Primis Financial Corp. - Quarter Report: 2012 September (Form 10-Q)

t74913_10q.htm

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 September 30, 2012

Commission File No. 001-33037

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)

	Virginia	20-1417448
	(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

6830 Old Dominion Drive

McLean, Virginia 22101

(Address of principal executive offices) (zip code)

(703) 893-7400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES x NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES x NO o

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

Large accelerated filer o Accelerated filer x Smaller reporting company o

Non-accelerated filer o (Do not check if a smaller reporting company)

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

As of October 31, 2012, there were 11,590,212 shares of common stock outstanding.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

September 30, 2012

INDEX

		PAGE

	PART 1 - FINANCIAL INFORMATION

Item 1 -	Financial Statements
	Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011	2
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011	3
	Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2012	4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011	5
	Notes to Consolidated Financial Statements	6- 29

Item 2 - Management’s Discussion and Analysis of
	Financial Condition and Results of Operations	30- 42

Item 3 – Quantitative and Qualitative Disclosures about Market Risk		43-45

Item 4 – Controls and Procedures		46

	PART II - OTHER INFORMATION

Item 1 – Legal Proceedings		48

Item 1A – Risk Factors		48

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		48

Item 3 – Defaults Upon Senior Securities		48

Item 4 – Mine Safety Disclosures		48

Item 5 – Other Information		48

Item 6 - Exhibits		48

Signatures		49

Certifications		50-52

ITEM I - FINANCIAL INFORMATION

PART I - FINANCIAL STATEMENTS

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

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

	September 30,			December 31,
	2012			2011
ASSETS
Cash and cash equivalents:
Cash and due from financial institutions	$	4,229		$	2,432
Interest-bearing deposits in other financial institutions		18,059			2,603
Total cash and cash equivalents		22,288			5,035

Securities available for sale, at fair value		49			9,905

Securities held to maturity, at amortized cost (fair value of $81,609 and $34,464, respectively)		80,496			35,075

Covered loans		76,600			82,588
Non-covered loans		461,169			409,180
Total loans		537,769			491,768
Less allowance for loan losses		(6,911	)		(6,295	)
Net loans		530,858			485,473

Stock in Federal Reserve Bank and Federal Home Loan Bank		6,190			6,653
Bank premises and equipment, net		6,476			6,350
Goodwill		9,160			9,160
Core deposit intangibles, net		1,480			1,995
FDIC indemnification asset		7,006			7,537
Bank-owned life insurance		17,633			17,575
Other real estate owned		13,452			14,256
Deferred tax assets, net		6,153			6,255
Other assets		7,021			6,104

Total assets	$	708,262		$	611,373

LIABILITIES AND STOCKHOLDERS’ EQUITY

Noninterest-bearing demand deposits	$	43,096		$	32,582
Interest-bearing deposits:
NOW accounts		20,520			17,497
Money market accounts		167,370			148,959
Savings accounts		8,997			6,273
Time deposits		297,268			255,784
Total interest-bearing deposits		494,155			428,513
Total deposits		537,251			461,095

Securities sold under agreements to repurchase and other short-term borrowings		32,713			17,736
Federal Home Loan Bank (FHLB) advances		30,250			30,000
Other liabilities		4,025			3,491
Total liabilities		604,239			512,322

Commitments and contingencies (See Note 5)		-			-

Stockholders’ equity:
Preferred stock, $.01 par value. Authorized 5,000,000 shares; no shares issued and outstanding		-			-
Common stock, $.01 par value. Authorized 45,000,000 shares; issued and outstanding, 11,590,212 shares at September 30, 2012 and December 31, 2011		116			116
Additional paid in capital		96,791			96,645
Retained earnings		10,100			5,472
Accumulated other comprehensive loss		(2,984	)		(3,182	)
Total stockholders’ equity		104,023			99,051

Total liabilities and stockholders’ equity	$	708,262		$	611,373

See accompanying notes to consolidated financial statements.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,

	2012			2011			2012			2011
				(As Restated)						(As Restated)
Interest and dividend income :
Interest and fees on loans	$	9,008		$	8,165		$	26,387		$	23,255
Interest and dividends on taxable securities		490			457			1,401			1,495
Interest and dividends on other earning assets		102			66			247			169
Total interest and dividend income		9,600			8,688			28,035			24,919
Interest expense:
Interest on deposits		1,304			1,217			3,803			3,744
Interest on borrowings		165			272			628			857
Total interest expense		1,469			1,489			4,431			4,601

Net interest income		8,131			7,199			23,604			20,318

Provision for loan losses		1,830			1,550			4,605			5,140
Net interest income after provision for loan losses		6,301			5,649			18,999			15,178

Noninterest income:
Account maintenance and deposit service fees		222			218			624			636
Income from bank-owned life insurance		148			129			649			1,196
Bargain purchase gain on acquisition		-			-			3,484			-
Gain on sale of loans		-			-			657			-
Net gain (loss) on other real estate owned		24			-			(2,376	)		(147	)
Gain on other assets		-			-			14			-
Net gain on sale of available for sale securities		287			-			274			-
Total other-than-temporary impairment losses (OTTI)		(480	)		(43	)		(721	)		(113	)
Portion of OTTI recognized in other comprehensive income (before taxes)		-			-			4			-
Net credit related OTTI recognized in earnings		(480	)		(43	)		(717	)		(113	)
Other		63			62			198			151

Total noninterest income		264			366			2,807			1,723

Noninterest expenses:
Salaries and benefits		2,073			1,759			5,868			5,066
Occupancy expenses		753			573			2,040			1,667
Furniture and equipment expenses		149			140			448			406
Amortization of core deposit intangible		236			230			694			690
Virginia franchise tax expense		145			171			436			514
Merger expenses		11			-			360			-
FDIC assessment		146			125			417			397
Data processing expense		175			126			474			400
Telephone and communication expense		183			101			418			289
Change in FDIC indemnification asset		242			(13	)		481			(85	)
Other operating expenses		665			702			2,417			1,809
Total noninterest expenses		4,778			3,914			14,053			11,153
Income before income taxes		1,787			2,101			7,753			5,748
Income tax expense		579			692			2,487			1,602
Net income	$	1,208		$	1,409		$	5,266		$	4,146
Other comprehensive income:
Unrealized gain (loss) on available for sale securities	$	(107	)	$	(30	)	$	(26	)	$	167
Realized amount on securities sold, net		(287	)		-			(274	)		-
Non-credit component of other-than-temporary impairment on held-to-maturity securities		475			(70	)		676			26

Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale		(17	)		(27	)		(77	)		(44	)
Net unrealized gain		64			(127	)		299			149
Tax effect		21			(44	)		101			50
Other comprehensive income		43			(83	)		198			99
Comprehensive income	$	1,251		$	1,326		$	5,464		$	4,245
Earnings per share, basic and diluted	$	0.10		$	0.12		$	0.45		$	0.36

See accompanying notes to consolidated financial statements.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012
(dollars in thousands, except per share amounts) (Unaudited)

								Accumulated
			Additional					Other
	Common		Paid in		Retained			Comprehensive
	Stock		Capital		Earnings			Loss			Total

Balance - January 1, 2012	$	116	$	96,645	$	5,472		$	(3,182	)	$	99,051
Comprehensive income:
Net income						5,266						5,266
Change in unrealized gain on available for sale securities (net of tax benefit, $102)									(198	)		(198	)
Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax expense, $203 and accretion, $77 and amounts recorded into other comprehensive income at transfer)									396			396
Dividends on common stock ($.015 per share)						(638	)					(638	)
Stock-based compensation expense				146								146

Balance - September 30, 2012	$	116	$	96,791	$	10,100		$	(2,984	)	$	104,023

See accompanying notes to consolidated financial statements.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(dollars in thousands) (Unaudited)

	2012			2011
				(As Restated)
Operating activities:
Net income	$	5,266		$	4,146
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation		430			393
Amortization of core deposit intangible		694			690
Other amortization, net		210			(1	)
Accretion of loan discount		(3,277	)		(2,552	)
(Increase) decrease in FDIC indemnification asset		481			(85	)
Provision for loan losses		4,605			5,140
Earnings on bank-owned life insurance		(649	)		(396	)
Stock based compensation expense		146			120
Bargain purchase gain on acquisition		(3,484	)		-
Net gain on sale of available for sale securities		(274	)		-
Gain on sale of loans		(657	)		-
Impairment on securities		717			113
Net loss on other real estate owned		2,376			147
Net (increase) decrease in other assets		(456	)		501
Net increase in other liabilities		399			549
Net cash and cash equivalents provided by operating activities		6,527			8,765
Investing activities:
Purchases of securities available-for-sale		(3,128	)		-
Proceeds from sales of securities available for sale		22,914			-
Proceeds from paydowns, maturities and calls of securities available for sale		1,318			763
Purchases of securities held to maturity		(27,410	)		-
Proceeds from paydowns, maturities and calls of securities held to maturity		8,973			6,632
Loan originations and payments, net		11,238			(29,114	)
Proceeds from sale of HarVest loans		7,568			-
Proceeds from sale of SBA loans		5,713			-
Net cash received in HarVest acquisition		47,257			-
Net (increase) decrease in stock in Federal Reserve Bank and Federal Home Loan Bank		1,630			(1,006	)
Proceeds from cash surrender value of bank-owned life insurance		395			-
Proceeds from sale of other real estate owned		1,137			854
Payments received on FDIC indemnification asset		155			800
Purchases of bank premises and equipment		(557	)		(434	)
Net cash and cash equivalents provided by (used in) investing activities		77,203			(21,505	)
Financing activities:
Net decrease in deposits		(64,328	)		(22,992	)
Cash dividends paid - common stock		(638	)		-
Proceeds from Federal Home Loan Bank advances		-			37,500
Repayment of Federal Home Loan Bank advances		(16,488	)		-
Net increase (decrease) in securities sold under agreement to repurchase and other short-term borrowings		14,977			(4,456	)
Net cash and cash equivalents provided by (used in) financing activities		(66,477	)		10,052
Increase (decrease) in cash and cash equivalents		17,253			(2,688	)
Cash and cash equivalents at beginning of period		5,035			9,745
Cash and cash equivalents at end of period	$	22,288		$	7,057
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest	$	4,464		$	4,706
Income taxes		1,788			855
Supplemental schedule of noncash investing and financing activities
Transfer from non-covered loans to other real estate owned		1,959			9,477
Transfer from covered loans to other real estate owned		-			82

See accompanying notes to consolidated financial statements.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2012

1. ACCOUNTING POLICIES

Southern National Bancorp of Virginia, Inc. (“Southern National”) is a corporation formed on July 28, 2004 under the laws of the Commonwealth of Virginia and is the holding company for Sonabank (“Sonabank”) a Virginia state chartered bank which commenced operations on April 14, 2005. The principal activities of Sonabank are to attract deposits and originate loans as permitted under applicable banking regulations. Sonabank operates 15 branches in Virginia located in Fairfax County (Reston, McLean and Fairfax), in Charlottesville, Warrenton (2), Loudoun County (Middleburg, Leesburg (2), and South Riding), Front Royal, New Market, Richmond, Haymarket and Clifton Forge, and five branches in Maryland (four in Montgomery County and one in Frederick County).

Sonabank assumed substantially all of the deposits and liabilities and acquired substantially all of the assets of the HarVest Bank of Maryland from the FDIC as receiver. The acquisition included HarVest Bank’s branches in Bethesda, North Rockville, Germantown and Frederick. Adding the new branches to an existing branch in Rockville brings Sonabank’s total number of branches in Maryland to five, four of which are in Montgomery County. This was a strategic acquisition for Sonabank given the expansion into an affluent market. Full details on the transaction are contained in an 8-K/A filed on July 13, 2012.

The consolidated financial statements include the accounts of Southern National Bancorp of Virginia, Inc. and its subsidiary. Significant inter-company accounts and transactions have been eliminated in consolidation.

The unaudited consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles (“U. S. GAAP”) for interim financial information and instructions for Form 10-Q and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by U. S. GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in Southern National’s Form 10-K for the year ended December 31, 2011.

