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

t74277_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 June 30, 2012

Commission File No. 001-33037

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)

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

6830 Old Dominion Drive

McLean, Virginia 22101

(Address of principal executive offices) (zip code)

(703) 893-7400

(Registrant’s telephone number, including area code)

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

YES x NO o

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

YES x NO o

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

Large accelerated filer o Accelerated filer x Smaller reporting company o

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

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

As of August 3, 2012, there were 11,590,212 shares of common stock outstanding.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

June 30, 2012

INDEX

		PAGE

PART 1 - FINANCIAL INFORMATION

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

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		29-42

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

Item 4 – Controls and Procedures		46

PART II - OTHER INFORMATION

Item 1 – Legal Proceedings		48

Item 1A – Risk Factors		48

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

Item 3 – Defaults Upon Senior Securities		48

Item 4 – Mine Safety Disclosures		48

Item 5 – Other Information		48

Item 6 - Exhibits		48

Signatures		49

Certifications

ITEM I - FINANCIAL INFORMATION
PART I - FINANCIAL STATEMENTS

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts) (Unaudited)
	June 30,			December 31,
	2012			2011
ASSETS
Cash and cash equivalents:
Cash and due from financial institutions	$	4,051		$	2,432
Interest-bearing deposits in other financial institutions		23,292			2,603
Total cash and cash equivalents		27,343			5,035

Securities available for sale, at fair value		9,037			9,905

Securities held to maturity, at amortized cost
(fair value of $61,787 and $34,464, respectively)		61,728			35,075

Covered loans		78,522			82,588
Non-covered loans		468,123			409,180
Total loans		546,645			491,768
Less allowance for loan losses		(6,655	)		(6,295	)
Net loans		539,990			485,473

Stock in Federal Reserve Bank and Federal Home Loan Bank		6,030			6,653
Bank premises and equipment, net		6,132			6,350
Goodwill		9,160			9,160
Core deposit intangibles, net		1,716			1,995
FDIC indemnification asset		7,314			7,537
Bank-owned life insurance		17,485			17,575
Other real estate owned		13,458			14,256
Deferred tax assets, net		6,175			6,255
Other assets		6,423			6,104

Total assets	$	711,991		$	611,373

LIABILITIES AND STOCKHOLDERS' EQUITY

Noninterest-bearing demand deposits	$	52,706		$	32,582
Interest-bearing deposits:
NOW accounts		21,157			17,497
Money market accounts		165,310			148,959
Savings accounts		8,909			6,273
Time deposits		295,920			255,784
Total interest-bearing deposits		491,296			428,513
Total deposits		544,002			461,095

Securities sold under agreements to repurchase and other short-term borrowings		31,029			17,736
Federal Home Loan Bank (FHLB) advances		30,250			30,000
Other liabilities		3,698			3,491
Total liabilities		608,979			512,322

Commitments and contingencies (See Note 5)		-			-

Stockholders' equity:
Preferred stock, $.01 par value. Authorized 5,000,000 shares; no shares issued and outstanding		-			-
Common stock, $.01 par value. Authorized 45,000,000 shares; issued and outstanding, 11,590,212 shares at June 30, 2012 and December 31, 2011		116			116
Additional paid in capital		96,742			96,645
Retained earnings		9,181			5,472
Accumulated other comprehensive loss		(3,027	)		(3,182	)
Total stockholders' equity		103,012			99,051

Total liabilities and stockholders' equity	$	711,991		$	611,373

See accompanying notes to consolidated financial statements.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands, except per share amounts) (Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,

	2012			2011			2012			2011
				(As Restated)						(As Restated)
Interest and dividend income :
Interest and fees on loans	$	8,768		$	7,559		$	17,379		$	15,090
Interest and dividends on taxable securities		509			482			911			1,038
Interest and dividends on other earning assets		84			51			145			103
Total interest and dividend income		9,361			8,092			18,435			16,231
Interest expense:
Interest on deposits		1,301			1,249			2,499			2,526
Interest on borrowings		227			267			463			585
Total interest expense		1,528			1,516			2,962			3,111

Net interest income		7,833			6,576			15,473			13,120

Provision for loan losses		1,325			2,250			2,775			3,590
Net interest income after provision for loan losses		6,508			4,326			12,698			9,530

Noninterest income:
Account maintenance and deposit service fees		206			218			402			418
Income from bank-owned life insurance		347			933			500			1,067
Bargain purchase gain on acquisition		3,484			-			3,484			-
Gain on sale of loans		-			-			657			-
Net gain (loss) on other real estate owned		(2,201	)		(108	)		(2,400	)		(147	)
Gain on other assets		-			-			14			-
Net loss on sale of available for sale securities		(13	)		-			(13	)		-
Total other-than-temporary impairment losses (OTTI)		(235	)		(38	)		(241	)		(70	)
Portion of OTTI recognized in other comprehensive income (before taxes)		-			-			4			-
Net credit related OTTI recognized in earnings		(235	)		(38	)		(237	)		(70	)
Other		81			44			135			89

Total noninterest income		1,669			1,049			2,542			1,357

Noninterest expenses:
Salaries and benefits		1,970			1,705			3,795			3,308
Occupancy expenses		705			554			1,287			1,093
Furniture and equipment expenses		143			131			299			267
Amortization of core deposit intangible		228			230			458			460
Virginia franchise tax expense		145			171			291			343
Merger expenses		349			-			349			-
FDIC assessment		142			119			271			272
Data processing expense		162			132			299			274
Telephone and communication expense		133			100			235			188
Change in FDIC indemnification asset		253			(57	)		239			(73	)
Other operating expenses		732			550			1,752			1,107
Total noninterest expenses		4,962			3,635			9,275			7,239
Income before income taxes		3,215			1,740			5,965			3,648
Income tax expense		1,000			293			1,907			911
Net income	$	2,215		$	1,447		$	4,058		$	2,737
Other comprehensive income:
Unrealized gain on available for sale securities	$	65		$	101		$	94		$	197
Realized amount on securities sold, net		-			-			-			-
Non-credit component of other-than-temporary impairment on held-to-maturity securities		205			41			201			96
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale		(28	)		(6	)		(60	)		(17	)
Net unrealized gain		242			136			235			276
Tax effect		82			46			80			94
Other comprehensive income		160			90			155			182
Comprehensive income	$	2,375		$	1,537		$	4,213		$	2,919
Earnings per share, basic and diluted	$	0.19		$	0.12		$	0.35		$	0.24

See accompanying notes to consolidated financial statements.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2012

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

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

Balance - January 1, 2012	$	116	$	96,645	$	5,472		$	(3,182	)	$	99,051
Comprehensive income:
Net income						4,058						4,058
Change in unrealized gain on available for sale securities (net of tax, $32)									62			62
Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $48 and accretion, $60 and amounts recorded into other comprehensive income at transfer)									93			93
Dividends on common stock ($.015 per share)						(349	)					(349	)
Stock-based compensation expense				97								97

Balance - June 30, 2012	$	116	$	96,742	$	9,181		$	(3,027	)	$	103,012

See accompanying notes to consolidated financial statements.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(dollars in thousands) (Unaudited)

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

See accompanying notes to consolidated financial statements.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2012

1. ACCOUNTING POLICIES

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

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

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

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

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

Use of Estimates

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

Recent Accounting Pronouncements

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

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

2.	STOCK- BASED COMPENSATION

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

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

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

The risk-free interest rate was developed using the U. S. Treasury yield curve for periods equal to the expected life of the options on the grant date. An increase in the risk-free interest rate will increase stock compensation expense on future option grants. Our dividend yield was approximately 0%.

