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

t73485_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 March 31, 2012

Commission File No. 001-33037

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)

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

6830 Old Dominion Drive

McLean, Virginia 22101

(Address of principal executive offices) (zip code)

(703) 893-7400

(Registrant’s telephone number, including area code)

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

YES x NO o

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

YES x NO o

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

Large accelerated filer o Accelerated filer x Smaller reporting company o

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

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

As of May 4, 2012, there were 11,590,212 shares of common stock outstanding.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

March 31, 2012

INDEX


		PAGE
PART 1 - FINANCIAL INFORMATION

Item 1 -	Financial Statements
	Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011	2
	Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2012 and 2011	3
	Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2012	4
	Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011	5
	Notes to Consolidated Financial Statements	6- 27

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		27- 37

Item 3 – Quantitative and Qualitative Disclosures about Market Risk		38-40

Item 4 – Controls and Procedures		41

PART II - OTHER INFORMATION

Item 1 – Legal Proceedings		42

Item 1A – Risk Factors		42

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		42

Item 3 – Defaults Upon Senior Securities		42

Item 4 – Mine Safety Disclosures		42

Item 5 – Other Information		42

Item 6 - Exhibits		42

Signatures		43

Certifications		44-46

PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts) (Unaudited)
	March 31,			December 31,
	2012			2011
ASSETS
Cash and cash equivalents:
Cash and due from financial institutions	$	2,470		$	2,432
Interest-bearing deposits in other financial institutions		2,579			2,603
Total cash and cash equivalents		5,049			5,035

Securities available for sale, at fair value		9,203			9,905

Securities held to maturity, at amortized cost (fair value of $37,014 and $34,464, respectively)		37,579			35,075

Covered loans		81,027			82,588
Non-covered loans		410,154			409,180
Total loans		491,181			491,768
Less allowance for loan losses		(6,902	)		(6,295	)
Net loans		484,279			485,473

Stock in Federal Reserve Bank and Federal Home Loan Bank		6,653			6,653
Bank premises and equipment, net		6,239			6,350
Goodwill		9,160			9,160
Core deposit intangibles, net		1,765			1,995
FDIC indemnification asset		7,549			7,537
Bank-owned life insurance		17,728			17,575
Other real estate owned		12,950			14,256
Deferred tax assets, net		6,257			6,255
Other assets		6,430			6,104

Total assets	$	610,841		$	611,373

LIABILITIES AND STOCKHOLDERS’ EQUITY

Noninterest-bearing demand deposits	$	33,658		$	32,582
Interest-bearing deposits:
NOW accounts		17,185			17,497
Money market accounts		150,919			148,959
Savings accounts		6,978			6,273
Time deposits		243,923			255,784
Total interest-bearing deposits		419,005			428,513
Total deposits		452,663			461,095

Securities sold under agreements to repurchase and other short-term borrowings		23,346			17,736
Federal Home Loan Bank (FHLB) advances		30,000			30,000
Other liabilities		4,068			3,491
Total liabilities		510,077			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 March 31, 2012 and December 31, 2011		116			116
Additional paid in capital		96,695			96,645
Retained earnings		7,140			5,472
Accumulated other comprehensive loss		(3,187	)		(3,182	)
Total stockholders’ equity		100,764			99,051

Total liabilities and stockholders’ equity	$	610,841		$	611,373

See accompanying notes to consolidated financial statements.

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

	For the Three Months Ended
	March 31,
	2012			2011
				(As Restated)
Interest and dividend income:
Interest and fees on loans	$	8,611		$	7,531
Interest and dividends on taxable securities		402			556
Interest and dividends on other earning assets		61			52
Total interest and dividend income		9,074			8,139
Interest expense:
Interest on deposits		1,197			1,277
Interest on borrowings		237			318
Total interest expense		1,434			1,595

Net interest income		7,640			6,544

Provision for loan losses		1,450			1,340
Net interest income after provision for loan losses		6,190			5,204

Noninterest income:
Account maintenance and deposit service fees		196			200
Income from bank-owned life insurance		153			135
Gain on sale of SBA loans		657			-
Net loss on other real estate owned		(199	)		(39	)
Gain on other assets		14			-
Total other-than-temporary impairment losses		(6	)		(32	)
Portion of loss recognized in other comprehensive income (before taxes)		4			-
Net credit impairment losses recognized in earnings		(2	)		(32	)
Other		53			44

Total noninterest income		872			308

Noninterest expenses:
Salaries and benefits		1,825			1,603
Occupancy expenses		582			539
Furniture and equipment expenses		156			136
Amortization of core deposit intangible		230			230
Virginia franchise tax expense		145			171
FDIC assessment		129			154
Data processing expense		137			142
Telephone and communication expense		102			88
Change in FDIC indemnification asset		(14	)		(16	)
Other operating expenses		1,020			557
Total noninterest expenses		4,312			3,604
Income before income taxes		2,750			1,908
Income tax expense		907			618
Net income	$	1,843		$	1,290
Other comprehensive income (loss) :
Unrealized gain on available for sale securities	$	29		$	96
Realized amount on securities sold, net		-			-
Non-credit component of other-than-temporary impairment on held-to-maturity securities		(4	)		55
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale		(32	)		(11	)
Net unrealized gain (loss)		(7	)		140
Tax effect		2			(48	)
Other comprehensive income (loss)		(5	)		92
Comprehensive income	$	1,838		$	1,382
Earnings per share, basic and diluted	$	0.16		$	0.11

See accompanying notes to consolidated financial statements.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(dollars in thousands, except per share amounts) (Unaudited)

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

Balance - January 1, 2012	$	116	$	96,645	$	5,472		$	(3,182	)				$	99,051
Comprehensive income:
Net income						1,843					$	1,843			1,843
Change in unrealized gain on available for sale securities (net of tax, $10)									19			19			19
Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $12 and accretion, $32 and amounts recorded into other comprehensive income at transfer)									(24	)		(24	)		(24	)
Total comprehensive income											$	1,838
Dividends on common stock ($.015 per share)						(175	)								(175	)
Stock-based compensation expense				50											50

Balance - March 31, 2012	$	116	$	96,695	$	7,140		$	(3,187	)				$	100,764

See accompanying notes to consolidated financial statements.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(dollars in thousands) (Unaudited)

