Primis Financial Corp. - Quarter Report: 2008 June (Form 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 June 30, 2008

Commission File No. 001-33037

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)

1770 Timberwood Boulevard

Suite 100

Charlottesville, Virginia 22911

(Address of principal executive offices) (zip code)

(434) 973-5242

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant 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:

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

As of July 31, 2008, there were 6,798,547 shares of common stock outstanding.

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

June 30, 2008

INDEX

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ITEM I - FINANCIAL INFORMATION

PART I - FINANCIAL STATEMENTS

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands) (Unaudited)

See accompanying notes to 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)

See accompanying notes to consolidated financial statements.

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2008

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

See accompanying notes to consolidated financial statements.

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(dollars in thousands) (Unaudited)

See accompanying notes to consolidated financial statements.

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2008

Southern National Bancorp of Virginia, Inc. (“SNBV”) is a corporation formed on July 28, 2004 under the laws of the Commonwealth of Virginia and is the holding company for Sonabank, N. A. (“Sonabank”) a national bank chartered on April 14, 2005, under the laws of the United States of America. The principal activities of Sonabank are to attract deposits and originate loans as permitted for federally chartered national banks under the laws of the United States of America. Sonabank conducts full-service banking operations in Charlottesville, Clifton Forge, Leesburg, Warrenton and Fairfax County in Virginia.

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 SNBV’s Form 10-K for the year ended December 31, 2007.

Use of Estimates

To prepare financial statements in conformity with U. S. generally accepted accounting principles management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, valuation of deferred tax assets, valuation of goodwill and other intangible assets, loan servicing rights, and fair values of financial instruments are particularly subject to change.

Reclassifications

Some items in the prior financial statements were reclassified to conform to the current presentation.

Net interest income during the first half of 2008 was affected by a reclassification of certain items for the first quarter of 2008 which had no impact on earnings. During the first quarter of 2008, a loan which was acquired in the merger with 1^st Service Bank in 2006, which had been partially charged off, was paid in full. We inadvertently recorded the transaction in the amount of approximately $311 thousand as a recovery and increased our allowance for loan losses by an equal amount. Accounting rules (SOP 03-3) require that the recovery be recognized as interest income, so we have reclassified the transaction to interest income in the first quarter of 2008 and increased our provision for loan loss by the amount of the cash received. The impact of this

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transaction was to increase previously reported interest income and provision for loan loss expense by $311 thousand for the three months ended March 31, 2008. We also reclassified certain impaired loans totaling approximately $365 thousand which had been recorded as charge offs in the first quarter, but under FAS 114 should have been recorded as specific reserves as a component of the allowance for loan losses. This reclassification entry increased previously reported total loans and the allowance for loan losses by $365 thousand at March 31, 2008. We also reclassified $366 thousand of loan loss recoveries that were inadvertently recorded in the first quarter. These were also loans that had been partially charged off prior to our acquisition of 1^st Service Bank. Accounting rules (SOP 03-3) require that these recoveries be recognized as interest income as payments are received. This reclassified entry reduced our previously reported recoveries by $366 thousand for the three months ended March 31, 2008. The combination of these two adjustments to the allowance resulted in a negligible change in the previously reported allowance for loan losses at March 31, 2008. There was no impact on net income of the first quarter of 2008, nor were there any changes in asset quality or allowance adequacy.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (FAS 157). This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. See Footnote 9 for the impact of the adoption and required disclosure about fair value measurements.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (FAS 159). The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. We did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008, the effective date of the standard or subsequently.

In September 2006, the EITF finalized Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This issue is effective for fiscal years beginning after December 15, 2007. Our adoption of this standard did not have a material impact on our consolidated financial statements.

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133(FAS 161). FAS 161 expands the disclosure requirements of FASB Statement No. 133 and requires the reporting entity to provide enhanced disclosures about the objectives and strategies for using derivative instruments, quantitative disclosures about fair values and amounts of gains and losses on derivative contracts, and credit-risk related contingent features in derivative agreements. FAS

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161 is effective for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. We plan to include the required disclosures in our first interim reporting period ending March 31, 2009, if applicable.