For the three and six months ended June 30, 2012, stock-based compensation expense was $47 thousand and $96 thousand, respectively, compared to $47 thousand and $73 thousand for the same periods last year. As of June 30, 2012, unrecognized compensation expense associated with the stock options was $567 thousand, which is expected to be recognized over a weighted average period of 3.4 years.

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

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
Options outstanding, beginning of period		415,325		$	8.06
Granted		19,000			6.48
Forfeited		(4,150	)		8.01
Exercised		-			-
Options outstanding, end of period		430,175		$	7.99		6.0	$	167

Vested or expected to vest		430,175		$	7.99		6.0	$	167

Exercisable at end of period		255,725		$	8.60		4.4	$	62

3. SECURITIES

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

	Amortized			Gross Unrealized				Fair
June 30, 2012		Cost		Gains		Losses		Value
SBA guaranteed loan pools		$	8,595	$	348	$	-		8,943
FHLMC preferred stock			16		78		-		94
Total		$	8,611	$	426	$	-	$	9,037

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

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

	Amortized			Gross Unrecognized					Fair
June 30, 2012		Cost		Gains		Losses			Value
Residential government-sponsored mortgage-backed securities		$	42,090	$	1,624	$	-		$	43,714
Residential government-sponsored collateralized mortgage obligations			5,958		66		-			6,024
Government-sponsored agency securities			5,000		60		-			5,060
Other residential collateralized mortgage obligations			882		-		(22	)		860
Trust preferred securities			7,798		1,214		(2,883	)		6,129
		$	61,728	$	2,964	$	(2,905	)	$	61,787

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

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

	Held to Maturity				Available for Sale
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
Due in one to five years	$	-	$	-	$	113	$	112
Due in five to ten years		-		-		874		899
Due after ten years		12,798		11,189		7,608		7,932
Residential government-sponsored mortgage-backed securities		42,090		43,714		-		-
Residential government-sponsored collateralized mortgage obligations		5,958		6,024		-		-
Other residential collateralized mortgage obligations		882		860		-		-
Total	$	61,728	$	61,787	$	8,595	$	8,943

Securities with a carrying amount of approximately $39.6 million and $36.0 million at June 30, 2012 and December 31, 2011, respectively, were pledged to secure public deposits, repurchase agreements and a line of credit for advances from the Federal Home Loan Bank of Atlanta (“FHLB”).

SNBV monitors the portfolio for indicators of other than temporary impairment. At June 30, 2012, certain securities’ fair values were below cost. As outlined in the table below, there were securities with fair values totaling approximately $5.1 million in the portfolio that are considered temporarily impaired at June 30, 2012. Because the decline in fair value is attributable to changes in interest rates and market illiquidity, and not credit quality, and because we do not have the intent to sell these securities and it is likely that we will not be required to sell the securities before their anticipated recovery, management does not consider these securities to be other-than-temporarily impaired as of June 30, 2012. The following tables present information regarding securities in a continuous unrealized loss position as of June 30, 2012 and December 31, 2011 (in thousands) by duration of time in a loss position:

June 30, 2012
		Less than 12 months						12 Months or More							Total
				Unrecognized						Unrecognized						Unrecognized
Held to Maturity	Fair value				Losses			Fair value			Losses			Fair value			Losses
Other residential collateralized mortgage obligations		$	860		$	(22	)	$	-		$	-		$	860		$	(22	)
Trust preferred securities			-			-			4,260			(2,883	)		4,260			(2,883	)
		$	860		$	(22	)	$	4,260		$	(2,883	)	$	5,120		$	(2,905	)

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

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

																Previously
																Recognized
																Cumulative
		Ratings										Estimated		Current		Other
	Tranche	When Purchased			Current Ratings							Fair		Defaults and		Comprehensive
Security	Level	Moody’s	Fitch		Moody’s	Fitch		Par Value		Book Value		Value		Deferrals		Loss (1)
										(in thousands)
ALESCO VII A1B	Senior	Aaa	AAA		Baa3	BB		$	6,953	$	6,253	$	3,603	$	117,400	$	297
MMCF III B	Senior Sub	A3		A-	Ba1	CC			435		426		271		37,000		9
									7,388		6,679		3,874			$	306

																Cumulative		Cumulative
																Other Comprehensive		OTTI Related to
Other Than Temporarily Impaired:																Loss (2)		Credit Loss (2)
TPREF FUNDING II	Mezzanine	A1		A-	Caa3		C		1,500		383		456		134,100		763	$	354
TRAP 2007-XII C1	Mezzanine	A3		A	C		C		2,099		99		99		191,205		1,186		814
TRAP 2007-XIII D	Mezzanine	NR		A-	NR		C		2,039		-		54		223,750		7		2,032
MMC FUNDING XVIII	Mezzanine	A3		A-	Ca		C		1,066		27		173		101,682		347		692
ALESCO V C1	Mezzanine	A2		A	C		C		2,053		464		386		84,000		1,003		586
ALESCO XV C1	Mezzanine	A3		A-	C		C		3,162		29		657		249,100		574		2,559
ALESCO XVI C	Mezzanine	A3		A-	C		C		2,104		117		430		97,400		807		1,180
									14,023		1,119		2,255			$	4,687	$	8,217

Total								$	21,411	$	7,798	$	6,129

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

(2) Pre-tax

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

●

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

●

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

●

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

●

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

●

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

TRAP 2007-XII C1 was determined to be other than temporarily impaired during the three months ended June 30, 2012. Our analyses resulted in OTTI charges related to credit on TRAP 2007-XII C1 in the amount of $235 thousand during the three months ended June 30, 2012, compared to OTTI charges related to credit on two trust preferred securities (TPREF FUNDING II and MMC FUNDING XVIII) totaling $38 thousand during the second quarter of 2011.

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

	2012			2011

Amount of cumulative other-than-temporary impairment related to credit loss prior to January 1	$	8,277		$	8,002
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized		-			-
Amounts related to credit loss for which an other-than-temporary impairment was previously recognized		237			70
Reductions due to realized losses		(89	)		-
Amount of cumulative other-than-temporary impairment related to credit loss as of June 30	$	8,425		$	8,072

4. LOANS AND ALLOWANCE FOR LOAN LOSSES

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

	Covered		Non-covered Loans
	Loans (1)		HarVest		Other			Total			Covered		Non-covered			Total
			Loans (2)		Loans			Loans			Loans (1)		Loans			Loans
	June 30, 2012										December 31, 2011
Mortgage loans on real estate:
Commercial real estate - owner-occupied	$	5,497	$	15,223	$	79,280		$	100,000		$	4,854	$	82,450		$	87,304
Commercial real estate - non-owner-occupied		12,076		11,118		114,026			137,220			11,243		117,059			128,302
Secured by farmland		-		-		1,493			1,493			-		1,506			1,506
Construction and land loans		1,255		6,537		52,221			60,013			2,883		39,565			42,448
Residential 1-4 family		23,156		13,971		48,018			85,145			25,307		49,288			74,595
Multi- family residential		628		930		18,426			19,984			629		19,553			20,182
Home equity lines of credit		33,913		3,892		7,011			44,816			35,442		9,040			44,482
Total real estate loans		76,525		51,671		320,475			448,671			80,358		318,461			398,819