	2012			2011
				(As Restated)
Operating activities:
Net income	$	1,843		$	1,290
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation		147			126
Amortization of core deposit intangible		230			230
Other amortization , net		44			(37	)
Accretion of loan discount		(1,472	)		(970	)
Increase (decrease) in FDIC indemnification asset		(14	)		(16	)
Provision for loan losses		1,450			1,340
Earnings on bank-owned life insurance		(153	)		(135	)
Stock based compensation expense		50			26
Gain on sale of loans		(657	)		-
Impairment on securities		2			32
Net loss on other real estate owned		199			39
Net (increase) decrease in other assets		195			(202	)
Net increase in other liabilities		577			1,014
Net cash and cash equivalents provided by operating activities		2,441			2,737
Investing activities:
Proceeds from paydowns, maturities and calls of securities available for sale		710			265
Purchases of securities held to maturity		(5,000	)		-
Proceeds from paydowns, maturities and calls of securities held to maturity		2,509			3,486
Loan originations and payments, net		(3,839	)		(7,075	)
Proceeds from sale of SBA loans		5,713			-
Proceeds from sale of other real estate owned		511			388
Payments received on FDIC indemnification asset		2			696
Purchases of bank premises and equipment		(36	)		(17	)
Net cash and cash equivalents provided by (used in) investing activities		570			(2,257	)
Financing activities:
Net increase (decrease) in deposits		(8,432	)		1,384
Cash dividends paid - common stock		(175	)		-
Net increase (decrease) in securities sold under agreement to repurchase and other short-term borrowings		5,610			(4,027	)
Net cash and cash equivalents used in financing activities		(2,997	)		(2,643	)
Increase (decrease) in cash and cash equivalents		14			(2,163	)
Cash and cash equivalents at beginning of period		5,035			9,745
Cash and cash equivalents at end of period	$	5,049		$	7,582
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest	$	1,420		$	1,640
Income taxes		125			-
Supplemental schedule of noncash investing and financing activities
Transfer from non-covered loans to other real estate owned		-			3,759

See accompanying notes to consolidated financial statements.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)

March 31, 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 we also have a branch in Rockville, Maryland.

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 months ended March 31, 2011set 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 March 31, 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 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 12,000 options during the first three 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 three months ended March 31, 2012:

	2012
Dividend yield		0.00	%
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.

For the three months ended March 31, 2012 and 2011, stock-based compensation expense was $50 thousand and $26 thousand, respectively. As of March 31, 2012, unrecognized compensation expense associated with the stock options was $594 thousand, which is expected to be recognized over a weighted average period of 3.6 years.

A summary of the activity in the stock option plan during the three months ended March 31, 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		12,000		6.24
Forfeited		-		-
Exercised		-		-
Options outstanding, end of period		427,325	$	8.01		6.2	$	56

Vested or expected to vest		427,325	$	8.01		6.2	$	56

Exercisable at end of period		341,375	$	8.26		5.7	$	30

3. SECURITIES

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

	Amortized		Gross Unrealized				Fair
March 31, 2012	Cost		Gains		Losses		Value
SBA guaranteed loan pools	$	8,825	$	304	$	-		9,129
FHLMC preferred stock		16		58		-		74
Total	$	8,841	$	362	$	-	$	9,203

	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
March 31, 2012	Cost		Gains		Losses			Value
Residential government-sponsored mortgage-backed securities	$	23,729	$	1,528	$	-		$	25,257
Residential government-sponsored collateralized mortgage obligations		63		1		-			64
Government-sponsored agency securities		5,000		12		-			5,012
Other residential collateralized mortgage obligations		939		-		(153	)		786
Trust preferred securities		7,848		862		(2,815	)		5,895
	$	37,579	$	2,403	$	(2,968	)	$	37,014


	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 March 31, 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	$	-	$	-	$	126	$	126
Due in five to ten years		-		-		912		936
Due after ten years		12,848		10,907		7,787		8,067
Residential government-sponsored mortgage-backed securities		23,729		25,257		-		-
Residential government-sponsored collateralized mortgage obligations		63		64		-		-
Other residential collateralized mortgage obligations		939		786		-		-
Total	$	37,579	$	37,014	$	8,825	$	9,129

Securities with a carrying amount of approximately $37.9 million and $36.0 million at March 31, 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 March 31, 2012, certain securities’ fair values were below cost. As outlined in the table below, there were securities with fair values totaling approximately $5.5 million in the portfolio that are considered temporarily impaired at March 31, 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 March 31, 2012. The following tables present information regarding securities in a continuous unrealized loss position as of March 31, 2012 and December 31, 2011 (in thousands) by duration of time in a loss position:

March 31, 2012
	Less than 12 months					12 Months or More					Total
Held to Maturity	Fair value		Unrecognized Losses			Fair value		Unrecognized Losses			Fair value		Unrecognized Losses
Other residential collateralized mortgage obligations	$	786	$	(153	)	$	-	$	-		$	786	$	(153	)
Trust preferred securities		-		-			4,732		(2,815	)		4,732		(2,815	)
	$	786	$	(153	)	$	4,732	$	(2,815	)	$	5,518	$	(2,968	)

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

As of March 31, 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	$	6,979	$	6,269	$	3,779	$	117,400	$	300
MMCF III B	Senior Sub		A3	A-	Ba1	CC		437		427		274		37,000		10
								7,416		6,696		4,053			$	310

															Cumulative
															Other Comprehensive		Cumulative OTTI Related to
Other Than Temporarily Impaired:															Loss (2)		Credit Loss (2)
TPREF FUNDING II	Mezzanine		A1	A-	Caa3	C		1,500		383		334		134,100		763	$	354
TRAP 2007-XII C1	Mezzanine		A3	A	C	C		2,090		129		166		167,205		1,382		579
TRAP 2007-XIII D	Mezzanine	NR		A-	NR	C		2,039		-		34		218,750		7		2,032
MMC FUNDING XVIII	Mezzanine		A3	A-	Ca	C		1,061		26		26		121,682		343		692
ALESCO V C1	Mezzanine		A2	A	C	C		2,115		468		345		90,000		986		661
ALESCO XV C1	Mezzanine		A3	A-	C	C		3,149		29		574		249,100		561		2,559
ALESCO XVI C	Mezzanine		A3	A-	C	C		2,096		117		363		97,400		799		1,180
								14,050		1,152		1,842			$	4,841	$	8,057

Total							$	21,466	$	7,848	$	5,895

(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.

Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because we do not have the intent to sell these securities and it is more likely than not 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 during the three months ended March 31, 2012, except for the MMC Funding XVIII security.

Our analyses resulted in OTTI charges related to credit on MMC Funding XVIII in the amount of $2 thousand during the three months ended March 31, 2012, compared to OTTI charges related to credit on TPREF Funding II totaling $32 thousand during the first quarter of 2011.

