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Section 1: 10-Q (10-Q)

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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, 2019

 

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 ☒       NO ☐

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files).

 

YES ☒       NO ☐

 

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

 

 

 

 

Large accelerated filer 

Accelerated filer 

Smaller reporting company 

 

 

 

Non-accelerated filer 

Emerging growth company 

 

 

 

 

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).

Yes ☐   No ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of each class:

Trading symbol

Name of each exchange on which registered:

  Common Stock

        SONA

                            NASDAQ

 

   

 

As of May 2, 2019, there were 24,117,326 shares of common stock outstanding.

 

 

 


 

Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10‑Q

March 31, 2019

INDEX

 

    

PAGE

PART I - FINANCIAL INFORMATION

 

 

 

 

 

Item 1 - Financial Statements

 

 

Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 

 

2

Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2019 and 2018 

 

3

Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2019 and 2018 

 

4

Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 

 

5

Notes to Unaudited Consolidated Financial Statements 

 

6

 

 

 

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

28

 

 

 

Item 3 – Quantitative and Qualitative Disclosures about Market Risk 

 

37

 

 

 

Item 4 – Controls and Procedures 

 

38

 

 

 

PART II - OTHER INFORMATION 

 

 

 

 

 

Item 1 – Legal Proceedings 

 

39

 

 

 

Item 1A – Risk Factors 

 

39

 

 

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds 

 

39

 

 

 

Item 3 – Defaults Upon Senior Securities 

 

39

 

 

 

Item 4 – Mine Safety Disclosures 

 

39

 

 

 

Item 5 – Other Information 

 

39

 

 

 

Item 6 - Exhibits 

 

40

 

 

 

Signatures 

 

41

 

 

 

 

 

 

 


 

Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2019

 

2018

 

 

(unaudited)

 

*

ASSETS

 

 

 

 

 

 

Cash and cash equivalents:

 

 

  

 

 

  

Cash and due from financial institutions

 

$

6,868

 

$

6,939

Interest-bearing deposits in other financial institutions

 

 

24,973

 

 

20,877

Federal funds sold

 

 

 —

 

 

795

Total cash and cash equivalents

 

 

31,841

 

 

28,611

 

 

 

 

 

 

 

Securities available for sale, at fair value

 

 

156,192

 

 

143,377

 

 

 

 

 

 

 

Securities held to maturity, at amortized cost (fair value of $88,667 and $89,109, respectively)

 

 

90,592

 

 

92,462

 

 

 

 

 

 

 

Total loans

 

 

2,157,215

 

 

2,178,824

Less allowance for loan losses

 

 

(11,874)

 

 

(12,283)

Net loans

 

 

2,145,341

 

 

2,166,541

 

 

 

 

 

 

 

Stock in Federal Reserve Bank and Federal Home Loan Bank

 

 

18,427

 

 

19,522

Equity investment in mortgage affiliate

 

 

3,847

 

 

3,829

Preferred investment in mortgage affiliate

 

 

3,305

 

 

3,305

Bank premises and equipment, net

 

 

31,478

 

 

32,352

Operating lease right-of-use assets

 

 

7,865

 

 

 —

Goodwill

 

 

101,954

 

 

101,954

Core deposit intangibles, net

 

 

8,246

 

 

8,609

Bank-owned life insurance

 

 

62,674

 

 

62,495

Other real estate owned

 

 

5,041

 

 

5,077

Deferred tax assets, net

 

 

13,876

 

 

14,104

Other assets

 

 

23,516

 

 

19,057

Total assets

 

$

2,704,195

 

$

2,701,295

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

Noninterest-bearing demand deposits

 

$

328,808

 

$

320,043

Interest-bearing deposits:

 

 

  

 

 

  

   NOW accounts

 

 

361,301

 

 

345,597

   Money market accounts

 

 

426,072

 

 

355,469

   Savings accounts

 

 

148,547

 

 

151,050

   Time deposits

 

 

846,325

 

 

925,441

   Total interest-bearing deposits

 

 

1,782,245

 

 

1,777,557

Total deposits

 

 

2,111,053

 

 

2,097,600

 

 

 