Commercial loans		1,894		7,855		87,474			97,223			2,122		89,939			92,061
Consumer loans		103		97		1,576			1,776			108		1,868			1,976
Gross loans		78,522		59,623		409,525			547,670			82,588		410,268			492,856

Less deferred fees on loans		-		-		(1,025	)		(1,025	)		-		(1,088	)		(1,088	)
Loans, net of deferred fees	$	78,522	$	59,623	$	408,500		$	546,645		$	82,588	$	409,180		$	491,768

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

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

As part of the Greater Atlantic acquisition, the Bank and the FDIC entered into a loss sharing agreement on approximately $143.4 million (contractual basis) of Greater Atlantic Bank’s assets. The Bank will share in the losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharing agreement; we refer to these assets collectively as “covered assets.” Loans that are not covered in the loss sharing agreement are referred to as “non-covered loans.” Non-covered loans included $59.6 million of loans acquired in the HarVest acquisition.

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

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

Impaired loans were as follows (in thousands):

June 30, 2012	Covered Loans				Non-covered Loans				Total Loans
			Allowance				Allowance				Allowance
	Recorded		for Loan		Recorded		for Loan		Recorded		for Loan
	Investment		Losses Allocated		Investment (1)		Losses Allocated (3)		Investment		Losses Allocated
With no related allowance recorded
Commercial real estate - owner occupied	$	134	$	-	$	288	$	-	$	422	$	-
Commercial real estate - non-owner occupied (2)		2,359		-		2,896		-		5,255		-
Construction and land development		1,105		-		3,003		-		4,108		-
Commercial loans		210		-		3,191		-		3,401		-
Residential 1-4 family		1,170		-		1,237		-		2,407		-
Other consumer loans		-		-		-		-		-		-

Total	$	4,978	$	-	$	10,615	$	-	$	15,593	$	-

With an allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	-	$	-	$	-	$	-
Commercial real estate - non-owner occupied (2)		-		-		1,550		50		1,550		50
Construction and land development		-		-		2,463		550		2,463		550
Commercial loans		-		-		-		-		-		-
Residential 1-4 family		-		-		-		-		-		-
Other consumer loans		-		-		-		-		-		-

Total	$	-	$	-	$	4,013	$	600	$	4,013	$	600
Grand total	$	4,978	$	-	$	14,628	$	600	$	19,606	$	600

(1) Recorded investment is after charge offs of $2.1 million and includes 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 charge offs of $5.6 million and includes 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 six months ended June 30, 2012 and 2011 (in thousands):

Six months ended June 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	$	9	$	287	$	11	$	422	$	20
Commercial real estate - non-owner occupied (1)		2,131		42		2,319		37		4,450		79
Construction and land development		1,081		51		3,005		74		4,086		125
Commercial loans		211		11		3,682		83		3,893		94
Residential 1-4 family		1,165		15		1,267		12		2,432		27
Other consumer loans		-		-		-		-		-		-

Total	$	4,723	$	128	$	10,560	$	217	$	15,283	$	345

With an allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	-	$	-	$	-	$	-
Commercial real estate - non-owner occupied (1)		-		-		1,492		51		1,492		51
Construction and land development		-		-		2,546		58		2,546		58
Commercial loans		-		-		-		-		-		-
Residential 1-4 family		-		-		-		-		-		-
Other consumer loans		-		-		-		-		-		-

Total	$	-	$	-	$	4,038	$	109	$	4,038	$	109
Grand total	$	4,723	$	128	$	14,598	$	326	$	19,321	$	454

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

Six months ended June 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	$	155	$	10	$	1,159	$	11	$	1,314	$	21
Commercial real estate - non-owner occupied (1)		1,750		42		4,915		89		6,665		131
Construction and land development		750		51		1,937		52		2,687		103
Commercial loans		218		11		2,518		7		2,736		18
Residential 1-4 family		377		3		4,671		149		5,048		152
Other consumer loans		-		-		-		-		-		-

Total	$	3,250	$	117	$	15,200	$	308	$	18,450	$	425

With an allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	-	$	-	$	-	$	-
Commercial real estate - non-owner occupied (1)		-		-		-		-		-		-
Construction and land development		-		-		2,011		63		2,011		63
Commercial loans		-		-		1,441		26		1,441		26
Residential 1-4 family		-		-		-		-		-		-
Other consumer loans		-		-		-		-		-		-

Total	$	-	$	-	$	3,452	$	89	$	3,452	$	89
Grand total	$	3,250	$	117	$	18,652	$	397	$	21,902	$	514

(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 June 30, 2012 and December 31, 2011 (in thousands):

June 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)		2,205		-		1,825		-		4,030		-
Construction and land development		63		-		1,843		-		1,906		-
Commercial loans		-		-		1,953		-		1,953		-
Residential 1-4 family		1,170		-		-		-		1,170		-
Other consumer loans		-		-		-		-		-		-

Total	$	3,438	$	-	$	5,621	$	-	$	9,059	$	-

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 June 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 June 30, 2012 and December 31, 2011 (in thousands):

June 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	$	399	$	-	$	-	$	399	$	-	$	5,098	$	5,497
Commercial real estate - non-owner occupied (1)		1,764		-		-		1,764		2,205		8,735		12,704
Construction and land development		93		-		-		93		63		1,099		1,255
Commercial loans		-		-		-		-		-		1,894		1,894
Residential 1-4 family		440		193		-		633		1,170		55,266		57,069
Other consumer loans		1		-		-		1		-		102		103

Total	$	2,697	$	193	$	-	$	2,890	$	3,438	$	72,194	$	78,522

Non-covered loans:
Commercial real estate - owner occupied	$	3,272	$	137	$	-	$	3,409	$	-	$	91,094	$	94,503
Commercial real estate - non-owner occupied (1)		1,888		396		-		2,284		1,825		141,884		145,993
Construction and land development		535		1,400		-		1,935		1,843		54,980		58,758
Commercial loans		1,090		955		-		2,045		1,953		91,331		95,329
Residential 1-4 family		5,888		1,357		-		7,245		-		65,647		72,892
Other consumer loans		14		-		-		14		-		1,659		1,673

Total	$	12,687	$	4,245	$	-	$	16,932	$	5,621	$	446,595	$	469,148

Total loans:
Commercial real estate - owner occupied	$	3,671	$	137	$	-	$	3,808	$	-	$	96,192	$	100,000
Commercial real estate - non-owner occupied (1)		3,652		396		-		4,048		4,030		150,619		158,697
Construction and land development		628		1,400		-		2,028		1,906		56,079		60,013
Commercial loans		1,090		955		-		2,045		1,953		93,225		97,223
Residential 1-4 family		6,328		1,550		-		7,878		1,170		120,913		129,961
Other consumer loans		15		-		-		15		-		1,761		1,776