We also own $939 thousand of SARM 2005-22 1A2. This residential collateralized mortgage obligation was originally rated AAA by Standard and Poors. After a series of downgrades, this security has been other than temporarily impaired in past reporting periods. For the first quarter of 2012 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 was required for the quarter ended March 31, 2012. The assumptions used in the analysis included a 3.4% prepayment speed, 10% default rate, a 50% loss severity and an accounting yield of 2.48%. We recorded no OTTI charges for credit on this security during the first 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 three months ended March 31, 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		2			32
Reductions due to realized losses		(5	)		-
Amount of cumulative other-than-temporary impairment related to credit loss as of March 31	$	8,274		$	8,034

4. LOANS AND ALLOWANCE FOR LOAN LOSSES

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

	Covered		Non-covered			Total			Covered		Non-covered			Total
	Loans		Loans			Loans			Loans		Loans			Loans
	March 31, 2012								December 31, 2011
Mortgage loans on real estate:
Commercial real estate - owner-occupied	$	4,949	$	81,256		$	86,205		$	4,854	$	82,450		$	87,304
Commercial real estate - non-owner-occupied		11,727		112,777			124,504			11,243		117,059			128,302
Secured by farmland		-		1,500			1,500			-		1,506			1,506
Construction and land loans		2,258		51,200			53,458			2,883		39,565			42,448
Residential 1-4 family		24,445		48,884			73,329			25,307		49,288			74,595
Multi- family residential		626		19,163			19,789			629		19,553			20,182
Home equity lines of credit		34,810		7,987			42,797			35,442		9,040			44,482
Total real estate loans		78,815		322,767			401,582			80,358		318,461			398,819

Commercial loans		2,112		86,823			88,935			2,122		89,939			92,061
Consumer loans		100		1,676			1,776			108		1,868			1,976
Gross loans		81,027		411,266			492,293			82,588		410,268			492,856

Less deferred fees on loans		-		(1,112	)		(1,112	)		-		(1,088	)		(1,088	)
Loans, net of deferred fees	$	81,027	$	410,154		$	491,181		$	82,588	$	409,180		$	491,768

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.”

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 with a partially offsetting noninterest expense item reflecting the change to the FDIC indemnification asset.

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):

March 31, 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	$	135	$	-	$	675	$	-	$	810	$	-
Commercial real estate - non-owner occupied (2)		2,121		-		3,294		-		5,415		-
Construction and land development		1,053		-		6,172		-		7,225		-
Commercial loans		212		-		3,861		-		4,073		-
Residential 1-4 family		1,233		-		387		-		1,620		-
Other consumer loans		-		-		-		-		-		-

Total	$	4,754	$	-	$	14,389	$	-	$	19,143	$	-

With an allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	-	$	-	$	-	$	-
Commercial real estate - non-owner occupied (2)		-		-		-		-		-		-
Construction and land development		-		-		1,465		689		1,465		689
Commercial loans		-		-		-		-		-		-
Residential 1-4 family		-		-		-		-		-		-
Other consumer loans		-		-		-		-		-		-

Total	$	-	$	-	$	1,465	$	689	$	1,465	$	689
Grand total	$	4,754	$	-	$	15,854	$	689	$	20,608	$	689

(1) Recorded investment is after charge offs of $5.0 million and includes SBA guarantees of $2.4 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 three months ended March 31, 2012 and 2011 (in thousands):

Three months ended March 31, 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	$	136	$	5	$	682	$	12	$	818	$	17
Commercial real estate - non-owner occupied (2)		2,020		39		3,294		45		5,314		84
Construction and land development		1,058		25		4,772		31		5,830		56
Commercial loans		212		6		4,031		42		4,243		48
Residential 1-4 family		1,223		6		400		3		1,623		9
Other consumer loans		-		-		-		-		-		-

Total	$	4,649	$	81	$	13,179	$	133	$	17,828	$	214

With an allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	-	$	-	$	-	$	-
Commercial real estate - non-owner occupied (2)		-		-		-		-		-		-
Construction and land development		-		-		1,690		14		1,690		14
Commercial loans		-		-		-		-		-		-
Residential 1-4 family		-		-		-		-		-		-
Other consumer loans		-		-		-		-		-		-

Total	$	-	$	-	$	1,690	$	14	$	1,690	$	14
Grand total	$	4,649	$	81	$	14,869	$	147	$	19,518	$	228

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

Three months ended March 31, 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	$	141	$	5	$	323	$	6	$	464	$	11
Commercial real estate - non-owner occupied (2)		1,748		21		5,119		44		6,867		65
Construction and land development		702		26		1,789		26		2,491		52
Commercial loans		218		5		1,842		13		2,060		18
Residential 1-4 family		225		3		2,062		-		2,287		3
Other consumer loans						-		-		-		-

Total	$	3,034	$	60	$	11,135	$	89	$	14,169	$	149

With an allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	-	$	-	$	-	$	-
Commercial real estate - non-owner occupied (2)		-		-		-		-		-		-
Construction and land development		-		-		2,014		31		2,014		31
Commercial loans		-		-		1,048		-		1,048		-
Residential 1-4 family		-		-		4,564		74		4,564		74
Other consumer loans		-		-		-		-		-		-

Total	$	-	$	-	$	7,626	$	105	$	7,626	$	105
Grand total	$	3,034	$	60	$	18,761	$	194	$	21,795	$	254

(2) 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 March 31, 2012 and December 31, 2011 (in thousands):

March 31, 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)		2,121		-		625		-		2,746		-
Construction and land development		-		-		2,163		-		2,163		-
Commercial loans		-		-		2,016		-		2,016		-
Residential 1-4 family		1,233		-		-		-		1,233		-
Other consumer loans		-		-		-		-		-		-

Total	$	3,354	$	-	$	4,804	$	-	$	8,158	$	-

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 amounts totaling $2.4 million and $2.5 million at March 31, 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 March 31, 2012 and December 31, 2011 (in thousands):

March 31, 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	$	338	$	-	$	-	$	338	$	-	$	4,611	$	4,949
Commercial real estate - non-owner occupied (1)		1,867		-		-		1,867		2,121		8,365		12,353
Construction and land development		-		97		-		97		-		2,161		2,258
Commercial loans		-		-		-		-		-		2,112		2,112
Residential 1-4 family		271		48		-		319		1,233		57,703		59,255
Other consumer loans		1		1		-		2		-		98		100