As disclosed in our 2011 Annual Report on Form 10-K filed on April 16, 2012, Southern National restated its financial statements for the year ended December 31, 2009, the interim quarterly periods and year ended December 31, 2010 and the interim quarterly periods through September 30, 2011. In December 2009, we acquired Greater Atlantic Bank from the FDIC. We identified errors in the purchase accounting related to that acquisition. All amounts for the three and 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. See Note 8 for further details.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the carrying value of investment securities, other than temporary impairment of investment securities, the valuation of goodwill and intangible assets, fair value measurements related to assets acquired and liabilities assumed from business combinations, the FDIC indemnification asset, mortgage servicing rights, other real estate owned and deferred tax assets.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The guidance clarifies and expands the disclosures pertaining to unobservable inputs used in Level 3 fair value measurements, including the disclosure of quantitative information related to (1) the valuation processes used, (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, and (3) use of a nonfinancial asset in a way that differs from the asset’s highest and best use. The guidance also requires disclosure of the level within the fair value hierarchy for assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed. The amendments in this Update are to be applied prospectively, effective during interim and annual periods beginning after December 15, 2011. This ASU was adopted in the first quarter of 2012 and its requirements are reflected in our disclosures.

In September 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. This ASU amends the disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in stockholder’s equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. In December 2011, the FASB issued ASU 2011-12 to defer changes that relate to the presentation of reclassification adjustments but the other requirements of ASU 2011-05 remain in effect. We present OCI in a single continuous statement of comprehensive income.

In October 2012, the FASB issued ASU 2012-06, Business Combinations (Topic 805), Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution. The amendments of this ASU clarify the applicable guidance for subsequently measuring an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. The amended guidance requires an indemnification asset recognized in a government-assisted acquisition of a financial institution that includes a loss-sharing agreement to be measured on the same basis as the indemnified asset and changes in the indemnification asset to be amortized over the lesser of the term of the indemnification agreement or the remaining life of the indemnified assets. The changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. The guidance will be applied prospectively to any new indemnification assets acquired and to changes in expected cash flows of existing indemnification assets occurring on or after the date of adoption. Any unamortized balance that exists at the date of adoption also will be amortized over the shorter of the remaining term of the loss-sharing agreement or the remaining life of the indemnified assets. Early adoption is permitted. We applied the proposed guidance in this ASU in determining the amortization period for the indemnification asset resulting from our re-forecasting of estimated recoveries under the loss-sharing agreement with the FDIC for the 2009 Greater Atlantic Bank acquisition in the second quarter of 2012.

2.	STOCK- BASED COMPENSATION

In 2004, the Board of Directors adopted a stock option plan that authorized the reservation of up to 302,500 shares of common stock and provided for the granting of stock options to certain directors, officers and employees. As of September 30, 2012, options to purchase an aggregate of 302,500 shares of common stock were outstanding and no shares remained available for issuance under this plan. The 2010 Stock Awards and Incentive Plan was approved by the Board of Directors in January 2010 and approved by the stockholders at the Annual Meeting in April 2010. The 2010 plan authorized the reservation of 700,000 shares of common stock for the granting of stock awards. The options granted to officers and employees are incentive stock options and the options granted to non-employee directors are non-qualified stock options. The purpose of the plan is to afford key employees an incentive to remain in the employ of Southern National and to assist in the attracting and retaining of non-employee directors by affording them an opportunity to share in Southern National’s future success. Under the plan, the option’s exercise price cannot be less than the fair market value of the stock on the grant date. The maximum term of the options is ten years and options granted may be subject to a graded vesting schedule.

SNBV granted 19,000 options during the first nine months of 2012. The fair value of each option granted is estimated on the date of grant using the Black-Scholes options-pricing model. The following weighted-average assumptions were used to value options granted in the nine months ended September 30, 2012:

Expected life	10 years
Expected volatility		35.64	%
Risk-free interest rate		2.04	%
Weighted average fair value per option granted	$	3.03

The risk-free interest rate was developed using the U. S. Treasury yield curve for periods equal to the expected life of the options on the grant date. An increase in the risk-free interest rate will increase stock compensation expense on future option grants. The dividend yield has a de minimis impact on the fair value of the awards given the recent iniation of the dividend and the amount.

For the three and nine months ended September 30, 2012, stock-based compensation expense was $49 thousand and $146 thousand, respectively, compared to $47 thousand and $120 thousand for the same periods last year. As of September 30, 2012, unrecognized compensation expense associated with the stock options was $518 thousand, which is expected to be recognized over a weighted average period of 3.2 years.

A summary of the activity in the stock option plan during the nine months ended September 30, 2012 follows (dollars in thousands):

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
Options outstanding, beginning of period		415,325		$	8.06
Granted		19,000			6.48
Forfeited		(11,250	)		8.08
Exercised		-			-
Options outstanding, end of period		423,075		$	7.99		5.7

Vested or expected to vest		423,075		$	7.99		5.7	$	245

Exercisable at end of period		251,825		$	8.59		4.1	$	91

3. SECURITIES

The amortized cost and fair value of securities available-for-sale were as follows (in thousands):

	Amortized Cost		Gross Unrealized				Fair Value
September 30, 2012	Amortized Cost		Gains		Losses		Fair Value
FHLMC preferred stock	$	16	$	33	$	-	$	49

	Amortized Cost		Gross Unrealized				Fair Value
December 31, 2011	Amortized Cost		Gains		Losses		Fair Value
SBA guaranteed loan pools	$	9,557	$	280	$	-		9,837
FHLMC preferred stock		16		52		-		68
Total	$	9,573	$	332	$	-	$	9,905

The carrying amount and fair value of securities held-to-maturity were as follows (in thousands):

	Amortized Cost		Gross Unrecognized					Fair Value
September 30, 2012	Amortized Cost		Gains		Losses			Fair Value
Residential government-sponsored mortgage-backed securities	$	38,765	$	1,930	$	-		$	40,695
Residential government-sponsored collateralized mortgage obligations		5,713		79		-			5,792
Government-sponsored agency securities		24,982		131		-			25,113
Obligations of states and political subdivisions		2,427		1		-			2,428
Other residential collateralized mortgage obligations		842		8		-			850
Trust preferred securities		7,767		1,188		(2,224	)		6,731
	$	80,496	$	3,337	$	(2,224	)	$	81,609

	Amortized Cost		Gross Unrecognized					Fair Value
December 31, 2011	Amortized Cost		Gains		Losses			Fair Value
Residential government-sponsored mortgage-backed securities	$	26,105	$	1,710				$	27,815
Residential government-sponsored collateralized mortgage obligations		85		2					87
Other residential collateralized mortgage obligations		957		-		(157	)		800
Trust preferred securities		7,928		674		(2,840	)		5,762
	$	35,075	$	2,386	$	(2,997	)	$	34,464

The fair value and carrying amount, if different, of debt securities as of September 30, 2012, by contractual maturity were as follows (in thousands). Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations, are shown separately.

	Held to Maturity
	Amortized
	Cost		Fair Value
Due after ten years	$	35,176	$	34,272
Residential government-sponsored mortgage-backed securities		38,765		40,695
Residential government-sponsored collateralized mortgage obligations		5,713		5,792
Other residential collateralized mortgage obligations		842		850
Total	$	80,496	$	81,609

During the three and nine months ended September 30, 2012, we sold $8.0 million of available-for-sale SBA pooled securities acquired in the Greater Atlantic Bank transaction resulting in a gross gain of $287 thousand.

Securities with a carrying amount of approximately $28.2 million and $36.0 million at September 30, 2012 and December 31, 2011, respectively, were pledged to secure public deposits, repurchase agreements and a line of credit for advances from the Federal Home Loan Bank of Atlanta (“FHLB”).

SNBV monitors the portfolio for indicators of other than temporary impairment. At September 30, 2012, certain securities’ fair values were below cost. As outlined in the table below, there were securities (ALESCO VII A1B, MMCF III B, and ALESCO V C1) with fair values totaling approximately $4.9 million in the portfolio with the carrying value exceeding the estimated fair value for a period of time greater than twelve months that are considered temporarily impaired at September 30, 2012. Because the decline in fair value is attributable to changes in interest rates and market illiquidity, and not credit quality, and because we do not have the intent to sell these securities and it is likely that we will not be required to sell the securities before their anticipated recovery, management does not consider these securities to be other-than-temporarily impaired as of September 30, 2012. The following tables present information regarding securities in a continuous unrealized loss position as of September 30, 2012 and December 31, 2011 (in thousands) by duration of time in a loss position:

September 30, 2012
	Less than 12 months					12 Months or More					Total
Held to Maturity	Fair value		Unrecognized Losses			Fair value		Unrecognized Losses			Fair value		Unrecognized Losses
Trust preferred securities	$	-	$	-		$	4,891	$	(2,224	)	$	4,891		(2,224	)

December 31, 2011
	Less than 12 months					12 Months or More					Total
Held to Maturity	Fair value		Unrecognized Losses			Fair value		Unrecognized Losses			Fair value		Unrecognized Losses
Other residential collateralized mortgage obligations	$	800	$	(157	)	$	-	$	-		$	800	$	(157	)
Trust preferred securities		-		-			4,783		(2,840	)		4,783		(2,840	)
	$	800	$	(157	)	$	4,783	$	(2,840	)	$	5,583	$	(2,997	)

As of September 30, 2012, we owned pooled trust preferred securities as follows:

														Previously
														Recognized
														Cumulative
		Ratings								Estimated		Current		Other
	Tranche	When Purchased		Current Ratings						Fair		Defaults and		Comprehensive
Security	Level	Moody’s	Fitch	Moody’s	Fitch	Par Value		Book Value		Value		Deferrals		Loss (1)
					(in thousands)
ALESCO VII A1B	Senior	Aaa	AAA	Baa3	BB	$	6,904	$	6,216	$	4,211	$	117,400	$	296
MMCF III B	Senior Sub	A3	A-	Ba1	CC		435		426		254		37,000		9
							7,339		6,642		4,465			$	305

														Cumulative		Cumulative
														Other Comprehensive		OTTI Related to
Other Than Temporarily Impaired:														Loss (2)		Credit Loss (2)
TPREF FUNDING II	Mezzanine	A1	A-	Caa3	C		1,500		423		423		134,100		722	$	355
TRAP 2007-XII C1	Mezzanine	A3	A	C	C		2,107		55		55		202,705		759		1,293
TRAP 2007-XIII D	Mezzanine	NR	A-	NR	C		2,039		-		83		214,000		7		2,032
MMC FUNDING XVIII	Mezzanine	A3	A-	Ca	C		1,070		27		166		96,682		352		691
ALESCO V C1	Mezzanine	A2	A	C	C		2,138		473		426		84,000		1,004		661
ALESCO XV C1	Mezzanine	A3	A-	C	C		3,175		30		641		249,100		586		2,559
ALESCO XVI C	Mezzanine	A3	A-	C	C		2,113		117		472		86,150		816		1,180
							14,142		1,125		2,266			$	4,246	$	8,771

Total						$	21,481	$	7,767	$	6,731

(1) Pre-tax, and represents unrealized losses at date of transfer from available-for-sale to held-to-maturity, net of accretion

(2) Pre-tax

Each of these securities has been evaluated for other than temporary impairment. In performing a detailed cash flow analysis of each security, Sonabank works with independent third parties to estimate expected cash flows and assist with the evaluation of other than temporary impairment. The cash flow analyses performed included the following assumptions:

●	.5% of the remaining performing collateral will default or defer per annum.

●	Recoveries ranging from 25% to 47% with a two year lag on all defaults and deferrals.

●	No prepayments for 10 years and then 1% per annum for the remaining life of the security.

●

Additionally banks with assets over $15 billion will no longer be allowed to count down-streamed trust preferred proceeds as Tier 1 capital (although it will still be counted as Tier 2 capital). That will incent the large banks to prepay their trust preferred securities if they can or if it is economically desirable. As a consequence, we have projected in all of our pools that 25% of the collateral issued by banks with assets over $15 billion will prepay in 2013.

●	Our securities have been modeled using the above assumptions by independent third parties using the forward LIBOR curve to discount projected cash flows to present values.