 

 

 

 

Securities sold under agreements to repurchase - short term

 

 

13,623

 

 

18,721

Federal Home Loan Bank (FHLB) advances - short term

 

 

135,640

 

 

163,340

Junior subordinated debt - long term

 

 

9,596

 

 

9,584

Senior subordinated notes - long term

 

 

47,080

 

 

47,089

Operating lease liabilities

 

 

8,856

 

 

 —

Other liabilities

 

 

25,658

 

 

16,671

Total liabilities

 

 

2,351,506

 

 

2,353,005

 

 

 

 

 

 

 

Commitments and contingencies (See Note 6)

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

  

 

 

  

Preferred stock, $0.01 par value. Authorized 5,000,000 shares; no shares issued and outstanding

 

 

 —

 

 

 —

Common stock, $0.01 par value. Authorized 45,000,000 shares; 24,107,103 and 24,052,253 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

241

 

 

240

Additional paid in capital

 

 

305,879

 

 

305,654

Retained earnings

 

 

48,300

 

 

44,985

Accumulated other comprehensive loss

 

 

(1,731)

 

 

(2,589)

Total stockholders' equity

 

 

352,689

 

 

348,290

Total liabilities and stockholders' equity

 

$

2,704,195

 

$

2,701,295

*  Derived from audited consolidated financial statements

See accompanying notes to unaudited consolidated financial statements.

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

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

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

    

Interest and dividend income:

 

 

  

 

 

  

 

Interest and fees on loans

 

$

27,974

 

$

25,905

 

Interest and dividends on taxable securities

 

 

1,425

 

 

1,482

 

Interest and dividends on tax exempt securities

 

 

156

 

 

159

 

Interest and dividends on other earning assets

 

 

746

 

 

467

 

Interest on federal funds sold

 

 

 2

 

 

 7

 

Total interest and dividend income

 

 

30,303

 

 

28,020

 

Interest expense:

 

 

  

 

 

  

 

Interest on deposits

 

 

7,462

 

 

3,270

 

Interest on repurchase agreements

 

 

23

 

 

22

 

Interest on junior subordinated debt

 

 

150

 

 

128

 

Interest on senior subordinated notes

 

 

712

 

 

711

 

Interest on other borrowings

 

 

1,004

 

 

1,389

 

Total interest expense

 

 

9,351

 

 

5,520

 

Net interest income

 

 

20,952

 

 

22,500

 

Provision for loan losses

 

 

200

 

 

1,600

 

Net interest income after provision for loan losses

 

 

20,752

 

 

20,900

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

  

 

 

  

 

Account maintenance and deposit service fees

 

 

1,687

 

 

1,408

 

Income from bank-owned life insurance

 

 

523

 

 

307

 

Equity gain (loss) from mortgage affiliate

 

 

18

 

 

(317)

 

Recoveries related to acquired charged-off loans and investment securities

 

 

591

 

 

1,483

 

Other

 

 

243

 

 

198

 

Total noninterest income

 

 

3,062

 

 

3,079

 

 

 

 

 

 

 

 

 

Noninterest expenses:

 

 

  

 

 

  

 

Salaries and benefits

 

 

5,812

 

 

6,772

 

Occupancy expenses

 

 

1,803

 

 

1,650

 

Furniture and equipment expenses

 

 

710

 

 

797

 

Amortization of core deposit intangible

 

 

363

 

 

362

 

Virginia franchise tax expense

 

 

563

 

 

364

 

FDIC assessment

 

 

 —

 

 

335

 

Data processing expense

 

 

512

 

 

466

 

Telephone and communication expense

 

 

375

 

 

594

 

Net (gain) loss on other real estate owned

 

 

(2)

 

 

200

 

Other operating expenses

 

 

6,154

 

 

2,079

 

Total noninterest expenses

 

 

16,290

 

 

13,619

 

Income before income taxes

 

 

7,524

 

 

10,360

 

Income tax expense

 

 

1,504

 

 

2,101

 

Net income

 

$

6,020

 

$

8,259

 

Other comprehensive income (loss)

 

 

  

 

 

  

 