Total	$	2,477	$	146	$	-	$	2,623	$	3,354	$	75,050	$	81,027

Non-covered loans:
Commercial real estate - owner occupied	$	842	$	2,435	$	-	$	3,277	$	-	$	77,979	$	81,256
Commercial real estate - non-owner occupied (1)		253		-		-		253		625		132,562		133,440
Construction and land development		19		-		-		19		2,163		49,018		51,200
Commercial loans		1,243		351		-		1,594		2,016		83,213		86,823
Residential 1-4 family		5,303		801		-		6,104		-		50,767		56,871
Other consumer loans		7		-		-		7		-		1,669		1,676

Total	$	7,667	$	3,587	$	-	$	11,254	$	4,804	$	395,208	$	411,266

Total loans:
Commercial real estate - owner occupied	$	1,180	$	2,435	$	-	$	3,615	$	-	$	82,590	$	86,205
Commercial real estate - non-owner occupied (1)		2,120		-		-		2,120		2,746		140,927		145,793
Construction and land development		19		97		-		116		2,163		51,179		53,458
Commercial loans		1,243		351		-		1,594		2,016		85,325		88,935
Residential 1-4 family		5,574		849		-		6,423		1,233		108,470		116,126
Other consumer loans		8		1		-		9		-		1,767		1,776

Total	$	10,144	$	3,733	$	-	$	13,877	$	8,158	$	470,258	$	492,293

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 three months ended March 31, 2012 and 2011 is summarized below (in thousands):

	Commercial Real Estate Owner Occupied			Commercial Real Estate Non-owner Occupied (1)
							Construction and Land Development									Other Consumer Loans
										Commercial Loans			1-4 Family Residential
Three months ended March 31, 2012										Commercial Loans			1-4 Family Residential						Unallocated		Total
Allowance for loan losses:
Beginning balance	$	627		$	1,011		$	1,367		$	2,227		$	1,021		$	42		$	-	$	6,295
Charge offs		-			-			-			(823	)		(32	)		(3	)		-		(858	)
Recoveries		-			-			-			12			1			2			-		15
Provision		22			655			(867	)		1,136			(42	)		(3	)		549		1,450
Ending balance	$	649		$	1,666		$	500		$	2,552		$	948		$	38		$	549	$	6,902

Three months ended March 31, 2011
Allowance for loan losses:
Beginning balance	$	562		$	1,265		$	326		$	2,425		$	999		$	9		$	13	$	5,599
Charge offs		(60	)		(600	)		(7	)		(521	)		(102	)		-			-		(1,290	)
Recoveries		-			-			5			36			13			1			-		55
Provision		243			334			580			(135	)		(16	)		17			317		1,340
Ending balance	$	745		$	999		$	904		$	1,805		$	894		$	27		$	330	$	5,704

(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 March 31, 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
March 31, 2012
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	-	$	689	$	-	$	-	$	-	$	-	$	-	$	689
Collectively evaluated for impairment		649		977		500		2,552		948		38		549		6,213
Total ending allowance	$	649	$	1,666	$	500	$	2,552	$	948	$	38	$	549	$	6,902

Loans:
Individually evaluated for impairment	$	675	$	3,294	$	7,637	$	3,861	$	387	$	-	$	-	$	15,854
Collectively evaluated for impairment		80,581		130,146		43,563		82,962		56,484		1,676		-		395,412
Total ending loan balances	$	81,256	$	133,440	$	51,200	$	86,823	$	56,871	$	1,676	$	-	$	411,266

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 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.

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 three months ended March 31, 2012, we modified two loans in troubled debt restructurings totaling $755 thousand. Loan impairment in the amount of $555 thousand was previously recognized on these loans, and no incremental impairment was recognized during the first quarter of 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 has no loans 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 March 31, 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):

March 31, 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	$	135	$	4,814	$	4,949	$	1,399	$	675	$	79,182	$	81,256	$	2,209	$	83,996	$	86,205
Commercial real estate - non-owner occupied (2)		2,121		10,232		12,353		-		3,294		130,146		133,440		5,415		140,378		145,793
Construction and land development		1,053		1,205		2,258		-		7,637		43,563		51,200		8,690		44,768		53,458
Commercial loans		212		1,900		2,112		33		3,861		82,929		86,823		4,106		84,829		88,935
Residential 1-4 family		1,233		58,022		59,255		39		387		56,445		56,871		1,659		114,467		116,126
Other consumer loans				100		100		-		-		1,676		1,676		-		1,776		1,776

Total	$	4,754	$	76,273	$	81,027	$	1,471	$	15,854	$	393,941	$	411,266	$	22,079	$	470,214	$	492,293

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 $2.4 million and $2.5 million as of March 31, 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 March 31, 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 March 31, 2012 and December 31, 2011, we had unfunded lines of credit and undisbursed construction loan funds totaling $103.2 million and $106.6 million, respectively. Our approved loan commitments were $1.0 million and $690 thousand at March 31, 2012 and December 31, 2011, respectively.

6. EARNINGS PER SHARE

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

			Weighted
			Average
	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
For the three months ended March 31, 2012
Basic EPS	$	1,843		11,590	$	0.16
Effect of dilutive stock options and warrants		-		1		-
Diluted EPS	$	1,843		11,591	$	0.16

For the three months ended March 31, 2011
Basic EPS (as restated)	$	1,290		11,590	$	0.11
Effect of dilutive stock options and warrants		-		4		-
Diluted EPS (as restated)	$	1,290		11,594	$	0.11

There were 571,006 and 550,365 anti-dilutive options and warrants for the three months ended March 31, 2012 and 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)	March 31, 2012		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Available for sale securities
SBA guaranteed loan pools	$	9,129	$	-	$	9,129	$	-
FHLMC preferred stock		74		74		-		-
Total available-for-sale securities	$	9,203	$	74	$	9,129	$	-

			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 9.55% to 16.55%. 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 March 31, 2012. The assumptions used in the analysis included a 3.4% prepayment speed, 10% default rate, a 50% loss severity and an accounting yield of 2.48%.

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 $15.9 million (including SBA guarantees of $2.4 million) as of March 31, 2012 with an allocated allowance for loan losses totaling $689 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 March 31, 2012 totaled $250 thousand for the three months ended March 31, 2012 compared to $1.1 million for the quarter ended March 31, 2011.