TRAP 2007-XII C1 and TPREF Funding II were determined to be other than temporarily impaired during the three months ended September 30, 2012. Our analyses resulted in OTTI charges related to credit on TRAP 2007-XII C1 and TPREF Funding II in the amount of $479 thousand and $1 thousand, respectively, during the three months ended September 30, 2012, compared to OTTI charges related to credit on TPREF Funding II in the amount of $43 thousand during the third quarter of 2011. The OTTI charge on TRAP 2007-XII C1 was caused by the deferral of interest payments by a large issuer in the deal which has eroded the credit support below the tranche we own. This adverse credit development impacts the amount and timing of expected cash flows to the tranche, resulting in the recognition of OTTI. In the first quarter of 2012 we recognized OTTI charges related to credit on MMCF Funding XVIII in the amount of $2 thousand, and in the second quarter of 2012 we recognized OTTI charges related to credit on TRAP 2007-XII C1 in the amount of $235 thousand.

The following table presents a roll-forward of the credit losses for the trust preferred securities and the residential collateralized mortgage obligation recognized in earnings for the nine months ended September 30, 2012 and 2011 (in thousands):

	2012			2011

Amount of cumulative other-than-temporary impairment related to credit loss prior to January 1	$	8,277		$	8,002
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized		-			-
Amounts related to credit loss for which an other-than-temporary impairment was previously recognized		717			113
Reductions due to realized losses		(25	)		(28	)
Amount of cumulative other-than-temporary impairment related to credit loss as of September 30	$	8,969		$	8,087

4. LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table summarizes the composition of our loan portfolio as of September 30, 2012 and December 31, 2011:

			Non-covered Loans
	Covered		HarVest			Other			Total			Covered		Non-covered			Total
	Loans (1)		Loans (2)			Loans			Loans			Loans (1)		Loans			Loans
	September 30, 2012											December 31, 2011
Mortgage loans on real estate:
Commercial real estate - owner-occupied	$	4,276	$	17,067		$	77,731		$	99,074		$	4,854	$	82,450		$	87,304
Commercial real estate - non-owner-occupied		11,965		11,233			107,307			130,505			11,243		117,059			128,302
Secured by farmland		-		-			1,486			1,486			-		1,506			1,506
Construction and land loans		1,244		5,500			54,647			61,391			2,883		39,565			42,448
Residential 1-4 family		22,038		13,709			47,330			83,077			25,307		49,288			74,595
Multi- family residential		621		736			18,358			19,715			629		19,553			20,182
Home equity lines of credit		33,288		1,991			6,925			42,204			35,442		9,040			44,482
Total real estate loans		73,432		50,236			313,784			437,452			80,358		318,461			398,819

Commercial loans		3,058		7,098			89,413			99,569			2,122		89,939			92,061
Consumer loans		104		18			1,626			1,748			108		1,868			1,976
Gross loans		76,594		57,352			404,823			538,769			82,588		410,268			492,856

Less deferred fees on loans		6		(5	)		(1,001	)		(1,000	)		-		(1,088	)		(1,088	)
Loans, net of deferred fees	$	76,600	$	57,347		$	403,822		$	537,769		$	82,588	$	409,180		$	491,768

(1) Covered Loans are loans acquired in the Greater Atlantic transaction and are covered under an FDIC loss-share agreement.

(2) HarVest Loans are loans acquired in the HarVest transaction and are not covered under an FDIC loss-share agreement.

As part of the Greater Atlantic acquisition, the Bank and the FDIC entered into a loss sharing agreement on approximately $143.4 million (contractual basis) of Greater Atlantic Bank’s assets. The Bank will share in the losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharing agreement; we refer to these assets collectively as “covered assets.” Loans that are not covered in the loss sharing agreement are referred to as “non-covered loans.” Non-covered loans included $57.3 million of loans acquired in the HarVest acquisition.

The covered loans acquired in the Greater Atlantic transaction are and will continue to be subject to our internal and external credit review. As a result, if and when credit deterioration is noted subsequent to the acquisition date, such deterioration will be measured through our allowance for loan loss calculation methodology and a provision for credit losses will be charged to earnings.

Credit-impaired covered loans are those loans showing evidence of credit deterioration since origination and it is probable, at the date of acquisition, that Southern National will not collect all contractually required principal and interest payments. Generally, acquired loans that meet Southern National’s definition for nonaccrual status fall within the definition of credit-impaired covered loans.

Impaired loans were as follows (in thousands):

September 30, 2012	Covered Loans				Non-covered Loans				Total Loans
			Allowance				Allowance				Allowance
	Recorded		for Loan		Recorded		for Loan		Recorded		for Loan
	Investment		Losses Allocated		Investment (1)		Losses Allocated (3)		Investment		Losses Allocated
With no related allowance recorded
Commercial real estate - owner occupied	$	132	$	-	$	2,032	$	-	$	2,164	$	-
Commercial real estate - non-owner occupied (2)		2,321		-		1,714		-		4,035		-
Construction and land development		1,091		-		4,518		-		5,609		-
Commercial loans		208		-		5,550		-		5,758		-
Residential 1-4 family		1,162		-		9,946		-		11,108		-
Other consumer loans		-		-		-		-		-		-

Total	$	4,914	$	-	$	23,760	$	-	$	28,674	$	-

With an allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	277	$	75	$	277	$	75
Commercial real estate - non-owner occupied (2)		-		-		1,181		200		1,181		200
Construction and land development		-		-		1,975		300		1,975		300
Commercial loans		-		-		-		-		-		-
Residential 1-4 family		-		-		-		-		-		-
Other consumer loans		-		-		-		-		-		-

Total	$	-	$	-	$	3,433	$	575	$	3,433	$	575
Grand total	$	4,914	$	-	$	27,193	$	575	$	32,107	$	575

(1) Recorded investment is after cumulative prior charge offs of $5.9 million. These loans also have aggregate SBA guarantees of $2.6 million.

(2) Includes loans secured by farmland and multi-family residential loans.

(3) The Bank recognizes loan impairment through earnings and may concurrently record a charge off to the allowance for loan losses.

December 31, 2011	Covered Loans				Non-covered Loans				Total Loans
			Allowance				Allowance				Allowance
	Recorded		for Loan		Recorded		for Loan		Recorded		for Loan
	Investment		Losses Allocated		Investment (1)		Losses Allocated (3)		Investment		Losses Allocated
With no related allowance recorded
Commercial real estate - owner occupied	$	235	$	-	$	4,739	$	-	$	4,974	$	-
Commercial real estate - non-owner occupied (2)		1,831		-		3,294		-		5,125		-
Construction and land development		1,062		-		4,825		-		5,887		-
Commercial loans		213		-		10,704		-		10,917		-
Residential 1-4 family		1,355		-		375		-		1,730		-
Other consumer loans		-		-		-		-		-		-

Total	$	4,696	$	-	$	23,937	$	-	$	28,633	$	-

With an allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	-	$	-	$	-	$	-
Commercial real estate - non-owner occupied (2)		-		-		-		-		-		-
Construction and land development		-		-		1,765		989		1,765		989
Commercial loans		-		-		452		50		452		50
Residential 1-4 family		-		-		-		-		-		-
Other consumer loans		-		-		-		-		-		-

Total	$	-	$	-	$	2,217	$	1,039	$	2,217	$	1,039
Grand total	$	4,696	$	-	$	26,154	$	1,039	$	30,850	$	1,039

(1) Recorded investment is after cumulative prior charge offs of $5.6 million. These loans also have aggregate SBA guarantees of $2.5 million.

(2) Includes loans secured by farmland and multi-family residential loans.

(3) The Bank recognizes loan impairment through earnings and may concurrently record a charge off to the allowance for loan losses.

The following tables present the average recorded investment and interest income for impaired loans recognized by class of loans for the nine months ended September 30, 2012 and 2011 (in thousands):

Nine months ended September 30, 2012
	Covered Loans				Non-covered Loans				Total Loans
	Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized
With no related allowance recorded
Commercial real estate - owner occupied	$	135	$	14	$	203	$	-	$	338	$	14
Commercial real estate - non-owner occupied (1)		2,194		55		2,113		17		4,307		72
Construction and land development		1,085		76		3,410		50		4,495		126
Commercial loans		210		17		3,657		111		3,867		128
Residential 1-4 family		1,164		19		2,001		31		3,165		50
Other consumer loans		-		-		-		-		-		-

Total	$	4,788	$	181	$	11,384	$	209	$	16,172	$	390

With an allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	286	$	16	$	286	$	16
Commercial real estate - non-owner occupied (1)		-		-		1,435		78		1,435		78
Construction and land development		-		-		2,179		87		2,179		87
Commercial loans		-		-		-		-		-		-
Residential 1-4 family		-		-		-		-		-		-
Other consumer loans		-		-		-		-		-		-

Total	$	-	$	-	$	3,900	$	181	$	3,900	$	181
Grand total	$	4,788	$	181	$	15,284	$	390	$	20,072	$	571

(1) Includes loans secured by farmland and multi-family residential loans.

Nine months ended September 30, 2011
	Covered Loans				Non-covered Loans				Total Loans
	Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized
With no related allowance recorded
Commercial real estate - owner occupied	$	172	$	14	$	2,403	$	102	$	2,575	$	116
Commercial real estate - non-owner occupied (1)		1,774		64		3,457		134		5,231		198
Construction and land development		737		77		3,140		141		3,877		218
Commercial loans		217		17		4,314		179		4,531		196
Residential 1-4 family		517		4		431		11		948		15
Other consumer loans		-		-		-		-		-		-

Total	$	3,417	$	176	$	13,745	$	567	$	17,162	$	743

With an allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	-	$	-	$	-	$	-
Commercial real estate - non-owner occupied (1)		-		-		-		-		-		-
Construction and land development		-		-		1,796		60		1,796		60
Commercial loans		-		-		994		54		994		54
Residential 1-4 family		-		-		-		-		-		-
Other consumer loans		-		-		-		-		-		-

Total	$	-	$	-	$	2,790	$	114	$	2,790	$	114
Grand total	$	3,417	$	176	$	16,535	$	681	$	19,952	$	857

(1) Includes loans secured by farmland and multi-family residential loans.

The following tables present the recorded investment in nonaccrual and loans past due over 90 days and still accruing by class of loans as of September 30, 2012 and December 31, 2011 (in thousands):

September 30, 2012	Covered Loans				Non-covered Loans				Total Loans
			Loans Past Due				Loans Past Due				Loans Past Due
	Nonaccrual		90 Days or More		Nonaccrual		90 Days or More		Nonaccrual		90 Days or More
	Loans		Still on Accrual		Loans		Still on Accrual		Loans		Still on Accrual
Commercial real estate - owner occupied	$	-	$	-	$	-	$	-	$	-	$	-
Commercial real estate - non-owner occupied (1)		2,168		-		625		-		2,793		-
Construction and land development		57		-		1,544		-		1,601		-
Commercial loans		-		-		4,610		-		4,610		-
Residential 1-4 family		1,162		-		320		-		1,482		-
Other consumer loans		-		2		-		-		-		2

Total	$	3,387	$	2	$	7,099	$	-	$	10,486	$	2


December 31, 2011	Covered Loans				Non-covered Loans				Total Loans
			Loans Past Due				Loans Past Due				Loans Past Due
	Nonaccrual		90 Days or More		Nonaccrual		90 Days or More		Nonaccrual		90 Days or More
	Loans		Still on Accrual		Loans		Still on Accrual		Loans		Still on Accrual
Commercial real estate - owner occupied	$	-	$	-	$	-	$	-	$	-	$	-
Commercial real estate - non-owner occupied (1)		1,985		136		625		-		2,610		136
Construction and land development		-		-		1,087		-		1,087		-
Commercial loans		-		-		2,772		-		2,772		-
Residential 1-4 family		1,355		-		57		32		1,412		32
Other consumer loans		-		-		-		-		-		-

Total	$	3,340	$	136	$	4,541	$	32	$	7,881	$	168

(1) Includes loans secured by farmland and multi-family residential loans.

Non-covered nonaccrual loans include SBA guaranteed loans with a carrying amount totaling $2.6 million and $2.5 million at September 30, 2012 and December 31, 2011, respectively.

