Primis Financial Corp. - Quarter Report: 2014 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2014

Commission File No. 001-33037

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)

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

6830 Old Dominion Drive

McLean, Virginia 22101

(Address of principal executive offices) (zip code)

(703) 893-7400

(Registrant’s telephone number, including area code)

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

YES x NO o

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

YES x NO o

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

Large accelerated filer o Accelerated filer x Smaller reporting company o

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

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

As of October 31, 2014, there were 12,196,070 shares of common stock outstanding.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

September 30, 2014

INDEX

		PAGE

PART 1 - FINANCIAL INFORMATION

Item 1 -	Financial Statements
	Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013	2
	Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2014 and 2013	3
	Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2014	4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013	5
	Notes to Consolidated Financial Statements	6- 28

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		29- 41

Item 3 – Quantitative and Qualitative Disclosures about Market Risk		42-46

Item 4 – Controls and Procedures		47

PART II - OTHER INFORMATION

Item 1 – Legal Proceedings		47

Item 1A – Risk Factors		47

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		47

Item 3 – Defaults Upon Senior Securities		47

Item 4 – Mine Safety Disclosures		47

Item 5 – Other Information		47

Item 6 - Exhibits		48

Signatures		49

Certifications

ITEM I - FINANCIAL INFORMATION

PART I - FINANCIAL STATEMENTS

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

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

	September 30,			December 31,
	2014			2013
ASSETS
Cash and cash equivalents:
Cash and due from financial institutions	$	5,541		$	2,679
Interest-bearing deposits in other financial institutions		40,262			18,177
Total cash and cash equivalents		45,803			20,856

Securities available for sale, at fair value		2,271			1,993

Securities held to maturity, at amortized cost
(fair value of $88,970 and $76,193, respectively)		89,993			82,443

Covered loans		47,989			51,701
Non-covered loans		617,845			494,357
Total loans		665,834			546,058
Less allowance for loan losses		(7,124	)		(7,090	)
Net loans		658,710			538,968

Stock in Federal Reserve Bank and Federal Home Loan Bank		6,131			5,915
Equity investment in mortgage affiliate		3,745			-
Preferred investment in mortgage affiliate		1,805			-
Bank premises and equipment, net		9,443			6,324
Goodwill		12,073			9,160
Core deposit intangibles, net		1,424			813
FDIC indemnification asset		3,970			5,804
Bank-owned life insurance		20,829			18,374
Other real estate owned		12,955			11,792
Deferred tax assets, net		8,205			8,281
Other assets		5,662			5,462

Total assets	$	883,019		$	716,185

LIABILITIES AND STOCKHOLDERS’ EQUITY

Noninterest-bearing demand deposits	$	70,679		$	44,643
Interest-bearing deposits:
NOW accounts		23,658			24,297
Money market accounts		138,390			130,855
Savings accounts		41,047			16,999
Time deposits		424,311			323,565
Total interest-bearing deposits		627,406			495,716
Total deposits		698,085			540,359

Securities sold under agreements to repurchase and other
short-term borrowings		37,779			39,795
Federal Home Loan Bank (FHLB) advances		25,000			25,000
Other liabilities		5,775			4,417
Total liabilities		766,639			609,571

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, 12,194,570 shares at September 30, 2014 and 11,590,612 at December 31, 2013		122			116
Additional paid in capital		103,791			97,127
Retained earnings		15,486			12,561
Accumulated other comprehensive loss		(3,019	)		(3,190	)
Total stockholders’ equity		116,380			106,614

Total liabilities and stockholders’ equity	$	883,019		$	716,185

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						For the Nine Months Ended
	September 30,						September 30,

	2014			2013			2014			2013

Interest and dividend income:
Interest and fees on loans	$	9,181		$	8,168		$	25,037		$	24,277
Interest and dividends on taxable securities		551			504			1,634			1,540
Interest and dividends on tax exepmt securities		101			71			289			159
Interest and dividends on other earning assets		151			104			591			443
Total interest and dividend income		9,984			8,847			27,551			26,419
Interest expense:
Interest on deposits		986			966			2,779			3,086
Interest on borrowings		186			157			514			465
Total interest expense		1,172			1,123			3,293			3,551

Net interest income		8,812			7,724			24,258			22,868

Provision for loan losses		975			1,197			2,344			3,015
Net interest income after provision for loan losses		7,837			6,527			21,914			19,853

Noninterest income:
Account maintenance and deposit service fees		220			198			594			593
Income from bank-owned life insurance		159			147			455			445
Equity income from mortgage affiliate		176			-			507			-
Gain on other assets		-			-			202			13
Net gain on sale of available for sale securities		-			-			-			142
Total other-than-temporary impairment losses (OTTI)		-			-			(41	)		(3	)
Portion of OTTI recognized in other comprehensive income (before taxes)		-			-			-			-
Net credit related OTTI recognized in earnings		-			-			(41	)		(3	)
Other		54			30			145			169