Total	$	15,384	$	4,438	$	-	$	19,822	$	9,059	$	518,789	$	547,670

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 six months ended June 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
	Occupied			Occupied (1)			Development			Loans			Residential			Loans			Unallocated		Total
Six months ended June 30, 2012
Allowance for loan losses:
Beginning balance	$	627		$	1,011		$	1,367		$	2,227		$	1,021		$	42		$	-	$	6,295
Charge offs		-			(32	)		(1,280	)		(1,167	)		(222	)		(6	)		-		(2,707	)
Recoveries		-			-			-			273			13			6			-		292
Provision		(2	)		36			1,387			1,211			73			(7	)		77		2,775
Ending balance	$	625		$	1,015		$	1,474		$	2,544		$	885		$	35		$	77	$	6,655

Six months ended June 30, 2011
Allowance for loan losses:
Beginning balance	$	562		$	1,265		$	326		$	2,425		$	999		$	9		$	13	$	5,599
Charge offs		(63	)		(600	)		(7	)		(846	)		(1,757	)		(5	)		-		(3,278	)
Recoveries		-			6			5			123			16			2			-		152
Provision		137			170			737			182			1,649			21			694		3,590
Ending balance	$	636		$	841		$	1,061		$	1,884		$	907		$	27		$	707	$	6,063

(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 June 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
June 30, 2012
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	-	$	50	$	550	$	-	$	-	$	-	$	-	$	600
Collectively evaluated for impairment		625		965		924		2,544		885		35		77		6,055
Total ending allowance	$	625	$	1,015	$	1,474	$	2,544	$	885	$	35	$	77	$	6,655

Loans:
Individually evaluated for impairment	$	288	$	4,446	$	6,366	$	3,191	$	1,237	$	-	$	-	$	15,528
Collectively evaluated for impairment		94,215		141,547		52,392		92,138		71,655		1,673		-		453,620
Total ending loan balances	$	94,503	$	145,993	$	58,758	$	95,329	$	72,892	$	1,673	$	-	$	469,148

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 six months ended June 30, 2012, we modified two loans in troubled debt restructurings totaling $196 thousand. Loan impairment in the amount of $555 thousand was previously recognized on these loans, and no incremental impairment was recognized during the six months ended June 30, 2012 in connection with the modifications. The loans are paying in accordance with the modified terms and there is no additional commitment to lend.

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 June 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):

June 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	$	134	$	5,363	$	5,497	$	1,393	$	288	$	92,822	$	94,503	$	1,815	$	98,185	$	100,000
Commercial real estate - non-owner occupied (2)		2,359		10,345		12,704		-		4,446		141,547		145,993		6,805		151,892		158,697
Construction and land development		1,105		150		1,255		-		5,466		53,292		58,758		6,571		53,442		60,013
Commercial loans		210		1,684		1,894		33		3,191		92,105		95,329		3,434		93,789		97,223
Residential 1-4 family		1,170		55,899		57,069		39		1,237		71,616		72,892		2,446		127,515		129,961
Other consumer loans		-		103		103		-		-		1,673		1,673		-		1,776		1,776

Total	$	4,978	$	73,544	$	78,522	$	1,465	$	14,628	$	453,055	$	469,148	$	21,071	$	526,599	$	547,670

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 June 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 $9.4 million and $6.5 million as of June 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 June 30, 2012 and December 31, 2011, we had unfunded lines of credit and undisbursed construction loan funds totaling $96.9 million and $106.6 million, respectively. We had no approved loan commitments at June 30, 2012, and we had approved loan commitments totaling $690 thousand at December 31, 2011.

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 June 30, 2012
Basic EPS	$	2,215		11,590	$	0.19
Effect of dilutive stock options and warrants		-		4		-
Diluted EPS	$	2,215		11,594	$	0.19

For the three months ended June 30, 2011
Basic EPS (as restated)	$	1,447		11,590	$	0.12
Effect of dilutive stock options and warrants		-		1		-
Diluted EPS (as restated)	$	1,447		11,591	$	0.12

For the six months ended June 30, 2012
Basic EPS	$	4,058		11,590	$	0.35
Effect of dilutive stock options and warrants		-		3		-
Diluted EPS	$	4,058		11,593	$	0.35

For the six months ended June 30, 2011
Basic EPS (as restated)	$	2,737		11,590	$	0.24
Effect of dilutive stock options and warrants		-		2		-
Diluted EPS (as restated)	$	2,737		11,592	$	0.24

There were 514,104 and 515,390 anti-dilutive options and warrants for the three and six months ended June 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 558,921 and 557,612 for the three and six months ended June 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, all of Southern National’s available-for-sale debt securities are considered to be Level 2 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)	June 30, 2012		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Available for sale securities
SBA guaranteed loan pools	$	8,943	$	-	$	8,943	$	-
FHLMC preferred stock		94		94		-		-
Total available-for-sale securities	$	9,037	$	94	$	8,943	$	-

			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 single issuer 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 10.05% to 13.99%. 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 June 30, 2012. The assumptions used in the analysis included a 5.6% prepayment speed, 9% default rate, a 50% loss severity and an accounting yield of 2.62%.

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 $14.6 million (including SBA guarantees of $2.6 million and HarVest loans of $1.9 million) as of June 30, 2012 with an allocated allowance for loan losses totaling $600 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 June 30, 2012 totaled $1.4 million and $1.6 million for the three and six months ended June 30, 2012, respectively, compared to $1.6 million and $2.7 million for the three and six months ended June 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 June 30, 2012, the total amount of OREO was $13.5 million, of which $12.8 million was non-covered (including $750 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)	June 30, 2012		(Level 1)	(Level 2)	(Level 3)
Trust preferred securities, held to maturity	$	99			$	99
Impaired non-covered loans:
Commercial real estate - owner occupied		288				288
Commercial real estate - non-owner occupied (1)		4,396				4,396
Construction and land development		4,916				4,916
Commercial loans		3,191				3,191
Residential 1-4 family		1,237				1,237
Impaired covered loans:
Commercial real estate - owner occupied		134				134
Commercial real estate - non-owner occupied (1)		2,359				2,359
Construction and land development		1,105				1,105
Commercial loans		210				210
Residential 1-4 family		1,170				1,170
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		5,521				5,521
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):

		June 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	$	27,343	$	27,343	$	5,035	$	5,035
Securities available for sale	See previous table		9,037		9,037		9,905		9,905
Securities held to maturity	Level 2 & Level 3		61,728		61,787		35,075		34,464
Stock in Federal Reserve Bank and Federal
Home Loan Bank	n/a		6,030		n/a		6,653		n/a
Net non-covered loans	Level 3		461,468		462,248		402,885		400,777
Net covered loans	Level 3		78,522		78,673		82,588		82,079
Accrued interest receivable	Level 3		2,419		2,419		2,118		2,118
FDIC indemnification asset	Level 3		7,314		5,491		7,537		7,537
Financial liabilities:
Deposits:
Demand deposits	Level 3		73,863		73,863		50,079		50,079
Money market and savings accounts	Level 3		174,219		174,219		155,232		155,232
Certificates of deposit	Level 3		295,920		298,761		255,784		258,928
Securities sold under agreements to
repurchase and other short-term borrowings	Level 3		31,029		31,029		17,736		17,736
FHLB advances	Level 3		30,250		31,529		30,000		31,293
Accrued interest payable	Level 3		340		340		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 have 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 six months ended June 30, 2011.