The following tables present the aging of the recorded investment in past due loans by class of loans as of September 30, 2012 and December 31, 2011 (in thousands):

September 30, 2012	30 - 59		60 - 89
	Days		Days		90 Days		Total		Nonaccrual		Loans Not		Total
	Past Due		Past Due		or More		Past Due		Loans		Past Due		Loans
Covered loans:
Commercial real estate - owner occupied	$	845	$	-	$	-	$	845	$	-	$	3,431	$	4,276
Commercial real estate - non-owner occupied (1)		4,287		-		-		4,287		2,168		6,131		12,586
Construction and land development		81		-		-		81		57		1,106		1,244
Commercial loans		-		-		-		-		-		3,058		3,058
Residential 1-4 family		635		187		-		822		1,162		53,342		55,326
Other consumer loans		-		1		2		3		-		101		104

Total	$	5,848	$	188	$	2	$	6,038	$	3,387	$	67,169	$	76,594

Non-covered loans:
Commercial real estate - owner occupied	$	8,353	$	403	$	-	$	8,756	$	-	$	86,042	$	94,798
Commercial real estate - non-owner occupied (1)		204		524		-		728		625		137,767		139,120
Construction and land development		27		1,425		-		1,452		1,544		57,151		60,147
Commercial loans		974		438		-		1,412		4,610		90,489		96,511
Residential 1-4 family		4,241		4,465		-		8,706		320		60,929		69,955
Other consumer loans		1		2		-		3		-		1,641		1,644

Total	$	13,800	$	7,257	$	-	$	21,057	$	7,099	$	434,019	$	462,175

Total loans:
Commercial real estate - owner occupied	$	9,198	$	403	$	-	$	9,601	$	-	$	89,473	$	99,074
Commercial real estate - non-owner occupied (1)		4,491		524		-		5,015		2,793		143,898		151,706
Construction and land development		108		1,425		-		1,533		1,601		58,257		61,391
Commercial loans		974		438		-		1,412		4,610		93,547		99,569
Residential 1-4 family		4,876		4,652		-		9,528		1,482		114,271		125,281
Other consumer loans		1		3		2		6		-		1,742		1,748

Total	$	19,648	$	7,445	$	2	$	27,095	$	10,486	$	501,188	$	538,769

December 31, 2011	30 - 59		60 - 89
	Days		Days		90 Days		Total		Nonaccrual		Loans Not		Total
	Past Due		Past Due		or More		Past Due		Loans		Past Due		Loans
Covered loans:
Commercial real estate - owner occupied	$	-	$	303	$	-	$	303	$	-	$	4,551	$	4,854
Commercial real estate - non-owner occupied (1)		-		-		136		136		1,985		9,751		11,872
Construction and land development		-		-		-		-		-		2,883		2,883
Commercial loans		-		-		-		-		-		2,122		2,122
Residential 1-4 family		269		16		-		285		1,355		59,109		60,749
Other consumer loans		5		-		-		5		-		103		108

Total	$	274	$	319	$	136	$	729	$	3,340	$	78,519	$	82,588

Non-covered loans:
Commercial real estate - owner occupied	$	847	$	-	$	-	$	847	$	-	$	81,603	$	82,450
Commercial real estate - non-owner occupied (1)		140		-		-		140		625		137,353		138,118
Construction and land development		290		39		-		329		1,087		38,149		39,565
Commercial loans		1,022		585		-		1,607		2,772		85,560		89,939
Residential 1-4 family		953		840		32		1,825		57		56,446		58,328
Other consumer loans		2		-		-		2		-		1,866		1,868

Total	$	3,254	$	1,464	$	32	$	4,750	$	4,541	$	400,977	$	410,268

Total loans:
Commercial real estate - owner occupied	$	847	$	303	$	-	$	1,150	$	-	$	86,154	$	87,304
Commercial real estate - non-owner occupied (1)		140		-		136		276		2,610		147,104		149,990
Construction and land development		290		39		-		329		1,087		41,032		42,448
Commercial loans		1,022		585		-		1,607		2,772		87,682		92,061
Residential 1-4 family		1,222		856		32		2,110		1,412		115,555		119,077
Other consumer loans		7		-		-		7		-		1,969		1,976

Total	$	3,528	$	1,783	$	168	$	5,479	$	7,881	$	479,496	$	492,856

(1) Includes loans secured by farmland and multi-family residential loans.

Activity in the allowance for loan and lease losses for the nine months ended September 30, 2012 and 2011 is summarized below (in thousands):

	Commercial			Commercial
	Real Estate			Real Estate			Construction									Other
	Owner			Non-owner			and Land			Commercial			1-4 Family			Consumer
Nine months ended September 30, 2012	Occupied			Occupied (1)			Development			Loans			Residential			Loans			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	627		$	1,011		$	1,367		$	2,227		$	1,021		$	42		$	-	$	6,295
Charge offs		-			(1,081	)		(1,618	)		(1,378	)		(522	)		(6	)		-		(4,605	)
Recoveries		-			262			10			322			16			6			-		616
Provision		186			1,111			1,639			1,225			215			(7	)		236		4,605
Ending balance	$	813		$	1,303		$	1,398		$	2,396		$	730		$	35		$	236	$	6,911

Nine months ended September 30, 2011
Allowance for loan losses:
Beginning balance	$	562		$	1,265		$	326		$	2,425		$	999		$	9		$	13	$	5,599
Charge offs		(63	)		(950	)		(7	)		(1,867	)		(1,927	)		(6	)		-		(4,820	)
Recoveries		3			6			6			127			23			3			-		168
Provision		197			566			928			1,573			1,802			21			53		5,140
Ending balance	$	699		$	887		$	1,253		$	2,258		$	897		$	27		$	66	$	6,087

(1) Includes loans secured by farmland and multi-family residential loans.

The following tables present the balance in the allowance for loan losses and the recorded investment in non-covered loans by portfolio segment and based on impairment method as of September 30, 2012 and December 31, 2011 (in thousands):

	Commercial		Commercial
	Real Estate		Real Estate		Construction						Other
	Owner		Non-owner		and Land		Commercial		1-4 Family		Consumer
	Occupied		Occupied (1)		Development		Loans		Residential		Loans		Unallocated		Total
September 30, 2012
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	75	$	200	$	300	$	-	$	-	$	-	$	-	$	575
Collectively evaluated for impairment		738		1,103		1,098		2,396		730		35		236		6,336
Total ending allowance	$	813	$	1,303	$	1,398	$	2,396	$	730	$	35	$	236	$	6,911

Loans:
Individually evaluated for impairment	$	2,309	$	2,895	$	6,493	$	5,550	$	9,946	$	-	$	-	$	27,193
Collectively evaluated for impairment		92,489		136,225		53,654		90,961		60,009		1,644		-		434,982
Total ending loan balances	$	94,798	$	139,120	$	60,147	$	96,511	$	69,955	$	1,644	$	-	$	462,175

December 31, 2011
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	-	$	-	$	989	$	50	$	-	$	-	$	-	$	1,039
Collectively evaluated for impairment		627		1,011		378		2,177		1,021		42		-		5,256
Total ending allowance	$	627	$	1,011	$	1,367	$	2,227	$	1,021	$	42	$	-	$	6,295

Loans:
Individually evaluated for impairment	$	4,739	$	3,294	$	6,590	$	11,156	$	375	$	-	$	-	$	26,154
Collectively evaluated for impairment		77,711		134,824		32,975		78,783		57,953		1,868		-		384,114
Total ending loan balances	$	82,450	$	138,118	$	39,565	$	89,939	$	58,328	$	1,868	$	-	$	410,268

(1) Includes loans secured by farmland and multi-family residential loans.

Troubled Debt Restructurings

A modification is classified as a troubled debt restructuring (“TDR”) if both of the following exist: (1) the borrower is experiencing financial difficulty and (2) the Bank has granted a concession to the borrower. The Bank determines that a borrower may be experiencing financial difficulty if the borrower is currently delinquent on any of its debt, or if the Bank is concerned that the borrower may not be able to perform in accordance with the current terms of the loan agreement in the foreseeable future. Many aspects of the borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty, particularly as it relates to commercial borrowers due to the complex nature of the loan structure, business/industry risk and borrower/guarantor structures. Concessions may include the reduction of an interest rate at a rate lower than current market rate for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, or principal forgiveness. When evaluating whether a concession has been granted, the Bank also considers whether the borrower has provided additional collateral or guarantors and whether such additions adequately compensate the Bank for the restructured terms, or if the revised terms are consistent with those currently being offered to new loan customers. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty and whether a concession has been granted is subjective in nature and management’s judgment is required when determining whether a modification is a TDR.

Although each occurrence is unique to the borrower and is evaluated separately, for all portfolio segments, TDRs are typically modified through reduction in interest rates, reductions in payments, changing the payment terms from principal and interest to interest only, and/or extensions in term maturity.

During the nine months ended September 30, 2012, we modified four loans in troubled debt restructurings with unpaid principal balances totaling $4.3 million as follows:

Residential 1-4 Family Mortgage	3 loans	$2.8 million
Construction and Land Loans	1 loan	$1.5 million

All of these loans were restructured by reducing the interest rates and modifying other terms.

Two of the residential loans with unpaid principal balances of $195 thousand were thirty days past due as of September 30, 2012. The other two loans are paying in accordance with their modified terms. There is no additional commitment to lend to these four borrowers.

Credit Quality Indicators

Through its system of internal controls SNBV evaluates and segments loan portfolio credit quality on a quarterly basis using regulatory definitions for Special Mention, Substandard and Doubtful. Special Mention loans are considered to be criticized. Substandard and Doubtful loans are considered to be classified. SNBV currently has no loan balances classified Doubtful.

Special Mention loans are loans that have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position.

Substandard loans may be inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

As of September 30, 2012 and December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):

September 30, 2012	Covered Loans						Non-covered Loans								Total Loans
	Classified/						Special								Classified/
	Criticized (1)		Pass		Total		Mention		Substandard (3)		Pass		Total		Criticized		Pass		Total
Commercial real estate - owner occupied	$	132	$	4,144	$	4,276	$	1,388	$	2,309	$	91,101	$	94,798	$	3,829	$	95,245	$	99,074
Commercial real estate - non-owner occupied (2)		2,321		10,265		12,586		-		2,895		136,225		139,120		5,216		146,490		151,706
Construction and land development		1,091		153		1,244		-		6,493		53,654		60,147		7,584		53,807		61,391
Commercial loans		208		2,850		3,058		33		5,550		90,928		96,511		5,791		93,778		99,569
Residential 1-4 family		1,162		54,164		55,326		-		9,946		60,009		69,955		11,108		114,173		125,281
Other consumer loans		-		104		104		-		-		1,644		1,644		-		1,748		1,748

Total	$	4,914	$	71,680	$	76,594	$	1,421	$	27,193	$	433,561	$	462,175	$	33,528	$	505,241	$	538,769

December 31, 2011	Covered Loans						Non-covered Loans								Total Loans
	Classified/						Special								Classified/
	Criticized (1)		Pass		Total		Mention		Substandard (3)		Pass		Total		Criticized		Pass		Total
Commercial real estate - owner occupied	$	235	$	4,619	$	4,854	$	1,404	$	4,739	$	76,307	$	82,450	$	6,378	$	80,926	$	87,304
Commercial real estate - non-owner occupied (2)		1,831		10,041		11,872		-		3,294		134,824		138,118		5,125		144,865		149,990
Construction and land development		1,062		1,821		2,883		-		6,590		32,975		39,565		7,652		34,796		42,448
Commercial loans		213		1,909		2,122		33		11,156		78,750		89,939		11,402		80,659		92,061
Residential 1-4 family		1,355		59,394		60,749		40		375		57,913		58,328		1,770		117,307		119,077
Other consumer loans				108		108		-		-		1,868		1,868		-		1,976		1,976

Total	$	4,696	$	77,892	$	82,588	$	1,477	$	26,154	$	382,637	$	410,268	$	32,327	$	460,529	$	492,856

(1)	Credit quality is enhanced by a loss sharing agreement with the FDIC in the covered portfolio. The same credit quality indicators used in the non-covered portfolio are combined.

(2)	Includes loans secured by farmland and multi-family residential loans.

(3)	Includes SBA guarantees of $2.6 million and $2.5 million as of September 30, 2012 and December 31, 2011, respectively.

5. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

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 $10.2 million and $6.5 million as of September 30, 2012 and December 31, 2011, respectively.

