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EX-32.1 - EXHIBIT 32.1 - Southern National Bancorp of Virginia Inct1700298_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Southern National Bancorp of Virginia Inct1700298_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Southern National Bancorp of Virginia Inct1700298_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 March 31, 2017

 

Commission File No. 001-33037

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)

 

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

 

6830 Old Dominion Drive

McLean, Virginia 22101

(Address of principal executive offices) (zip code)

 

(703) 893-7400

(Registrant’s telephone number, including area code)

 

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

 

YES x              NO ¨

 

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

 

YES x              NO ¨

 

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

 

Large accelerated filer   ¨ Accelerated filer x Smaller reporting company ¨

 

Non-accelerated filer  ¨  An emerging growth company ¨

 

(Do not check if a smaller reporting company)

 

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

 

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

 

As of May 2, 2017, there were 12,340,993 shares of common stock outstanding.

 

 

 

 
 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

March 31, 2017

 

INDEX

 

      PAGE
       
PART 1 - FINANCIAL INFORMATION
       
Item 1 - Financial Statements    
  Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016   2
  Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2017 and 2016   3
  Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2017   4
  Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016   5
  Notes to Consolidated Financial Statements   6-26
       
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations   26-36
     
Item 3 – Quantitative and Qualitative Disclosures about Market Risk   37-39
     
Item 4 – Controls and Procedures   40
       
PART II - OTHER INFORMATION
       
Item 1 – Legal Proceedings   40
     
Item 1A – Risk Factors   40
     
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds   40
     
Item 3 – Defaults Upon Senior Securities   40
     
Item 4 – Mine Safety Disclosures   40
     
Item 5 – Other Information   40
     
Item 6 – Exhibits   40
     
Signatures   42
     
Certifications    

 

 
 

 

ITEM I - FINANCIAL INFORMATION

PART I - FINANCIAL STATEMENTS

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

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

 

   March 31,   December 31, 
   2017   2016 
ASSETS          
Cash and cash equivalents:          
Cash and due from financial institutions  $3,901   $4,656 
Interest-bearing deposits in other financial institutions   31,518    42,736 
Total cash and cash equivalents   35,419    47,392 
           
Securities available for sale, at fair value   4,238    3,918 
           
Securities held to maturity, at amortized cost (fair value of $87,054 and $83,344, respectively)   89,003    85,300 
           
Covered loans   25,666    28,180 
Non-covered loans   948,556    902,235 
Total loans   974,222    930,415 
Less allowance for loan losses   (8,678)   (8,610)
Net loans   965,544    921,805 
           
Stock in Federal Reserve Bank and Federal Home Loan Bank   8,917    7,929 
Equity investment in mortgage affiliate   4,150    4,629 
Preferred investment in mortgage affiliate   2,555    2,555 
Bank premises and equipment, net   8,083    8,227 
Goodwill   10,514    10,514 
Core deposit intangibles, net   825    874 
FDIC indemnification asset   1,920    2,111 
Bank-owned life insurance   23,989    23,826 
Other real estate owned   8,265    8,617 
Deferred tax assets, net   6,669    6,780 
Other assets   7,242    7,966 
           
Total assets  $1,177,333   $1,142,443 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Noninterest-bearing demand deposits  $101,674   $88,783 
Interest-bearing deposits:          
NOW accounts   26,287    26,338 
Cash management accounts   10,252    9,658 
Money market accounts   127,052    129,835 
Savings accounts   53,949    52,755 
Time deposits   577,003    605,613 
Total interest-bearing deposits   794,543    824,199 
Total deposits   896,217    912,982 
           
Federal Home Loan Bank (FHLB) advances - short term   116,000    95,000 
Subordinated notes   26,075    - 
Other liabilities   10,753    8,117 
Total liabilities   1,049,045    1,016,099 
           
Commitments and contingencies (See Note 5)   -    - 
           
Stockholders' equity:          
Preferred stock, $.01 par value. Authorized 5,000,000 shares; no shares issued and outstanding   -    - 
Common stock, $.01 par value. Authorized 45,000,000 shares; issued and outstanding, 12,330,043 shares at March 31, 2017 and 12,263,643 at December 31, 2016   123    123 
Additional paid in capital   105,544    104,884 
Retained earnings   23,195    22,126 
Accumulated other comprehensive loss   (574)   (789)
Total stockholders' equity   128,288    126,344 
           
Total liabilities and stockholders' equity  $1,177,333   $1,142,443 

 

See accompanying notes to consolidated financial statements.