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

(a)

Correct the carrying value of the FDIC indemnification asset as of June 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 June 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
	June 30, 2011
	As Previously Reported			As Restated			Adjustment
	(dollars in thousands)
	(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from financial institutions	$	2,191		$	2,191		$	-
Interest-bearing deposits in other financial institutions		1,495			1,495			-
Total cash and cash equivalents		3,686			3,686			-

Securities available for sale, at fair value		10,751			10,751			-

Securities held to maturity, at amortized cost
(fair value of $39,791)		40,021			40,021			-

Covered loans		82,935			86,811			3,876	b
Non-covered loans		394,052			394,052			-
Total loans		476,987			480,863			3,876
Less allowance for loan losses		(6,063	)		(6,063	)		-
Net loans		470,924			474,800			3,876

Stock in Federal Reserve Bank and Federal Home Loan Bank		5,972			5,972			-
Bank premises and equipment, net		4,691			4,691			-
Goodwill		8,713			8,723			10	e
Core deposit intangibles, net		2,455			2,455			-
FDIC indemnification asset		18,088			7,569			(10,519)	a
Bank-owned life insurance		14,310			14,310			-
Other real estate owned		9,613			9,613			-
Deferred tax assets, net		4,128			6,867			2,739	d
Other assets		8,035			8,025			(10)	b/d
								-
Total assets	$	601,387		$	597,483			(3,904	)

LIABILITIES AND STOCKHOLDERS’ EQUITY

Noninterest-bearing demand deposits	$	33,917		$	33,917		$	-
Interest-bearing deposits:
NOW accounts		15,013			15,013			-
Money market accounts		141,928			141,928			-
Savings accounts		5,814			5,814			-
Time deposits		237,319			237,319			-
Total interest-bearing deposits		400,074			400,074			-
Total deposits		433,991			433,991			-

Securities sold under agreements to repurchase and other
short-term borrowings		19,968			19,968			-
Federal Home Loan Bank (FHLB) advances		43,500			43,500			-
Other liabilities		2,128			2,755			627	c
Total liabilities		499,587			500,214			627

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 June 30, 2011		116			116			-
Additional paid in capital		96,551			96,551			-
Retained earnings		8,285			3,754			(4,531	)
Accumulated other comprehensive loss		(3,152	)		(3,152	)		-
Total stockholders' equity		101,800			97,269			(4,531	)

Total liabilities and stockholders' equity	$	601,387		$	597,483		$	(3,904	)

	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 Six Months Ended
	June 30, 2011									June 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	$	7,210		$	7,559		$	349	b	$	14,331		$	15,090		$	759	b
Interest and dividends on taxable securities		482			482			-			1,038			1,038			-
Interest and dividends on other earning assets		51			51			-			103			103			-
Total interest and dividend income		7,743			8,092			349			15,472			16,231			759
Interest expense:
Interest on deposits		1,249			1,249			-			2,526			2,526			-
Interest on borrowings		267			267			-			585			585			-
Total interest expense		1,516			1,516			-			3,111			3,111			-

Net interest income		6,227			6,576			349			12,361			13,120			759

Provision for loan losses		2,250			2,250			-			3,590			3,590			-
Net interest income after provision for loan losses		3,977			4,326			349			8,771			9,530			759

Noninterest income (loss):
Account maintenance and deposit service fees		218			218			-			418			418			-
Income from bank-owned life insurance		933			933			-			1,067			1,067			-
Net loss on other assets		(108	)		(108	)		-			(147	)		(147	)		-
Total other-than-temporary impairment losses (OTTI)		(38	)		(38	)		-			(70	)		(70	)		-
Portion of OTTI recognized in other comprehensive income (before taxes)		-			-			-			-			-			-
Net credit related OTTI recognized in earnings		(38	)		(38	)		-			(70	)		(70	)		-
Other		44			44			-			89			89			-

Total noninterest income (loss)		1,049			1,049			-			1,357			1,357			-

Noninterest expenses:
Salaries and benefits		1,705			1,705			-			3,308			3,308			-
Occupancy expenses		554			554			-			1,093			1,093			-
Furniture and equipment expenses		131			131			-			267			267			-
Amortization of core deposit intangible		230			230			-			460			460			-
Virginia franchise tax expense		171			171			-			343			343			-
FDIC assessment		119			119			-			272			272			-
Data processing expense		132			132			-			274			274			-
Telephone and communication expense		100			100			-			188			188			-
Change in FDIC indemnification asset		(192	)		(57	)		135	a		(351	)		(73	)		278	a
Other operating expenses		543			550			7	c		1,093			1,107			14	c
Total noninterest expenses		3,493			3,635			142			6,947			7,239			292
Income (loss) before income taxes		1,533			1,740			207			3,181			3,648			467
Income tax expense (benefit)		222			293			71	d		750			911			161	d
Net income (loss)	$	1,311		$	1,447		$	136		$	2,431		$	2,737		$	306
Other comprehensive income :
Unrealized gain on available for sale securities	$	101		$	101		$	-		$	197		$	197		$	-
Realized amount on securities sold, net		-			-			-			-			-			-
Non-credit component of other-than-temporary impairment on held-to-maturity securities		41			41			-			96			96			-
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for sale		(6	)		(6	)		-			(17	)		(17	)		-
Net unrealized gain		136			136			-			276			276			-
Tax effect		46			46			-			94			94			-
Other comprehensive income		90			90			-			182			182			-
Comprehensive income	$	1,401		$	1,537		$	136		$	2,613		$	2,919		$	306
Earnings per share, basic and diluted	$	0.11		$	0.12		$	0.01		$	0.21		$	0.24		$	0.03

	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		2,431		2,683		252
Change in unrealized loss on securities available for sale (net of tax, $67)		130		130		-
Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $27 and accretion, $17 and amounts recorded into other comprehensive income at transfer)		52		52		-
Total comprehensive income		2,613		2,865		252
Stock-based compensation expense		73		73		-

Balance - June 30, 2011	$	101,800	$	97,269	$	(4,531	)