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 we do for on-balance sheet instruments.

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 September 30, 2012 and December 31, 2011, we had unfunded lines of credit and undisbursed construction loan funds totaling $91.7 million and $106.6 million, respectively. Our approved loan commitments were $1.2 million at September 30, 2012 and $690 thousand at December 31, 2011, respectively.

6. EARNINGS PER SHARE

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):

			Weighted
			Average
	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
For the three months ended September 30, 2012
Basic EPS	$	1,208		11,590	$	0.10
Effect of dilutive stock options and warrants		-		7		-
Diluted EPS	$	1,208		11,597	$	0.10

For the three months ended September 30, 2011
Basic EPS (as restated)	$	1,409		11,590	$	0.12
Effect of dilutive stock options and warrants		-		1		-
Diluted EPS (as restated)	$	1,409		11,591	$	0.12

For the nine months ended September 30, 2012
Basic EPS	$	5,266		11,590	$	0.45
Effect of dilutive stock options and warrants		-		4		-
Diluted EPS	$	5,266		11,594	$	0.45

For the nine months ended September 30, 2011
Basic EPS (as restated)	$	4,146		11,590	$	0.36
Effect of dilutive stock options and warrants		-		2		-
Diluted EPS (as restated)	$	4,146		11,592	$	0.36

There were 498,247 and 501,438 anti-dilutive options and warrants for the three and nine months ended September 30, 2012, respectively because these options and warrants have exercise prices that are greater than the average market price of our common stock for the periods presented. Anti-dilutive options and warrants totaled 559,209 and 558,120 for the three and nine months ended September 30, 2011, respectively.

7. FAIR VALUE

ASC 820-10 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) for 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

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 Available for Sale

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, Southern National has no available-for-sale debt securities.

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

			Fair Value Measurements Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Total at		Identical Assets		Inputs		Inputs
(dollars in thousands)	September 30, 2012		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Available for sale securities
FHLMC preferred stock	$	49	$	49	$	-	$	-
Total available-for-sale securities	$	49	$	49	$	-	$	-


			Fair Value Measurements Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Total at		Identical Assets		Inputs		Inputs
(dollars in thousands)	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Available for sale securities
SBA guaranteed loan pools	$	9,837	$	-	$	9,837	$	-
FHLMC preferred stock		68		68		-		-
Total available-for-sale securities	$	9,905	$	68	$	9,837	$	-

Assets and Liabilities Measured on a Non-recurring Basis:

Trust Preferred Securities Classified as Held-to-Maturity

The base input in calculating fair value is a Bloomberg Fair Value Index yield curve for trust preferred securities which correspond to the ratings of the securities we own. We also use composite rating indices to fill in the gaps where the bank rating indices did not correspond to the ratings in our portfolio. When a bank index that matches the rating of our security is not available, we used the bank index that most closely matches the rating, adjusted by the spread between the composite index that most closely matches the security’s rating and the composite index with a rating that matches the bank index used. Then, we use the adjusted index yield, which is further adjusted by a liquidity premium, as the discount rate to be used in the calculation of the present value of the same cash flows used to evaluate the securities for OTTI. The liquidity premiums were derived in consultation with a securities advisor. The liquidity premiums we used ranged from 2% to 5%, and the adjusted discount rates ranged from 9.86% to 13.84%. Due to current market conditions as well as the limited trading activity of these securities, the market value of the securities is highly sensitive to assumption changes and market volatility. We have determined that our trust preferred securities are classified within Level 3 of the fair value hierarchy.

Other Residential Collateralized Mortgage Obligation Classified as Held-to Maturity

The fair value was estimated within Level 2 fair value hierarchy, as the fair value is based on either pricing models, quoted market prices of securities with similar characteristics, or discounted cash flows. We have evaluated this security for potential impairment and, based on our review of the trustee report, shock analysis and current information regarding delinquencies, nonperforming loans and credit support, it has been determined that no OTTI charge for credit exists for the three months ended September 30, 2012. The assumptions used in the analysis included a 5.8% prepayment speed, 7.6% default rate, a 55% loss severity and an accounting yield of 2.68%.

Impaired Loans

Generally, we measure the impairment for impaired loans considering the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral is determined by appraisals or other valuation which is then adjusted for the cost related to liquidation of the collateral. Fair value is classified as Level 3 in the fair value hierarchy. Non-covered loans identified as impaired totaled $27.2 million (including SBA guarantees of $2.6 million and HarVest loans of $1.9 million) as of September 30, 2012 with an allocated allowance for loan losses totaling $575 thousand compared to a carrying amount of $26.2 million (including SBA guarantees of $2.5 million) with an allocated allowance for loan losses totaling $1.0 million at December 31, 2011. Charge-offs related to the impaired loans at September 30, 2012 totaled $963 thousand and $2.6 million for the three and nine months ended September 30, 2012, respectively, compared to $1.5 million and $4.2 million for the three and nine months ended September 30, 2011, respectively.

Other Real Estate Owned (OREO)

OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or internal market evaluation less cost to sell. OREO is further evaluated quarterly for any additional impairment. Fair value is classified as Level 3 in the fair value hierarchy. At September 30, 2012, the total amount of OREO was $13.5 million, of which $12.8 million was non-covered (including $744 thousand acquired from HarVest) and $636 thousand was covered.

At December 31, 2011, the total amount of OREO was $14.3 million, of which $13.6 million was non-covered and $636 thousand was covered.

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

			Fair Value Measurements Using
				Significant
			Quoted Prices in	Other	Significant
			Active Markets for	Observable	Unobservable
	Total at		Identical Assets	Inputs	Inputs
(dollars in thousands)	September 30, 2012		(Level 1)	(Level 2)	(Level 3)
Trust preferred securities, held to maturity	$	478			$	478
Impaired non-covered loans:
Commercial real estate - owner occupied		2,234				2,234
Commercial real estate - non-owner occupied (1)		2,695				2,695
Construction and land development		6,193				6,193
Commercial loans		5,550				5,550
Residential 1-4 family		9,946				9,946
Impaired covered loans:
Commercial real estate - owner occupied		132				132
Commercial real estate - non-owner occupied (1)		2,321				2,321
Construction and land development		1,091				1,091
Commercial loans		208				208
Residential 1-4 family		1,162				1,162
Non-covered other real estate owned:
Commercial real estate - owner occupied		746				746
Commercial real estate - non-owner occupied (1)		1,342				1,342
Construction and land development		5,515				5,515
Residential 1-4 family		5,213				5,213
Covered other real estate owned:
Commercial real estate - owner occupied		557				557
Commercial		79				79

			Fair Value Measurements Using
				Significant
			Quoted Prices in	Other	Significant
			Active Markets for	Observable	Unobservable
	Total at		Identical Assets	Inputs	Inputs
(dollars in thousands)	December 31, 2011		(Level 1)	(Level 2)	(Level 3)
Trust preferred securities, held to maturity	$	32			$	32
Impaired non-covered loans:
Commercial real estate - owner occupied		4,739				4,739
Commercial real estate - non-owner occupied (1)		3,294				3,294
Construction and land development		5,601				5,601
Commercial loans		11,106				11,106
Residential 1-4 family		375				375
Impaired covered loans:
Commercial real estate - owner occupied		235				235
Commercial real estate - non-owner occupied (1)		1,831				1,831
Construction and land development		1,062				1,062
Commercial loans		213				213
Residential 1-4 family		1,355				1,355
Non-covered other real estate owned:
Commercial real estate - owner occupied		1,414				1,414
Commercial real estate - non-owner occupied (1)		1,519				1,519
Construction and land development		4,614				4,614
Residential 1-4 family		6,073				6,073
Covered other real estate owned:
Commercial real estate - owner occupied		557				557
Commercial		79				79

(1) Includes loans secured by farmland and multi-family residential loans.

Fair Value of Financial Instruments

The carrying amount, estimated fair values and fair value hierarchy levels (previously defined) of financial instruments were as follows (in thousands):

		September 30, 2012				December 31, 2011
	Fair Value	Carrying		Fair		Carrying		Fair
	Hierarchy Level	Amount		Value		Amount		Value

Financial assets:
Cash and cash equivalents	Level 1	$	22,288	$	22,288	$	5,035	$	5,035
Securities available for sale	See previous table		49		49		9,905		9,905
Securities held to maturity	Level 2 & Level 3		80,496		81,609		35,075		34,464
Stock in Federal Reserve Bank and Federal
Home Loan Bank	n/a		6,190		n/a		6,653		n/a
Net non-covered loans	Level 3		454,258		453,600		402,885		400,777
Net covered loans	Level 3		76,600		76,474		82,588		82,079
Accrued interest receivable	Level 3		2,623		2,623		2,118		2,118
FDIC indemnification asset	Level 3		7,006		7,006		7,537		7,537
Financial liabilities:
Deposits:
Demand deposits	Level 3		63,616		63,616		50,079		50,079
Money market and savings accounts	Level 3		176,367		176,367		155,232		155,232
Certificates of deposit	Level 3		297,268		300,044		255,784		258,928
Securities sold under agreements to
repurchase and other short-term borrowings	Level 3		32,713		32,713		17,736		17,736
FHLB advances	Level 3		30,250		31,531		30,000		31,293
Accrued interest payable	Level 3		330		330		363		363

Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, demand deposits, savings accounts, money market accounts, short-term debt, and variable rate loans that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life. It was not practicable to determine the fair value of Federal Reserve Bank and Federal Home Loan Bank stock due to restrictions placed on its transferability. Fair value of long-term debt is based on current rates for similar financing. The fair value of the FDIC indemnification asset was determined by discounting estimated future cash flows using the long-term risk free rate plus a premium and represents the present value of our current expectation for recoveries from the FDIC on covered loans. The fair value of off-balance-sheet items is not considered material. The fair value of loans is not presented on an exit price basis.

8. CORRECTION OF ERRORS RELATED TO PURCHASE ACCOUNTING

In December 2009, we acquired Greater Atlantic Bank from the FDIC. We subsequently identified errors in the purchase accounting related to that acquisition. We had utilized the services of a valuation consultant to assist with the identification and estimation of the fair value of the assets acquired and liabilities assumed. As disclosed in our 2011 Annual Report on Form 10-K, we have restated our financial statements for year ended December 31, 2009, the interim quarterly periods and year ended December 31, 2010 and the interim quarterly periods through September 30, 2011.

The most significant error was that a redundant credit loss assumption was applied to the acquired residential and home equity loan portfolios for purposes of calculating the expected credit losses for these portfolios recoverable from the FDIC. This error resulted in an overstatement of the FDIC indemnification asset. The correction of the error resulted in the removal of the gain of $11.2 million reported in our 2009 consolidated statement of operations, as well as adjustments to other amounts originally reported in 2009. We engaged an advisor to assist with calculating the correct initial fair value of the indemnification asset; accretion of the acquired loan discount; calculation of estimated amounts due back to the FDIC in the event that losses do not achieve a specified level (the clawback liability); and other purchase accounting adjustments. Correcting the 2009 purchase accounting entries required adjustments to certain as reported amounts as of and for the three and nine months ended September 30, 2011.

Notes (a) through (f) below describe the restatement adjustments to the consolidated balance sheets as of September 30, 2011, and the consolidated statements of income and comprehensive income (loss), changes in stockholders’ equity, and cash flows for the three and nine months ended September 30, 2011 presented in the following tables.

(a)	Correct the carrying value of the FDIC indemnification asset as of September 30, 2011.

(b)

Correct the accretion amounts for the accretable discount on the acquired loans. On the statement of cash flows as reported, the accretion of the loan discount was previously presented as loan originations and payments, net within investing activities. Reclassifications between covered loans, other assets and goodwill of approximately $500 thousand are reflected as adjustments to the balance sheet presentation in this footnote as of September 30, 2011 as compared to the summarized presentation included in the unaudited quarterly financial information footnote in our 2011 Form 10-K.

(c)

Record a liability for amounts expected to be paid to the FDIC at the maturity of the indemnification agreement as credit losses are not expected to reach levels established in the Purchase and Assumption Agreement for the acquisition of Greater Atlantic Bank. The initial fair value of this liability was reflected at the net present value of expected cash outflows of $586 thousand, and is accreted through other operating expenses to the expected cash disbursement.