Unrealized gain (loss) on available for sale securities

 

$

1,084

 

$

(1,876)

 

Accretion of amounts previously recorded upon transfer to held to maturity from available for sale

 

 

 3

 

 

 4

 

Net unrealized gain (loss)

 

 

1,087

 

 

(1,872)

 

Tax effect

 

 

229

 

 

(394)

 

Other comprehensive income (loss):

 

 

858

 

 

(1,478)

 

Comprehensive income

 

$

6,878

 

$

6,781

 

Earnings per share, basic

 

$

0.25

 

$

0.34

 

Earnings per share, diluted

 

$

0.25

 

$

0.34

 

 

See accompanying notes to unaudited consolidated financial statements.

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

Common

 

Paid in

 

Retained

 

Comprehensive

 

 

 

    

Stock

    

Capital

    

Earnings

    

Loss

    

Total

Balance - December 31, 2018

 

$

240

 

$

305,654

 

$

44,985

 

$

(2,589)

 

$

348,290

Net income

 

 

 —

 

 

 —

 

 

6,020

 

 

 —

 

 

6,020

Changes in other comprehensive income on investment securities (net of tax, $229, and accretion of $3)

 

 

 —

 

 

 —

 

 

 —

 

 

858

 

 

858

Dividends on common stock ($0.09 per share)

 

 

 —

 

 

 —

 

 

(2,170)

 

 

 —

 

 

(2,170)

Issuance of common stock under Stock Incentive Plan (17,250 shares, net)

 

 

 1

 

 

121

 

 

 —

 

 

 —

 

 

122

Impact of adoption of ASU 2016-02

 

 

 —

 

 

 —

 

 

(535)

 

 

 —

 

 

(535)

Stock-based compensation expense

 

 

 —

 

 

104

 

 

 —

 

 

 —

 

 

104

Balance - March 31, 2019

 

$

241

 

$

305,879

 

$

48,300

 

$

(1,731)

 

$

352,689

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

Common

 

Paid in

 

Retained

 

Comprehensive

 

 

 

    

Stock

    

Capital

    

Earnings

    

Loss

    

Total

Balance - December 31, 2017

 

$

239

 

$

304,932

 

$

18,753

 

$

(1,152)

 

$

322,772

Net income

 

 

 —

 

 

 —

 

 

8,259

 

 

 —

 

 

8,259

Changes in other comprehensive loss on investment securities (net of tax, $394, and accretion of $3)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,478)

 

 

(1,478)

Dividends on common stock ($0.08 per share)

 

 

 —

 

 

 —

 

 

(1,917)

 

 

 —

 

 

(1,917)

Issuance of common stock under Stock Incentive Plan (51,200 shares, net)

 

 

 1

 

 

353

 

 

 —

 

 

 —

 

 

354

Reclassification from accumulated other comprehensive loss to retained earnings due to adoption of ASU 2018-02

 

 

 —

 

 

 —

 

 

229

 

 

(229)

 

 

 —

Stock-based compensation expense

 

 

 —

 

 

75

 

 

 —

 

 

 —

 

 

75

Balance - March 31, 2018

 

$

240

 

$

305,360

 

$

25,324

 

$

(2,859)

 

$

328,065

 

See accompanying notes to unaudited consolidated financial statements.

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(dollars in thousands) (Unaudited)

 

 

 

 

 

 

 

 

    

2019

    

2018

Operating activities:

 

 

  

 

 

  

Net income

 

$

6,020

 

$

8,259

Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:

 

 

  

 

 

  

Depreciation and amortization - premises and equipment

 

 

881

 

 

841

Amortization of operating lease right-of-use assets

 

 

586

 

 

 —

Amortization of core deposit intangible

 

 

363

 

 

362

Other amortization

 

 

497

 

 

677

Accretion of loan discount

 

 

(816)

 

 

(1,212)

Amortization of FDIC indemnification asset

 

 

177

 

 

173

Provision for loan losses

 

 

200

 

 

1,600

Earnings on bank-owned life insurance

 

 

(523)

 

 

(307)

Equity (gain) loss on mortgage affiliate

 

 

(18)

 

 