	Impact on Consolidated Statements Cash Flows
	For the Six Months Ended June 30, 2011
	As Previously Reported			As Restated			Adjustment
	(dollars in thousands)
	(Unaudited)
Operating activities:
Net income	$	2,431		$	2,737		$	306
Adjustments to reconcile net income (loss) to net cash and
cash equivalents provided by operating activities:
Depreciation		253			253			-
Amortization of core deposit intangible		460			460			-
Other amortization , net		(23	)		(23	)		-
Accretion of loan discount		-			(1,745	)		(1,745	) b
Decrease (increase) in FDIC indemnification asset		(351	)		(73	)		278	a
Provision for loan losses		3,590			3,590			-
Earnings on bank-owned life insurance		(1,067	)		(1,067	)		-
Stock based compensation expense		73			73			-
Impairment on securities		70			70			-
Net loss on other real estate owned		147			147			-
Net (increase) decrease in other assets		(59	)		(643	)		(584	) d
Net increase (decrease) in other liabilities		300			300			-
Net cash and cash equivalents provided by operating activities		5,824			4,079			(1,745	)
Investing activities:
Proceeds from paydowns, maturities and calls of securities available for sale		489			489			-
Proceeds from paydowns, maturities and calls of securities held to maturity		5,056			5,056			-
Loan originations and payments, net		(26,668	)		(24,923	)		1,745	b
Net (increase) decrease in stock in Federal Reserve Bank and Federal Home Loan Bank		378			378
Proceeds from sale of other real estate owned		771			771			-
Payments received on FDIC indemnification asset		799			799
Purchases of bank premises and equipment		(285	)		(285	)		-
Net cash and cash equivalents used in investing activities		(19,460	)		(17,715	)		1,745
Financing activities:
Net increase in deposits		3,017			3,017			-
Proceeds from Federal Home Loan Bank advances		8,500			8,500
Net increase (decrease) in securities sold under agreement to repurchase and								-
other short-term borrowings		(3,940	)		(3,940	)		-
Net cash and cash equivalents provided by financing activities		7,577			7,577			-
Decrease in cash and cash equivalents		(6,059	)		(6,059	)		-
Cash and cash equivalents at beginning of period		9,745			9,745			-
Cash and cash equivalents at end of period	$	3,686		$	3,686		$	-
Supplemental disclosure of cash flow information
Cash payments for:
Interest	$	3,250		$	3,250			-
Income taxes		825			825			-
Supplemental schedule of noncash investing and financing activities
Transfer from non-covered loans to other real estate owned		5,910			5,910			-
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. The discount of $3.4 million for these credit impaired loans will not be accreted in accordance with ASC 310-30.

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. The Company recorded a $1.2 million deferred tax liability as a result of the transaction.

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.

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 six month periods ended June 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 14 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 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 six months ended June 30, 2011set 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. 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 ended June 30, 2012 was $2.2 million and $4.1 million for the first half of 2012. That compares to $1.4 million and $2.7 million for the three and six months ended June 30, 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 $7.8 million in the quarter ended June 30, 2012 up from $6.6 million during the same period last year. The accretion of the discount on Greater Atlantic Bank’s loans contributed $705 thousand to second quarter 2012 net interest income compared to $786 thousand during the second quarter of 2011. The accretion of the discount on HarVest’s loans contributed $172 thousand in the second quarter of 2012. Average loans increased $68.1 million for the second quarter of 2012 compared to the quarter ended June 30, 2011, and the cost of funds decreased from 1.33% to 1.16%. Sonabank’s net interest margin was 5.07% in the second quarter of 2012 compared to 4.96% during the comparable quarter last year and 5.59% during the first quarter of 2012.

Net interest income was $15.5 million during the six months ended June 30, 2012, compared to $13.1 million during the comparable period in the prior year. Approximately $805 thousand of the increase arose during the first quarter of 2012 and resulted from the recovery of discount recognized in purchase accounting during the first quarter of 2012 for two impaired loans acquired in the Greater Atlantic Bank acquisition following the receipt of payment from the borrowers. The total accretion of the discount on the Greater Atlantic Bank loan portfolio, including the aforementioned $805 thousand, amounted to $2.2 million in the first six months of 2012, compared to $1.8 million in the first half of 2011. Average loans increased $48.7 million for the first half of 2012 compared to the six months ended June 30, 2011, and the cost of funds decreased from 1.38% to 1.19%.

There was very little net impact on the net interest margin from the HarVest acquisition. Adjusted for the recovery of discount on two Greater Atlantic Bank loans the net interest margin would have been 5.00% during the first quarter of 2012. The net interest margin for the second quarter, including two months with the HarVest balance sheet, was 5.07%. An analysis of the yield on loans shows that the addition of the HarVest loan portfolio resulted in a modest increase but the addition of HarVest’s securities, which had an average yield of 2.25% resulted in an offsetting decline. The average expense of interest bearing liabilities declined quarter to quarter after HarVest’s CD’s were repriced to Sonabank’s current posted levels.

The following table details 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
	6/30/2012								6/30/2011
				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)	$	539,322		$	8,768		6.54	%	$	471,214		$	7,559		6.43	%
Investment securities		65,483			509		3.11	%		51,679			482		3.73	%
Other earning assets		15,965			84		2.12	%		9,092			51		2.25	%

Total earning assets		620,770			9,361		6.07	%		531,985			8,092		6.10	%
Allowance for loan losses		(7,032	)							(5,934	)
Total non-earning assets		72,680								62,555
Total assets	$	686,418							$	588,606

Liabilities and stockholders’ equity
Interest-bearing liabilities:
NOW accounts	$	19,160			22		0.46	%	$	15,235			10		0.27	%
Money market accounts		163,001			327		0.81	%		144,615			319		0.88	%
Savings accounts		8,321			13		0.61	%		5,909			9		0.60	%
Time deposits		287,092			939		1.32	%		235,806			911		1.55	%
Total interest-bearing deposits		477,574			1,301		1.10	%		401,565			1,249		1.25	%
Borrowings		51,788			227		1.76	%		56,285			267		1.90	%
Total interest-bearing liabilities		529,362			1,528		1.16	%		457,850			1,516		1.33	%
Noninterest-bearing liabilities:
Demand deposits		43,228								31,177
Other liabilities		12,106								2,878
Total liabilites		584,696								491,905
Stockholders’ equity		101,722								96,701
Total liabilities and stockholders’
equity	$	686,418							$	588,606
Net interest income					7,833								6,576
Interest rate spread							4.90	%							4.77	%
Net interest margin							5.07	%							4.96	%

(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 Six Months Ended
	6/30/2012								6/30/2011
				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)	$	513,970		$	17,379		6.80	%	$	465,241		$	15,090		6.54	%
Investment securities		55,008			911		3.31	%		53,003			1,038		3.92	%
Other earning assets		16,269			145		1.79	%		10,323			103		2.01	%

Total earning assets		585,247			18,435		6.33	%		528,567			16,231		6.19	%
Allowance for loan losses		(6,989	)							(5,956	)
Total non-earning assets		71,899								61,471
Total assets	$	650,157							$	584,082

Liabilities and stockholders’ equity
Interest-bearing liabilities:
NOW accounts	$	17,911			33		0.37	%	$	15,550			21		0.27	%
Money market accounts		156,091			626		0.81	%		151,673			683		0.91	%
Savings accounts		7,340			22		0.60	%		5,763			18		0.61	%
Time deposits		270,896			1,818		1.35	%		224,771			1,804		1.62	%
Total interest-bearing deposits		452,238			2,499		1.11	%		397,757			2,526		1.28	%
Borrowings		49,446			463		1.88	%		55,894			585		2.11	%
Total interest-bearing liabilities		501,684			2,962		1.19	%		453,651			3,111		1.38	%
Noninterest-bearing liabilities:
Demand deposits		39,402								31,643
Other liabilities		8,102								2,816
Total liabilites		549,188								488,110
Stockholders’ equity		100,969								95,972
Total liabilities and stockholders’
equity	$	650,157							$	584,082
Net interest income				$	15,473							$	13,120
Interest rate spread							5.14	%							4.81	%
Net interest margin							5.32	%							5.01	%

(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 second quarter of 2012 was $1.3 million compared to $2.3 million in the second quarter of 2011. For the six months ended June 30, 2012, the provision for loan losses was $2.8 million compared to $3.6 million for the same period last year.

Net charge-offs during the second quarter of 2012 were $1.6 million, compared to net charge-offs during the second quarter of 2011 of $1.9 million.