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 March 31, 2012, the total amount of OREO was $12.9 million, of which $12.3 million was non-covered 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)	March 31, 2012		(Level 1)	(Level 2)	(Level 3)
Trust preferred securities, held to maturity	$	26			$	26
Impaired non-covered loans:
Commercial real estate - owner occupied		675				675
Commercial real estate - non-owner occupied (2)		3,294				3,294
Construction and land development		6,948				6,948
Commercial loans		3,861				3,861
Residential 1-4 family		387				387
Impaired covered loans:
Commercial real estate - owner occupied		135				135
Commercial real estate - non-owner occupied (2)		2,121				2,121
Construction and land development		1,053				1,053
Commercial loans		212				212
Residential 1-4 family		1,233				1,233
Non-covered other real estate owned:
Commercial real estate - owner occupied		786				786
Commercial real estate - non-owner occupied (2)		1,492				1,492
Construction and land development		4,063				4,063
Residential 1-4 family		5,973				5,973
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 (2)		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 (2)		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 (2)		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

(2) 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):

		March 31, 2012				December 31, 2011
	Fair Value	Carrying		Fair		Carrying		Fair
	Hierarchy Level	Amount		Value		Amount		Value

Financial assets:
Cash and cash equivalents	Level 1	$	5,049	$	5,049	$	5,035	$	5,035
Securities available for sale	See previous table		9,203		9,203		9,905		9,905
Securities held to maturity	Level 2 & Level 3		37,579		37,014		35,075		34,464
Stock in Federal Reserve Bank and Federal Home Loan Bank	n/a		6,653		n/a		6,653		n/a
Net non-covered loans	Level 3		403,252		403,142		402,885		400,777
Net covered loans	Level 3		81,027		81,002		82,588		82,079
Accrued interest receivable	Level 1		2,138		2,138		2,118		2,118
FDIC indemnification asset	Level 3		7,549		7,549		7,537		7,537
Financial liabilities:
Deposits:
Demand deposits	Level 1		50,843		50,843		50,079		50,079
Money market and savings accounts	Level 1		157,897		157,897		155,232		155,232
Certificates of deposit	Level 3		243,923		246,473		255,784		258,928
Securities sold under agreements to repurchase and other short-term borrowings	Level 1		23,346		23,346		17,736		17,736
FHLB advances	Level 3		30,000		31,116		30,000		31,293
Accrued interest payable	Level 1		377		377		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 months ended March 31, 2011.

Notes (a) through (f) below describe the restatement adjustments to the consolidated balance sheets as of March 31, 2011, and the consolidated statements of income and comprehensive income (loss), changes in stockholders’ equity, and cash flows for the three months ended March 31, 2011 presented in the following tables.

(a)	Correct the carrying value of the FDIC indemnification asset as of March 31, 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 March 31, 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)	Corrections to the statement of cash flows to reflect the impact of the aforementioned adjustments as well as to present the accretion of the loan discount in operating activities.

(f)	Recognize goodwill of $10 thousand.

	Impact on Consolidated Balance Sheets
	March 31, 2011
	As Previously
	Reported			As Restated			Adjustment
	(dollars in thousands)
	(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from financial institutions	$	2,634		$	2,634		$	-
Interest-bearing deposits in other financial institutions		4,948			4,948			-
Total cash and cash equivalents		7,582			7,582			-

Securities available for sale, at fair value		10,886			10,886			-

Securities held to maturity, at amortized cost (fair value of $40,777)		41,525			41,525			-

Covered loans		85,490			89,517			4,027		b
Non-covered loans		377,555			377,555			-
Total loans		463,045			467,072			4,027
Less allowance for loan losses		(5,704	)		(5,704	)		-
Net loans		457,341			461,368			4,027

Stock in Federal Reserve Bank and Federal Home Loan Bank		6,350			6,350			-
Bank premises and equipment, net		4,550			4,550			-
Goodwill		8,713			8,723			10		f
Core deposit intangibles, net		2,685			2,685			-
FDIC indemnification asset		17,999			7,615			(10,384	)	a
Bank-owned life insurance		14,703			14,703			-
Other real estate owned		7,908			7,908			-
Deferred tax assets, net		3,734			6,634			2,900		d
Other assets		6,457			5,947			(510	)	b/d
								-
Total assets	$	590,433		$	586,476			(3,957	)

LIABILITIES AND STOCKHOLDERS’ EQUITY

Noninterest-bearing demand deposits	$	32,591		$	32,591		$	-
Interest-bearing deposits:
NOW accounts		16,324			16,324			-
Money market accounts		150,964			150,964			-
Savings accounts		5,771			5,771			-
Time deposits		226,708			226,708			-
Total interest-bearing deposits		399,767			399,767			-
Total deposits		432,358			432,358			-

Securities sold under agreements to repurchase and other short-term borrowings		19,881			19,881			-
Federal Home Loan Bank (FHLB) advances		35,000			35,000			-
Other liabilities		2,842			3,462			620		c
Total liabilities		490,081			490,701			620

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 March 31, 2011		116			116			-
Additional paid in capital		96,504			96,504			-
Retained earnings		6,974			2,397			(4,577	)
Accumulated other comprehensive loss		(3,242	)		(3,242	)		-
Total stockholders’ equity		100,352			95,775			(4,577	)

Total liabilities and stockholders’ equity	$	590,433		$	586,476		$	(3,957	)

	Impact on Consolidated Statements of Income and Comprehensive Income
	For the Three Months Ended
	March 31, 2011
	As Previously
	Reported			As Restated			Adjustment
	(dollars in thousands)
	(Unaudited)
Interest and dividend income :
Interest and fees on loans	$	7,121		$	7,531		$	410	b
Interest and dividends on taxable securities		556			556			-
Interest and dividends on other earning assets		52			52			-
Total interest and dividend income		7,729			8,139			410
Interest expense:
Interest on deposits		1,277			1,277			-
Interest on borrowings		318			318			-
Total interest expense		1,595			1,595			-

Net interest income		6,134			6,544			410

Provision for loan losses		1,340			1,340			-
Net interest income after provision for loan losses		4,794			5,204			410

Noninterest income (loss):
Account maintenance and deposit service fees		200			200			-
Income from bank-owned life insurance		135			135			-
Net loss on other assets		(39	)		(39	)		-
Total other-than-temporary impairment losses (OTTI)		(32	)		(32	)		-
Portion of OTTI recognized in other comprehensive income (before taxes)		-			-			-
Net credit related OTTI recognized in earnings		(32	)		(32	)		-
Other		44			44			-