In 2004, the Board of Directors adopted a stock options 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 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 SNBV and to assist in the attracting and retaining of non-employee directors by affording them an opportunity to share in SNBV’s future success. Under the plans, the options 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.

SNBV accounts for the plan under the fair value method of FASB Statement No 123 Revised (“SFAS 123R”), “Share Based Payment,” which was adopted January 1, 2006. In 2005 the plan was measured under the intrinsic value method. Prior to 2006, 168,025 options were granted under the plan. No stock-based compensation cost was reflected in net income, as all options granted had an exercise price equal to the market value of the underlying common stock on the grant date. In addition, all options granted prior to 2006 were fully vested as of December 31, 2005.

SNBV granted 44,500 options during the first quarter of 2008, and no options were granted in the second quarter. 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, 2008:

SFAS 123R requires the recognition of stock-based compensation expense for the number of awards that are ultimately expected to vest. For the three and six month periods ended June 30, 2008, stock-based compensation expense recorded was $6 thousand and $13 thousand, respectively, compared to $1 thousand and $3 thousand for the same periods last year. As of June 30, 2008, unrecognized compensation expense associated with the stock options was $145 thousand which is expected to be recognized over a weighted average period of 4.5 years.

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A summary of the activity in the stock option plan during the six months ended June 30, 2008 follows:

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

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

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SNBV monitors the portfolio which is subject to liquidity needs, market rate changes and credit risk changes to see if adjustments are needed. There are 15 securities with stated maturities totaling approximately $34.0 million in the portfolio that are considered temporarily impaired at June 30, 2008. Management has concluded that the fair value is expected to recover as the securities approach their maturity date and/or market conditions improve, and management has the positive intent and ability to hold to recovery. All the securities continue to perform according to the contractual terms. The following tables present information regarding securities in a continuous unrealized loss position as of June 30, 2008 and December 31, 2007 (in thousands) by duration of time in a loss position:

Unrealized losses on corporate bonds have not been recognized into income because the bonds are of investment-grade quality (rated A- or higher), the bonds continue to perform according to the contractual terms, all interest payments are current, and management has the intent and ability to hold for the foreseeable future. The fair value is expected to recover as the bonds approach maturity. Due to current market conditions, all of these assets are extremely illiquid, and as such, the fair value is difficult to estimate due to the volatility in the financial sector.

SNBV owns 80,000 shares of FHLMC perpetual preferred 5.57% stock Series V. Management recognized a $440 thousand other than temporary loss in the fourth quarter of 2007 and an additional loss of $124 thousand was recognized in the second quarter of 2008. In accordance with SFAS 115, when a decline in fair value below cost is deemed other than temporary, the unrealized loss must be recognized as a charge to earnings. As current market conditions make it difficult to precisely forecast a time period for the security to fully recover, an impairment charge was recorded.

Securities with significant declines in fair value are evaluated on a quarterly basis to determine whether they should be considered other-than-temporarily impaired under Securities and Exchange Commission Codification Staff Accounting Bulletins, Topic 5: Miscellaneous

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Accounting – Item M, Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities, which provides that if a marketable security is in an unrealized loss position, whether due to general market conditions or industry or issuer specific factors, the holder must assess whether the impairment is other-than-temporary. SNBV determined, based on their methodology, that a forecasted recovery period could not be accurately predicted for the FHLMC preferred stock and as such determined the loss to be other-than-temporary.

The following summarizes activity in the allowance for loan losses for the six months ended June 30, 2008 and 2007 (in thousands):

Also, refer to Note 1, Accounting Policies – Reclassifications, pertaining to the reclassification of a transaction during the first quarter of 2008.

SNBV is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve elements of credit and funding risk in excess of the amount recognized in the consolidated balance sheet. Letters of credit are written conditional commitments issued by SNBV to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. We had letters of credit outstanding totaling $1.6 million and $1.2 million as of June 30, 2008 and December 31, 2007, respectively.

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Our exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit is based on the contractual amount of these instruments. We use the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, we do not require collateral or other security to support financial instruments with credit risk.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments are made predominately for adjustable rate loans, and generally have fixed expiration dates of up to three months or other termination clauses and usually require payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis.

