2,350 
Comprehensive income  $2,892   $2,478   $7,932   $9,301 
Earnings per share, basic  $0.23   $0.20   $0.66   $0.56 
Earnings per share, diluted  $0.22   $0.20   $0.65   $0.56 

 

See accompanying notes to consolidated financial statements.

 

 3 

 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

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

 

               Accumulated     
       Additional       Other     
   Common   Paid in   Retained   Comprehensive     
   Stock   Capital   Earnings   Loss   Total 
                     
Balance - December 31, 2015  $122   $104,389   $15,735   $(610)  $119,636 
Comprehensive income:                         
Net income             8,120         8,120 
Change in unrealized loss  on securities available for sale (net of tax benefit, $101)                  (195)   (195)
Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $3 and accretion, $7 and amounts recorded into other comprehensive income at transfer)                  7    7 
Dividends on common stock ($.24 per share)             (2,940)        (2,940)
Issuance of common stock for warrants exercised (11,000 shares)   1    100              101 
Issuance of common stock under Stock                         
Incentive Plan (16,200 shares)        118              118 
Stock-based compensation expense        198              198 
                          
Balance - September 30, 2016  $123   $104,805   $20,915   $(798)  $125,045 

 

See accompanying notes to consolidated financial statements.

 

 4 

 

  

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

(dollars in thousands) (Unaudited)

 

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

 

See accompanying notes to consolidated financial statements.

 

 5 

 

  

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2016

 

1.ACCOUNTING POLICIES

 

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

 

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

 

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

 

Use of Estimates

 

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

 

Recent Accounting Pronouncements

 

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

 

 6 

 

  

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

 

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

 

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

 

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

 

 7 

 

  

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.

 

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

 

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

 

2.STOCK- BASED COMPENSATION

 

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

 

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

 

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

 

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

A summary of the activity in the stock option plan during the nine months ended September 30, 2016 follows (dollars in thousands):

 

           Weighted     
       Weighted   Average   Aggregate 
       Average   Remaining   Intrinsic 
       Exercise   Contractual   Value 
   Shares   Price   Term   (in thousands) 
Options outstanding, beginning of period   664,400   $9.00           
Granted   136,000    11.99           
Forfeited   -    -           
Exercised   (16,200)   7.35           
Options outstanding, end of period   784,200   $9.55    6.7   $2,748 
                     
Vested or expected to vest   784,200   $9.55    6.7   $2,748 
                     
Exercisable at end of period   402,950   $7.98    4.9   $1,910 

 

3.       SECURITIES

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The fair value and carrying amount, if different, of debt securities as of September 30, 2016, by contractual maturity were as follows (in thousands). Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations, are shown separately.

 

   Held to Maturity   Available for Sale 
   Amortized       Amortized     
   Cost   Fair Value   Cost   Fair Value 
Due in five to ten years  $7,190   $7,353   $-   $- 
Due after ten years   57,582    57,564    4,872    3,908 
Residential government-sponsored mortgage-backed securities   19,648    20,322    -    - 
Residential government-sponsored collateralized mortgage obligations   2,538    2,533    -    - 
Total  $86,958   $87,772   $4,872   $3,908 

 

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

 

Southern National monitors the portfolio for indicators of other than temporary impairment. At September 30, 2016 and December 31, 2015, certain securities’ fair values were below cost. As outlined in the table below, there were securities with fair values totaling approximately $24.6 million in the portfolio with the carrying value exceeding the estimated fair value that are considered temporarily impaired at September 30, 2016. Because the decline in fair value is attributable to changes in interest rates and market illiquidity, and not credit quality, and because we do not have the intent to sell these securities and it is likely that we will not be required to sell the securities before their anticipated recovery, management does not consider these securities to be other-than-temporarily impaired as of September 30, 2016. The following tables present information regarding securities in a continuous unrealized loss position as of September 30, 2016 and December 31, 2015 (in thousands) by duration of time in a loss position:

 

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September 30, 2016                        
   Less than 12 months   12 Months or More   Total 
Available for Sale  Fair value   Unrealized
Losses
   Fair value   Unrealized
Losses
   Fair value   Unrealized
Losses
 
Trust preferred securities  $-   $-   $1,572   $(1,018)  $1,572   $(1,018)

 

   Less than 12 months   12 Months or More   Total 
Held to Maturity  Fair value   Unrecognized
Losses
   Fair value   Unrecognized
Losses
   Fair value   Unrecognized
Losses
 