 

 2

 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

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

 

   For the Three Months Ended 
   March 31, 
         
   2017   2016 
           
Interest and dividend income :          
Interest and fees on loans  $11,761   $10,757 
Interest and dividends on taxable securities   538    681 
Interest and dividends on tax exempt securities   84    84 
Interest and dividends on other earning assets   162    151 
Total interest and dividend income   12,545    11,673 
Interest expense:          
Interest on deposits   2,160    1,812 
Interest on subordinated notes   329    - 
Interest on other borrowings   165    150 
Total interest expense   2,654    1,962 
           
Net interest income   9,891    9,711 
           
Provision for loan losses   550    625 
Net interest income after provision for loan losses   9,341    9,086 
           
Noninterest income (loss):          
Account maintenance and deposit service fees   213    223 
Income from bank-owned life insurance   163    174 
Equity (loss) income from mortgage affiliate   (479)   80 
Other   36    24 
           
Total noninterest (loss) income   (67)   501 
           
Noninterest expenses:          
Salaries and benefits   2,898    3,128 
Occupancy expenses   791    809 
Furniture and equipment expenses   247    189 
Amortization of core deposit intangible   49    62 
Virginia franchise tax expense   111    97 
FDIC assessment   137    146 
Data processing expense   208    172 
Telephone and communication expense   162    187 
Amortization of FDIC indemnification asset   191    216 
Net loss on other real estate owned   53    120 
Merger expenses   323    - 
Other operating expenses   883    907 
Total noninterest expenses   6,053    6,033 
Income before income taxes   3,221    3,554 
Income tax expense   1,167    989 
Net income  $2,054   $2,565 
Other comprehensive income:          
Unrealized gain (loss) on available for sale securities  $322   $(337)
Non-credit component of other-than-temporary impairment on held-to-maturity securities   -    - 
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale   3    3 
Net unrealized gain (loss)   325    (334)
Tax effect   (110)   114 
Other comprehensive income (loss)   215    (220)
Comprehensive income  $2,269   $2,345 
Earnings per share, basic  $0.17   $0.21 
Earnings per share, diluted  $0.16   $0.21 

 

See accompanying notes to consolidated financial statements.

 

 3

 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2017

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

 

               Accumulated     
       Additional       Other     
   Common   Paid in   Retained   Comprehensive     
   Stock   Capital   Earnings   Loss   Total 
                     
Balance - December 31, 2016  $123   $104,884   $22,126   $(789)  $126,344 
Comprehensive income:                         
Net income             2,054         2,054 
Change in unrealized loss on securities available for sale (net of tax benefit, $109)                  213    213 
Change in unrecognized loss on securities held
to maturity for which a portion of OTTI has been recognized (net of tax, $1 and accretion,
$2 and amounts recorded into other comprehensive income at transfer)
                  2    2 
Dividends on common stock ($.08 per share)             (985)        (985)
Issuance of common stock for warrants exercised (49,500 shares)        449              449 
Issuance of common stock under Stock                         
Incentive Plan (16,900 shares)        151              151 
Stock-based compensation expense        60              60 
                          
Balance - March 31, 2017  $123   $105,544   $23,195   $(574)  $128,288 

 

See accompanying notes to consolidated financial statements.

 

 4

 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016

(dollars in thousands) (Unaudited)

 

   2017   2016 
         
Operating activities:          
Net income  $2,054   $2,565 
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:          
Depreciation   179    208 
Amortization of core deposit intangible   49    62 
Other amortization, net   54    - 
Accretion of loan discount   (349)   (502)
Amortization of FDIC indemnification asset   191    216 
Provision for loan losses   550    625 
Earnings on bank-owned life insurance   (163)   (174)
Equity loss (income) on mortgage affiliate   479    (80)
Stock based compensation expense   60    79 
Net loss on other real estate owned   53    120 
Net decrease (increase) in other assets   720    (1,549)
Net increase in other liabilities   2,636    734 
Net cash and cash equivalents provided by operating activities   6,513    2,304 
Investing activities:          
Purchases of held to maturity securities   (9,950)   (10,994)
Proceeds from paydowns, maturities and calls of held to maturity securities   6,204    9,059 
Loan originations and payments, net   (43,940)   (41,212)
Net increase in stock in Federal Reserve Bank and Federal Home Loan Bank   (988)   (660)
Proceeds from sale of other real estate owned   298    357 
Purchases of bank premises and equipment   (35)   (70)
Net cash and cash equivalents used in investing activities   (48,411)   (43,520)
Financing activities:          
Net (decrease) increase in deposits   (16,765)   32,244 
Cash dividends paid - common stock   (985)   (979)
Issuance of common stock for warrants exercised   449    - 
Issuance of common stock under Stock Incentive Plan   151    75 
Issuance of subordinated notes net of cost   26,075    - 
Net increase in short-term borrowings   21,000    13,664 
Net cash and cash equivalents provided by financing activities   29,925    45,004 
(Decrease) Increase in cash and cash equivalents   (11,973)   3,788 
Cash and cash equivalents at beginning of period   47,392    30,336 
Cash and cash equivalents at end of period  $35,419   $34,124 
           
Supplemental disclosure of cash flow information          
Cash payments for:          
Interest  $2,290   $1,903 
Income taxes   -    700 
Supplemental schedule of noncash investing and financing activities          
Transfer from covered loans to other real estate owned   -    144 

 

See accompanying notes to consolidated financial statements.