317

Stock-based compensation expense

 

 

104

 

 

75

(Gain) loss on other real estate owned

 

 

(2)

 

 

200

Net (increase) decrease in other assets

 

 

(4,420)

 

 

1,353

Net increase in other liabilities

 

 

8,641

 

 

2,064

Net cash and cash equivalents provided by operating activities

 

 

11,690

 

 

14,402

Investing activities:

 

 

  

 

 

  

Purchases of available for sale investment securities

 

 

(15,313)

 

 

 —

Proceeds from paydowns, maturities and calls of available for sale investment securities

 

 

3,172

 

 

3,414

Proceeds from paydowns, maturities and calls of held to maturity investment securities

 

 

1,778

 

 

1,190

Sales (purchases) of FRB and FHLB stock

 

 

1,095

 

 

(26)

Net (increase) decrease in loans

 

 

21,815

 

 

(43,445)

Proceeds from bank-owned life insurance death benefit

 

 

344

 

 

 —

Proceeds from sales of other real estate owned, net of improvements

 

 

38

 

 

52

Proceeds from sales of bank premise and equipment and assets held for sale

 

 

 —

 

 

2,136

Purchases of bank premises and equipment

 

 

(7)

 

 

(1,623)

Net cash and cash equivalents provided by (used in) investing activities

 

 

12,922

 

 

(38,302)

Financing activities:

 

 

  

 

 

  

Net increase in deposits

 

 

13,464

 

 

29,315

Cash dividends paid on common stock

 

 

(2,170)

 

 

(1,917)

Issuance of common stock under Stock Incentive Plan

 

 

122

 

 

354

Net decrease in short-term borrowings

 

 

(32,798)

 

 

(690)

Net cash and cash equivalents provided by (used in) financing activities

 

 

(21,382)

 

 

27,062

Increase in cash and cash equivalents

 

 

3,230

 

 

3,162

Cash and cash equivalents at beginning of period

 

 

28,611

 

 

25,463

Cash and cash equivalents at end of period

 

$

31,841

 

$

28,625

Supplemental disclosure of cash flow information

 

 

  

 

 

  

Cash payments for:

 

 

  

 

 

  

Interest

 

$

8,989

 

$

4,898

Income taxes

 

 

 —

 

 

471

Non-cash investing and financing activities:

 

 

 

 

 

 

Initial recognition of operating lease right-of-use assets

 

 

8,296

 

 

 —

Initial recognition of operating lease liabilities

 

 

9,305

 

 

 —

 

See accompanying notes to unaudited consolidated financial statements.

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Unaudited Consolidated Financial Statements

March 31, 2019

1.      ACCOUNTING POLICIES

Southern National Bancorp of Virginia, Inc. (“Southern National” or “SNBV” or the “Company”) is a corporation that was formed on July 28, 2004 under the laws of the Commonwealth of Virginia and is the holding company for Sonabank (“Sonabank” or the “Bank”) a Virginia state-chartered bank which commenced operations on April 14, 2005. As of the close of business on June 23, 2017, SNBV completed its merger with Eastern Virginia Bankshares, Inc. (“EVBS”) and the merger of EVBS’s wholly-owned subsidiary, EVB, with and into SNBV’s wholly-owned subsidiary, Sonabank. Sonabank provides a range of financial services to individuals and small and medium sized businesses. At March 31, 2019, Sonabank had thirty-eight full-service retail branches in Virginia, located in the counties of Chesterfield (2), Essex (2), Fairfax (Reston, McLean and Fairfax), Gloucester (2), Hanover (3), King William, Lancaster, Middlesex (3), New Kent, Northumberland (3), Southampton, Surry, Sussex, and in Charlottesville, Clifton Forge, Colonial Heights, Front Royal, Hampton, Haymarket, Leesburg, Middleburg, New Market, Newport News, Richmond, South Riding, Warrenton, and Williamsburg, and seven full-service retail branches in Maryland, in Rockville, Shady Grove, Bethesda, Upper Marlboro, Brandywine, Owings and Huntingtown.