At June 30, 2008 and December 31, 2007, we had unfunded lines of credit and undisbursed construction loan funds totaling $40.0 million and $54.5 million, respectively. Our approved loan commitments were zero and $10.8 million at June 30, 2008 and December 31, 2007, respectively.

The following is a reconciliation of the denominators of the basic and diluted earnings per share (“EPS”) computations (dollars in thousands, except per share data):

There were 356,425 and 105,900 anti-dilutive options and warrants for the three and six months ended June 30, 2008, and there were 5,500 anti-dilutive options and warrants for the three and six months ended June 30, 2007.

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FAS 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

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

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

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

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

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

Securities

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

Assets and Liabilities Measured on a Non-recurring Basis:

Impaired Loans

SFAS 157 applies to loans measured for impairment using the practical expedients permitted by SFAS 114, including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral depended). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent

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valuation which is then adjusted for the cost related to liquidation of the collateral. After charge-offs in the amount of $150 thousand and allocated allowance for loan losses totaling $370 thousand, loans identified as impaired in accordance with SFAS 114 totaled $896 thousand as of June 30, 2008.

Other Real Estate Owned

Certain assets such as other real estate owned are measured at fair value less cost to sell. Management believes that the fair value component in its valuation follows the provisions of SFAS 157. Other real estate owned was recorded at $3.3 million at June 30, 2008.

As part of the purchase price of the fixed assets related to the Leesburg branch, SNBV issued 61,000 warrants for the purchase of its common stock at an exercise price of $12.73 per share during the first quarter of 2008. The warrants expire in three years. The fair value of each warrant issued was estimated using the Black-Scholes options-pricing model. The following weighted-average assumptions were used to value the warrants:

Effective July 1, 2008 SNBV transferred $23.9 million par value of bank pooled trust preferred securities from its securities available for sale portfolio to its securities held to maturity portfolio. The transferred securities had a fair value of $19.1 million at June 30, 2008, and a weighted average maturity of 29 years. As a result of the transfer, it is expected that $4.0 million of unrealized pre-tax losses associated with the transferred securities that were previously recognized in Accumulated Other Comprehensive Income (Loss) will be recovered in tangible capital over the remaining life of the securities. It is also expected that there will be no other future impact on Accumulated Other Comprehensive Income, earnings or capital related to these securities unless the transferred securities are determined to be other than temporarily impaired.

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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 dated December 31, 2007 on Form 10-K. Results of operations for the three and six month periods ended June 30, 2008 are not necessarily indicative of results that may be attained for any other period.

FORWARD-LOOKING STATEMENTS

Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualified words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements concerning opinions or judgment of the Company and its management about future events. Although we believe that its expectations with respect to certain forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of SNBV will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, changes in the stock and bond markets, technology, and consumer spending and savings habits. We do not update any forward-looking statements that may be made from time to time by or on behalf of SNBV.

OVERVIEW

Southern National Bancorp of Virginia, Inc. (“SNBV”), a Virginia corporation, is the holding company for Sonabank, a nationally chartered commercial bank. We opened Sonabank’s first branch in Charlottesville, Virginia on April 14, 2005. We also have full service branches in Fairfax County (McLean, Reston and Fairfax), Warrenton, Clifton Forge and Leesburg, all in Virginia. We also have loan production offices in Charlottesville, Warrenton, Fredericksburg and Richmond. Our administrative offices are in Warrenton, Virginia, and we also have executive offices in Georgetown, Washington D.C. where senior management is located.

On December 19^th, 2007, SNBV announced that it had entered into an agreement with Founders Corporation of Leesburg, Virginia to purchase certain assets and to assume its lease at 1 East Market Street in Leesburg in the 100 year old Loudoun National Bank building. Sonabank received approval from the Office of the Comptroller of the Currency (OCC) to open a branch at that location. The branch was opened February 11, 2008. The OCC has also approved the opening of a drive-through/ATM facility that was opened on April 7, 2008.