Total noninterest income (loss)		308			308			-

Noninterest expenses:
Salaries and benefits		1,603			1,603			-
Occupancy expenses		539			539			-
Furniture and equipment expenses		136			136			-
Amortization of core deposit intangible		230			230			-
Virginia franchise tax expense		171			171			-
FDIC assessment		154			154			-
Data processing expense		142			142			-
Telephone and communication expense		88			88			-
Change in FDIC indemnification asset		(159	)		(16	)		143	a
Other operating expenses		550			557			7	c
Total noninterest expenses		3,454			3,604			150
Income (loss) before income taxes		1,648			1,908			260
Income tax expense (benefit)		528			618			90	d
Net income (loss)	$	1,120		$	1,290		$	170
Other comprehensive income :
Unrealized gain on available for sale securities	$	96		$	96		$	-
Realized amount on securities sold, net		-			-			-
Non-credit component of other-than-temporary impairment on held-to-maturity securities		55			55			-
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for sale		(11	)		(11	)		-
Net unrealized gain		140			140			-
Tax effect		(48	)		(48	)		-
Other comprehensive income		92			92			-
Comprehensive income	$	1,212		$	1,382		$	170
Earnings per share, basic and diluted	$	0.10		$	0.11		$	0.01

	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		1,120		1,290		170
Change in unrealized loss on securities available for sale (net of tax, $33)		63		63		-
Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $15 and accretion, $11 and amounts recorded into other comprehensive income at transfer)		29		29		-
Total comprehensive income		1,212		1,382		170
Stock-based compensation expense		26		26		-

Balance - March 31, 2011	$	100,352	$	95,739	$	(4,613	)

	Impact on Consolidated Statements Cash Flows
	For the Three Months Ended
	March 31, 2011
	As Previously
	Reported			As Restated			Adjustment
	(dollars in thousands)
	(Unaudited)
Operating activities:
Net income (loss)	$	1,120		$	1,290		$	170
Adjustments to reconcile net income (loss) to net cash and cash equivalents provided by operating activities:
Depreciation		126			126			-
Amortization of core deposit intangible		230			230			-
Other amortization , net		(37	)		(37	)		-
Accretion of loan discount		-			(970	)		(970	)	b
Decrease (increase) in FDIC indemnification asset		(159	)		(16	)		143		a
Provision for loan losses		1,340			1,340			-
Earnings on bank-owned life insurance		(135	)		(135	)		-
Stock based compensation expense		26			26			-
Impairment on securities		32			32			-
Net loss on other real estate owned		39			39			-
Net (increase) decrease in other assets		111			(202	)		(313	)	d
Net increase (decrease) in other liabilities		1,014			1,014			-
Net cash and cash equivalents provided by operating activities		3,707			2,737			(970	)
Investing activities:
Proceeds from paydowns, maturities and calls of securities available for sale		265			265			-
Proceeds from paydowns, maturities and calls of securities held to maturity		3,486			3,486			-
Loan originations and payments, net		(8,045	)		(7,075	)		970		b
Proceeds from sale of other real estate owned		388			388			-
Payments received on FDIC indemnification asset		696			696
Purchases of bank premises and equipment		(17	)		(17	)		-
Net cash and cash equivalents used in investing activities		(3,227	)		(2,257	)		970
Financing activities:
Net increase in deposits		1,384			1,384			-
Net increase (decrease) in securities sold under agreement to repurchase and other short-term borrowings		(4,027	)		(4,027	)		- -
Net cash and cash equivalents used in financing activities		(2,643	)		(2,643	)		-
Decrease in cash and cash equivalents		(2,163	)		(2,163	)		-
Cash and cash equivalents at beginning of period		9,745			9,745			-
Cash and cash equivalents at end of period	$	7,582		$	7,582		$	-
Supplemental disclosure of cash flow information
Cash payments for:
Interest	$	1,640		$	1,640			-
Supplemental schedule of noncash investing and financing activities
Transfer from non-covered loans to other real estate owned		3,759			3,759			-

9. SUBSEQUENT EVENT

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 operates four branches – North Rockville, Frederick, Germantown and Bethesda. With this acquisition Sonabank will now operate 19 retail banking offices, with 14 in Virginia and five in Maryland.

Sonabank will initially be acquiring the assets and liabilities of HarVest at a $27.3 million discount and no premium on deposits. In this transaction, Sonabank will be receiving $145 million in deposits, $95 million in loans and $6.2 million in other real estate owned (OREO) from HarVest. There will be no loss share agreement between the FDIC and Sonabank. In addition, Sonabank will be purchasing cash and marketable securities of HarVest. Sonabank will account for the HarVest transaction under the purchase method of accounting in accordance with Business Combinations (“ASC 805”). Under ASC 805, the assets acquired and the liabilities assumed will be recorded at their estimated fair values as of the April 27, 2012 acquisition date.

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 month period ended March 31, 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. Prior to the acquisition of HarVest Bank of Maryland on April 27, 2012, Sonabank operated 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 one branch in Rockville, Maryland. 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 months ended March 31, 2011set forth in this Quarterly Report on Form 10-Q, as applicable, reflect the restatement of previously issued financial statements.

RESULTS OF OPERATIONS

Net Income

Net income for the quarter ended March 31, 2012 was $1.8 million compared to $1.3 million during the first quarter of 2011.

Net Interest Income

Our operating results depend primarily on our net interest income, which is the difference between interest and dividend income on interest-earning assets such as loans and investments, and interest expense on interest-bearing liabilities such as deposits and borrowings.

Net interest income was $7.6 million for the first quarter of 2012, compared to $6.5 million for the first quarter of 2011. Approximately $805 thousand of the increase resulted from the recovery of the non-accretable credit-related discount recognized in purchase accounting for two impaired loans acquired in the Greater Atlantic Bank acquisition following the receipt of principal paydown from the borrowers. The total accretion of the discount on the Greater Atlantic Bank loan portfolio, including the aforementioned $805 thousand, amounted to $1.5 million in the first quarter of 2012, compared to $985 thousand in the first quarter of 2011. The net interest margin was 5.59% in the quarter ended March 31, 2012, up from 5.05% in the first quarter of 2011. This was the result of an increase in average loan balances of $29.5 million over the first quarter of 2011, as well as the additional discount accretion. The yield on earning assets increased to 6.64% during the first quarter of 2012 from 6.29% for the same period in 2011, while the cost of funds decreased from 1.44% during the quarter ended March 31, 2011 to 1.22% during the first quarter of 2012. The decrease in the cost of funds was primarily related to time deposits and borrowings.