(d)	Record the tax effects for the impact of the adjustments.

(e)	Recognize goodwill of $10 thousand.

	Impact on Consolidated Balance Sheets
	September 30, 2011
	As Previously
	Reported			As Restated			Adjustment
	(dollars in thousands)
	(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from financial institutions	$	2,432		$	2,432		$	-
Interest-bearing deposits in other financial institutions		4,625			4,625			-
Total cash and cash equivalents		7,057			7,057			-

Securities available for sale, at fair value		10,438			10,438			-

Securities held to maturity, at amortized cost
(fair value of $38,097)		38,354			38,354			-

Covered loans		80,398			84,567			4,169	b
Non-covered loans		396,494			396,494			-
Total loans		476,892			481,061			4,169
Less allowance for loan losses		(6,087	)		(6,087	)		-
Net loans		470,805			474,974			4,169

Stock in Federal Reserve Bank and Federal Home Loan Bank		7,356			7,356			-
Bank premises and equipment, net		4,700			4,700			-
Goodwill		8,713			8,723			10	e
Core deposit intangibles, net		2,225			2,225			-
FDIC indemnification asset		18,226			7,580			(10,646	) a
Bank-owned life insurance		14,435			14,435			-
Other real estate owned		13,097			13,097			-
Deferred tax assets, net		4,440			6,963			2,523	d
Other assets		5,532			5,522			(10	) b/d
								-
Total assets	$	605,378		$	601,424			(3,954	)

LIABILITIES AND STOCKHOLDERS’ EQUITY

Noninterest-bearing demand deposits	$	31,791		$	31,791		$	-
Interest-bearing deposits:
NOW accounts		16,310			16,310			-
Money market accounts		140,781			140,781			-
Savings accounts		6,335			6,335			-
Time deposits		212,765			212,765			-
Total interest-bearing deposits		376,191			376,191			-
Total deposits		407,982			407,982			-

Securities sold under agreements to repurchase and other
short-term borrowings		19,452			19,452			-
Federal Home Loan Bank (FHLB) advances		72,500			72,500			-
Other liabilities		2,377			2,794			417	c
Total liabilities		502,311			502,728			417

Commitments and contingencies (see note 15)		-			-

Stockholders’ equity:
Preferred stock, $.01 par value. Authorized 5,000,000 shares;
no shares issued and outstanding		-			-
Common stock, $.01 par value. Authorized 45,000,000 shares;
issued and outstanding, 11,590,212 shares at September 30, 2011		116			116			-
Additional paid in capital		96,598			96,598			-
Retained earnings		9,588			5,217			(4,371	)
Accumulated other comprehensive loss		(3,235	)		(3,235	)		-
Total stockholders’ equity		103,067			98,696			(4,371	)

Total liabilities and stockholders’ equity	$	605,378		$	601,424		$	(3,954	)

	Impact on Consolidated Statements of Income and Comprehensive Income									Impact on Consolidated Statements of Income and Comprehensive Income
	For the Three Months Ended									For the Nine Months Ended
	September 30, 2011									September 30, 2011
	As Previously									As Previously
	Reported			As Restated			Adjustment			Reported			As Restated			Adjustment
	(dollars in thousands)									(dollars in thousands)
	(Unaudited)									(Unaudited)
Interest and dividend income :
Interest and fees on loans	$	7,871		$	8,165		$	294	b	$	22,202		$	23,255		$	1,053	b
Interest and dividends on taxable securities		457			457			-			1,495			1,495			-
Interest and dividends on other earning assets		66			66			-			169			169			-
Total interest and dividend income		8,394			8,688			294			23,866			24,919			1,053
Interest expense:
Interest on deposits		1,217			1,217			-			3,744			3,744			-
Interest on borrowings		272			272			-			857			857			-
Total interest expense		1,489			1,489			-			4,601			4,601			-

Net interest income		6,905			7,199			294			19,265			20,318			1,053

Provision for loan losses		1,550			1,550			-			5,140			5,140			-
Net interest income after provision
for loan losses		5,355			5,649			294			14,125			15,178			1,053

Noninterest income:
Account maintenance and deposit service fees		218			218			-			636			636			-
Income from bank-owned life insurance		129			129			-			1,196			1,196			-
Net loss on other assets		-			-			-			(147	)		(147	)		-
Total other-than-temporary impairment losses (OTTI)		(43	)		(43	)		-			(113	)		(113	)		-
Portion of OTTI recognized in other comprehensive income (before taxes)		-			-			-			-			-			-
Net credit related OTTI recognized in earnings		(43	)		(43	)		-			(113	)		(113	)		-
Other		62			62			-			151			151			-

Total noninterest income		366			366			-			1,723			1,723			-

Noninterest expenses:
Salaries and benefits		1,759			1,759			-			5,066			5,066			-
Occupancy expenses		573			573			-			1,667			1,667			-
Furniture and equipment expenses		140			140			-			406			406			-
Amortization of core deposit intangible		230			230			-			690			690			-
Virginia franchise tax expense		171			171			-			514			514			-
FDIC assessment		125			125			-			397			397			-
Data processing expense		126			126			-			400			400			-
Telephone and communication expense		101			101			-			289			289			-
Change in FDIC indemnification asset		(140	)		(13	)		127	a		(490	)		(85	)		405	a
Other operating expenses		695			702			7	c		1,788			1,809			21	c
Total noninterest expenses		3,780			3,914			134			10,727			11,153			426
Income before income taxes		1,941			2,101			160			5,121			5,748			627
Income tax expense		638			692			54	d		1,387			1,602			215	d
Net income	$	1,303		$	1,409		$	106		$	3,734		$	4,146		$	412
Other comprehensive income (loss):
Unrealized gain on available for sale securities	$	(30	)	$	(30	)	$	-		$	167		$	167		$	-
Realized amount on securities sold, net		-			-			-			-			-			-
Non-credit component of other-than-temporary impairment on held-to-maturity securities		(70	)		(70	)		-			26			26			-
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for sale		(27	)		(27	)		-			(44	)		(44	)		-
Net unrealized gain (loss)		(127	)		(127	)		-			149			149			-
Tax effect		(44	)		(44	)		-			50			50			-
Other comprehensive income (loss):		(83	)		(83	)		-			99			99			-
Comprehensive income	$	1,220		$	1,326		$	106		$	3,833		$	4,245		$	412
Earnings per share, basic and diluted	$	0.11		$	0.12		$	0.01		$	0.32		$	0.36		$	0.04

	Impact on Consolidated Statements
	of Changes in Stockholders’ Equity
	As Previously
	Reported			As Restated			Adjustment
	(dollars in thousands)
	(Unaudited)
Balance - December 31, 2010	$	99,114		$	94,331		$	(4,783	)
Comprehensive income:
Net income		3,734			4,146			412
Change in unrealized loss on securities available for sale (net of tax, $57)		110			110			-
Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $7 and accretion, $44 and amounts recorded into other ”comprehensive income at transfer)		(11	)		(11	)		-
Total comprehensive income		3,833			4,245			412
Stock-based compensation expense		120			120			-

Balance - September 30, 2011	$	103,067		$	98,696		$	(4,371	)

	Impact on Consolidated Statements Cash Flows
	For the Nine Months Ended
	September 30, 2011
	As Previously
	Reported			As Restated			Adjustment
	(dollars in thousands)
	(Unaudited)
Operating activities:
Net income	$	3,734		$	4,146		$	412
Adjustments to reconcile net income (loss) to net cash and
cash equivalents provided by operating activities:
Depreciation		393			393			-
Amortization of core deposit intangible		690			690			-
Other amortization, net		(1	)		(1	)		-
Accretion of loan discount		-			(2,552	)		(2,552	) b
Decrease (increase) in FDIC indemnification asset		(490	)		(85	)		405	a
Provision for loan losses		5,140			5,140			-
Earnings on bank-owned life insurance		(396	)		(396	)		-
Stock based compensation expense		120			120			-
Impairment on securities		113			113			-
Net loss on other real estate owned		147			147			-
Net (increase) decrease in other assets		1,318			501			(817	) d
Net increase (decrease) in other liabilities		549			549			-
Net cash and cash equivalents provided by operating activities		11,317			8,765			(2,552	)
Investing activities:
Proceeds from paydowns, maturities and calls of securities available for sale		763			763			-
Proceeds from paydowns, maturities and calls of securities held to maturity		6,632			6,632			-
Loan originations and payments, net		(31,666	)		(29,114	)		2,552	b
Net (increase) decrease in stock in Federal Reserve Bank and Federal Home Loan Bank		(1,006	)		(1,006	)		-
Proceeds from sale of other real estate owned		854			854			-
Payments received on FDIC indemnification asset		800			800			-
Purchases of bank premises and equipment		(434	)		(434	)		-
Net cash and cash equivalents used in investing activities		(24,057	)		(21,505	)		2,552
Financing activities:
Net increase in deposits		(22,992	)		(22,992	)		-
Proceeds from Federal Home Loan Bank advances		37,500			37,500			-
Net increase (decrease) in securities sold under agreement to repurchase and								-
other short-term borrowings		(4,456	)		(4,456	)		-
Net cash and cash equivalents provided by financing activities		10,052			10,052			-
Decrease in cash and cash equivalents		(2,688	)		(2,688	)		-
Cash and cash equivalents at beginning of period		9,745			9,745			-
Cash and cash equivalents at end of period	$	7,057		$	7,057		$	-
Supplemental disclosure of cash flow information
Cash payments for:
Interest	$	4,706		$	4,706			-
Income taxes		855			855			-
Supplemental schedule of noncash investing and financing activities
Transfer from non-covered loans to other real estate owned		9,477			9,477			-
Transfer from covered loans to other real estate owned		82			82			-

9. FDIC-ASSISTED ACQUISITION

On April 27, 2012, Sonabank entered into an agreement with the Federal Deposit Insurance Corporation (“FDIC”) to assume all of the deposits and certain assets of HarVest Bank of Maryland (“HarVest”) a state chartered non-Federal Reserve member commercial bank. HarVest operated four branches – North Rockville, Frederick, Germantown and Bethesda (all located in Maryland).

The assets and liabilities were recorded at their estimated fair values as of the April 27, 2012 acquisition date. A summary of the net assets acquired from the FDIC is as follows (in thousands):

Assets
Cash and cash equivalents	$	21,704
Consideration from the FDIC		25,553
Investment securities		38,379
Loans		64,966
Loans held for sale		7,568
Federal Home Loan Bank stock		1,167
Other real estate owned		750
Core deposit intangible		179
Other assets		576
Total assets acquired	$	160,842

Liabilities
Deposits	$	140,484
FHLB advances		16,738
Other liabilities		136
Total liabilities	$	157,358

Net assets acquired (bargain purchase gain)	$	3,484

A valuation of the acquired loans and core deposit intangible was performed with the assistance of a third-party valuation consultant. The unpaid principal balance and fair value of performing loans was $67.4 million and $63.0 million, respectively. The discount of $4.4 million will be accreted through interest income over the life of the loans in accordance with Accounting Standards Codification (ASC) topic 310-20. The unpaid principal balance and estimated fair value of acquired and retained non-performing loans was $5.3 million and $1.9 million, respectively. In accordance with ASC 310-30, the discount of $3.4 million for these credit impaired loans will not be accreted.

Because HarVest was a distressed financial institution that was seized by the FDIC, certain historical operating information is not available to us and the preparation of pro forma operating disclosures is not practicable.

The application of the acquisition method of accounting resulted in the recognition of a bargain purchase gain of $3.5 million, and the bargain purchase gain is equal to the amount by which the fair value of the net assets acquired exceeded the consideration transferred and is influenced significantly by the FDIC-assisted transaction process. However, the acquired loans in the HarVest transaction are not covered by an indemnification agreement with the FDIC.

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 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	%

(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	%

(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

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

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 ended September 30, 2012, compared to accretion of $13 thousand for the same period last year. Audit and consulting fees were $137 thousand during the third quarter of 2012 compared to $93 thousand during the same period in 2011.