Net charge offs during the six months ended June 30, 2012 were $2.4 million compared to $3.1 million during the first half of 2011.

Noninterest Income

The following table presents the major categories of noninterest income for the three and six months ended June 30, 2012 and 2011:

	For the Three Months Ended
	June 30,
	2012			2011			Change
	(dollars in thousands)
Account maintenance and deposit service fees	$	206		$	218		$	(12	)
Income from bank-owned life insurance		347			933			(586	)
Bargain purchase gain on acquisition		3,484			-			3,484
Net loss on other real estate owned		(2,201	)		(108	)		(2,093	)
Net loss on sale of available for sale securities		(13	)		-			(13	)
Net impairment losses recognized in earnings		(235	)		(38	)		(197	)
Other		81			44			37
Total noninterest income	$	1,669		$	1,049		$	620

	For the Six Months Ended
	June 30,
		2012			2011		Change
	(dollars in thousands)
Account maintenance and deposit service fees	$	402		$	418		$	(16	)
Income from bank-owned life insurance		500			1,067			(567	)
Bargain purchase gain on acquisition		3,484			-			3,484
Gain on sale of loans		657			-			657
Net loss on other real estate owned		(2,400	)		(147	)		(2,253	)
Gain on other assets		14			-			14
Net loss on sale of available for sale securities		(13	)		-			(13	)
Net impairment losses recognized in earnings		(237	)		(70	)		(167	)
Other		135			89			46
Total noninterest income	$	2,542		$	1,357		$	1,185

During the second quarter of 2012 Sonabank had noninterest income of $1.7 million compared to noninterest income of $1.0 million during the second quarter of 2011. The increase resulted from the bargain purchase gain of $3.5 million from the HarVest transaction which was largely offset by the recognition of impairment in the values of five OREO properties in the Charlottesville market and one in the Culpeper market. One of the Charlottesville property writedowns was based on a new appraisal received during the quarter. Four others in Charlottesville and the one in Culpeper were based on updated and extensive discussions with realtors for each property. The impairment recognized aggregated $2.2 million. In addition, there was an other than temporary impairment (“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. Income from bank owned life insurance (“BOLI”) contributed $347 thousand during the second quarter of 2012 compared to $933 thousand the prior year quarter. Both quarters 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 income increased to $2.5 million in the first six months of 2012 from $1.4 million in the first six months of 2011. The drivers of the increase for the first half of 2012 were largely the same as the quarter except that during the first quarter of 2012 the bank sold the guaranteed portions of SBA loans and realized a $657 thousand gain.

Noninterest Expense

The following table presents the major categories of noninterest expense for the three and six months ended June 30, 2012 and 2011:

	For the Three Months Ended
	June 30,
	2012		2011			Change
	(As Restated)
	(dollars in thousands)
Salaries and benefits	$	1,970	$	1,705		$	265
Occupancy expenses		705		554			151
Furniture and equipment expenses		143		131			12
Amortization of core deposit intangible		228		230			(2	)
Virginia franchise tax expense		145		171			(26	)
Merger expenses		349		-			349
FDIC assessment		142		119			23
Data processing expense		162		132			30
Telephone and communication expense		133		100			33
Change in FDIC indemnification asset		253		(57	)		310
Other operating expenses		732		550			182
Total noninterest expense	$	4,962	$	3,635		$	1,327

	For the Six Months Ended
	June 30,
	2012			2011		Change
	(As Restated)
	(dollars in thousands)
Salaries and benefits	$	3,795	$	3,308		$	487
Occupancy expenses		1,287		1,093			194
Furniture and equipment expenses		299		267			32
Amortization of core deposit intangible		458		460			(2	)
Virginia franchise tax expense		291		343			(52	)
Merger expenses		349		-			349
FDIC assessment		271		272			(1	)
Data processing expense		299		274			25
Telephone and communication expense		235		188			47
Change in FDIC indemnification asset		239		(73	)		312
Other operating expenses		1,752		1,107			645
Total noninterest expense	$	9,275	$	7,239		$	2,036

Noninterest expenses were $5.0 million and $9.3 million during the second quarter and the first half of 2012, respectively, compared to $3.6 million and $7.2 million during the same periods in 2011. The primary factors causing the increase were higher other professional services relating to the restatement of 2009, 2010 and 2011 and the reforecasting expected recoveries from the FDIC. We acquired the Greater Atlantic loans in December 2009 and revised our estimates of expected losses on these loans during the second quarter of 2012 based on the actual historical losses on the loan pools over the previous 24 month period. Estimated losses on the acquired Greater Atlantic loans (the covered loans) are lower than previously forecasted which results in a lower expected recovery from the FDIC. Estimated recoveries on the FDIC loss-share agreement are expected to be $5.5 million at June 30, 2012. The difference between the estimated recoveries and the carrying amount of the FDIC indemnification asset will be amortized over the life of the indemnification asset. As a result of the revised estimate of recoveries under the FDIC indemnification asset, amortization expense was $253 thousand for the quarter ended June 30, 2012, compared to accretion of $57 thousand for the same period last year. Audit and consulting fees were $271 thousand during the second quarter of 2012 compared to $83 thousand during the same period in 2011. Also affecting the second quarter were merger expenses relating to the HarVest transaction totaling $349 thousand, and other noninterest expenses related to the HarVest branches were $245 thousand.

Audit and consulting fees were $840 thousand during the six months ended June 30, 2012, compared to $214 thousand during the same period in 2011. The other increases in noninterest expenses for the first half of 2012 were largely the same as those for the second quarter.

FINANCIAL CONDITION

Balance Sheet Overview

Total assets were $712.0 million as of June 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 $546.6 million at June 30, 2012. Within that total, covered loans declined by $4.1 million while the non-covered loan portfolio increased by $58.9 million. Non-covered loans included $59.6 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 $544.0 million at June 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 $295.9 million at June 30, 2012, compared to $255.8 million at December 31, 2011.We acquired time deposits totaling $ $107.6 million in the HarVest acquisition. We allowed $46.3 million of Sonabank time deposits to run off since December 31, 2011 and following repricing of the HarVest time deposits, there was a decrease of $21.2 million in those deposits. Noninterest-bearing deposits were $52.7 million at June 30, 2012 and $32.6 million at December 31, 2011.

Loan Portfolio

The following table summarizes the composition of our loan portfolio as of June 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
	June 30, 2012										December 31, 2011
Mortgage loans on real estate:
Commercial real estate - owner-occupied	$	5,497	$	15,223	$	79,280		$	100,000		$	4,854	$	82,450		$	87,304
Commercial real estate - non-owner-occupied		12,076		11,118		114,026			137,220			11,243		117,059			128,302
Secured by farmland		-		-		1,493			1,493			-		1,506			1,506
Construction and land loans		1,255		6,537		52,221			60,013			2,883		39,565			42,448
Residential 1-4 family		23,156		13,971		48,018			85,145			25,307		49,288			74,595
Multi- family residential		628		930		18,426			19,984			629		19,553			20,182
Home equity lines of credit		33,913		3,892		7,011			44,816			35,442		9,040			44,482
Total real estate loans		76,525		51,671		320,475			448,671			80,358		318,461			398,819

Commercial loans		1,894		7,855		87,474			97,223			2,122		89,939			92,061
Consumer loans		103		97		1,576			1,776			108		1,868			1,976
Gross loans		78,522		59,623		409,525			547,670			82,588		410,268			492,856

Less deferred fees on loans		-		-		(1,025	)		(1,025	)		-		(1,088	)		(1,088	)
Loans, net of deferred fees	$	78,522	$	59,623	$	408,500		$	546,645		$	82,588	$	409,180		$	491,768

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

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

As of June 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.