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 Three Months Ended
	3/31/2012								3/31/2011
				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 deferred fees (1) (2)	$	488,618		$	8,611		7.09	%	$	459,130		$	7,531		6.65	%
Investment securities		44,533			402		3.61	%		54,342			556		4.09	%
Other earning assets		16,572			61		1.48	%		11,568			52		1.82	%

Total earning assets		549,723			9,074		6.64	%		525,040			8,139		6.29	%
Allowance for loan losses		(6,946	)							(5,979	)
Total non-earning assets		71,119								60,526
Total assets	$	613,896							$	579,587

Liabilities and stockholders’ equity
Interest-bearing liabilities:
NOW accounts	$	16,661			11		0.28	%	$	15,869			11		0.27	%
Money market accounts		149,181			298		0.80	%		158,811			365		0.93	%
Savings accounts		6,359			9		0.59	%		5,616			9		0.62	%
Time deposits		254,699			878		1.39	%		213,613			893		1.70	%
Total interest-bearing deposits		426,900			1,197		1.13	%		393,909			1,277		1.31	%
Borrowings		47,103			237		2.02	%		55,499			318		2.32	%
Total interest-bearing liabilities		474,003			1,434		1.22	%		449,408			1,595		1.44	%
Noninterest-bearing liabilities:
Demand deposits		35,576								32,113
Other liabilities		4,099								2,752
Total liabilites		513,678								484,273
Stockholders’ equity		100,218								95,314
Total liabilities and stockholders’ equity	$	613,896							$	579,587
Net interest income				$	7,640							$	6,544
Interest rate spread							5.42	%							4.85	%
Net interest margin							5.59	%							5.05	%

(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 first quarter of 2012 was $1.5 million, compared to $1.3 million in the first quarter of 2011. Net charge offs during the quarter ended March 31, 2012 were $843 thousand compared to $1.2 million during the first quarter of 2011. The 2012 charge-offs were primarily related to various commercial and industrial loans.

Noninterest Income

The following table presents the major categories of noninterest income for the three months ended March 31, 2012 and 2011:


	For the Three Months Ended
	March 31,
	2012			2011			Change
	(dollars in thousands)
Account maintenance and deposit service fees	$	196		$	200		$	(4	)
Income from bank-owned life insurance		153			135			18
Gain on sale of SBA loans		657			-			657
Net loss on other real estate owned		(199	)		(39	)		(160	)
Gain on other assets		14			-			14
Net impairment losses recognized in earnings		(2	)		(32	)		30
Other		53			44			9
Total noninterest income	$	872		$	308		$	564

Noninterest income was $872 thousand during the first quarter of 2012, compared to $308 thousand during the same quarter of 2011. The increase was attributable to a gain on sale of the guaranteed portion of SBA loans which was partially offset by small losses on the sale of other real estate owned (“OREO”) properties. Additionally, we recognized impairment charges on two OREO properties after updating our assessment of current market values and reduced our list prices. Income from bank-owned life insurance (“BOLI”) also improved slightly as we purchased additional insurance during the fourth quarter of 2011.

Noninterest Expense

The following table presents the major categories of noninterest expense for the three months ended March 31, 2012 and 2011:

	For the Three Months Ended
	March 31,
	2012			2011			Change
				(As Restaated)
	(dollars in thousands)
Salaries and benefits	$	1,825		$	1,603		$	222
Occupancy expenses		582			539			43
Furniture and equipment expenses		156			136			20
Amortization of core deposit intangible		230			230			-
Virginia franchise tax expense		145			171			(26	)
FDIC assessment		129			154			(25	)
Data processing expense		137			142			(5	)
Telephone and communication expense		102			88			14
Change in FDIC indemnification asset		(14	)		(16	)		2
Other operating expenses		1,020			557			463
Total noninterest expense	$	4,312		$	3,604		$	708

Noninterest expense was $4.3 million for the first quarter of 2012 compared to $3.6 million for the first quarter of 2011. The increase in noninterest expenses was primarily because other professional services expense, relating mostly to the restatement of 2010 and 2009 financial statements, increased from $391 thousand in the first quarter of 2011 to $804 thousand in the first quarter of 2012.

The efficiency ratio was 53.62% during the quarter ended March 31, 2012 compared to 52.06% during the first quarter of 2011.

FINANCIAL CONDITION

Balance Sheet Overview

Total assets were $610.8 million as of March 31, 2012 compared to $611.4 million as of December 31, 2011. Net loans receivable decreased from $491.8 million at the end of 2011 to $491.2 million at March 31, 2012. Within that total, covered loans declined by $1.6 million while the non-covered loan portfolio increased by $1.0 million. We sold $5.7 million of SBA loans during the first quarter of 2012.

Total deposits were $452.7 million at March 31, 2012 compared to $461.1 million at December 31, 2011. Certificates of deposit decreased $11.9 million during the quarter. This was partially offset by an increase in money market accounts of $2.0 million during the quarter ended March 31, 2012. Noninterest-bearing deposits were $33.7 million at March 31, 2012 and $32.6 million at December 31, 2011.

Loan Portfolio

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

	Covered		Non-covered			Total			Covered		Non-covered			Total
	Loans		Loans			Loans			Loans		Loans			Loans
	March 31, 2012								December 31, 2011
Mortgage loans on real estate:
Commercial real estate - owner-occupied	$	4,949	$	81,256		$	86,205		$	4,854	$	82,450		$	87,304
Commercial real estate - non-owner-occupied		11,727		112,777			124,504			11,243		117,059			128,302
Secured by farmland		-		1,500			1,500			-		1,506			1,506
Construction and land loans		2,258		51,200			53,458			2,883		39,565			42,448
Residential 1-4 family		24,445		48,884			73,329			25,307		49,288			74,595
Multi- family residential		626		19,163			19,789			629		19,553			20,182
Home equity lines of credit		34,810		7,987			42,797			35,442		9,040			44,482
Total real estate loans		78,815		322,767			401,582			80,358		318,461			398,819

Commercial loans		2,112		86,823			88,935			2,122		89,939			92,061
Consumer loans		100		1,676			1,776			108		1,868			1,976
Gross loans		81,027		411,266			492,293			82,588		410,268			492,856

Less deferred fees on loans		-		(1,112	)		(1,112	)		-		(1,088	)		(1,088	)
Loans, net of deferred fees	$	81,027	$	410,154		$	491,181		$	82,588	$	409,180		$	491,768

As of March 31, 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 $15.9 million with allocated allowance for loan losses in the amount of $689 thousand as of March 31, 2012, including $4.8 million of nonaccrual loans and $755 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 $2.4 million and $2.5 million at March 31, 2012 and December 31, 2011, respectively. At March 31, 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 decreased from $18.2 million at December 31, 2011 to $17.1 million at March 31, 2012.

Non-covered OREO as of March 31, 2012 was $12.3 million compared to $13.6 million as of the end of the previous year. During the first quarter of 2012 we had no foreclosures and OREO sales of $1.1 million. Non-covered OREO was comprised of the Culpeper lots, a horse facility, an estate in Charlottesville, a construction/land project, 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 March 31, 2012.

