XNAS:SONA Quarterly Report 10-Q Filing - 5/8/2012

Effective Date 5/8/2012

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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, 2012
 
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
of incorporation or organization)
   (I.R.S. Employer Identification No.)
 
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 o
 
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 o
 
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  o                           Accelerated filer x                                 Smaller reporting company o
 
Non-accelerated filer    o  (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 o   No x
 
As of May 4, 2012, there were 11,590,212 shares of common stock outstanding.
 
 
 

 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
FORM 10-Q
March 31, 2012
 
INDEX
     
   
PAGE
  PART 1 - FINANCIAL INFORMATION  
     
 
 
2
 
3
 
4
 
5
 
6- 27
     
27- 37
     
38-40
     
41
     
  PART II - OTHER INFORMATION  
     
42
     
42
     
42
     
42
     
42
     
42
     
42
     
43
     
Certifications
44-46

 
 

 

           
           
             
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
           
           
(dollars in thousands, except per share amounts) (Unaudited)
 
           
   
March 31,
   
December 31,
 
   
2012
   
2011
 
ASSETS
           
Cash and cash equivalents:
           
Cash and due from financial institutions
 
$
2,470
   
$
2,432
 
Interest-bearing deposits in other financial institutions
   
2,579
     
2,603
 
Total cash and cash equivalents
   
5,049
     
5,035
 
                 
Securities available for sale, at fair value
   
9,203
     
9,905
 
                 
Securities held to maturity, at amortized cost (fair value of $37,014 and $34,464, respectively)
   
37,579
     
35,075
 
                 
Covered loans
   
81,027
     
82,588
 
Non-covered loans
   
410,154
     
409,180
 
Total loans
   
491,181
     
491,768
 
Less allowance for loan losses
   
(6,902
)
   
(6,295
)
Net loans
   
484,279
     
485,473
 
                 
Stock in Federal Reserve Bank and Federal Home Loan Bank
   
6,653
     
6,653
 
Bank premises and equipment, net
   
6,239
     
6,350
 
Goodwill
   
9,160
     
9,160
 
Core deposit intangibles, net
   
1,765
     
1,995
 
FDIC indemnification asset
   
7,549
     
7,537
 
Bank-owned life insurance
   
17,728
     
17,575
 
Other real estate owned
   
12,950
     
14,256
 
Deferred tax assets, net
   
6,257
     
6,255
 
Other assets
   
6,430
     
6,104
 
                 
Total assets
 
$
610,841
   
$
611,373
 
                 
LIABILITIES AND STOCKHOLDERS EQUITY
               
                 
Noninterest-bearing demand deposits
 
$
33,658
   
$
32,582
 
Interest-bearing deposits:
               
NOW accounts
   
17,185
     
17,497
 
Money market accounts
   
150,919
     
148,959
 
Savings accounts
   
6,978
     
6,273
 
Time deposits
   
243,923
     
255,784
 
Total interest-bearing deposits
   
419,005
     
428,513
 
Total deposits
   
452,663
     
461,095
 
                 
Securities sold under agreements to repurchase and other short-term borrowings
   
23,346
     
17,736
 
Federal Home Loan Bank (FHLB) advances
   
30,000
     
30,000
 
Other liabilities
   
4,068
     
3,491
 
Total liabilities
   
510,077
     
512,322
 
                 
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, 11,590,212 shares at March 31, 2012  and December 31, 2011
   
116
     
116
 
Additional paid in capital
   
96,695
     
96,645
 
Retained earnings
   
7,140
     
5,472
 
Accumulated other comprehensive loss
   
(3,187
)
   
(3,182
)
Total stockholders’ equity
   
100,764
     
99,051
 
                 
Total liabilities and stockholders’ equity
 
$
610,841
   
$
611,373
 
                 
See accompanying notes to consolidated financial statements.
               