The consolidated financial statements include the accounts of Southern National and its subsidiaries Sonabank and EVB Statutory Trust I (the “Trust”). Significant inter-company accounts and transactions have been eliminated in consolidation. Southern National consolidates subsidiaries in which it holds, directly or indirectly, more than 50 percent of the voting rights or where it exercises control. Entities where Southern National holds 20 to 50 percent of the voting rights, or has the ability to exercise significant influence, or both, are accounted for under the equity method. Southern National has an interest in one affiliate, Southern Trust Mortgage, LLC (“STM”), which it accounts for as an equity method investment. In addition, Southern National owns the Trust which is an unconsolidated subsidiary. The junior subordinated debt owed to the Trust is reported as a liability of Southern National.

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, 2018.

Revenue from Contracts with Customers

Southern National records revenue from contracts with customers in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606). Under Topic 606, we must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) we satisfy a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

Our primary sources of revenue are derived from financial instruments, namely loans, investment securities, and other financial instruments that are not within the scope of Topic 606. We have evaluated the nature of the Company’s contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income and Comprehensive Income was not necessary. Southern National generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little

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judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

Operating Leases

The Company leases certain properties and equipment under operating leases. For leases in effect upon adoption of FASB Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) at January 1, 2019 and for any leases commencing thereafter, the Company recognizes a liability to make lease payments, the operating lease liability, and an asset representing the right to use the underlying asset during the lease term, the right-of-use asset. The operating lease liability is measured at the present value of the remaining lease payments, discounted at the Company’s incremental borrowing rate at inception. The right-of-use asset is measured at the amount of the operating lease liability adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term, any unamortized initial direct costs, and any impairment of the right-of-use-asset. Lease expense consists of a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis, variable lease payments not included in the operating lease liability, and any impairment of the right-of-use asset.

Certain of the Company’s leases contain options to renew the lease; however, these renewal options are not included in the calculation of the operating lease liabilities as they are not reasonably certain to be exercised. The Company’s leases do not contain residual value guarantees or material variable lease payments. The Company does not have any material restrictions or covenants imposed by leases that would impact the Company’s ability to pay dividends or cause the Company to incur additional financial obligations.  

The Company has made an accounting policy election to not apply the recognition requirements in Topic 842 to short-term leases. The Company has also elected to use the practical expedient to make an accounting policy election for property leases to use the discount rates in effect on January 2, 2019 for the remaining life of the leases.

 

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP 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 and the valuation of goodwill and intangible assets.

Recent Accounting Pronouncements

Adoption of New Accounting Standards:

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which updates narrow aspects of the guidance issued in ASU 2016-02. The amendments in this ASU were effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.  Early adoption of this ASU was permitted for all entities. The Company adopted ASU 2016-02 in the first quarter of 2019 and inventoried and categorized its lease agreements. Upon adoption, the Company recognized right-of-use assets and associated operating lease liabilities of $8.3 million and $9.3 million, respectively. Right-of-use assets and operating lease liabilities are reflected on our consolidated balance sheets. The company currently does not have any finance leases. See Note 5 – Leases for additional disclosures related to leases.

 

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In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities, which shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date.  The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.  ASU 2017-08 became effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  The company adopted ASU 2017-08 in the first quarter of 2019 and it did not have a material impact on the Company’s consolidated financial statements.

 

In July 2018, the FASB issued ASU 2018-09, Codification Improvements. This ASU makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification. The majority of the amendments in ASU 2018-09 were effective for the Company for fiscal years beginning after December 15, 2018. The Company adopted ASU 2018-09 in the first quarter of 2019 and it did not have a material impact on the Company’s consolidated financial statements.

 

New Accounting Standards Not Yet Adopted:

In June 2016,  the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which sets forth a “current expected credit loss” ("CECL") model requiring the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. For public business entities that are U.S. Securities and Exchange Commission filers, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Southern National has engaged a third-party to collect data that will be needed to produce historical inputs into any models created as a result of adopting this ASU. We are currently evaluating the impact of the adoption of this ASU on our consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the second step of the previous FASB guidance for testing goodwill for impairment and is intended to reduce cost and complexity of goodwill impairment testing. The amendments in this ASU modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. After determining if the carrying amount of a reporting unit exceeds its fair value, the entity should take an impairment charge of the same amount to the goodwill for that reporting unit, not to exceed the total goodwill amount for that reporting unit. ASU 2017-04 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Southern National is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.