Residential government-sponsored mortgage-backed securities  $-   $-   $461   $(8)  $461   $(8)
Residential government-sponsored collateralized mortgage obligations   1,025    (1)   1,081    (6)   2,106    (7)
Government-sponsored agency securities   14,976    (25)   -    -    14,976    (25)
Obligations of states and political subdivisions   685    -    1,122    (8)   1,807    (8)
Trust preferred securities   -    -    3,721    (350)   3,721    (350)
   $16,686   $(26)  $6,385   $(372)  $23,071   $(398)

 

December 31, 2015                        
   Less than 12 months   12 Months or More   Total 
Available for Sale  Fair value   Unrealized
Losses
   Fair value   Unrealized
Losses
   Fair value   Unrealized
Losses
 
Trust preferred securities  $-   $-   $1,897   $(693)  $1,897   $(693)

 

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

 

As of September 30, 2016, we owned pooled trust preferred securities as follows:

 

                                  Previously 
                              % of Current   Recognized 
                              Defaults and   Cumulative 
      Ratings                Estimated   Deferrals to   Other 
   Tranche  When Purchased  Current Ratings      Fair   Total   Comprehensive 
Security  Level  Moody's  Fitch  Moody's  Fitch  Par Value   Book Value   Value   Collateral   Loss (1) 
Held to Maturity                 (in thousands)         
ALESCO VII  A1B  Senior  Aaa  AAA  A1  A  $4,142   $3,802   $3,496    11%  $242 
MMCF III B  Senior Sub  A3  A-  Ba1  BB   273    268    224    32%   5 
                   4,415    4,070    3,720        $247 
                                         
                                  Cumulative OTTI 
Available for Sale                                 Related to 
Other Than Temporarily Impaired:                                 Credit Loss (2) 
TPREF FUNDING II  Mezzanine  A1  A-  Caa3  C   1,500    1,099    623    37%   400 
ALESCO V C1  Mezzanine  A2  A  Caa3  C   2,150    1,490    949    10%   660 
                   3,650    2,589    1,572        $1,060 
                                         
Total                 $8,065   $6,659   $5,292           

 

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

 

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

 

·.5% of the remaining performing collateral will default or defer per annum.
·Recoveries of 7% with a two year lag on all defaults and deferrals.
·No prepayments for 10 years and then 1% per annum for the remaining life of the security.

 

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

 

We recognized no OTTI charges during the three and nine months ended September 30, 2016 and the three and nine months ended September 30, 2015.

 

The following table presents a roll forward of the credit losses on our securities previously classified as held to maturity and now classified as available for sale recognized in earnings for the nine months ended September 30, 2016 and 2015 (in thousands):

 

   2016   2015 
         
Amount of cumulative other-than-temporary impairment related to credit loss prior to January 1  $1,060   $8,949 
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized   -    - 
Amounts related to credit loss for which an other-than-temporary impairment was previously recognized   -    - 
Reductions due to sales of securities for which an other-than-temporary impairment was previously recognized   -    (7,889)
Reductions due to realized losses   -    - 
Amount of cumulative other-than-temporary impairment related to credit loss as of September 30  $1,060   $1,060 

 

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

 

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

 

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

 

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

 

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

 

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4.LOANS AND ALLOWANCE FOR LOAN LOSSES

 

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

 

   Covered   Non-covered   Total   Covered   Non-covered   Total 
   Loans (1)   Loans   Loans   Loans (1)   Loans   Loans 
   September 30, 2016   December 31, 2015 
Loans secured by real estate:                              
Commercial real estate - owner-occupied  $-   $141,969   $141,969   $-   $141,521   $141,521 
Commercial real estate - non-owner-occupied   -    301,688    301,688    -    256,513    256,513 
Secured by farmland   -    552    552    -    578    578 
Construction and land loans   -    78,352    78,352    -    67,832    67,832 
Residential 1-4 family   11,421    202,526    213,947    12,994    165,077    178,071 
Multi- family residential   -    32,979    32,979    -    25,501    25,501 
Home equity lines of credit   18,140    10,682    28,822    21,379    13,798    35,177 
Total real estate loans   29,561    768,748    798,309    34,373    670,820    705,193 
                               
Commercial loans   -    115,590    115,590    -    124,985    124,985 
Consumer loans   -    916    916    -    1,366    1,366 
Gross loans   29,561    885,254    914,815    34,373    797,171    831,544 
                               
Less deferred fees on loans   -    (1,984)   (1,984)   -    (2,119)   (2,119)
Loans, net of deferred fees  $29,561   $883,270   $912,831   $34,373   $795,052   $829,425 

 

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

 

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

 

As part of the Greater Atlantic acquisition, the Bank and the FDIC entered into loss sharing agreements on approximately $143.4 million (contractual basis) of Greater Atlantic Bank’s assets.  There were two agreements with the FDIC, one for single family loans which is a 10-year agreement expiring in December 2019, and one for non-single family (commercial) assets which was a 5-year agreement which expired in December 2014. The Bank will share in the losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharing agreements; we refer to these assets collectively as “covered assets.”  Loans that are not covered in the loss sharing agreement are referred to as “non-covered loans”. As of September 30, 2016, non-covered loans included $24.6 million of loans acquired in the HarVest acquisition and $45.1 million acquired in the PGFSB acquisition.

 

Accretable discount on the acquired Greater Atlantic loans, the PGFSB loans and the HarVest loans was $6.6 million and $7.9 million at September 30, 2016 and December 31, 2015 respectively.

 

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

 

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

 

September 30, 2016  Covered Loans   Non-covered Loans   Total Loans 
       Unpaid           Unpaid           Unpaid     
   Recorded   Principal   Related   Recorded   Principal   Related   Recorded   Principal   Related 
   Investment   Balance   Allowance   Investment (1)   Balance   Allowance   Investment (1)   Balance   Allowance 
With no related allowance recorded                                             
Commercial real estate - owner occupied  $-   $-   $-   $5,610   $5,619   $-   $5,610   $5,619   $- 
Commercial real estate - non-owner occupied (2)   -    -    -    131    223    -    131    223    - 
Construction and land development   -    -    -    -    -    -    -    -    - 
Commercial loans   -    -    -    2,535    2,990    -    2,535    2,990    - 
Residential 1-4 family (4)   958    1,115    -    -    -    -    958    1,115    - 
Other consumer loans   -    -    -    -    -    -    -    -    - 
                                              
Total  $958   $1,115   $-   $8,276   $8,832   $-   $9,234   $9,947   $- 
                                              
With an allowance recorded                                             
Commercial real estate - owner occupied  $-   $-   $-   $692   $692   $150   $692   $692   $150 
Commercial real estate - non-owner occupied (2)   -    -    -    -    -    -    -    -    - 
Construction and land development   -    -    -    -    -    -    -    -    - 
Commercial loans   -    -    -    3,977    5,897    650    3,977    5,897    650 
Residential 1-4 family (4)   -    -    -    -    -    -    -    -    - 
Other consumer loans   -    -    -    -    -    -    -    -    - 
                                              
Total  $-   $-   $-   $4,669   $6,589   $800   $4,669   $6,589   $800 
Grand total  $958   $1,115   $-   $12,945   $15,421   $800   $13,903   $16,536   $800 

 

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

 

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

 

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

 

 16 

 

 

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

 

Three months ended September 30, 2016  Covered Loans   Non-covered Loans   Total Loans 
   Average   Interest   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized   Investment   Recognized 
With no related allowance recorded                              
Commercial real estate - owner occupied  $-   $-   $7,984   $73   $7,984   $73 
Commercial real estate - non-owner occupied (1)   -    -    132    3    132    3 
Construction and land development   -    -    -    -    -    - 
Commercial loans   -    -    2,600    13    2,600    13 
Residential 1-4 family (2)   959    7    -    -    959    7 
Other consumer loans   -    -    -    -    -    - 
                               
Total  $959   $7   $10,716   $89   $11,675   $96 
                               
With an allowance recorded                              
Commercial real estate - owner occupied  $-   $-   $693   $8   $693   $8 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    - 
Construction and land development   -    -    -    -    -    - 
Commercial loans   -    -    4,140    39    4,140    39 
Residential 1-4 family (2)   -    -    -    -    -    - 
Other consumer loans   -    -    -    -    -    - 
                               
Total  $-   $-   $4,833   $47   $4,833   $47 
Grand total  $959   $7   $15,549   $136   $16,508   $143 

 

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

 

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

 

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

 

 17 

 

  

Nine months ended September 30, 2016                        
   Covered Loans   Non-covered Loans   Total Loans 
   Average   Interest   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized   Investment   Recognized 
With no related allowance recorded                              
Commercial real estate - owner occupied  $-   $-   $6,711   $220   $6,711   $220 
Commercial real estate - non-owner occupied (1)   -    -    134    8    134    8 
Construction and land development   -    -    -    -    -    - 
Commercial loans   -    -    2,852    41    2,852    - 
Residential 1-4 family (2)   996    24    -    -    996    24 
Other consumer loans   -    -    -    -    -    - 
                               
Total  $996   $24   $9,697   $269   $10,693   $252 
                               
With an allowance recorded                              
Commercial real estate - owner occupied  $-   $-   $696   $24   $696   $24 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    - 
Construction and land development   -    -    -    -    -    - 
Commercial loans   -    -    3,301    117    3,301    117 
Residential 1-4 family (2)   -    -    -    -    -    - 
Other consumer loans   -    -    -    -    -    - 
                               
Total  $-   $-   $3,997   $141   $3,997   $141 
Grand total  $996   $24   $13,694   $410   $14,690   $393 

 

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

 

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

 

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

 

 18 

 

  

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

 

September 30, 2016  30 - 59   60 - 89                     
   Days   Days   90 Days   Total   Nonaccrual   Loans Not   Total 
   Past Due   Past Due   or More   Past Due   Loans   Past Due   Loans 
Covered loans:                                   
Commercial real estate - owner occupied  $-   $-   $-   $-   $-   $-   $- 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    -    - 
Construction and land development   -    -    -    -    -    -    - 
Commercial loans   -    -    -    -    -    -    - 
Residential 1-4 family (2)   -    333    -    333    512    28,716    29,561 
Other consumer loans   -    -    -    -    -    -    - 
                                    
Total  $-   $333   $-   $333   $512   $28,716   $29,561 
                                    
Non-covered loans:                                   
Commercial real estate - owner occupied  $269   $-   $-   $269   $638   $141,062   $141,969 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    335,219    335,219 
Construction and land development   -    -    -    -    -    78,352    78,352 
Commercial loans   191    688    -    879    3,284    111,427    115,590 
Residential 1-4 family (2)   126    107    -    233    -    212,975    213,208 
Other consumer loans   -    -    -    -    -    916    916 
                                    
Total  $586   $795   $-   $1,381   $3,922   $879,951   $885,254 
                                    
Total loans:                                   
Commercial real estate - owner occupied  $269   $-   $-   $269   $638   $141,062   $141,969 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    335,219    335,219 
Construction and land development   -    -    -    -    -    78,352    78,352 
Commercial loans   191    688    -    879    3,284    111,427    115,590 
Residential 1-4 family (2)   126    440    -    566    512    241,691    242,769 
Other consumer loans   -    -    -    -    -    916    916 
                                    
Total  $586   $1,128   $-   $1,714   $4,434   $908,667   $914,815 

 

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

 

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

 

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

 

 19 

 

  

Activity in the allowance for non-covered loan and lease losses for the three and nine months ended September 30, 2016 and 2015 is summarized below (in thousands):

 

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

 

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

(2) Includes home equity lines of credit.

 

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

 

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

(2) Includes home equity lines of credit.

 

 20 

 

  

Activity in the allowance for covered loan and lease losses by class of loan for the three and nine months ended September 30, 2016 and 2015 is summarized below (in thousands):

 

   Commercial   Commercial                         
   Real Estate   Real Estate   Construction           Other         
Covered loans:  Owner   Non-owner   and Land   Commercial   1-4 Family   Consumer         
Three months ended September 30, 2016  Occupied   Occupied (1)   Development   Loans   Residential (3)   Loans   Unallocated   Total 
Allowance for loan losses:                                        
Beginning balance  $-   $-   $-   $-   $-   $-   $-   $- 
Charge offs   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    - 
Adjustments (2)   -    -    -    -    -    -    -    - 
Provision   -    -    -    -    -    -    -    - 
Ending balance  $-   $-   $-   $-   $-   $-   $-   $- 
                                         
Three months ended September 30, 2015                                        
Allowance for loan losses:                                        
Beginning balance  $-   $-   $-   $-   $17   $4   $-   $21 
Charge offs   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    - 
Adjustments (2)   -    -    -    -    -    -    -    - 
Provision   -    -    -    -    -    -    -    - 
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.

 

   Commercial   Commercial                         
   Real Estate   Real Estate   Construction           Other         
Covered loans:  Owner   Non-owner   and Land   Commercial   1-4 Family   Consumer         
Nine months ended September 30, 2016  Occupied   Occupied (1)   Development   Loans   Residential (3)   Loans   Unallocated   Total 
Allowance for loan losses:                                        
Beginning balance  $-   $-   $-   $-   $-   $-   $-   $- 
Charge offs   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    - 
Adjustments (2)   -    -    -    -    -    -    -    - 
Provision   -    -    -    -    -    -    -    - 
Ending balance  $-   $-   $-   $-   $-   $-   $-   $- 
                                         
Nine months ended September 30, 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.

 

 21 

 

  

The following tables present the balance in the allowance for loan losses and the recorded investment in non-covered loans by portfolio segment and based on impairment method as of September 30, 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