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| SONA > SEC Filings for SONA > Form 10-Q on 8-Nov-2012 | All Recent SEC Filings |
8-Nov-2012
Quarterly Report
Management's discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of SNBV. This discussion and analysis should be read with the consolidated financial statements, the footnotes thereto, and the other financial data included in this report and in our annual report on Form 10-K for the year ended December 31, 2011. Results of operations for the three and nine month periods ended September 30, 2012 are not necessarily indicative of results that may be attained for any other period.
FORWARD-LOOKING STATEMENTS
Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and involve a number of risks and uncertainties, many of which are beyond our control. The words "believe," "may," "should," "anticipate," "estimate," "expect," "intend," "continue," "would," "could," "hope," "might," "assume," "objective," "seek," "plan," "strive" and similar words, or the negatives of these words, are intended to identify forward-looking statements.
Many possible events or factors could affect our future financial results and performance and could cause our actual results to differ materially from the expectations of future results we express or imply in any forward-looking statements. In addition to the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, factors that could contribute to those differences include, but are not limited to:
? our limited operating history;
? the effects of future economic, business and market conditions and changes, domestic and foreign;
? changes in the local economies in our market areas adversely affect our customers and their ability to transact profitable business with us, including the ability of our borrowers to repay their loans according to their terms or a change in the value of the related collateral;
? changes in the availability of funds resulting in increased costs or reduced liquidity;
? a deterioration or downgrade in the credit quality and credit agency ratings of the securities in our securities portfolio;
? impairment concerns and risks related to our investment portfolio of collateralized mortgage obligations, agency mortgage-backed securities and pooled trust preferred securities;
? the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations;
? increased credit risk in our assets and increased operating risk caused by a material change in commercial, consumer and/or real estate loans as a percentage of our total loan portfolio;
? the concentration of our loan portfolio in loans collateralized by real estate;
? our level of construction and land development and commercial real estate loans;
? changes in the levels of loan prepayments and the resulting effects on the value of our loan portfolio;
? the failure of assumptions and estimates underlying the establishment of and provisions made to the allowance for loan losses;
? our ability to expand and grow our business and operations, including the establishment of additional branches and acquisition of additional branches and banks, and our ability to realize the cost savings and revenue enhancements we expect from such activities;
? changes in governmental monetary and fiscal policies, including interest rate policies of the Board of Governors of the Federal Reserve System, or changes in interest rates and market prices, which could reduce our net interest margins, asset valuations and expense expectations;
? increased competition for deposits and loans adversely affecting rates and terms;
? the continued service of key management personnel;
? the potential payment of interest on demand deposit accounts to effectively compete for customers;
? potential environmental liability risk associated with lending activities;
? increased asset levels and changes in the composition of assets and the resulting impact on our capital levels and regulatory capital ratios;
? our ability to acquire, operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive but necessary technological changes; and
? legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators, including those associated with the Dodd Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and changes in the scope and cost of Federal Deposit Insurance Corporation ("FDIC") insurance and other coverage;
? increases in regulatory capital requirements for banking organizations generally, which may adversely affect our ability to expand our business or could cause us to shrink our business;
? the effects of war or other conflicts, acts of terrorism or other catastrophic events that may affect general economic conditions;
? changes in accounting policies, rules and practices and applications or determinations made thereunder;
? the risk that our deferred tax assets could be reduced if future taxable income is less than currently estimated, if corporate tax rates in the future are less than current rates, or if sales of our capital stock trigger limitations on the amount of net operating loss carryforwards that we may utilize for income tax purposes; and
? other factors and risks described under "Risk Factors" herein and in any of our subsequent reports that we make with the Securities and Exchange Commission (the "Commission" or "SEC") under the Exchange Act.
Forward-looking statements are not guarantees of performance or results. A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe we have chosen these assumptions or bases in good faith and that they are reasonable. We caution you, however, that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Quarterly Report on Form 10-Q. These statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by applicable law, we undertake no obligation to update publicly these statements in light of new information or future events.