 

 5

 

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2017

 

1.ACCOUNTING POLICIES

 

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

 

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

 

The unaudited consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles (“U. S. GAAP”) for interim financial information and instructions for Form 10-Q and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by U. S. GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in Southern National’s Form 10-K for the year ended December 31, 2016.

 

Use of Estimates

 

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

 

Recent Accounting Pronouncements

 

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

 

 6

 

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of this ASU is permitted for all entities. Management currently anticipates recognizing a right-of-use asset and a lease liability associated with its long-term operating leases and is in the process of inventorying and categorizing its lease agreements.

 

In March 2016, the FASB issued ASU 2016-07, Investments – Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting. The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increase the level of ownership interest or degree of influence that result in the adoption of the equity method. The adoption of the amendments did not have an effect on our consolidated financial statements.

 

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

 

 7

 

 

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

 

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

 

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

 

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

 

 8

 

 

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

 

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

 

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

 

2.STOCK- BASED COMPENSATION

 

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

 

 9

 

 

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

 

For the three months ended March 31, 2017 and 2016, stock-based compensation expense was $60 thousand and $79 thousand, respectively. As of March 31, 2017, unrecognized compensation expense associated with the stock options was $390 thousand, which is expected to be recognized over a weighted average period of 2.3 years.

 

A summary of the activity in the stock option plan during the three months ended March 31, 2017 follows (dollars in thousands):

 

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

 

3.SECURITIES

 

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

 

   Amortized   Gross Unrealized   Fair 
March 31, 2017  Cost   Gains   Losses   Value 
Obligations of states and political subdivisions  $2,279   $12   $(20)  $2,271 
Trust preferred securities   2,589    -    (622)   1,967 
   $4,868   $12   $(642)  $4,238 

 

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

 

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

 

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

 

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

 

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

 

The fair value and carrying amount, if different, of debt securities as of March 31, 2017, by contractual maturity were as follows (in thousands). Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations, are shown separately.

 

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

 

Securities with a carrying amount of approximately $75.7 million and $73.9 million at March 31, 2017 and December 31, 2016, respectively, were pledged to secure public deposits, certain deposits and a line of credit for advances from the Federal Home Loan Bank of Atlanta (“FHLB”).

 

Southern National monitors the portfolio for indicators of other than temporary impairment. At March 31, 2017 and December 31, 2016, certain securities’ fair values were below cost. As outlined in the table below, there were securities with fair values totaling approximately $64.7 million in the portfolio with the carrying value exceeding the estimated fair value that are considered temporarily impaired at March 31, 2017. Because the decline in fair value is attributable to changes in interest rates and market illiquidity, and not credit quality, and because we do not have the intent to sell these securities and it is likely that we will not be required to sell the securities before their anticipated recovery, management does not consider these securities to be other-than-temporarily impaired as of March 31, 2017. The following tables present information regarding securities in a continuous unrealized loss position as of March 31, 2017 and December 31, 2016 (in thousands) by duration of time in a loss position:

 

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March 31, 2017

 

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

 

   Less than 12 months   12 Months or More   Total 
Held to Maturity  Fair value   Unrecognized
Losses
   Fair value   Unrecognized
Losses
   Fair value   Unrecognized
Losses
 
Residential government-sponsored mortgage-backed securities  $7,669   $(68)  $451   $(9)  $8,120   $(77)
Residential government-sponsored collateralized mortgage obligations   1,271    (27)   904    (22)   2,175    (49)
Government-sponsored agency securities   43,953    (2,023)   -    -    43,953    (2,023)
Obligations of states and political subdivisions   2,175    (40)   1,080    (47)   3,255    (87)
Trust preferred securities   -    -    3,504    (95)   3,504    (95)
   $55,068   $(2,158)  $5,939   $(173)  $61,007   $(2,331)

 

December 31, 2016

 

   Less than 12 months   12 Months or More   Total 
Available for Sale  Fair value   Unrealized
Losses
   Fair value   Unrealized
Losses
   Fair value   Unrealized
Losses
 
Obligations of states and political subdivisions  $1,706   $(30)  $-   $-   $1,706   $(30)
Trust preferred securities   -    -    1,658    (931)   1,658    (931)
   $1,706   $(30)  $1,658   $(931)  $3,364   $(961)

 

   Less than 12 months   12 Months or More   Total 
Held to Maturity  Fair value   Unrecognized
Losses
   Fair value   Unrecognized
Losses
   Fair value   Unrecognized
Losses
 
Residential government-sponsored mortgage-backed securities  $10,238   $(110)  $457   $(8)  $10,695   $(118)
Residential government-sponsored collateralized mortgage obligations   1,346    (27)   971    (27)   2,317    (54)
Government-sponsored agency securities                       -    - 
Obligations of states and political subdivisions   41,110    (1,865)   -    -    41,110    (1,865)
Trust preferred securities   3,578    (98)   1,065    (64)   4,643    (162)
    -    -    3,508    (146)   3,508    (146)
   $56,272   $(2,100)  $6,001   $(245)  $62,273   $(2,345)

 

As of March 31, 2017, we owned pooled trust preferred securities as follows:

 

                                  Previously 
                              % of Current   Recognized 
                              Defaults and   Cumulative 
      Ratings                Estimated   Deferrals to   Other 
   Tranche  When Purchased  Current Ratings      Fair   Total   Comprehensive 
Security  Level  Moody's  Fitch  Moody's  Fitch  Par Value   Book Value   Value   Collateral   Loss (1) 
Held to Maturity                 (in thousands)         
ALESCO VII A1B  Senior  Aaa  AAA  A1  A  $3,624   $3,334   $3,271    11%  $236 
MMCF III B  Senior Sub  A3  A-  Ba1  BB   269    265    233    32%   4 
                   3,893    3,599    3,504        $240 
                                         
                                       Cumulative
OTTI
 
Available for Sale                                      Related to 
Other Than Temporarily Impaired:                                      Credit Loss (2) 
TPREF FUNDING II  Mezzanine  A1  A-  Caa3  C   1,500    1,099    675    37%  $400 
ALESCO V C1  Mezzanine  A2  A  Caa3  C   2,150    1,490    1,292    10%   660 
                   3,650    2,589    1,967        $1,060 
                                         
Total                 $7,543   $6,188   $5,471           

 

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

 

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

 

·.5% of the remaining performing collateral will default or defer per annum.
·Recoveries of 9% with a two year lag on all defaults and deferrals.

 

 12

 

 

·No prepayments for 10 years and then 1% per annum for the remaining life of the security.
·Our securities have been modeled using the above assumptions by independent third parties using the forward LIBOR curve to discount projected cash flows to present values.

 

We recognized no OTTI charges during the three months ended March 31, 2017 and the three months ended March 31, 2016.

 

The following table presents a roll forward of the credit losses on our securities previously classified as held to maturity and now classified as available for sale recognized in earnings for the three months ended March 31, 2017 and 2016 (in thousands):

 

   2017   2016 
         
Amount of cumulative other-than-temporary impairment related to credit loss prior to January 1  $1,060   $1,060 
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized   -    - 
Amounts related to credit loss for which an other-than-temporary impairment was previously recognized   -    - 
Reductions due to realized losses   -    - 
Amount of cumulative other-than-temporary impairment related to credit loss as of March 31  $1,060   $1,060 

 

Changes in accumulated other comprehensive income by component for the three months ended March 31, 2017 and 2016 are shown in the table below. All amounts are net of tax (in thousands).

 

   Unrealized Holding         
   Gains (Losses) on         
For the three months ended March 31, 2017  Available for Sale   Held to Maturity     
   Securities   Securities   Total 
Beginning balance  $(627)  $(162)  $(789)
Other comprehensive income/(loss) before reclassifications   213    2    215 
Amounts reclassified from accumulated other comprehensive income/(loss)   -    -    - 
Net current-period other comprehensive income/(loss)   213    2    215 
Ending balance  $(414)  $(160)  $(574)

 

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

 

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4.LOANS AND ALLOWANCE FOR LOAN LOSSES

 

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

 

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

 

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

 

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

 

As part of the Greater Atlantic acquisition, the Bank and the FDIC entered into loss sharing agreements on approximately $143.4 million (contractual basis) of Greater Atlantic Bank’s assets.  There were two agreements with the FDIC, one for single family loans which is a 10-year agreement expiring in December 2019, and one for non-single family (commercial) assets which was a 5-year agreement which expired in December 2014. The Bank will share in the losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharing agreements; we refer to these assets collectively as “covered assets.”  Loans that are not covered in the loss sharing agreement are referred to as “non-covered loans”. As of March 31, 2017, non-covered loans included $22.3 million of loans acquired in the HarVest acquisition and $39.6 million acquired in the PGFSB acquisition.

 

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

 

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

 

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

 

March 31, 2017  Covered Loans   Non-covered Loans   Total Loans 
       Unpaid           Unpaid           Unpaid     
   Recorded   Principal   Related   Recorded   Principal   Related   Recorded   Principal   Related 
   Investment   Balance   Allowance   Investment (1)   Balance   Allowance   Investment   Balance   Allowance 
With no related allowance recorded                                             
Commercial real estate - owner occupied  $-   $-   $-             $-   $-   $-   $- 
Commercial real estate - non-owner occupied (2)   -    -    -              -    -    -    - 
Construction and land development   -    -    -              -    -    -    - 
Commercial loans   -    -    -    2,060    2,632    -    2,060    2,632    - 
Residential 1-4 family (4)   1,288    1,499    -    -    -    -    1,288    1,499    - 
Other consumer loans   -    -    -    -    -    -    -    -    - 
                                              
Total  $1,288   $1,499   $-   $2,060   $2,632   $-   $3,348   $4,131   $- 
                                              
With an allowance recorded                                             
Commercial real estate - owner occupied  $-   $-   $-   $1,322   $1,331   $250   $1,322   $1,331   $250 
Commercial real estate - non-owner occupied (2)   -    -    -    -    -    -    -    -    - 
Construction and land development   -    -    -    -    -    -    -    -    - 
Commercial loans   -    -    -    482    3,402    350    482    3,402    350 
Residential 1-4 family (4)   -    -    -    484    517    100    484    517    100 
Other consumer loans   -    -    -    -    -    -    -    -    - 
                                              
Total  $-   $-   $-   $2,288   $5,250   $700   $2,288   $5,250   $700 
Grand total  $1,288   $1,499   $-   $4,348   $7,882   $700   $5,636   $9,381   $700 

 

(1) Recorded investment is after cumulative prior charge offs of $3.5 million. These loans also have aggregate SBA guarantees of $2.1 million.

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

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

(4) Includes home equity lines of credit.

 

December 31, 2016  Covered Loans   Non-covered Loans   Total Loans 
       Unpaid           Unpaid           Unpaid     
   Recorded   Principal   Related   Recorded   Principal   Related   Recorded   Principal   Related 
   Investment   Balance   Allowance   Investment (1)   Balance   Allowance   Investment   Balance   Allowance 
With no related allowance recorded                                             
Commercial real estate - owner occupied  $-   $-   $-   $5,583   $5,592   $-   $5,583   $5,592   $- 
Commercial real estate - non-owner occupied (2)   -    -    -    -    -    -    -    -    - 
Construction and land development   -    -    -    -    -    -    -    -    - 
Commercial loans   -    -    -    3,002    3,603    -    3,002    3,603    - 
Residential 1-4 family (4)   963    1,113    -    -    -    -    963    1,113    - 
Other consumer loans   -    -    -    -    -    -    -    -    - 
                                              
Total  $963   $1,113   $-   $8,585   $9,195   $-   $9,548   $10,308   $- 
                                              
With an allowance recorded                                             
Commercial real estate - owner occupied  $-   $-   $-   $688   $688   $150   $688   $688   $150 
Commercial real estate - non-owner occupied (2)   -    -    -    -    -    -    -    -    - 
Construction and land development   -    -    -    -    -    -    -    -    - 
Commercial loans   -    -    -    3,378    5,798    750    3,378    5,798    750 
Residential 1-4 family (4)   -    -    -    -    -         -    -    - 
Other consumer loans   -    -    -    -    -    -    -    -    - 
                                              
Total  $-   $-   $-   $4,066   $6,486   $900   $4,066   $6,486   $900 
Grand total  $963   $1,113   $-   $12,651   $15,681   $900   $13,614   $16,794   $900 

 

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

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

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

(4) Includes home equity lines of credit.

 

 15

 

 

The following tables present the average recorded investment and interest income for impaired loans recognized by class of loans for the three months ended March 31, 2017 and 2016 (in thousands):

 

Three months ended March 31, 2017  Covered Loans   Non-covered Loans   Total Loans 
   Average   Interest   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized   Investment   Recognized 
With no related allowance recorded                              
Commercial real estate - owner occupied  $-   $-   $-   $-   $-   $- 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    - 
Construction and land development   -    -    -    -    -    - 
Commercial loans   -    -    2,117    -    2,117    - 
Residential 1-4 family (2)   1,290    8    -    -    1,290    8 
Other consumer loans   -    -    -    -    -    - 
                               
Total  $1,290   $8   $2,117   $-   $3,407   $8 
                               
With an allowance recorded                              
Commercial real estate - owner occupied  $-   $-   $1,324   $8   $1,324   $8 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    - 
Construction and land development   -    -    -    -    -    - 
Commercial loans   -    -    859    -    859    - 
Residential 1-4 family (2)   -    -    242    -    242    - 
Other consumer loans   -    -    -    -    -    - 
                               
Total  $-   $-   $2,425   $8   $2,425   $8 
Grand total  $1,290   $8   $4,542   $8   $5,832   $16 

 

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

(2) Includes home equity lines of credit.

 

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

 

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

(2) Includes home equity lines of credit.

 

 16

 

 

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

 

 

March 31, 2017  30 - 59   60 - 89                     
   Days   Days   90 Days   Total   Nonaccrual   Loans Not   Total 
   Past Due   Past Due   or More   Past Due   Loans   Past Due   Loans 
Covered loans:                                   
Commercial real estate - owner occupied  $-   $-   $-   $-   $-   $-   $- 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    -    - 
Construction and land development   -    -    -    -    -    -    - 
Commercial loans   -    -    -    -    -    -    - 
Residential 1-4 family (2)   88    44    -    132    850    24,684    25,666 
Other consumer loans   -    -    -    -    -    -    - 
                                    
Total  $88   $44   $-   $132   $850   $24,684   $25,666 
                                    
Non-covered loans:                                   
Commercial real estate - owner occupied  $-   $-   $-   $-   $637   $153,404   $154,041 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    326,836    326,836 
Construction and land development   -    -    -    -    -    97,002    97,002 
Commercial loans   315    -    -    315    2,542    109,100    111,957 
Residential 1-4 family (2)   336    503    -    839    484    258,324    259,647 
Other consumer loans   28    -    -    28    -    776    804 
                                    
Total  $679   $503   $-   $1,182   $3,663   $945,442   $950,287 
                                    
Total loans:                                   
Commercial real estate - owner occupied  $-   $-   $-   $-   $637   $153,404   $154,041 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    326,836    326,836 
Construction and land development   -    -    -    -    -    97,002    97,002 
Commercial loans   315    -    -    315    2,542    109,100    111,957 
Residential 1-4 family (2)   424    547    -    971    1,334    283,008    285,313 
Other consumer loans   28    -    -    28    -    776    804 
                                    
Total  $767   $547   $-   $1,314   $4,513   $970,126   $975,953 

 

December 31, 2016  30 - 59   60 - 89                     
   Days   Days   90 Days   Total   Nonaccrual   Loans Not   Total 
   Past Due   Past Due   or More   Past Due   Loans   Past Due   Loans 
Covered loans:                                   
Commercial real estate - owner occupied  $-   $-   $-   $-   $-   $-   $- 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    -    - 
Construction and land development   -    -    -    -    -    -    - 
Commercial loans   -    -    -    -    -    -    - 
Residential 1-4 family (2)   221    95    -    316    850    27,014    28,180 
Other consumer loans   -    -    -    -    -    -    - 
                                    
Total  $221   $95   $-   $316   $850   $27,014   $28,180 
                                    
Non-covered loans:                                   
Commercial real estate - owner occupied  $-   $-   $-   $-   $637   $154,170   $154,807 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    310,196    310,196 
Construction and land development   -    -    -    -    -    91,067    91,067 
Commercial loans   1,349    -    -    1,349    3,158    110,858    115,365 
Residential 1-4 family (2)   1,011    -    -    1,011    -    230,822    231,833 
Other consumer loans        -    -    -    -    856    856 
                                    
Total  $2,360   $-   $-   $2,360   $3,795   $897,969   $904,124 
                                    
Total loans:                                   
Commercial real estate - owner occupied  $-   $-   $-   $-   $637   $154,170   $154,807 
Commercial real estate - non-owner occupied (1)   -    -    -    -    -    310,196    310,196 
Construction and land development   -    -    -    -    -    91,067    91,067 
Commercial loans   1,349    -    -    1,349    3,158    110,858    115,365 
Residential 1-4 family (2)   1,232    95    -    1,327    850    257,836    260,013 
Other consumer loans   -    -    -    -    -    856    856 
                                    
Total  $2,581   $95   $-   $2,676   $4,645   $924,983   $932,304 

 

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

(2) Includes home equity lines of credit.

 

Non-covered nonaccrual loans include SBA guaranteed amounts totaling $2.1 million and $2.2 million at March 31, 2017 and December 31, 2016, respectively.

 

 17

 

 

Activity in the allowance for non-covered loan and lease losses for the three months ended March 31, 2017 and 2016 is summarized below (in thousands):

 

   Commercial   Commercial                         
   Real Estate   Real Estate   Construction           Other         
Non-covered loans:  Owner   Non-owner   and Land   Commercial   1-4 Family   Consumer         
Three months ended March 31, 2017  Occupied   Occupied (1)   Development   Loans   Residential (2)   Loans   Unallocated   Total 
Allowance for loan losses:                                        
Beginning balance  $905   $1,484   $752   $3,366   $1,279   $78   $746   $8,610 
Charge offs   -    -    -    (500)   (12)   -    -    (512)
Recoveries   10    -    -    16    2    2    -    30 
Provision   273    62    49    125    (15)   (6)   62    550 
Ending balance  $1,188   $1,546   $801   $3,007   $1,254   $74   $808   $8,678 
                                         
Three months ended March 31, 2016                                        
Allowance for loan losses:                                        
Beginning balance  $1,185   $1,222   $865   $3,041   $1,408   $48   $652   $8,421 
Charge offs   -    -    -    (114)   -    (253)   -    (367)
Recoveries   -    -    -    8    2    1    -    11 
Provision   66    331    (149)   (43)   146    286    (12)   625 
Ending balance  $1,251   $1,553   $716   $2,892   $1,556   $82   $640   $8,690 

 

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

(2) Includes home equity lines of credit.

 

Activity in the allowance for covered loan and lease losses by class of loan for the three months ended March 31, 2017 and 2016 is summarized below (in thousands):

 

    Commercial    Commercial                               
    Real Estate    Real Estate    Construction              Other           
Covered loans:   Owner    Non-owner    and Land    Commercial    1-4 Family    Consumer           
Three months ended March 31, 2017   Occupied    Occupied (1)    Development    Loans    Residential (3)    Loans    Unallocated    Total 
Allowance for loan losses:                                        
Beginning balance  $-   $-   $-   $-   $-   $-   $-   $- 
Charge offs   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    - 
Adjustments (2)   -    -    -    -    -    -    -    - 
Provision   -    -    -    -    -    -    -    - 
Ending balance  $-   $-   $-   $-   $-   $-   $-   $- 
                                         
Three months ended March 31, 2016                                        
Allowance for loan losses:                                        
Beginning balance  $-   $-   $-   $-   $-   $-   $-   $- 
Charge offs   -    -    -    -    -    -    -    - 
Recoveries   -    -    -    -    -    -    -    - 
Adjustments (2)   -    -    -    -    -    -    -    - 
Provision   -    -    -    -    -    -    -    - 
Ending balance  $-   $-   $-   $-   $-   $-   $-   $- 

 

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

(2) Represents the portion of increased expected losses which is covered by the loss sharing agreement with the FDIC.

(3) Includes home equity lines of credit.

 

 18

 

 

The following tables present the balance in the allowance for loan losses and the recorded investment in non-covered loans by portfolio segment and based on impairment method as of March 31, 2017 and December 31, 2016 (in thousands):

 

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

 

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

(2) Includes home equity lines of credit.

 

The following tables present the balance in the allowance for covered loan losses and the recorded investment in covered loans by portfolio segment and based on impairment method as of March 31, 2017 and December 31, 2016 (in thousands):

 

   Commercial   Commercial                         
   Real Estate   Real Estate   Construction           Other         
   Owner   Non-owner   and Land   Commercial   1-4 Family   Consumer         
Covered loans:  Occupied   Occupied (1)   Development   Loans   Residential (2)   Loans   Unallocated   Total 
March 31, 2017                                        
Ending allowance balance attributable to loans:                                        
Individually evaluated for impairment  $-   $-   $-   $-   $-   $-   $-   $- 
Collectively evaluated for impairment   -    -    -    -    -    -    -    - 
Total ending allowance  $-   $-   $-   $-   $-   $-   $-   $- 
                                         
Loans:                                        
Individually evaluated for impairment  $-   $-   $-   $-   $1,288   $-   $-   $1,288 
Collectively evaluated for impairment   -    -    -    -    24,378    -    -    24,378 
Total ending loan balances  $-   $-   $-   $-   $25,666   $-   $-   $25,666 
                                         
December 31, 2016                                        
Ending allowance balance attributable to loans:                                        
Individually evaluated for impairment  $-   $-   $-   $-   $-   $-   $-   $- 
Collectively evaluated for impairment   -    -    -    -    -    -    -    - 
Total ending allowance  $-   $-   $-   $-   $-   $-   $-   $- 
                                         
Loans:                                        
Individually evaluated for impairment  $-        $-   $-   $963   $-        $963 
Collectively evaluated for impairment   -    -    -    -    27,217    -    -    27,217 
Total ending loan balances  $-   $-   $-   $-   $28,180   $-   $-   $28,180 

 

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

(2) Includes home equity lines of credit.

 

 19

 

 

Troubled Debt Restructurings

 

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

 

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

 

During the three months ending March 31, 2017, there were no loans modified in troubled debt restructurings. One TDR which had been modified in 2013 defaulted during the second quarter of 2015. This loan, in the amount of $683 thousand, was current as of March 31, 2017.

 

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

 

Credit Quality Indicators

 

Through its system of internal controls Southern National evaluates and segments loan portfolio credit quality on a quarterly basis using regulatory definitions for Special Mention, Substandard and Doubtful. Special Mention loans are considered to be criticized. Substandard and Doubtful loans are considered to be classified. Southern National had no loans classified Doubtful at March 31, 2017 or December 31, 2016.