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RESULTS OF OPERATIONS

Net Income

For the three months ended June 30, 2008, our net income was $450 thousand, or $0.07 per share on a diluted basis, compared to net income of $647 thousand, or $0.09 per share on a diluted basis, for the same period in 2007. Net income for the quarter ended June 30, 2008 included an other than temporary impairment charge of $82 thousand, net of taxes. Income before taxes for the quarter ended June 30, 2008 was $601 thousand, up from $594 thousand for the second quarter of last year. Net income for the second quarter of 2007 included a tax benefit of $53 thousand related to the reversal of the remaining tax valuation allowance on deferred tax assets offset by tax expense, while net income for the second quarter of 2008 included tax expense of $151 thousand.

For the three months ended June 30, 2008 compared to the three months ended March 31, 2008, net income decreased $51 thousand from $501 thousand to $450 thousand. Earnings per share was $0.07 per share for both periods.

Income before taxes was $1.3 million during the six months ended June 30, 2008, up 20% compared to $1.1 during the first half of 2007. For the six months ended June 30, 2008, net income was $951 thousand, compared to $1.1 million for the first half of 2007.

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 for the three months ended June 30, 2008 was $2.9 million compared to $2.6 million for the same period last year. Average interest-earning assets for the three months ended June 30, 2008 increased $91.1 million over the same period in 2007. Approximately $69.0 million of this growth was an increase in average loans outstanding. Average investment securities increased by $19.5 million in the quarter ended June 30, 2008, compared to the same period last year. The average yield on interest-earning assets decreased from 7.59% in 2007 to 6.38% in 2008 primarily because of the prime rate decreases of 225 basis points during the first half of 2008 which accompanied the Federal Reserve Board’s reductions in its federal funds target rate. Average interest-bearing liabilities for the three months ended June 30, 2008 increased $96.1 million compared to the same period in 2007. Average interest-bearing deposits increased by $61.3 million, while average borrowings increased by $34.8 million compared to the second quarter of 2007. The average cost of interest-bearing liabilities decreased from 4.82% in 2007 to 3.78% in 2008. The interest rate spread for the three months ended June 30, 2008 decreased from 2.77% to 2.60% compared to the same period last year. The net interest margin for the three months ended June 30, 2008 decreased to 3.18% from 3.83% compared to the same period last year.

Net interest income for the six months ended June 30, 2008 was $6.1 million compared to $5.1 million for the same period last year. Average interest-earning assets for the six months ended June 30, 2008 increased $88.5 million over the same period in 2007. Approximately $66.8 million of this growth was an increase in average loans outstanding. Average investment securities increased by $20.1 million in the first half of 2008, compared to the same period last year. The average yield on interest-earning assets decreased from 7.48% in 2007 to 6.82% in 2008. Average interest-bearing liabilities for the six months ended June 30, 2008 increased $96.6 million compared to the same period in 2007. Average interest-bearing deposits increased by

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$60.8 million, while average borrowings increased by $35.8 million compared to the first half of 2007. The average cost of interest-bearing liabilities decreased from 4.80% in 2007 to 4.03% in 2008. The interest rate spread for the six months ended June 30, 2008 increased from 2.68% to 2.79% compared to the same period last year. The net interest margin for the six months ended June 30, 2008 decreased to 3.41% from 3.79% compared to the same period last year.

Also, refer to Note 1, Accounting Policies – Reclassifications, pertaining to the reclassification of a transaction during the first quarter of 2008.

Our commercial loans (non-real estate), acquisition and development loans, construction loans and SBA loans are predominately priced to a spread over the prime rate. Commercial real estate loans are generally priced at a spread over the one, three or five year constant maturity treasury yield (CMT) or our marginal cost of funds and fixed for one, three or five years. On the liability side of the balance sheet we have a large segment of our funding which floats; however, the prime rate loans reprice virtually immediately, but the liabilities reprice only at maturity resulting in a lag which can adversely affect net interest income and the net interest margin when interest rates decline. The decreases in the federal funds target rate during the second half of 2007 and the first half of 2008 have had a negative impact on our net interest margin. As it appears the Federal Reserve has stopped lowering the Federal Funds rate, the erosion in Sonabank’s net interest margin should abate.

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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: