XNAS:SONA Southern National Bancorp of Virginia Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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   (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 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 August 3, 2012, there were 11,590,212 shares of common stock outstanding.
 
 
 

 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
FORM 10-Q
June 30, 2012
 
INDEX
 
   
PAGE
     
PART 1 - FINANCIAL INFORMATION
   
     
Item 1 - Financial Statements
   
Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011
 
2
Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2012 and 2011
 
3
Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2012
 
4
Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011
 
5
Notes to Consolidated Financial Statements
 
6-29
     
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
29-42
     
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
 
43-45
     
Item 4 – Controls and Procedures
 
46
     
PART II - OTHER INFORMATION
   
     
Item 1 – Legal Proceedings
 
48
     
Item 1A – Risk Factors
 
48
     
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
 
48
     
Item 3 – Defaults Upon Senior Securities
 
48
     
Item 4 – Mine Safety Disclosures
 
48
     
Item 5 – Other Information
 
48
     
Item 6 - Exhibits
 
48
     
Signatures
 
49
     
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)
           
   
June 30,
   
December 31,
 
   
2012
   
2011
 
ASSETS
           
Cash and cash equivalents:
           
Cash and due from financial institutions
  $ 4,051     $ 2,432  
Interest-bearing deposits in other financial institutions
    23,292       2,603  
Total cash and cash equivalents
    27,343       5,035  
                 
Securities available for sale, at fair value
    9,037       9,905  
                 
Securities held to maturity, at amortized cost
               
(fair value of $61,787 and $34,464, respectively)
    61,728       35,075  
                 
Covered loans
    78,522       82,588  
Non-covered loans
    468,123       409,180  
Total loans
    546,645       491,768  
Less allowance for loan losses
    (6,655 )     (6,295 )
Net loans
    539,990       485,473  
                 
Stock in Federal Reserve Bank and Federal Home Loan Bank
    6,030       6,653  
Bank premises and equipment, net
    6,132       6,350  
Goodwill
    9,160       9,160  
Core deposit intangibles, net
    1,716       1,995  
FDIC indemnification asset
    7,314       7,537  
Bank-owned life insurance
    17,485       17,575  
Other real estate owned
    13,458       14,256  
Deferred tax assets, net
    6,175       6,255  
Other assets
    6,423       6,104  
                 
Total assets
  $ 711,991     $ 611,373  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Noninterest-bearing demand deposits
  $ 52,706     $ 32,582  
Interest-bearing deposits:
               
NOW accounts
    21,157       17,497  
Money market accounts
    165,310       148,959  
Savings accounts
    8,909       6,273  
Time deposits
    295,920       255,784  
Total interest-bearing deposits
    491,296       428,513  
Total deposits
    544,002       461,095  
                 
Securities sold under agreements to repurchase and other short-term borrowings
    31,029       17,736  
Federal Home Loan Bank (FHLB) advances
    30,250       30,000  
Other liabilities
    3,698       3,491  
Total liabilities
    608,979       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 June 30, 2012 and December 31, 2011
    116       116  
Additional paid in capital
    96,742       96,645  
Retained earnings
    9,181       5,472  
Accumulated other comprehensive loss
    (3,027 )     (3,182 )
Total stockholders' equity
    103,012       99,051  
                 
Total liabilities and stockholders' equity
  $ 711,991     $ 611,373  
                 
See accompanying notes to consolidated financial statements.
               
 
 
2

 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands, except per share amounts) (Unaudited)
 
   
For the Three Months Ended
June 30,
   
For the Six Months Ended
June 30,
 
                         
   
2012
   
2011
   
2012
   
2011
 
         
(As Restated)
         
(As Restated)
 
Interest and dividend income :
                       
Interest and fees on loans
  $ 8,768     $ 7,559     $ 17,379     $ 15,090  
Interest and dividends on taxable securities
    509       482       911       1,038  
Interest and dividends on other earning assets
    84       51       145       103  
Total interest and dividend income
    9,361       8,092       18,435       16,231  
Interest expense:
                               
Interest on deposits
    1,301       1,249       2,499       2,526  
Interest on borrowings
    227       267       463       585  
Total interest expense
    1,528       1,516       2,962       3,111  
                                 
Net interest income
    7,833       6,576       15,473       13,120  
                                 
Provision for loan losses
    1,325       2,250       2,775       3,590  
Net interest income after provision for loan losses
    6,508       4,326       12,698       9,530  
                                 
Noninterest income:
                               
Account maintenance and deposit service fees
    206       218       402       418  
Income from bank-owned life insurance
    347       933       500       1,067  
Bargain purchase gain on acquisition
    3,484       -       3,484       -  
Gain on sale of loans
    -       -       657       -  
Net gain (loss) on other real estate owned
    (2,201 )     (108 )     (2,400 )     (147 )
Gain on other assets
    -       -       14       -  
Net loss on sale of available for sale securities
    (13 )     -       (13 )     -  
Total other-than-temporary impairment losses (OTTI)
    (235 )     (38 )     (241 )     (70 )
Portion of OTTI recognized in other comprehensive income (before taxes)
    -       -       4       -  
Net credit related OTTI recognized in earnings
    (235 )     (38 )     (237 )     (70 )
Other
    81       44       135       89  
                                 
Total noninterest income
    1,669       1,049       2,542       1,357  
                                 
Noninterest expenses:
                               
Salaries and benefits
    1,970       1,705       3,795       3,308  
Occupancy expenses
    705       554       1,287       1,093  
Furniture and equipment expenses
    143       131       299       267  
Amortization of core deposit intangible
    228       230       458       460  
Virginia franchise tax expense
    145       171       291       343  
Merger expenses
    349       -       349       -  
FDIC assessment
    142       119       271       272  
Data processing expense
    162       132       299       274  
Telephone and communication expense
    133       100       235       188  
Change in FDIC indemnification asset
    253       (57 )     239       (73 )
Other operating expenses
    732       550       1,752       1,107  
Total noninterest expenses
    4,962       3,635       9,275       7,239  
Income before income taxes
    3,215       1,740       5,965       3,648  
Income tax expense
    1,000       293       1,907       911  
Net income
  $ 2,215     $ 1,447     $ 4,058     $ 2,737  
Other comprehensive income:
                               
Unrealized gain on available for sale securities
  $ 65     $ 101     $ 94     $ 197  
Realized amount on securities sold, net
    -       -       -       -  
Non-credit component of other-than-temporary impairment on held-to-maturity securities
    205       41       201       96  
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale
    (28 )     (6 )     (60 )     (17 )
Net unrealized gain
    242       136       235       276  
Tax effect
    82       46       80       94  
Other comprehensive income
    160       90       155       182  
Comprehensive income
  $ 2,375     $ 1,537     $ 4,213     $ 2,919  
Earnings per share, basic and diluted
  $ 0.19     $ 0.12     $ 0.35     $ 0.24  
                                 
See accompanying notes to consolidated financial statements.
                               
 
 
3

 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
                   
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
           
FOR THE SIX MONTHS ENDED JUNE 30, 2012
                       
(dollars in thousands, except per share amounts) (Unaudited)
                   
 
   
Common
Stock
   
Additional
Paid in
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Loss
       
Total
 
                                             
Balance - January 1, 2012
  $ 116     $ 96,645     $ 5,472     $ (3,182 )       $ 99,051  
Comprehensive income:
                                           
Net income
                    4,058                   4,058  
Change in unrealized gain on available for sale securities (net of tax, $32)
                            62           62  
Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $48 and accretion, $60 and amounts recorded into other comprehensive income at transfer)
                            93           93  
Dividends on common stock ($.015 per share)
                    (349 )                 (349 )
Stock-based compensation expense
            97                           97  
                                             
Balance - June 30, 2012
  $ 116     $ 96,742     $ 9,181     $ (3,027 )       $ 103,012  
 
See accompanying notes to consolidated financial statements.
                   
 
 
4

 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
           
CONSOLIDATED STATEMENTS OF CASH FLOWS
           
FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011
           
(dollars in thousands) (Unaudited)
           
             
   
2012
   
2011
 
         
(As Restated)
 
Operating activities:
           
Net income
  $ 4,058     $ 2,737  
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
               
Depreciation
    289       253  
Amortization of core deposit intangible
    458       460  
Other amortization , net
    114       (23 )
Accretion of loan discount
    (2,360 )     (1,745 )
(Increase) decrease in FDIC indemnification asset
    239       (73 )
Provision for loan losses
    2,775       3,590  
Earnings on bank-owned life insurance
    (500 )     (1,067 )
Stock based compensation expense
    97       73  
Bargain purchase gain on acquisition
    (3,484 )     -  
Net loss on sale of available for sale securities
    13       -  
Gain on sale of loans
    (657 )     -  
Impairment on securities
    237       70  
Net loss on other real estate owned
    2,400       147  
Net (increase) decrease in other assets
    204       (643 )
Net increase in other liabilities
    72       300  
Net cash and cash equivalents provided by operating activities
    3,955       4,079  
Investing activities:
               
Purchases of securities available-for-sale
    (3,128 )     -  
Proceeds from sales of securities available for sale
    14,414       -  
Proceeds from paydowns, maturities and calls of securities available for sale
    946       489  
Purchases of securities held to maturity
    (5,000 )     -  
Proceeds from paydowns, maturities and calls of securities held to maturity
    5,375       5,056  
Loan originations and payments, net
    3,020       (24,923 )
Proceeds from sale of HarVest loans
    7,568       -  
Proceeds from sale of SBA loans
    5,713       -  
Net cash received in HarVest acquisition
    47,257       -  
Net decrease in stock in Federal Reserve Bank and Federal Home Loan Bank
    1,790       378  
Proceeds from cash surrender value of bank-owned life insurance
    395       -  
Proceeds from sale of other real estate owned
    1,107       771  
Payments received on FDIC indemnification asset
    89       799  
Purchases of bank premises and equipment
    (72 )     (285 )
Net cash and cash equivalents provided by (used in) investing activities
    79,474       (17,715 )
Financing activities:
               
Net increase (decrease) in deposits
    (57,577 )     3,017  
Cash dividends paid - common stock
    (349 )     -  
Proceeds from Federal Home Loan Bank advances
    -       8,500  
Repayment of Federal Home Loan Bank advances
    (16,488 )     -  
Net increase (decrease) in securities sold under agreement to repurchase and other short-term borrowings
    13,293       (3,940 )
Net cash and cash equivalents provided by (used in) financing activities
    (61,121 )     7,577  
Increase (decrease) in cash and cash equivalents
    22,308       (6,059 )
Cash and cash equivalents at beginning of period
    5,035       9,745  
Cash and cash equivalents at end of period
  $ 27,343     $ 3,686  
Supplemental Disclosure of Cash Flow Information
               
Cash payments for:
               
Interest
  $ 2,985     $ 3,250  
Income taxes
    1,200       825  
Supplemental schedule of noncash investing and financing activities
               
Transfer from non-covered loans to other real estate owned
    1,959       5,910  
Transfer from covered loans to other real estate owned
    -       82  
                 
See accompanying notes to consolidated financial statements.
               
 
 
5

 
 
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
Notes to Consolidated Financial Statements (Unaudited)
June 30, 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 five branches in Maryland (four in Montgomery County and one in Frederick County).
 
Sonabank assumed substantially all of the deposits and liabilities and acquired substantially all of the assets of the HarVest Bank of Maryland from the FDIC as receiver. The acquisition included HarVest Bank’s branches in Bethesda, North Rockville, Germantown and Frederick. Adding the new branches to an existing branch in Rockville brings Sonabank’s total number of branches in Maryland to five, four of which are in Montgomery County. This was a strategic acquisition for Sonabank given the expansion into an affluent market. Full details on the transaction are contained in an 8-K/A filed on July 13, 2012.
 
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 and six months ended June 30, 2011 set 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.
 
 
6

 
 
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 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 June 30, 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 exercise 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 19,000 options during the first six 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 six months ended June 30, 2012:
 
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. Our dividend yield was approximately 0%.
 
For the three and six months ended June 30, 2012, stock-based compensation expense was $47 thousand and $96 thousand, respectively, compared to $47 thousand and $73 thousand for the same periods last year.  As of June 30, 2012, unrecognized compensation expense associated with the stock options was $567 thousand, which is expected to be recognized over a weighted average period of 3.4 years.
 
A summary of the activity in the stock option plan during the six months ended June 30, 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
    19,000       6.48              
Forfeited
    (4,150 )     8.01              
Exercised
    -       -              
Options outstanding, end of period
    430,175     $ 7.99       6.0     $ 167  
                                 
Vested or expected to vest
    430,175     $ 7.99       6.0     $ 167  
                                 
Exercisable at end of period
    255,725     $ 8.60       4.4     $ 62  
                                 
 
 
8

 
 
3.    SECURITIES
 
The amortized cost and fair value of securities available-for-sale were as follows (in thousands):
 
 
Amortized
   
Gross Unrealized
   
Fair
 
June 30, 2012
 
Cost
   
Gains
   
Losses
   
Value
 
SBA guaranteed loan pools
  $ 8,595     $ 348     $ -       8,943  
FHLMC preferred stock
    16       78       -       94  
Total
  $ 8,611     $ 426     $ -     $ 9,037  
                                 
 
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  
 
The carrying amount and fair value of securities held-to-maturity were as follows (in thousands):
 
 
Amortized
   
Gross Unrecognized
   
Fair
 
June 30, 2012
 
Cost
   
Gains
   
Losses
   
Value
 
Residential government-sponsored mortgage-backed securities
  $ 42,090     $ 1,624     $ -     $ 43,714  
Residential government-sponsored collateralized mortgage obligations
    5,958       66       -       6,024  
Government-sponsored agency securities
    5,000       60       -       5,060  
Other residential collateralized mortgage obligations
    882       -       (22 )     860  
Trust preferred securities
    7,798       1,214       (2,883 )     6,129  
    $ 61,728     $ 2,964     $ (2,905 )   $ 61,787  
                                 
 
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 June 30, 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
  $ -     $ -     $ 113     $ 112  
Due in five to ten years
    -       -       874       899  
Due after ten years
    12,798       11,189       7,608       7,932  
Residential government-sponsored mortgage-backed securities
    42,090       43,714       -       -  
Residential government-sponsored collateralized mortgage obligations
    5,958       6,024       -       -  
Other residential collateralized mortgage obligations
    882       860       -       -  
Total
  $ 61,728     $ 61,787     $ 8,595     $ 8,943  
 
Securities with a carrying amount of approximately $39.6 million and $36.0 million at June 30, 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”).
 
 
9

 
 
SNBV monitors the portfolio for indicators of other than temporary impairment.  At June 30, 2012, certain securities’ fair values were below cost. As outlined in the table below, there were securities with fair values totaling approximately $5.1 million in the portfolio that are considered temporarily impaired at June 30, 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 June 30, 2012.  The following tables present information regarding securities in a continuous unrealized loss position as of June 30, 2012 and December 31, 2011 (in thousands) by duration of time in a loss position:
 
June 30, 2012
                                   
   
Less than 12 months
   
12 Months or More
     
Total
 
       
Unrecognized
       
Unrecognized
       
Unrecognized
 
Held to Maturity
Fair value
   
Losses
   
Fair value
   
Losses
   
Fair value
   
Losses
 
Other residential collateralized mortgage obligations
  $ 860     $ (22 )   $ -     $ -     $ 860     $ (22 )
Trust preferred securities
    -       -       4,260       (2,883 )     4,260       (2,883 )
    $ 860     $ (22 )   $ 4,260     $ (2,883 )   $ 5,120     $ (2,905 )
                                                 
December 31, 2011
                                               
   
Less than 12 months
   
12 Months or More
     
Total
 
         
Unrecognized
         
Unrecognized
         
Unrecognized
 
Held to Maturity
Fair value
   
Losses
   
Fair value
   
Losses
   
Fair value
   
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 )
 
As of June 30, 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
 
Moodys
   
Fitch
   
Moodys
   
Fitch
   
Par Value
   
Book Value
   
Value
   
Deferrals
   
Loss (1)
       
                                   
(in thousands)
                         
ALESCO VII A1B
Senior
 
Aaa
   
AAA
   
Baa3
   
BB
    $ 6,953     $ 6,253     $ 3,603     $ 117,400     $ 297        
MMCF III B
Senior Sub
   A3       A-    
Ba1
   
CC
      435       426       271       37,000       9        
                                    7,388       6,679       3,874             $ 306        
                                                                             
                                                                 
Cumulative
   
Cumulative
 
                                                                 
Other Comprehensive
   
OTTI Related to
 
Other Than Temporarily Impaired:  
                                                               
Loss (2)
   
Credit Loss (2)
 
TPREF FUNDING II
Mezzanine
   A1       A-    
Caa3
      C       1,500       383       456       134,100       763     $ 354  
TRAP 2007-XII C1
Mezzanine
   A3       A      C       C       2,099       99       99       191,205       1,186       814  
TRAP 2007-XIII D
Mezzanine
 
NR
      A-    
NR
      C       2,039       -       54       223,750       7       2,032  
MMC FUNDING XVIII
Mezzanine
   A3       A-    
Ca
      C       1,066       27       173       101,682       347       692  
ALESCO V C1
Mezzanine
   A2       A      C       C       2,053       464       386       84,000       1,003       586  
ALESCO XV C1
Mezzanine
   A3       A-      C       C       3,162       29       657       249,100       574       2,559  
ALESCO XVI C
Mezzanine
   A3       A-      C       C       2,104       117       430       97,400       807       1,180  
                                        14,023       1,119       2,255             $ 4,687     $ 8,217  
                                                                                   
Total
                                    $ 21,411     $ 7,798     $ 6,129                          
 
(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.
 