 

In August 2018, FASB issued ASU 2018-13, Fair Value measurement (Topic 820). This ASU adds, eliminates and modifies certain disclosure requirements for fair value measurements. The amendments in ASU 2018-13 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The disclosures are effective using the prospective method for certain disclosures and retrospective for majority of the disclosures. Southern National is currently in the process of evaluating the impact of adopting the new guidance on its consolidated financial statements and disclosures.

 

 

2.      STOCK-BASED COMPENSATION

In 2004, the Company’s Board of Directors adopted a stock option plan that authorized the reservation of up to 302,500 shares of common stock and provided for the granting of stock options to certain directors, officers and employees. The 2010 Stock Awards and Incentive Plan (the “2010 Plan”) was approved by the Company’s Board of Directors in January 2010 and approved by the stockholders at the Annual Stockholder Meeting in April 2010. The 2010 Plan

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authorized the reservation of an additional 700,000 shares of common stock for the granting of stock awards. The options granted to officers and employees are incentive stock options and the options granted to non-employee directors are non-qualified stock options. The purpose of the plan is to afford key employees an incentive to remain in the employment 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.

At the June 21, 2017 Annual Meeting of Stockholders of Southern National, the 2017 Equity Compensation Plan (the “2017 Plan”) was approved as recommended by the Board of Directors. The 2017 Plan replaced the 2010 Plan and has a maximum number of 750,000 shares reserved for issuance. The purpose of the 2017 Plan is to promote the success of the Company by providing greater incentive to employees, non-employee directors, consultants and advisors to associate their personal interests with the long-term financial success of the Company, including its subsidiaries, and with growth in stockholder value, consistent with the Company’s risk management practices. Because the 2017 Plan was approved, shares under the 2004 stock-option plan or 2010 Plan will no longer be awarded.

A summary of the activity in the stock option plan during the three months ended March 31, 2019 follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Weighted

    

 

 

 

 

 

 

Weighted

 

Average 

 

Aggregate

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

 

Exercise

 

Contractual

 

Value

 

 

Shares

 

Price

 

Term

 

(in thousands)

Options outstanding, beginning of period

 

642,350

 

$

9.77

 

  

 

 

  

Forfeited

 

(1,400)

 

 

9.32

 

  

 

 

  

Exercised

 

(17,250)

 

 

6.40

 

 

 

 

  

Options outstanding, end of period

 

623,700

 

$

9.77

 

4.9

 

$

2,988

 

 

 

 

 

 

 

 

 

 

 

Exercisable at end of period

 

480,250

 

$

9.04

 

4.2

 

$

2,551

 

Stock-based compensation expense associated with stock options was $21 thousand and $39 thousand for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, unrecognized compensation expense associated with stock options was $71 thousand, which is expected to be recognized over a weighted average period of 1.5 years.

In 2019, 48,500 shares of restricted stock were granted at a weighted average exercise price of $14.15 to certain officers of Southern National under the 2017 Plan and are subject to vesting in five years. These shares are included in the total shares outstanding at March 31, 2019. In 2019, 2,700 shares of restricted stock granted to certain officers of Southern National under the 2017 Plan were forfeited. Restricted stock compensation expense totaled $83 thousand and $6 thousand for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, unrecognized compensation expense associated with restricted stock was $1.4 million, which is expected to be recognized over a weighted average period of 4.4 years.