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 $14.6 million with allocated allowance for loan losses in the amount of $600 thousand as of June 30, 2012, including $5.6 million of nonaccrual loans and $196 thousand 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 June 30, 2012 and December 31, 2011, respectively. At June 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 (excluding those acquired in the HarVest transaction) decreased from $18.2 million at December 31, 2011 to $17.7 million at June 30, 2012.

Non-covered OREO (including OREO acquired in the Harvest transaction) as of June 30, 2012 was $12.8 million compared to $13.6 million as of the end of the previous year. During the first six 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 the Culpeper lots, 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 June 30, 2012.

The following table presents a comparison of non-covered nonperforming assets (excluding loans and OREO acquired in the HarVest transaction) as of June 30, 2012 and December 31, 2011 (in thousands):

	June 30,			December 31,
	2012			2011

Nonaccrual loans	$	5,618		$	4,541
Loans past due 90 days and accruing interest		-			32
Total nonperforming loans		5,618			4,573
Other real estate owned		12,072			13,620
Total nonperforming assets	$	17,690		$	18,193

SBA guaranteed amounts included in nonaccrual loans	$	2,603		$	2,462

Allowance for loan losses (excluding HarVest) to nonperforming loans		117.39	%		137.66	%
Allowance for loan losses (excluding HarVest) to total non-covered loans excluding loans acquired in the HarVest transaction		1.61	%		1.54	%
Nonperforming assets to total non-covered assets excluding loans and OREO acquired in the HarVest transaction		3.09	%		3.44	%
Nonperforming assets excluding SBA guaranteed loans to total non-covered assets excluding loans and OREO acquired in the HarVest transaction		2.64	%		2.98	%
Nonperforming assets to total non-covered loans and OREO excluding thoses acquired in the HarVest transaction		4.21	%		4.30	%
Nonperforming assets excluding SBA guaranteed loans to total non-covered loans and OREO excluding those acquired in the HarVest transaction		3.59	%		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.

Covered Loans and Assets

Covered loans identified as impaired totaled $5.0 million as of June 30, 2012 and $4.7 million at December 31, 2011. Nonaccrual loans were $3.4 million and $3.3 million at June 30, 2012 and December 31, 2011, respectively. At June 30, 2012, there were no loans past due 90 days or more and accruing interest, and at December 31, 2011, there were loans past due 90 days or more and accruing interest in the amount of $136 thousand.

Securities

Investment securities, available for sale and held to maturity, were $70.8 million at June 30, 2012 and $45.0 million at December 31, 2011. 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.

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

		Ratings										Estimated		Current		Previously Recognized Cumulative 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	$	6,953	$	6,253	$	3,603	$	117,400	$	297
MMCF III B	Senior Sub		A3		A-	Ba1	CC		435		426		271		37,000		9
									7,388		6,679		3,874			$	306

																Cumulative		Cumulative
																Other Comprehensive		OTTI Related to
Other Than Temporarily Impaired:																Loss (2)		Credit Loss (2)
TPREF FUNDING II	Mezzanine		A1		A-	Caa3	C		1,500		383		456		134,100		763	$	354
TRAP 2007-XII C1	Mezzanine		A3		A	C	C		2,099		99		99		191,205		1,186		814
TRAP 2007-XIII D	Mezzanine		NR		A-	NR	C		2,039		-		54		223,750		7		2,032
MMC FUNDING XVIII	Mezzanine		A3		A-	Ca	C		1,066		27		173		101,682		347		692
ALESCO V C1	Mezzanine		A2		A	C	C		2,053		464		386		84,000		1,003		586
ALESCO XV C1	Mezzanine		A3		A-	C	C		3,162		29		657		249,100		574		2,559
ALESCO XVI C	Mezzanine		A3		A-	C	C		2,104		117		430		97,400		807		1,180
									14,023		1,119		2,255			$	4,687	$	8,217

Total								$	21,411	$	7,798	$	6,129

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

Each of these securities has been evaluated for potential impairment under ASC 325. 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.

The analyses resulted in OTTI charges related to credit on the trust preferred securities in the amount of $235 thousand during the second quarter of 2012, compared to OTTI charges related to credit on the trust preferred securities totaling $38 thousand for three months ended June 30, 2011.

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 months ended June 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 monthly cash flow report which forecasts weekly cash needs and availability for the coming three months, based on forecasts of loan closings from our pipeline report and other factors.

During the three and six months ended June 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 June 30, 2012, we had $96.9 million of unfunded lines of credit and undisbursed construction loan funds. We had no approved loan commitments at June 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
June 30, 2012
Southern National
Tier 1 risk-based capital ratio	$	94,833		17.67	%	$	21,468		4.00	%	$	32,202		6.00	%
Total risk-based capital ratio		101,488		18.91	%		42,936		8.00	%		53,671		10.00	%
Leverage ratio		94,833		14.05	%		27,005		4.00	%		33,756		5.00	%
Sonabank
Tier 1 risk-based capital ratio	$	91,595		17.08	%	$	21,457		4.00	%	$	32,185		6.00	%
Total risk-based capital ratio		98,250		18.32	%		42,914		8.00	%		53,642		10.00	%
Leverage ratio		91,595		13.57	%		26,994		4.00	%		33,743		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 June 30, 2012 and December 31, 2011, and all changes are within our ALM Policy guidelines:

	Sensitivity of Market Value of Portfolio Equity
	As of June 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	$	93,069	$	(8,097	)		-8.00	%		13.07	%		90.35	%
Up 300		96,010		(5,156	)		-5.10	%		13.48	%		93.20	%
Up 200		98,020		(3,146	)		-3.11	%		13.77	%		95.15	%
Up 100		100,294		(872	)		-0.86	%		14.09	%		97.36	%
Base		101,166		-			0.00	%		14.21	%		98.21	%
Down 100		96,526		(4,640	)		-4.59	%		13.56	%		93.70	%
Down 200		95,344		(5,822	)		-5.75	%		13.39	%		92.56	%

	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 June 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 June 30, 2012

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

Up 400	$	33,008	$	3,039		5.06	%		0.46	%
Up 300		32,252		2,283		4.94	%		0.34	%
Up 200		31,451		1,482		4.82	%		0.22	%
Up 100		30,625		656		4.70	%		0.10	%
Base		29,969		-		4.60	%		0.00	%
Down 100		30,306		337		4.66	%		0.06	%
Down 200		30,257		288		4.65	%		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.

During the quarter ended June 30, 2012, these efforts continued. 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.

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 occurred during the quarter ended June 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 June 30, 2012.

ITEM 1A – RISK FACTORS

As of June 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)

August 9, 2012		/s/ Georgia S. Derrico
(Date)		Georgia S. Derrico,
		Chairman of the Board and Chief Executive Officer



August 9, 2012		/s/ William H. Lagos
(Date)		William H. Lagos,
		Senior Vice President and Chief Financial Officer