OVERVIEW
Southern National Bancorp of Virginia, Inc. ("Southern National") 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 has 15 branches in Virginia, located in Fairfax County (Reston, McLean and Fairfax), in Charlottesville, Warrenton (2), Middleburg, Leesburg (2), South Riding, Front Royal, New Market, Richmond, Haymarket and Clifton Forge, and five branches in Maryland (four in Montgomery County and one in Frederick County). We have administrative offices in Warrenton and an executive office in Georgetown, Washington, D.C where senior management is located.
As disclosed in our 2011 Annual Report on Form 10-K, 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 nine months ended September 30, 2011 set forth in this Quarterly Report on Form 10-Q, as applicable, reflect the restatement of previously issued financial statements.
As previously announced 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. This was not simply a financial transaction but an opportunity to broaden and deepen our deposit base. HarVest's branches have been integrated into the Sonabank branch system, and the core processing systems were succesfully merged in the third quarter of 2012. Full details on the transaction are contained in an 8-K/A filed on July 13, 2012.
RESULTS OF OPERATIONS
Net Income
Net income for the quarter and nine months ended September 30, 2012 was $1.2 million and $5.3 million compared to $1.4 million and $4.1 million during the third quarter and the first nine months of 2011.
Net Interest Income
Our operating results depend primarily on our net interest income, which is the difference between interest and dividend income on interest-earning assets such as loans and investments, and interest expense on interest-bearing liabilities such as deposits and borrowings.
Net interest income was $8.1 million in the quarter ended September 30, 2012 up from $7.2 million during the same period last year. The accretion of the discount on Greater Atlantic Bank's loans contributed $674 thousand to third quarter 2012 net interest income compared to $786 thousand during the third quarter of 2011. The accretion of the discount on HarVest's loans contributed $241 thousand in the third quarter of 2012. Average loans increased $55.6 million for the third quarter of 2012 compared to the quarter ended September 30, 2011, and the cost of funds decreased from 1.25% to 1.08%. Sonabank's net interest margin was 5.14% in the third quarter of 2012 compared to 5.22% during the comparable quarter last year and 5.07% during the second quarter of 2012.
Net interest income was $23.6 million during the nine months ended September 30, 2012, compared to $20.3 million during the comparable period in the prior year. Average loans during the first nine months of 2012 were $523.2 million compared to $472.2 million during the same period last year. The Greater Atlantic Bank loan discount accretion contributed $2.9 million to net interest income during the first nine months of 2012, compared to $2.6 million during the nine months ended September 30, 2011. The loan discount accretion on the HarVest Bank portfolio contributed $412 thousand through the third quarter of 2012. The net interest margin in the nine months ended September 30, 2012 was 5.26% compared to 5.08% for the same period last year.
The following tables detail average balances of interest-earning assets and interest-bearing liabilities, the amount of interest earned/paid on such assets and liabilities, and the yield/rate for the periods indicated:
Average Balance Sheets and Net Interest
Analysis For the Quarters Ended
9/30/2012 9/30/2011
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
(Dollar amounts in thousands)
Assets
Interest-earning
assets:
Loans, net of
unearned income (1)
(2) $ 541,405 $ 9,008 6.62 % $ 485,773 $ 8,165 6.67 %
Investment securities 69,802 490 2.81 % 50,018 457 3.65 %
Other earning assets 17,520 102 2.32 % 11,370 66 2.30 %
Total earning assets 628,727 9,600 6.07 % 547,161 8,688 6.30 %
Allowance for loan
losses (7,246 ) (6,544 )
Total non-earning
assets 71,482 64,666
Total assets $ 692,963 $ 605,283
Liabilities and
stockholders' equity
Interest-bearing
liabilities:
NOW accounts $ 19,460 13 0.27 % $ 15,578 11 0.27 %
Money market accounts 167,313 333 0.79 % 141,580 305 0.85 %
Savings accounts 8,926 13 0.58 % 6,092 9 0.58 %
Time deposits 290,432 945 1.29 % 228,414 892 1.55 %
Total
interest-bearing
deposits 486,131 1,304 1.07 % 391,664 1,217 1.23 %
Borrowings 54,879 165 1.20 % 81,616 272 1.32 %
Total
interest-bearing
liabilities 541,010 1,469 1.08 % 473,280 1,489 1.25 %
Noninterest-bearing
liabilities:
Demand deposits 44,117 30,766
Other liabilities 3,909 2,987
Total liabilities 589,036 507,033
Stockholders' equity 103,927 98,250
Total liabilities and
stockholders'
equity $ 692,963 $ 605,283
Net interest income 8,131 $ 7,199
Interest rate spread 4.99 % 5.05 %
Net interest margin 5.14 % 5.22 %
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(1) Includes loan fees in both interest income and the calculation of the
yield on loans.
(2) Calculations include non-accruing loans in average loan amounts
outstanding.
Average Balance Sheets and Net Interest
Analysis For the Nine Months Ended
9/30/2012 9/30/2011
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
(Dollar amounts in thousands)
Assets
Interest-earning
assets:
Loans, net of
unearned income (1)
(2) $ 523,182 $ 26,387 6.74 % $ 472,222 $ 23,255 6.58 %
Investment securities 59,976 1,401 3.11 % 51,998 1,495 3.83 %
Other earning assets 16,689 247 1.98 % 10,676 169 2.12 %
Total earning assets 599,847 28,035 6.24 % 534,896 24,919 6.23 %
Allowance for loan
losses (7,075 ) (6,154 )
Total non-earning
assets 71,758 62,465
Total assets $ 664,530 $ 591,207
Liabilities and
stockholders' equity
Interest-bearing
liabilities:
NOW accounts $ 18,431 46 0.33 % $ 15,560 31 0.27 %
Money market accounts 159,859 959 0.80 % 148,272 989 0.89 %
Savings accounts 7,873 35 0.60 % 5,874 26 0.60 %
Time deposits 277,455 2,763 1.33 % 225,999 2,698 1.60 %
Total
interest-bearing
deposits 463,618 3,803 1.10 % 395,705 3,744 1.26 %
Borrowings 51,270 628 1.64 % 64,563 857 1.77 %
Total
interest-bearing
liabilities 514,888 4,431 1.15 % 460,268 4,601 1.34 %
Noninterest-bearing
liabilities:
Demand deposits 40,986 31,347
Other liabilities 6,694 2,872
Total liabilities 562,568 494,487
Stockholders' equity 101,962 96,720
Total liabilities and
stockholders'
equity $ 664,530 $ 591,207
Net interest income $ 23,604 $ 20,318
Interest rate spread 5.09 % 4.89 %
Net interest margin 5.26 % 5.08 %
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(1) Includes loan fees in both interest income and the calculation of the
yield on loans.
(2) Calculations include non-accruing loans in average loan amounts
outstanding.
Provision for Loan Losses
The provision for loan losses is a current charge to earnings made in order to increase the allowance for loan losses to a level deemed appropriate by management based on an evaluation of the loan portfolio, current economic conditions, changes in the nature and volume of lending, historical loan experience and other known internal and external factors affecting loan collectability. Our loan loss allowance is calculated by segmenting the loan portfolio by loan type and applying historical loss factors to each segment. The historical loss factors may be qualitatively adjusted by considering regulatory and peer data, and the application of management's judgment.
The provision for loan losses in the third quarter of 2012 was $1.8 million compared to $1.6 million in the third quarter of 2011. For the nine months ended September 30, 2012, the provision for loan losses was $4.6 million compared to $5.1 million for the same period last year.
Net charge-offs during the third quarter of 2012 were $1.6 million, compared to net charge-offs during the third quarter of 2011 of $1.5 million.
Net charge-offs during the nine months ended September 30, 2012 were $4.0 million compared to $4.7 million during the first nine months of 2011.