 
2

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
           
       
(dollars in thousands, except per share amounts) (Unaudited)
           
             
   
For the Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
         
(As Restated)
 
Interest and dividend income:
           
Interest and fees on loans
  $ 8,611     $ 7,531  
Interest and dividends on taxable securities
    402       556  
Interest and dividends on other earning assets
    61       52  
Total interest and dividend income
    9,074       8,139  
Interest expense:
               
Interest on deposits
    1,197       1,277  
Interest on borrowings
    237       318  
Total interest expense
    1,434       1,595  
                 
Net interest income
    7,640       6,544  
                 
Provision for loan losses
    1,450       1,340  
Net interest income after provision for loan losses
    6,190       5,204  
                 
Noninterest income:
               
Account maintenance and deposit service fees
    196       200  
Income from bank-owned life insurance
    153       135  
Gain on sale of SBA loans
    657       -  
Net loss on other real estate owned
    (199 )     (39 )
Gain on other assets
    14       -  
Total other-than-temporary impairment losses
    (6 )     (32 )
Portion of loss recognized in other comprehensive income (before taxes)
    4       -  
Net credit impairment losses recognized in earnings
    (2 )     (32 )
Other
    53       44  
                 
Total noninterest income
    872       308  
                 
Noninterest expenses:
               
Salaries and benefits
    1,825       1,603  
Occupancy expenses
    582       539  
Furniture and equipment expenses
    156       136  
Amortization of core deposit intangible
    230       230  
Virginia franchise tax expense
    145       171  
FDIC assessment
    129       154  
Data processing expense
    137       142  
Telephone and communication expense
    102       88  
Change in FDIC indemnification asset
    (14 )     (16 )
Other operating expenses
    1,020       557  
Total noninterest expenses
    4,312       3,604  
Income before income taxes
    2,750       1,908  
Income tax expense
    907       618  
Net income
  $ 1,843     $ 1,290  
Other comprehensive income (loss) :
               
Unrealized gain on available for sale securities
  $ 29     $ 96  
Realized amount on securities sold, net
    -       -  
Non-credit component of other-than-temporary impairment on held-to-maturity securities
    (4 )     55  
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale
    (32 )     (11 )
Net unrealized gain (loss)
    (7 )     140  
Tax effect
    2       (48 )
Other comprehensive income (loss)
    (5 )     92  
Comprehensive income
  $ 1,838     $ 1,382  
Earnings per share, basic and diluted
  $ 0.16     $ 0.11  
                 
See accompanying notes to consolidated financial statements.
               

 
3

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
       
     
FOR THE THREE MONTHS ENDED MARCH 31, 2012
                               
(dollars in thousands, except per share amounts) (Unaudited)
     
                                     
                     
Accumulated
             
         
Additional
         
Other
             
   
Common
   
Paid in
   
Retained
   
Comprehensive
   
Comprehensive
       
   
Stock
   
Capital
   
Earnings
   
Loss
   
Income
   
Total
 
                                     
Balance - January 1, 2012
  $ 116     $ 96,645     $ 5,472     $ (3,182 )         $ 99,051  
Comprehensive income:
                                             
    Net income
                    1,843             $ 1,843       1,843  
    Change in unrealized gain  on available for sale securities (net of tax, $10)
                            19       19       19  
    Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $12 and accretion, $32 and amounts recorded into other comprehensive income at transfer)
                            (24 )     (24 )     (24 )
Total comprehensive income
                                  $ 1,838          
    Dividends on common stock ($.015 per share)
                    (175 )                     (175 )
    Stock-based compensation expense
            50                               50  
                                                 
Balance - March 31, 2012
  $ 116     $ 96,695     $ 7,140     $ (3,187 )           $ 100,764  
                                                 
See accompanying notes to consolidated financial statements.
                                 

 
4

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
           
           
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
           
(dollars in thousands) (Unaudited)
           
             
   
2012
   
2011
 
         
(As Restated)
 
Operating activities:
           
Net income
  $ 1,843     $ 1,290  
Adjustments to reconcile net income  to net cash and cash equivalents provided  by operating activities:
               
Depreciation
    147       126  
Amortization of core deposit intangible
    230       230  
Other amortization , net
    44       (37 )
Accretion of loan discount
    (1,472 )     (970 )
Increase (decrease) in FDIC indemnification asset
    (14 )     (16 )
Provision for loan losses
    1,450       1,340  
Earnings on bank-owned life insurance
    (153 )     (135 )
Stock based compensation expense
    50       26  
Gain on sale of loans
    (657 )     -  
Impairment on securities
    2       32  
Net loss on other real estate owned
    199       39  
Net (increase) decrease in other assets
    195       (202 )
Net increase in other liabilities
    577       1,014  
Net cash and cash equivalents provided by operating activities
    2,441       2,737  
Investing activities:
               
Proceeds from paydowns, maturities and calls of securities available for sale
    710       265  
Purchases of securities held to maturity
    (5,000 )     -  
Proceeds from paydowns, maturities and calls of securities held to maturity
    2,509       3,486  
Loan originations and payments, net
    (3,839 )     (7,075 )
Proceeds from sale of SBA loans
    5,713       -  
Proceeds from sale of other real estate owned
    511       388  
Payments received on FDIC indemnification asset
    2       696  
Purchases of bank premises and equipment
    (36 )     (17 )
Net cash and cash equivalents provided by (used in) investing activities
    570       (2,257 )
Financing activities:
               
Net increase (decrease) in deposits
    (8,432 )     1,384  
Cash dividends paid - common stock
    (175 )     -  
Net increase (decrease)  in securities sold under agreement to repurchase and other short-term borrowings
    5,610       (4,027 )
Net cash and cash equivalents used in financing activities
    (2,997 )     (2,643 )
Increase (decrease) in cash and cash equivalents
    14       (2,163 )
Cash and cash equivalents at beginning of period
    5,035       9,745  
Cash and cash equivalents at end of period
  $ 5,049     $ 7,582  
Supplemental Disclosure of Cash Flow Information
               
Cash payments for:
               
Interest
  $ 1,420     $ 1,640  
Income taxes
    125       -  
Supplemental schedule of noncash investing and financing activities
               
Transfer from non-covered loans to other real estate owned
    -       3,759  
                 
See accompanying notes to consolidated financial statements.
               

 
5

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
March 31, 2012
 
1.   ACCOUNTING POLICIES
 
Southern National Bancorp of Virginia, Inc. (“Southern National”) 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.  The principal activities of Sonabank are to attract deposits and originate loans as permitted under applicable banking regulations.  Sonabank operates 14 branches in Virginia located in Fairfax County (Reston, McLean and Fairfax), in Charlottesville, Warrenton (2), Loudoun County (Middleburg, Leesburg (2), and South Riding), Front Royal, New Market, Richmond and Clifton Forge, and we also have a branch in Rockville, Maryland.
 
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, 2011.
 
As disclosed in our 2011 Annual Report on Form 10-K filed on April 16, 2012, Southern National restated its financial statements for the year ended December 31, 2009, the interim quarterly periods and year ended December 31, 2010 and the interim quarterly periods through September 30, 2011.  In December 2009, we acquired Greater Atlantic Bank from the FDIC.  We identified errors in the purchase accounting related to that acquisition.  All amounts for the three months ended March 31, 2011set forth in this Quarterly Report on Form 10-Q, as applicable, reflect the restatement of previously issued financial statements.  See Note 8 for further details.
 
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.
 
 
6

 
 
Recent Accounting Pronouncements
 
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The guidance clarifies and expands the disclosures pertaining to unobservable inputs used in Level 3 fair value measurements, including the disclosure of quantitative information related to (1) the valuation processes used, (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, and (3) use of a nonfinancial asset in a way that differs from the asset’s highest and best use. The guidance also requires disclosure of the level within the fair value hierarchy for assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed. The amendments in this Update are to be applied prospectively, effective during interim and annual periods beginning after December 15, 2011. This ASU was adopted in the first quarter of 2012 and its requirements are reflected in our disclosures.
 
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. This ASU amends the disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in stockholder’s equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  In December 2011, the FASB issued ASU 2011-12 to defer changes that relate to the presentation of reclassification adjustments but the other requirements of ASU 2011-05 remain in effect. We present OCI in a single continuous statement of comprehensive income.
 
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.  As of March 31, 2012, options to purchase an aggregate of 302,500 shares of common stock were outstanding and no shares remained available for issuance. 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 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.
 
 
7

 
 
SNBV granted 12,000 options during the first three months of 2012. 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 three months ended March 31, 2012:
 
   
2012
 
Dividend yield
    0.00 %
Expected life
 
10 years
Expected volatility
    35.64 %
Risk-free interest rate
    2.04 %
Weighted average fair value per option granted
  $ 3.03  
 
The risk-free interest rate was developed using the U. S. Treasury yield curve for periods equal to the expected life of the options on the grant date.  An increase in the risk-free interest rate will increase stock compensation expense on future option grants.
 
For the three months ended March 31, 2012 and 2011, stock-based compensation expense was $50 thousand and $26 thousand, respectively.  As of March 31, 2012, unrecognized compensation expense associated with the stock options was $594 thousand, which is expected to be recognized over a weighted average period of 3.6 years.
 
A summary of the activity in the stock option plan during the three months ended March 31, 2012 follows (dollars in thousands):

               
Weighted
       
         
Weighted
   
Average
       
         
Average
   
Remaining
   
Aggregate
 
         
Exercise
   
Contractual
   
Intrinsic
 
   
Shares
   
Price
   
Term
   
Value
 
Options outstanding, beginning of period
    415,325     $ 8.06              
Granted
    12,000       6.24              
Forfeited
    -       -              
Exercised
    -       -              
Options outstanding, end of period
    427,325     $ 8.01       6.2     $ 56  
                                 
Vested or expected to vest
    427,325     $ 8.01       6.2     $ 56  
                                 
Exercisable at end of period
    341,375     $ 8.26       5.7     $ 30  
 
3.    SECURITIES
 
The amortized cost and fair value of securities available-for-sale were as follows (in thousands):
 
   
Amortized
   
Gross Unrealized
 
Fair
 
March 31, 2012
 
Cost
   
Gains
   
Losses
   
Value
 
SBA guaranteed loan pools
  $ 8,825     $ 304     $ -       9,129  
FHLMC preferred stock
    16       58       -       74  
     Total
  $ 8,841     $ 362     $ -     $ 9,203  
                                 
   
Amortized
   
Gross Unrealized
 
Fair
 
December 31, 2011
 
Cost
   
Gains
   
Losses
   
Value
 
SBA guaranteed loan pools
  $ 9,557     $ 280     $ -       9,837  
FHLMC preferred stock
    16       52       -       68  
     Total
  $ 9,573     $ 332     $ -     $ 9,905  
 
 
8

 
 
The carrying amount and fair value of securities held-to-maturity were as follows (in thousands):
 
   
Amortized
   
Gross Unrecognized
 
Fair
 
March 31, 2012
 
Cost
   
Gains
   
Losses
   
Value
 
 Residential government-sponsored mortgage-backed securities
  $ 23,729     $ 1,528     $ -     $ 25,257  
 Residential government-sponsored collateralized mortgage obligations
    63       1       -       64  
 Government-sponsored agency securities
    5,000       12       -       5,012  
 Other residential collateralized mortgage obligations
    939       -       (153 )     786  
 Trust preferred securities
    7,848       862       (2,815 )     5,895  
    $ 37,579     $ 2,403     $ (2,968 )   $ 37,014  
                                 
                                 
   
Amortized
   
Gross Unrecognized
 
Fair
 
December 31, 2011
 
Cost
   
Gains
   
Losses
   
Value
 
 Residential government-sponsored mortgage-backed securities
  $ 26,105     $ 1,710             $ 27,815  
 Residential government-sponsored collateralized mortgage obligations
    85       2               87  
 Other residential collateralized mortgage obligations
    957       -       (157 )     800  
 Trust preferred securities
    7,928       674       (2,840 )     5,762  
    $ 35,075     $ 2,386     $ (2,997 )   $ 34,464  
 
The fair value and carrying amount, if different, of debt securities as of March 31, 2012, 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
  $ -     $ -     $ 126     $ 126  
 Due in five to ten years
    -       -       912       936  
 Due after ten years
    12,848       10,907       7,787       8,067  
 Residential government-sponsored mortgage-backed securities
    23,729       25,257       -       -  
 Residential government-sponsored collateralized mortgage obligations
    63       64       -       -  
 Other residential  collateralized mortgage obligations
    939       786       -       -  
      Total
  $ 37,579     $ 37,014     $ 8,825     $ 9,129  
 
Securities with a carrying amount of approximately $37.9 million and $36.0 million at March 31, 2012 and December 31, 2011, respectively, were pledged to secure public deposits, repurchase agreements and a line of credit for advances from the Federal Home Loan Bank of Atlanta (“FHLB”).
 
SNBV monitors the portfolio for indicators of other than temporary impairment.  At March 31, 2012, certain securities’ fair values were below cost. As outlined in the table below, there were securities with fair values totaling approximately $5.5 million in the portfolio that are considered temporarily impaired at March 31, 2012.  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, 2012.  The following tables present information regarding securities in a continuous unrealized loss position as of March 31, 2012 and December 31, 2011 (in thousands) by duration of time in a loss position:
 
March 31, 2012
                                   
   
Less than 12 months
 
12 Months or More
 
Total
 
Held to Maturity
 
Fair value
   
Unrecognized Losses
 
Fair value
   
Unrecognized Losses
 
Fair value
   
Unrecognized Losses
 
Other residential collateralized mortgage obligations
  $ 786     $ (153 )   $ -     $ -     $ 786     $ (153 )
Trust preferred securities
    -       -       4,732       (2,815 )     4,732       (2,815 )
    $ 786     $ (153 )   $ 4,732     $ (2,815 )   $ 5,518     $ (2,968 )
                                                 
December 31, 2011
                                               
   
Less than 12 months
 
12 Months or More
 
Total
 
Held to Maturity
 
Fair value
   
Unrecognized Losses
 
Fair value
   
Unrecognized Losses
 
Fair value
   
Unrecognized Losses
 
Other residential collateralized mortgage obligations
  $ 800     $ (157 )   $ -     $ -     $ 800     $ (157 )
Trust preferred securities
    -       -       4,783       (2,840 )     4,783       (2,840 )
    $ 800     $ (157 )   $ 4,783     $ (2,840 )   $ 5,583     $ (2,997 )
 
 
9

 
 
As of March 31, 2012, we owned pooled trust preferred securities as follows:
 
                                                     
Previously
       
                                                     
Recognized
       
                                                     
Cumulative
       
     
Ratings
                           
Estimated
   
Current
   
Other
       
 
Tranche
 
When Purchased
   
Current Ratings
               
Fair
   
Defaults and
   
Comprehensive
       
Security
Level
 
Moody’s
   
Fitch
   
Moody’s
   
Fitch
   
Par Value
   
Book Value
   
Value
   
Deferrals
   
Loss (1)
       
                             
(in thousands)
                               
ALESCO VII  A1B
Senior
 
Aaa
   
AAA
   
Baa3
   
BB
    $ 6,979     $ 6,269     $ 3,779     $ 117,400     $ 300        
MMCF III B
Senior Sub
    A3     A-    
Ba1
   
CC
      437       427       274       37,000       10        
                                  7,416       6,696       4,053             $ 310        
                                                                           
                                                               
Cumulative
       
                                                               
Other
Comprehensive
   
Cumulative
OTTI Related to
 
Other Than Temporarily Impaired:
                                               
Loss (2)
   
Credit Loss (2)
 
TPREF FUNDING II
Mezzanine
    A1     A-    
Caa3
    C       1,500       383       334       134,100       763     $ 354  
TRAP 2007-XII C1
Mezzanine
    A3     A      C     C       2,090       129       166       167,205       1,382       579  
TRAP 2007-XIII D
Mezzanine
 
NR
    A-    
NR
    C       2,039       -       34       218,750       7       2,032  
MMC FUNDING XVIII
Mezzanine
    A3     A-    
Ca
    C       1,061       26       26       121,682       343       692  
ALESCO V C1
Mezzanine
    A2     A     C     C       2,115       468       345       90,000       986       661  
ALESCO XV C1
Mezzanine
    A3     A-     C     C       3,149       29       574       249,100       561       2,559  
ALESCO XVI  C
Mezzanine
    A3     A-     C     C       2,096       117       363       97,400       799       1,180  
                                  14,050       1,152       1,842             $ 4,841     $ 8,057  
                                                                             
Total
                              $ 21,466     $ 7,848     $ 5,895                          
 
(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 ranging from 25% to 47% 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.
●  
Additionally banks with assets over $15 billion will no longer be allowed to count down streamed trust preferred proceeds as Tier 1 capital (although it will still be counted as Tier 2 capital). That will incent the large banks to prepay their trust preferred securities if they can or if it is economically desirable. As a consequence, we have projected in all of our pools that 25% of the collateral issued by banks with assets over $15 billion will prepay in 2013.
●  
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.
 
Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because we do not have the intent to sell these securities and it is more likely than not 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 during the three months ended March 31, 2012, except for the MMC Funding XVIII security.
 
Our analyses resulted in OTTI charges related to credit on MMC Funding XVIII in the amount of $2 thousand during the three months ended March 31, 2012, compared to OTTI charges related to credit on TPREF Funding II totaling $32 thousand during the first quarter of 2011.
 
 
10

 
 
We also own $939 thousand of SARM 2005-22 1A2. This residential collateralized mortgage obligation was originally rated AAA by Standard and Poors. After a series of downgrades, this security has been other than temporarily impaired in past reporting periods. For the first quarter of 2012 and based on our review of the trustee report, shock analysis and current information regarding delinquencies, nonperforming loans and credit support it has been determined that no OTTI charge for credit was required for the quarter ended March 31, 2012.  The assumptions used in the analysis included a 3.4% prepayment speed, 10% default rate, a 50% loss severity and an accounting yield of 2.48%. We recorded no OTTI charges for credit on this security during  the first quarter of 2011.
 
The following table presents a roll forward of the credit losses for the trust preferred securities and the residential collateralized mortgage obligation recognized in earnings for the three months ended March 31, 2012 and 2011 (in thousands):
 
   
2012
   
2011
 
             
Amount of cumulative other-than-temporary impairment related to credit loss prior to January 1
  $ 8,277     $ 8,002  
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
    2       32  
Reductions due to realized losses
    (5 )     -  
Amount of cumulative other-than-temporary impairment related to credit loss as of March 31
  $ 8,274     $ 8,034  
 
  4.       LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The following table summarizes the composition of our loan portfolio as of March 31, 2012 and December 31, 2011:
 
   
Covered
   
Non-covered
   
Total
   
Covered
   
Non-covered
   
Total
 
   
Loans
   
Loans
   
Loans
   
Loans
   
Loans
   
Loans
 
   
March 31, 2012
   
December 31, 2011
 
Mortgage loans on real estate:
                                   
    Commercial real estate - owner-occupied
  $ 4,949     $ 81,256     $ 86,205     $ 4,854     $ 82,450     $ 87,304  
    Commercial real estate - non-owner-occupied
    11,727       112,777       124,504       11,243       117,059       128,302  
    Secured by farmland
    -       1,500       1,500       -       1,506       1,506  
    Construction and land loans
    2,258       51,200       53,458       2,883       39,565       42,448  
    Residential 1-4 family
    24,445       48,884       73,329       25,307       49,288       74,595  
    Multi- family residential
    626       19,163       19,789       629       19,553       20,182  
    Home equity lines of credit
    34,810       7,987       42,797       35,442       9,040       44,482  
     Total real estate loans
    78,815       322,767       401,582       80,358       318,461       398,819  
                                                 
Commercial loans
    2,112       86,823       88,935       2,122       89,939       92,061  
Consumer loans
    100       1,676       1,776       108       1,868       1,976  
      Gross loans
    81,027       411,266       492,293       82,588       410,268       492,856  
                                                 
Less deferred fees on loans
    -       (1,112 )     (1,112 )     -       (1,088 )     (1,088 )
Loans, net of deferred fees
  $ 81,027     $ 410,154     $ 491,181     $ 82,588     $ 409,180     $ 491,768  
 
As part of the Greater Atlantic acquisition, the Bank and the FDIC entered into a loss sharing agreement on approximately $143.4 million (contractual basis) of Greater Atlantic Bank’s assets.  The Bank will share in the losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharing agreement; 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.”
 