Audit and consulting fees were $977 thousand during the nine months ended September 30, 2012, compared to $306 thousand during the same period in 2011. Occupancy and furniture and equipment expenses were $2.5 million during the nine months ended September 30, 2012, compared to $2.1 million during the same period in 2011. Of this increase, $213 thousand resulted from operating five additional branches this quarter, and $67 thousand was a result of expenses related to the HarVest administrative office on a lease which has now been terminated. In addition, salaries and benefits expense has increased $802 thousand during the nine months ended September 30, 2012, compared to the same period in 2011 as a result of the additional branches. Full-time equivalent employees have increased from 107 at September 30, 2011, to 138 at September 30, 2012. As a result of recasting estimated recoveries under the FDIC indemnification agreement in the second quarter of 2012, amortization expense was $481 thousand for the nine months ended September 30, 2012, compared to accretion of $85 thousand for the same period last year. The efficiency ratio was 55.03% during the nine months ended September 30, 2012, compared to 51.87% during the same period the prior year.

FINANCIAL CONDITION

Balance Sheet Overview

Total assets were $708.3 million as of September 30, 2012 compared to $611.4 million as of December 31, 2011. Net loans receivable increased from $491.8 million at the end of 2011 to $537.8 million at September 30, 2012. Within that total, covered loans declined by $6.0 million while the non-covered loan portfolio increased by $52.0 million. Non-covered loans included $57.3 million of loans acquired in the HarVest acquisition. We sold $5.7 million of SBA loans during the first quarter of 2012.

Total deposits were $537.3 million at September 30, 2012 compared to $461.1 million at December 31, 2011. We acquired deposits in the amount of $140.5 million in the HarVest transaction. Total time deposits were $297.3 million at September 30, 2012, compared to $255.8 million at December 31, 2011. We acquired time deposits totaling $ $107.6 million in the HarVest acquisition. Noninterest-bearing deposits were $43.1 million at September 30, 2012 and $32.6 million at December 31, 2011.

Loan Portfolio

The following table summarizes the composition of our loan portfolio as of September 30, 2012 and December 31, 2011:

			Non-covered Loans
	Covered		HarVest			Other			Total			Covered		Non-covered			Total
	Loans (1)		Loans (2)			Loans			Loans			Loans (1)		Loans			Loans
	September 30, 2012											December 31, 2011
Mortgage loans on real estate:
Commercial real estate - owner-occupied	$	4,276	$	17,067		$	77,731		$	99,074		$	4,854	$	82,450		$	87,304
Commercial real estate - non-owner-occupied		11,965		11,233			107,307			130,505			11,243		117,059			128,302
Secured by farmland		-		-			1,486			1,486			-		1,506			1,506
Construction and land loans		1,244		5,500			54,647			61,391			2,883		39,565			42,448
Residential 1-4 family		22,038		13,709			47,330			83,077			25,307		49,288			74,595
Multi- family residential		621		736			18,358			19,715			629		19,553			20,182
Home equity lines of credit		33,288		1,991			6,925			42,204			35,442		9,040			44,482
Total real estate loans		73,432		50,236			313,784			437,452			80,358		318,461			398,819

Commercial loans		3,058		7,098			89,413			99,569			2,122		89,939			92,061
Consumer loans		104		18			1,626			1,748			108		1,868			1,976
Gross loans		76,594		57,352			404,823			538,769			82,588		410,268			492,856

Less deferred fees on loans		6		(5	)		(1,001	)		(1,000	)		-		(1,088	)		(1,088	)
Loans, net of deferred fees	$	76,600	$	57,347		$	403,822		$	537,769		$	82,588	$	409,180		$	491,768

(1) Covered Loans are loans acquired in the Greater Atlantic transaction and are covered under an FDIC loss-share agreement.

(2) HarVest Loans are loans acquired in the HarVest transaction and are not covered under an FDIC loss-share agreement.

As of September 30, 2012 and December 31, 2011, substantially all of our loans were to customers located in Virginia and Maryland. We are not dependent on any single customer or group of customers whose insolvency would have a material adverse effect on operations.

Loan growth has been basically flat since the end of the year with the exception of the HarVest acquisition. In the Northern Virginia market, which is heavily dependent on defense spending and related government contracting, there is growing concern about the potential for sequestration. As a consequence, loan demand has been soft in Northern Virginia.

Asset Quality

We will generally place a loan on nonaccrual status when it becomes 90 days past due. Loans will also be placed on nonaccrual status in cases where we are uncertain whether the borrower can satisfy the contractual terms of the loan agreement. Cash payments received while a loan is categorized as nonaccrual will be recorded as a reduction of principal as long as doubt exists as to future collections.

We maintain appraisals on loans secured by real estate, particularly those categorized as nonperforming loans and potential problem loans. In instances where appraisals reflect reduced collateral values, we make an evaluation of the borrower’s overall financial condition to determine the need, if any, for impairment or write-down to their fair values. If foreclosure occurs, we record other real estate owned at the lower of our recorded investment in the loan or fair value less our estimated costs to sell.

Our loss and delinquency experience on our loan portfolio has been limited by a number of factors, including our underwriting standards and the relatively short period of time since the loans were originated. Whether our loss and delinquency experience in the area of our portfolio will increase significantly depends upon the value of the real estate securing loans and economic factors such as the overall economy of the region.

Non-covered Loans and Assets

Non-covered loans evaluated for impairment totaled $27.2 million with allocated allowance for loan losses in the amount of $575 thousand as of September 30, 2012, including $7.1 million of nonaccrual loans and $4.3 million of restructured loans. This compares to $26.2 million of impaired loans with allocated allowance for loan losses in the amount of $1.0 million at December 31, 2011, including $4.5 million of nonaccrual loans and $1.1 million of restructured loans. The nonaccrual loans included SBA guaranteed amounts of $2.6 million and $2.5 million at September 30, 2012 and December 31, 2011, respectively. At September 30, 2012 there were no loans past due 90 days or more and accruing interest, compared to $32 thousand as of December 31, 2011.

Non-covered nonperforming assets increased from $18.2 million at December 31, 2011 to $19.9 million at September 30, 2012.

Non-covered OREO as of September 30, 2012 was $12.8 million compared to $13.6 million as of the end of the previous year. During the first nine months of 2012 we had two foreclosures in the amount of $2.0 million and OREO sales of $1.1 million. Non-covered OREO was comprised of residential lots in Culpeper, Virginia, a horse facility, an estate in Charlottesville, three construction/land projects, a commercial property in southwest Virginia and three residential properties.

Sonabank has an internal loan review and a loan committee, both of which provide on-going monitoring to identify and address issues with problem loans. The loan loss provision is determined after consideration of all known relevant internal and external factors affecting loan collectability to maintain the allowance for loan and lease losses at a level necessary to absorb estimated credit losses. We believe the allowance for loan losses is sufficient to cover probable incurred credit losses at September 30, 2012.

The following table presents a comparison of non-covered nonperforming assets as of September 30, 2012 and December 31, 2011 (in thousands):

	September 30,			December 31,
	2012			2011

Nonaccrual loans	$	7,099		$	4,541
Loans past due 90 days and accruing interest		-			32
Total nonperforming loans		7,099			4,573
Other real estate owned		12,815			13,620
Total nonperforming assets	$	19,914		$	18,193

SBA guaranteed amounts included in nonaccrual loans	$	2,590		$	2,462

Allowance for loan losses to nonperforming loans		97.35	%		137.66	%
Allowance for loan losses to total non-covered loans		1.50	%		1.54	%
Nonperforming assets to total non-covered assets		3.16	%		3.44	%
Nonperforming assets excluding SBA guaranteed loans to total non-covered assets		2.75	%		2.98	%
Nonperforming assets to total non-covered loans and OREO		4.20	%		4.30	%
Nonperforming assets excluding SBA guaranteed loans to total non-covered loans and OREO		3.65	%		3.72	%

A modification is classified as a troubled debt restructuring (“TDR”) if both of the following exist: (1) the borrower is experiencing financial difficulty and (2) the Bank has granted a concession to the borrower. The Bank determines that a borrower may be experiencing financial difficulty if the borrower is currently in default on any of its debt, or if the Bank is concerned that the borrower may not be able to perform in accordance with the current terms of the loan agreement in the foreseeable future. Many aspects of the borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty, particularly as it relates to commercial borrowers due to the complex nature of the loan structure, business/industry risk and borrower/guarantor structures. Concessions may include the reduction of an interest rate at a rate lower than current market rate for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, or principal forgiveness. When evaluating whether a concession has been granted, the Bank also considers whether the borrower has provided additional collateral or guarantors and whether such additions adequately compensate the Bank for the restructured terms, or if the revised terms are consistent with those currently being offered to new loan customers. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty and whether a concession has been granted is subjective in nature and management’s judgment is required when determining whether a modification is a TDR.

During the nine months ended September 30, 2012, we modified four loans in troubled debt restructurings with unpaid principal balances totaling $4.3 million as follows:

Residential 1-4 Family Mortgage 3 loans $2.8 million

Construction and Land Loans 1 loan $1.5 million

All of these loans were restructured by reducing the interest rates and modifying other terms.

Covered Loans and Assets

Covered loans identified as impaired totaled $4.9 million as of September 30, 2012 and $4.7 million at December 31, 2011. Nonaccrual loans were $3.4 million and $3.3 million at September 30, 2012 and December 31, 2011, respectively. At September 30, 2012 and at December 31, 2011, there were loans past due 90 days or more and accruing interest in the amount of $2 thousand and $136 thousand, respectively.

Securities

Investment securities, available for sale and held to maturity, were $80.5 million at September 30, 2012 and $45.0 million at December 31, 2011. In the second quarter of 2012, we acquired securities with a fair value of $38.4 million in the HarVest transaction, and we sold $11.3 million of those securities. We retained mortgage-backed securities and collateralized mortgage obligations with a fair value of $27.1 million. We purchased $20.0 million of callable agency securities and $2.0 million of tax-exempt municipal securities during the third quarter of 2012. We also sold $8.0 million of SBA pooled securities which resulted in a gain of $287 thousand during the quarter.

As of September 30, 2012 we owned pooled trust preferred securities as follows:

															Previously
															Recognized
															Cumulative
		Ratings									Estimated		Current		Other
	Tranche	When Purchased			Current Ratings						Fair		Defaults and		Comprehensive
Security	Level	Moody’s		Fitch	Moody’s	Fitch	Par Value		Book Value		Value		Deferrals		Loss (1)
							(in thousands)
ALESCO VII A1B	Senior	Aaa		AAA	Baa3	BB	$	6,904	$	6,216	$	4,211	$	117,400	$	296
MMCF III B	Senior Sub		A3	A-	Ba1	CC		435		426		254		37,000		9
								7,339		6,642		4,465			$	305

															Cumulative		Cumulative
															Other Comprehensive		OTTI Related to
Other Than Temporarily Impaired:															Loss (2)		Credit Loss (2)
TPREF FUNDING II	Mezzanine		A1	A-	Caa3	C		1,500		423		423		134,100		722	$	355
TRAP 2007-XII C1	Mezzanine		A3	A	C	C		2,107		55		55		202,705		759		1,293
TRAP 2007-XIII D	Mezzanine	NR		A-	NR	C		2,039		-		83		214,000		7		2,032
MMC FUNDING XVIII	Mezzanine		A3	A-	Ca	C		1,070		27		166		96,682		352		691
ALESCO V C1	Mezzanine		A2	A	C	C		2,138		473		426		84,000		1,004		661
ALESCO XV C1	Mezzanine		A3	A-	C	C		3,175		30		641		249,100		586		2,559
ALESCO XVI C	Mezzanine		A3	A-	C	C		2,113		117		472		86,150		816		1,180
								14,142		1,125		2,266			$	4,246	$	8,771

Total							$	21,481	$	7,767	$	6,731

(1) Pre-tax, and represents unrealized losses at date of transfer from available-for-sale to held-to-maturity, net of accretion

(2) Pre-tax

Each of these securities has been evaluated for potential impairment. In performing a detailed cash flow analysis of each security, Sonabank works with independent third parties to identify the most reflective estimate of the cash flow estimated to be collected. If this estimate results in a present value of expected cash flows that is less than the amortized cost basis of a security (that is, credit loss exists), an OTTI is considered to have occurred. If there is no credit loss, any impairment is considered temporary.