Noninterest Income
The following table presents the major categories of noninterest income for the
three and nine months ended September 30, 2012 and 2011:
For the Three Months Ended
September 30,
2012 2011 Change
(dollars in thousands)
Account maintenance and deposit service fees $ 222 $ 218 $ 4
Income from bank-owned life insurance 148 129 19
Net gain on other real estate owned 24 - 24
Net gain on sale of available for sale securities 287 - 287
OTTI losses recognized in earnings (480 ) (43 ) (437 )
Other 63 62 1
Total noninterest income $ 264 $ 366 $ (102 )
For the Nine Months Ended
September 30,
2012 2011 Change
(dollars in thousands)
Account maintenance and deposit service fees $ 624 $ 636 $ (12 )
Income from bank-owned life insurance 649 1,196 (547 )
Bargain purchase gain on acquisition 3,484 - 3,484
Gain on sale of loans 657 - 657
Net loss on other real estate owned (2,376 ) (147 ) (2,229 )
Gain on other assets 14 - 14
Net gain on sale of available for sale securities 274 - 274
OTTI losses recognized in earnings (717 ) (113 ) (604 )
Other 198 151 47
Total noninterest income $ 2,807 $ 1,723 $ 1,084
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During the third quarter of 2012 Sonabank had noninterest income of $264 thousand compared to noninterest income of $366 thousand during the third quarter of 2011. The decline was primarily related to an OTTI charge on trust preferred securities in the amount of $480 thousand which was partially offset by a gain on the sale of SBA pooled securities in the amount of $287 thousand.
Noninterest income increased to $2.8 million in the first nine months of 2012 from $1.7 million in the first nine months of 2011. The increase resulted from the bargain purchase gain of $3.5 million from the HarVest transaction which was partially offset by the recognition of impairment in the values of five OREO properties in the Charlottesville market and one in the Culpeper market during the second quarter of 2012. In addition to the OTTI charge recognized in the third quarter of 2012, there was an OTTI of $235 thousand in one trust preferred security during the second quarter of 2012 compared to $38 thousand in OTTI charges during the second quarter of 2011. Also, during the first quarter of 2012 the bank sold the guaranteed portions of SBA loans and realized a $657 thousand gain. Income from bank owned life insurance ("BOLI") contributed $649 thousand during the nine months ended September 30, 2012, compared to $1.2 million during the nine months ended September 30, 2011. Both periods were affected by death benefits; however, the death benefit received in the 2011 period was $800 thousand as compared to $195 in the 2012 period.
Noninterest Expense
The following table presents the major categories of noninterest expense for the
three and nine months ended September 30, 2012 and 2011:
For the Three Months Ended
September 30,
2012 2011 Change
(As Restated)
(dollars in thousands)
Salaries and benefits $ 2,073 $ 1,759 $ 314
Occupancy expenses 753 573 180
Furniture and equipment expenses 149 140 9
Amortization of core deposit intangible 236 230 6
Virginia franchise tax expense 145 171 (26 )
Merger expenses 11 - 11
FDIC assessment 146 125 21
Data processing expense 175 126 49
Telephone and communication expense 183 101 82
Change in FDIC indemnification asset 242 (13 ) 255
Other operating expenses 665 702 (37 )
Total noninterest expense $ 4,778 $ 3,914 $ 864
For the Nine Months Ended
September 30,
2012 2011 Change
(As Restated)
(dollars in thousands)
Salaries and benefits $ 5,868 $ 5,066 $ 802
Occupancy expenses 2,040 1,667 373
Furniture and equipment expenses 448 406 42
Amortization of core deposit intangible 694 690 4
Virginia franchise tax expense 436 514 (78 )
Merger expenses 360 - 360
FDIC assessment 417 397 20
Data processing expense 474 400 74
Telephone and communication expense 418 289 129
Change in FDIC indemnification asset 481 (85 ) 566
Other operating expenses 2,417 1,809 608
Total noninterest expense $ 14,053 $ 11,153 $ 2,900
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Noninterest expenses were $4.8 million and $14.1 million during the third quarter and the first nine months of 2012, respectively, compared to $3.9 million and $11.2 million during the same periods in 2011. Occupancy and furniture and equipment expenses were $902 thousand during the quarter compared to $713 thousand during the third quarter of 2011. $134 thousand of the increase resulted from operating five more branches this quarter, and $43 thousand was a result of expenses related to the HarVest administrative office on a lease which has now been terminated. As a result of recasting estimated recoveries under the FDIC indemnification agreement for the Greater Atlantic Bank acquisition in the second quarter of 2012, amortization expense was $242 thousand for the quarter . . .
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