 
10

 
 
TRAP 2007-XII C1 was determined to be other than temporarily impaired during the three months ended June 30, 2012. Our analyses resulted in OTTI charges related to credit on TRAP 2007-XII C1 in the amount of $235 thousand during the three months ended June 30, 2012, compared to OTTI charges related to credit on two trust preferred securities (TPREF FUNDING II and MMC FUNDING XVIII) totaling $38 thousand during the second 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 six months ended June 30, 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
    237       70  
Reductions due to realized losses
    (89 )     -  
Amount of cumulative other-than-temporary impairment related to credit loss as of June 30
  $ 8,425     $ 8,072  
 
 
11

 
 
4.    LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The following table summarizes the composition of our loan portfolio as of June 30, 2012 and December 31, 2011:

   
Covered
   
Non-covered Loans
                         
   
Loans (1)
   
HarVest
   
Other
   
Total
   
Covered
   
Non-covered
   
Total
 
         
Loans (2)
   
Loans
   
Loans
   
Loans (1)
   
Loans
   
Loans
 
   
June 30, 2012
   
December 31, 2011
 
 Mortgage loans on real estate:
                                         
    Commercial real estate - owner-occupied
  $ 5,497     $ 15,223     $ 79,280     $ 100,000     $ 4,854     $ 82,450     $ 87,304  
    Commercial real estate - non-owner-occupied
    12,076       11,118       114,026       137,220       11,243       117,059       128,302  
    Secured by farmland
    -       -       1,493       1,493       -       1,506       1,506  
    Construction and land loans
    1,255       6,537       52,221       60,013       2,883       39,565       42,448  
    Residential 1-4 family
    23,156       13,971       48,018       85,145       25,307       49,288       74,595  
    Multi- family residential
    628       930       18,426       19,984       629       19,553       20,182  
    Home equity lines of credit
    33,913       3,892       7,011       44,816       35,442       9,040       44,482  
    Total real estate loans
    76,525       51,671       320,475       448,671       80,358       318,461       398,819  
                                                         
 Commercial loans
    1,894       7,855       87,474       97,223       2,122       89,939       92,061  
 Consumer loans
    103       97       1,576       1,776       108       1,868       1,976  
    Gross loans
    78,522       59,623       409,525       547,670       82,588       410,268       492,856  
                                                         
 Less deferred fees on loans
    -       -       (1,025 )     (1,025 )     -       (1,088 )     (1,088 )
 Loans, net of deferred fees
  $ 78,522     $ 59,623     $ 408,500     $ 546,645     $ 82,588     $ 409,180     $ 491,768  
 
(1) Covered Loans are loans acquired in the Greater Atlantic transaction and are covered under an FDIC loss-share agreement.
(2) HarVest Loans are loans acquired in the HarVest transaction and are not covered under an FDIC loss-share agreement.
 
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.” Non-covered loans included $59.6 million of loans acquired in the HarVest acquisition.
 
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.
 
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.
 
 
12

 
 
Impaired loans were as follows (in thousands):
 
June 30, 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
  $ 134     $ -     $ 288     $ -     $ 422     $ -  
    Commercial real estate - non-owner occupied (2)
    2,359       -       2,896       -       5,255       -  
    Construction and land development
    1,105       -       3,003       -       4,108       -  
    Commercial loans
    210       -       3,191       -       3,401       -  
    Residential 1-4 family
    1,170       -       1,237       -       2,407       -  
   Other consumer loans
    -       -       -       -       -       -  
                                                 
Total
  $ 4,978     $ -     $ 10,615     $ -     $ 15,593     $ -  
                                                 
With an allowance recorded
                                               
    Commercial real estate - owner occupied
  $ -     $ -     $ -     $ -     $ -     $ -  
    Commercial real estate - non-owner occupied (2)
    -       -       1,550