 

 

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3.      INVESTMENT SECURITIES

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Gross Unrealized

 

Fair

 

    

Cost

    

Gains

    

Losses

    

Value

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Residential government-sponsored mortgage-backed securities

 

$

42,552

 

$

15

 

$

(455)

 

$

42,112

Obligations of states and political subdivisions

 

 

18,235

 

 

138

 

 

(34)

 

 

18,339

Corporate securities

 

 

2,007

 

 

 6

 

 

 —

 

 

2,013

Trust preferred securities

 

 

2,589

 

 

315

 

 

(324)

 

 

2,580

Residential government-sponsored collateralized mortgage obligations

 

 

42,680

 

 

 3

 

 

(806)

 

 

41,877

Government-sponsored agency securities

 

 

3,247

 

 

 —

 

 

(64)

 

 

3,183

Agency commercial mortgage-backed securities

 

 

27,947

 

 

 —

 

 

(542)

 

 

27,405

SBA pool securities

 

 

18,921

 

 

15

 

 

(253)

 

 

18,683

Total

 

$

158,178

 

$

492

 

$

(2,478)

 

$

156,192

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Gross Unrealized

 

Fair

 

    

Cost

    

Gains

    

Losses

    

Value

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Residential government-sponsored mortgage-backed securities

 

$

27,945

 

$

 —

 

$

(643)

 

$

27,302

Obligations of states and political subdivisions

 

 

18,305

 

 

30

 

 

(280)

 

 

18,055

Corporate securities

 

 

2,008

 

 

 1

 

 

(1)

 

 

2,008

Trust preferred securities

 

 

2,589

 

 

356

 

 

(304)

 

 

2,641

Residential government-sponsored collateralized mortgage obligations

 

 

44,095

 

 

 3

 

 

(1,041)

 

 

43,057

Government-sponsored agency securities

 

 

3,247

 

 

 —

 

 

(122)

 

 

3,125

Agency commercial mortgage-backed securities

 

 

28,069

 

 

 —

 

 

(765)

 

 

27,304

SBA pool securities

 

 

20,183

 

 

10

 

 

(308)

 

 

19,885

Total

 

$

146,441

 

$

400

 

$

(3,464)

 

$

143,377

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Gross Unrecognized

 

Fair

 

    

Cost

    

Gains

    

Losses

    

Value

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Residential government-sponsored mortgage-backed securities

 

$

9,361

 

$

 4

 

$

(171)

 

$

9,194

Obligations of states and political subdivisions

 

 

20,693

 

 

118

 

 

(71)

 

 

20,740

Trust preferred securities

 

 

2,529

 

 

146

 

 

(1)

 

 

2,674

Residential government-sponsored collateralized mortgage obligations

 

 

5,351

 

 

 —

 

 

(66)

 

 

5,285

Government-sponsored agency securities

 

 

52,658

 

 

 —

 

 

(1,884)

 

 

50,774

Total

 

$

90,592

 

$

268

 

$

(2,193)

 

$

88,667

 

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Amortized

 

Gross Unrecognized

 

Fair

 

    

Cost

    

Gains

    

Losses

    

Value

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Residential government-sponsored mortgage-backed securities

 

$

9,699

 

$

 4

 

$

(230)

 

$

9,473

Obligations of states and political subdivisions

 

 

21,496

 

 

85

 

 

(147)

 

 

21,434

Trust preferred securities

 

 

2,610

 

 

150

 

 

(1)

 

 

2,759

Residential government-sponsored collateralized mortgage obligations

 

 

6,001

 

 

 —

 

 

(91)

 

 

5,910

Government-sponsored agency securities

 

 

52,656

 

 

 —

 

 

(3,123)

 

 

49,533

Total

 

$

92,462

 

$

239

 

$

(3,592)

 

$

89,109

 

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

In the three months ended March 31, 2019, $15.3 million of available for sale investment securities were purchased.

The fair value and carrying amount, if different, of debt investment securities as of March 31, 2019, by contractual maturity were as follows (in thousands). Investment securities not due at a single maturity date are shown separately.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

Held to Maturity

 

    

Amortized

    

 

 

    

Amortized

    

 

 

 

 

Cost

 

Fair Value

 

Cost

 

Fair Value

Due in one to five years

 

$

3,358

 

$

3,332

 

$

4,966

 

$

4,970

Due in five to ten years

 

 

6,584

 

 

6,623

 

 

18,942

 

 

18,454

Due after ten years

 

 

16,136

 

 

16,160

 

 

51,972

 

 

50,764

Residential government-sponsored mortgage-backed securities