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

	March 31,			December 31,
	2012			2011

Nonaccrual loans	$	4,804		$	4,541
Loans past due 90 days and accruing interest		-			32
Total nonperforming loans		4,804			4,573
Other real estate owned		12,314			13,620
Total nonperforming assets	$	17,118		$	18,193

SBA guaranteed amounts included in nonaccrual loans	$	2,439		$	2,462

Allowance for loan losses to nonperforming loans		143.67	%		137.66	%
Allowance for loan losses to total non-covered loans		1.68	%		1.54	%
Nonperforming assets to total non-covered assets		3.23	%		3.44	%
Nonperforming assets excluding SBA guaranteed loans to total non-covered assets		2.77	%		2.98	%
Nonperforming assets to total non-covered loans and OREO		4.05	%		4.30	%
Nonperforming assets excluding SBA guaranteed loans to total non-covered loans and OREO		3.47	%		3.72	%

Covered Loans and Assets

Covered loans identified as impaired totaled $4.8 million as of March 31, 2012 and $4.7 million at December 31, 2011. Nonaccrual loans were $3.4 million and $3.3 million at March 31, 2012 and December 31, 2011, respectively. At March 31, 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 $46.8 million at March 31, 2012 and $45.0 million at December 31, 2011.

As of March 31, 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	$	6,979	$	6,269	$	3,779	$	117,400	$	300
MMCF III B	Senior Sub	A3	A-	Ba1	CC		437		427		274		37,000		10
							7,416		6,696		4,053			$	310

														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		334		134,100		763	$	354
TRAP 2007-XII C1	Mezzanine	A3	A	C	C		2,090		129		166		167,205		1,382		579
TRAP 2007-XIII D	Mezzanine	NR	A-	NR	C		2,039		-		34		218,750		7		2,032
MMC FUNDING XVIII	Mezzanine	A3	A-	Ca	C		1,061		26		26		121,682		343		692
ALESCO V C1	Mezzanine	A2	A	C	C		2,115		468		345		90,000		986		661
ALESCO XV C1	Mezzanine	A3	A-	C	C		3,149		29		574		249,100		561		2,559
ALESCO XVI C	Mezzanine	A3	A-	C	C		2,096		117		363		97,400		799		1,180
							14,050		1,152		1,842			$	4,841	$	8,057

Total						$	21,466	$	7,848	$	5,895

(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 $2 thousand during the first quarter of 2012, compared to OTTI charges related to credit on the trust preferred securities totaling $32 thousand for three months ended March 31, 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 March 31, 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 months ended March 31, 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 March 31, 2012, we had $103.2 million of unfunded lines of credit and undisbursed construction loan funds. Our approved loan commitments were $1.0 million at March 31, 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
March 31, 2012
Southern National
Tier 1 risk-based capital ratio	$	92,694		19.51	%	$	19,007		4.00	%	$	28,510		6.00	%
Total risk-based capital ratio		98,627		20.76	%		38,014		8.00	%		47,517		10.00	%
Leverage ratio		92,694		15.38	%		24,101		4.00	%		30,126		5.00	%
Sonabank
Tier 1 risk-based capital ratio	$	89,303		18.80	%	$	18,997		4.00	%	$	28,496		6.00	%
Total risk-based capital ratio		95,233		20.05	%		37,994		8.00	%		47,493		10.00	%
Leverage ratio		89,303		14.83	%		24,092		4.00	%		30,115		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 March 31, 2012 and December 31, 2011, and all changes are within our ALM Policy guidelines:

	Sensitivity of Market Value of Portfolio Equity
	As of March 31, 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	$	89,739	$	(9,881	)		-9.92	%		14.69	%		89.06	%
Up 300		92,981		(6,639	)		-6.66	%		15.22	%		92.28	%
Up 200		95,399		(4,221	)		-4.24	%		15.62	%		94.68	%
Up 100		98,099		(1,521	)		-1.53	%		16.06	%		97.36	%
Base		99,620		-			0.00	%		16.31	%		98.86	%
Down 100		95,767		(3,853	)		-3.87	%		15.68	%		95.04	%
Down 200		94,027		(5,593	)		-5.61	%		15.39	%		93.31	%

	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 March 31, 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 March 31, 2012

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

Up 400	$	27,587	$	1,546		4.99	%		0.27	%
Up 300		27,214		1,173		4.92	%		0.20	%
Up 200		26,802		761		4.85	%		0.13	%
Up 100		26,364		323		4.77	%		0.05	%
Base		26,041		-		4.72	%		0.00	%
Down 100		26,680		639		4.83	%		0.11	%
Down 200		26,675		634		4.83	%		0.11	%

	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. Management has begun the process of remediating this internal control weakness in two ways:

First, controls have been augmented or developed for the process that management uses to develop and document, review and approve the underlying assumptions that management provides to our valuation consultant for purposes of conducting the necessary periodic evaluations of the FDIC Indemnification asset. Specifically, management has developed and documented a methodology to estimate future credit losses in the covered loan portfolio, consistent with the existing methodology applied for the non-covered loan portfolio, as well as a review of the loss experience on the covered portfolio. Management will now document its review and approval of the calculations performed by the valuation consultant related to the valuation of the FDIC Indemnification asset, as well as management’s review and approval of the proper application of management’s assumptions used in the valuation calculations, including estimated credit losses, discount rates and prepayment assumptions used in the periodic updating of cash flows on acquired loans. We are actively implementing these controls, and intend to test these controls during the quarter ending June 30, 2012, and report our findings to the Audit Committee.

Second, we are augmenting and strengthening the controls and procedures that we use for complex or unusual transactions, such as an acquisition, so as to provide greater assurances that material errors will be prevented and/or detected on a timely basis. Specifically, our remediation plans include developing and implementing a documented internal review process that includes formal management and audit committee oversight of the methods and assumptions used for the valuation of acquired assets and liabilities and the accounting calculations and conclusions reached.

Other than developing and enhancing the controls noted above, there have been no other changes in SNBV’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, SNBV’s internal control over financial reporting.

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 March 31, 2012.

ITEM 1A – RISK FACTORS

As of March 31, 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)

May 10, 2012			/s/ Georgia S. Derrico
(Date)			Georgia S. Derrico,
			Chairman of the Board and Chief Executive Officer

May 10, 2012			/s/ William H. Lagos
(Date)			William H. Lagos,
			Senior Vice President and Chief Financial Officer