The analyses resulted in OTTI charges related to credit on two trust preferred securities (TRAP 2007-XII C1 and TPREF Funding II) in the amount of $480 thousand during the third quarter of 2012, compared to OTTI charges related to credit on the trust preferred securities totaling $43 thousand for three months ended September 30, 2011. The OTTI charge on TRAP 2007-XII C1 was $479 thousand and was caused by the deferral of interest payments by a large issuer in the deal which has eroded the credit support below the tranche we own. This adverse credit development impacts the amount and timing of expected cash flows to the tranche, resulting in the recognition of OTTI.

We also own a residential collateralized mortgage obligation which has been evaluated for potential impairment. We recorded no OTTI charges for credit on this security during the three and nine months ended September 30, 2012 and 2011.

Liquidity and Funds Management

The objective of our liquidity management is to assure the ability to meet our financial obligations. These obligations include the payment of deposits on demand or at maturity, the repayment of borrowings at maturity and the ability to fund commitments and other new business opportunities. We obtain funding from a variety of sources, including customer deposit accounts, customer certificates of deposit and payments on our loans and investments. Historically, our level of core deposits has been insufficient to fully fund our lending activities. As a result, we have sought funding from additional sources, including institutional certificates of deposit and the sale of available-for-sale investment securities. In addition, we maintain lines of credit from the Federal Home Loan Bank of Atlanta and utilize securities sold under agreements to repurchase and reverse repurchase agreement borrowings from approved securities dealers.

We prepare a one-year cash flow report which forecasts weekly cash needs and availability for the first three months and monthly thereafter, based on forecasts of loan closings from our pipeline report and other factors.

During the three and nine months ended September 30, 2012, we funded our financial obligations with deposits, securities sold under agreements to repurchase and borrowings from the Federal Home Loan Bank of Atlanta. At September 30, 2012, we had $91.7 million of unfunded lines of credit and undisbursed construction loan funds. We had approved loan commitments of $1.2 million at September 30, 2012. Management anticipates that funding requirements for these commitments can be met from the normal sources of funds.

Capital Resources

The following table provides a comparison of our leverage and risk-weighted capital ratios and the leverage and risk-weighted capital ratios of the bank at the dates indicated to the minimum and well-capitalized regulatory standards (dollars in thousands):

						Required
						For Capital					To Be Categorized as
	Actual					Adequacy Purposes					Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2012
Southern National
Tier 1 risk-based capital ratio	$	96,038		18.25	%	$	21,050		4.00	%	$	31,574		6.00	%
Total risk-based capital ratio		102,605		19.50	%		42,099		8.00	%		52,624		10.00	%
Leverage ratio		96,038		14.08	%		27,275		4.00	%		34,093		5.00	%
Sonabank
Tier 1 risk-based capital ratio	$	93,070		17.70	%	$	21,038		4.00	%	$	31,557		6.00	%
Total risk-based capital ratio		99,633		18.94	%		42,076		8.00	%		52,595		10.00	%
Leverage ratio		93,070		13.65	%		27,263		4.00	%		34,079		5.00	%

December 31, 2011
Southern National
Tier 1 risk-based capital ratio	$	90,718		19.37	%	$	18,738		4.00	%	$	28,107		6.00	%
Total risk-based capital ratio		96,560		20.61	%		37,476		8.00	%		46,845		10.00	%
Leverage ratio		90,718		14.89	%		24,367		4.00	%		30,459		5.00	%
Sonabank
Tier 1 risk-based capital ratio	$	87,176		18.62	%	$	18,729		4.00	%	$	28,094		6.00	%
Total risk-based capital ratio		93,015		19.87	%		37,459		8.00	%		46,823		10.00	%
Leverage ratio		87,176		14.31	%		24,367		4.00	%		30,459		5.00	%

The most recent regulatory notification categorized Sonabank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed Sonabank’s category.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are engaged primarily in the business of investing funds obtained from deposits and borrowings into interest-earning loans and investments. Consequently, our earnings depend to a significant extent on our net interest income, which is the difference between the interest income on loans and other investments and the interest expense on deposits and borrowings. To the extent that our interest-bearing liabilities do not reprice or mature at the same time as our interest-earning assets, we are subject to interest rate risk and corresponding fluctuations in net interest income. We have employed asset/liability management policies that seek to manage our interest income, without having to incur unacceptable levels of credit or investment risk.

We use a duration gap of equity approach to manage our interest rate risk, and we review quarterly interest sensitivity reports prepared for us by FTN Financial using the Sendero ALM Analysis System. This approach uses a model which generates estimates of the change in our market value of portfolio equity (MVPE) over a range of interest rate scenarios. MVPE is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts using standard industry assumptions about estimated loan prepayment rates, reinvestment rates and deposit decay rates.

The following tables are based on an analysis prepared by FTN Financial setting forth an analysis of our interest rate risk as measured by the estimated change in MVPE resulting from instantaneous and sustained parallel shifts in the yield curve (plus 400 basis points or minus 200 basis points, measured in 100 basis point increments) as of September 30, 2012 and December 31, 2011, and all changes are within our ALM Policy guidelines:

	Sensitivity of Market Value of Portfolio Equity
	As of September 30, 2012

									Market Value of
Change in	Market Value of Portfolio Equity								Portfolio Equity as a % of
Interest Rates												Portfolio
in Basis Points			$ Change			% Change			Total			Equity
(Rate Shock)	Amount		From Base			From Base			Assets			Book Value
	(Dollar amounts in thousands)

Up 400	$	84,846	$	(16,560	)		-16.33	%		11.98	%		81.56	%
Up 300		88,700		(12,706	)		-12.53	%		12.52	%		85.27	%
Up 200		93,775		(7,631	)		-7.53	%		13.24	%		90.15	%
Up 100		97,824		(3,582	)		-3.53	%		13.81	%		94.04	%
Base		101,406		-			0.00	%		14.32	%		97.48	%
Down 100		98,074		(3,332	)		-3.29	%		13.85	%		94.28	%
Down 200		97,327		(4,079	)		-4.02	%		13.74	%		93.56	%

	Sensitivity of Market Value of Portfolio Equity
	As of December 31, 2011

									Market Value of
Change in	Market Value of Portfolio Equity								Portfolio Equity as a % of
Interest Rates												Portfolio
in Basis Points			$ Change			% Change			Total			Equity
(Rate Shock)	Amount		From Base			From Base			Assets			Book Value
	(Dollar amounts in thousands)

Up 400	$	94,069	$	(6,103	)		-6.09	%		15.39	%		94.97	%
Up 300		95,562		(4,610	)		-4.60	%		15.63	%		96.48	%
Up 200		97,934		(2,238	)		-2.23	%		16.02	%		98.87	%
Up 100		98,965		(1,207	)		-1.20	%		16.19	%		99.91	%
Base		100,172		-			0.00	%		16.38	%		101.13	%
Down 100		96,052		(4,120	)		-4.11	%		15.71	%		96.97	%
Down 200		94,524		(5,648	)		-5.64	%		15.46	%		95.43	%

Our interest rate sensitivity is also monitored by management through the use of a model run by FTN Financial that generates estimates of the change in the net interest income over a range of interest rate scenarios. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. In this regard, the model assumes that the composition of our interest sensitive assets and liabilities existing at September 30, 2012 and December 31, 2011 remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. All changes are within our ALM Policy guidelines.

	Sensitivity of Net Interest Income
	As of September 30, 2012

Change in	Adjusted Net Interest Income				Net Interest Margin
Interest Rates
in Basis Points			$ Change					% Change
(Rate Shock)	Amount		From Base		Percent			From Base
	(Dollar amounts in thousands)

Up 400	$	31,440	$	2,288		4.85	%		0.35	%
Up 300		30,899		1,747		4.77	%		0.27	%
Up 200		30,387		1,235		4.69	%		0.19	%
Up 100		29,780		628		4.60	%		0.10	%
Base		29,152		-		4.50	%		0.00	%
Down 100		29,501		349		4.56	%		0.06	%
Down 200		29,476		324		4.55	%		0.05	%

	Sensitivity of Net Interest Income
	As of December 31, 2011

Change in	Adjusted Net Interest Income				Net Interest Margin
Interest Rates
in Basis Points			$ Change					% Change
(Rate Shock)	Amount		From Base		Percent			From Base
	(Dollar amounts in thousands)

Up 400	$	28,323	$	2,593		5.16	%		0.46	%
Up 300		27,654		1,924		5.04	%		0.34	%
Up 200		27,021		1,291		4.93	%		0.23	%
Up 100		26,286		556		4.80	%		0.10	%
Base		25,730		-		4.70	%		0.00	%
Down 100		26,408		678		4.82	%		0.12	%
Down 200		26,405		675		4.82	%		0.12	%

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in MVPE requires the making of certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. Accordingly, although the MVPE tables and Sensitivity of Net Interest Income (NII) tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net worth and net interest income. Sensitivity of MVPE and NII are modeled using different assumptions and approaches. In the low interest rate environment that currently exists, limitations on downward adjustments for interest rates, particularly as they apply to deposits, can and do result in anomalies in scenarios that are unlikely to occur due to the current low interest rate environment.

ITEM 4 – CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this quarterly report on Form 10-Q, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d -15(c) under the Securities Exchange Act of 1934). Based upon that evaluation, our chief executive officer and chief financial officer have concluded that these controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting. As was noted in our Annual Report on Form 10-K for the year ended December 31, 2011, management identified a material weakness in our internal control over financial reporting relating to the design and operation of controls over the accounting for non-routine transactions. In our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, management disclosed our process of remediating this internal control material weakness through the implementation and improvement of control activities for the accounting for non-routine transactions.

We utilize a third-party consultant to assist management with purchase accounting valuation matters and the related accounting. We also utilize this consultant to assist management with the accounting for the FDIC indemnification asset and related accounting matters. Internal controls over non-routine transactions include, but may not be limited to:

	●	Reconciliation and review of data used by the third-party consultant to our internal systems and accounting records to ensure completeness and accuracy of the data.
	●	The review and approval by management of the methods, assumptions and calculations performed by the valuation consultant related to the accounting for non-routine transactions.
	●	The review and approval by the chief financial officer of all journal entries related to the accounting for non-routine transactions.
	●	Oversight by management and the Audit Committee of the methods and assumptions used for the valuation of acquired assets and liabilities and the accounting conclusions reached related to non-routine transactions.
	●	In-depth evaluation and approval of the credentials and expertise of third-party consultants prior to engagement.

During the second quarter of 2012, management engaged in two non-routine transactions against which we were able to apply and assess the implemented control activities, evaluate the design of the activities, and assess operating effectiveness. The procedures and controls were subject to testing by internal audit and a report was provided to the Audit Committee.

During the third quarter of 2012 there was no material change in the accounting for prior non-routine transactions. We continuously evaluate the design and operating effectiveness of our internal controls over the accounting for non-routine transactions.

For the quarter ending December 31, 2012 management will re-evaluate the accounting for the FDIC indemnification asset, the results of which will be subject to an internal audit with a report being made to the audit committee.

SNBV believes the processes and procedures that have been put in the place are properly designed and operating effectively to ensure the accuracy of the accounting for non-routine transactions based on the testing that has occurred and the review and observations by management through the quarter ended September 30, 2012.

PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

Southern National and Sonabank may, from time to time, be a party to various legal proceedings arising in the ordinary course of business. There are no other proceedings pending, or to management’s knowledge, threatened, against Southern National or Sonabank as of September 30, 2012.

ITEM 1A – RISK FACTORS

As of September 30, 2012 there were no material changes to the risk factors previously disclosed on our Annual Report on Form 10-K for the year ended December 31, 2011.

ITEM 2. – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable

ITEM 3. – DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. – MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. – OTHER INFORMATION

Not applicable

ITEM 6 - EXHIBITS

(a) Exhibits.

	Exhibit No.		Description

	31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1**		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*		Filed with this Quarterly Report on Form 10-Q
**		Furnished with this Quarterly Report on Form 10-Q

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Southern National Bancorp of Virginia, Inc.
		(Registrant)

November 8, 2012		/s/ Georgia S. Derrico
(Date)		Georgia S. Derrico,
		Chairman of the Board and Chief Executive Officer

November 8, 2012		/s/ William H. Lagos
(Date)		William H. Lagos,
		Senior Vice President and Chief Financial Officer