 

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

 

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

 

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

 

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

 

 20

 

 

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

 

December 31, 2016  Covered Loans   Non-covered Loans   Total Loans 
   Classified/           Special               Classified/         
   Criticized (1)   Pass   Total   Mention   Substandard (3)   Pass   Total   Criticized   Pass   Total 
Commercial real estate - owner occupied  $-   $-   $-   $-   $6,271   $148,536   $154,807   $6,271   $148,536   $154,807 
Commercial real estate - non-owner occupied (2)   -    -    -    -    -    310,196    310,196    -    310,196    310,196 
Construction and land development   -    -    -    -    -    91,067    91,067    -    91,067    91,067 
Commercial loans   -    -    -    28    6,380    108,957    115,365    6,408    108,957    115,365 
Residential 1-4 family (4)   963    27,217    28,180    -    -    231,833    231,833    963    259,050    260,013 
Other consumer loans   -    -    -    -    -    856    856    -    856    856 
                                                   
Total  $963   $27,217   $28,180   $28   $12,651   $891,445   $904,124   $13,642   $918,662   $932,304 

 

(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 $2.1 million and $2.2 million as of March 31, 2017 and December 31, 2016.

(4) Includes home equity lines of credit.

 

The amount of foreclosed residential real estate property held at March 31, 2017 and December 31, 2016 was $3.4 million. The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was $1.5 million and $1.8 million at March 31, 2017 and December 31, 2016, respectively.

 

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 $6.4 million as of March 31, 2017 and December 31, 2016.

 

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, 2017 and December 31, 2016, we had unfunded lines of credit and undisbursed construction loan funds totaling $127.4 million and $135.8 million, respectively. We had approved loan commitments of $13.3 million and $6.5 million at March 31, 2017, and December 31, 2016, respectively. Virtually all of our unfunded lines of credit, undisbursed construction loan funds and approved loan commitments are variable rate.

 

 21

 

 

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, 2017               
Basic EPS  $2,054    12,307   $0.17 
Effect of dilutive stock options and warrants   -    304      
Diluted EPS  $2,054    12,611   $0.16 
                
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 

 

There were 481,433 and 571,159 anti-dilutive options and warrants for the three months ended March 31, 2017, and March 31, 2016, respectively.

 

7.FAIR VALUE

 

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

 

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

 

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

 

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

 

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

 

Securities Available for Sale

 

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

 

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

 

       Fair Value Measurements Using 
           Significant     
       Quoted Prices in   Other   Significant 
       Active Markets for   Observable   Unobservable 
   Total at   Identical Assets   Inputs   Inputs 
(dollars in thousands)  March 31, 2017   (Level 1)   (Level 2)   (Level 3) 
Financial assets:                    
Available for sale securities                    
Obligations of states and political subdivisions  $2,271   $-   $2,271   $- 
Trust preferred securities   1,967    -    1,967    - 
   $4,238   $-   $4,238   $- 

 

       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, 2016   (Level 1)   (Level 2)   (Level 3) 
Financial assets:                    
Available for sale securities                    
Obligations of states and political subdivisions  $2,259   $-   $2,259   $- 
Trust preferred securities   1,659    -    1,659    - 
   $3,918   $-   $3,918   $- 

 

Assets and Liabilities Measured on a Non-recurring Basis:

 

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, 2017 and December 31, 2016. Fair value is classified as Level 3 in the fair value hierarchy. Non-covered loans identified as impaired totaled $4.3 million (including SBA guarantees of $2.1 million) as of March 31, 2017 with an allocated allowance for loan losses totaling $700 thousand compared to a carrying amount of $12.7 million (including SBA guarantees of $2.2 million) with an allocated allowance for loan losses totaling $900 thousand at December 31, 2016.

 

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, 2017 and December 31, 2016. Fair value is classified as Level 3 in the fair value hierarchy. OREO is further evaluated quarterly for any additional impairment. At March 31, 2017, the total amount of non-covered OREO was $8.3 million, and there was no covered OREO. As of December 31, 2016, the total amount of OREO was $8.6 million, and there was no covered OREO.

 

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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, 2017   (Level 1)   (Level 2)   (Level 3) 
Impaired non-covered loans:                    
Commercial real estate - owner occupied  $1,072         $1,072 
Commercial loans   2,192              2,192 
Residential 1-4 family   384              384 
Impaired covered loans:                    
Residential 1-4 family   1,288              1,288 
Non-covered other real estate owned:                    
Commercial real estate - owner occupied   1,110              1,110 
Construction and land development   3,748              3,748 
Residential 1-4 family   3,407              3,407 

 

       Fair Value Measurements Using 
           Significant