 
11

 
 
The covered loans acquired in the Greater Atlantic transaction are and will continue to be subject to our internal and external credit review. As a result, if and when credit deterioration is noted subsequent to the acquisition date, such deterioration will be measured through our allowance for loan loss calculation methodology and a provision for credit losses will be charged to earnings with a partially offsetting noninterest expense item reflecting the change to the FDIC indemnification asset.
 
Credit-impaired covered loans are those loans showing evidence of credit deterioration since origination and it is probable, at the date of acquisition, that Southern National will not collect all contractually required principal and interest payments. Generally, acquired loans that meet Southern National’s definition for nonaccrual status fall within the definition of credit-impaired covered loans.
 
Impaired loans were as follows (in thousands):
 
March 31, 2012
 
Covered Loans
   
Non-covered Loans
   
Total Loans
 
         
Allowance
         
Allowance
         
Allowance
 
   
Recorded
   
for Loan
   
Recorded
   
for Loan
   
Recorded
   
for Loan
 
   
Investment
   
Losses Allocated
   
Investment (1)
   
Losses Allocated (3)
   
Investment
   
Losses Allocated
 
With no related allowance recorded
                                   
    Commercial real estate - owner occupied
  $ 135     $ -     $ 675     $ -     $ 810     $ -  
    Commercial real estate - non-owner occupied (2)
    2,121       -       3,294       -       5,415       -  
    Construction and land development
    1,053       -       6,172       -       7,225       -  
    Commercial loans
    212       -       3,861       -       4,073       -  
    Residential 1-4 family
    1,233       -       387       -       1,620       -  
    Other consumer loans
    -       -       -       -       -       -  
                                                 
Total
  $ 4,754     $ -     $ 14,389     $ -     $ 19,143     $ -  
                                                 
With an allowance recorded
                                               
    Commercial real estate - owner occupied
  $ -     $ -     $ -     $ -     $ -     $ -  
    Commercial real estate - non-owner occupied (2)
    -       -       -       -       -       -  
    Construction and land development
    -       -       1,465       689       1,465       689  
    Commercial loans
    -       -       -       -       -       -  
    Residential 1-4 family
    -       -       -       -       -       -  
    Other consumer loans
    -       -       -       -       -       -  
                                                 
Total
  $ -     $ -     $ 1,465     $ 689     $ 1,465     $ 689  
Grand total
  $ 4,754     $ -     $ 15,854     $ 689     $ 20,608     $ 689  
 
(1) Recorded investment is after charge offs of $5.0 million and includes SBA guarantees of $2.4 million.
(2) Includes loans secured by farmland and multi-family residential loans.
(3) The Bank recognizes loan impairment through earnings and may concurrently record a charge off to the allowance for loan losses.
 
December 31, 2011
 
Covered Loans
   
Non-covered Loans
   
Total Loans
 
         
Allowance
         
Allowance
         
Allowance
 
   
Recorded
   
for Loan
   
Recorded
   
for Loan
   
Recorded
   
for Loan
 
   
Investment
   
Losses Allocated
   
Investment (1)
   
Losses Allocated (3)
   
Investment
   
Losses Allocated
 
With no related allowance recorded
                                   
    Commercial real estate - owner occupied
  $ 235     $ -     $ 4,739     $ -     $ 4,974     $ -  
    Commercial real estate - non-owner occupied (2)
    1,831       -       3,294       -       5,125       -  
    Construction and land development
    1,062       -       4,825       -       5,887       -  
    Commercial loans
    213       -       10,704       -       10,917       -  
    Residential 1-4 family
    1,355       -       375       -       1,730       -  
    Other consumer loans
    -       -       -       -       -       -  
                                                 
Total
  $ 4,696     $ -     $ 23,937     $ -     $ 28,633     $ -  
                                                 
With an allowance recorded
                                               
    Commercial real estate - owner occupied
  $ -     $ -     $ -     $ -     $ -     $ -  
    Commercial real estate - non-owner occupied (2)
    -       -       -       -       -       -  
    Construction and land development
    -       -       1,765       989       1,765       989  
    Commercial loans
    -       -       452       50       452       50  
    Residential 1-4 family
    -       -       -       -       -       -  
    Other consumer loans
    -       -       -       -       -