Total noninterest income		609			375			1,862			1,359

Noninterest expenses:
Salaries and benefits		2,671			2,338			7,487			6,760
Occupancy expenses		804			768			2,335			2,280
Furniture and equipment expenses		195			197			571			524
Amortization of core deposit intangible		61			123			151			368
Virginia franchise tax expense		113			115			342			357
Merger expenses		65			-			487			-
FDIC assessment		149			218			401			676
Data processing expense		146			131			406			433
Telephone and communication expense		198			166			556			507
Change in FDIC indemnification asset		403			113			837			350
Net (gain) loss on other real estate owned		(194	)		(698	)		(433	)		(580	)
Other operating expenses		678			790			2,313			2,334
Total noninterest expenses		5,289			4,261			15,453			14,009
Income before income taxes		3,157			2,641			8,323			7,203
Income tax expense		1,049			861			2,801			2,341
Net income	$	2,108		$	1,780		$	5,522		$	4,862
Other comprehensive income (loss):
Unrealized gain (loss) on available for sale securities	$	66		$	(12	)	$	283		$	(207	)
Realized amount on securities sold, net		-			-			-			(142	)
Non-credit component of other-than-temporary impairment on held-to-maturity securities		-			-			35			97
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale		(17	)		(12	)		(59	)		(32	)
Net unrealized gain (loss)		49			(24	)		259			(284	)
Tax effect		(17	)		8			(88	)		96
Other comprehensive income (loss)		32			(16	)		171			(188	)
Comprehensive income	$	2,140		$	1,764		$	5,693		$	4,674
Earnings per share, basic	$	0.18		$	0.15		$	0.47		$	0.42
Earnings per share, diluted	$	0.17		$	0.15		$	0.47		$	0.42

See accompanying notes to consolidated financial statements.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SPETEMBER 30, 2014
(dollars in thousands, except per share amounts) (Unaudited)

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

Balance - December 31, 2013	$	116	$	97,127	$	12,561		$	(3,190	)	$	106,614
Comprehensive income:
Net income						5,522						5,522
Change in unrealized loss on securities available for sale (net of tax benefit, $96)									187			187
Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $8 and accretion, $59 and amounts recorded into other comprehensive income at transfer)									(16	)		(16	)
Dividends on common stock ($.22 per share)						(2,597	)					(2,597	)
Issuance of common stock under Stock Incentive Plan (78,100 shares)		1		688								689
Issuance of common stock in exchange for net assets in acquisition (525,858 shares)		5		5,743								5,748
Stock-based compensation expense				233								233

Balance - September 30, 2014	$	122	$	103,791	$	15,486		$	(3,019	)	$	116,380

See accompanying notes to consolidated financial statements.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
(dollars in thousands) (Unaudited)

	2014			2013

Operating activities:
Net income	$	5,522		$	4,862
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation		549			495
Amortization of core deposit intangible		151			368
Other amortization, net		143			275
Accretion of loan discount		(2,305	)		(2,725	)
Amortization of FDIC indemnification asset		837			350
Provision for loan losses		2,344			3,015
Earnings on bank-owned life insurance		(455	)		(445	)
Equity income on mortgage affiliate		(507	)		-
Stock based compensation expense		233			205
Net gain on sale of available for sale securities		-			(142	)
Impairment loss on securities (OTTI)		41			3
Net gain on other real estate owned		(433	)		(580	)
Net decrease in other assets		1,232			2,261
Net increase (decrease) in other liabilities		860			(757	)
Net cash and cash equivalents provided by operating activities		8,212			7,185
Investing activities:
Proceeds from sales of available for sale securities		-			159
Purchases of held to maturity securities		(12,243	)		(11,345	)
Proceeds from paydowns, maturities and calls of held to maturity securities		4,616			14,497
Loan originations and payments, net		(62,358	)		(2,996	)
Proceeds from sale of PGFSB loans		3,499			-
Net cash received in PGFSB acquisition		22,430			-
Purchase of bank-owned life insurance		(2,000	)		-
Investment in mortgage affiliate		(5,043	)		-
Net (increase) decrease in stock in Federal Reserve Bank and Federal Home Loan Bank		(123	)		972
Payments received on FDIC indemnification asset		1,018			1,016
Proceeds from sale of other real estate owned		3,029			3,902
Purchases of bank premises and equipment		(664	)		(204	)
Net cash and cash equivalents provided by (used in) investing activities		(47,839	)		6,001
Financing activities:
Net increase (decrease) in deposits		68,498			(5,023	)
Cash dividends paid - common stock		(2,597	)		(2,086	)
Issuance of common stock under Stock Incentive Plan		689			3
Net decrease in securities sold under agreement to repurchase and other short-term borrowings		(2,016	)		(12,930	)
Net cash and cash equivalents provided by (used in) financing activities		64,574			(20,036	)
Increase (decrease) in cash and cash equivalents		24,947			(6,850	)
Cash and cash equivalents at beginning of period		20,856			39,200
Cash and cash equivalents at end of period	$	45,803		$	32,350
Supplemental disclosure of cash flow information
Cash payments for:
Interest	$	3,144		$	3,419
Income taxes		2,238			3,113
Supplemental schedule of noncash investing and financing activities
Transfer from non-covered loans to other real estate owned		4,409			3,044
Transfer from covered loans to other real estate owned		-			4,158
Issuance of common stock in exchange for net assets in acquisition		5,748			-

See accompanying notes to consolidated financial statements.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2014

1.	ORGANIZATION AND ACCOUNTING POLICIES

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

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, 2013.

The merger with Prince George’s Federal Savings Bank (PGFSB) was completed on August 1, 2014. Southern National acquired PGFSB in a cash and stock transaction. PGFSB was founded in 1931 and is headquartered in Upper Marlboro, which is the County Seat of Prince George’s County, Maryland. Prince George’s FSB has four offices, all of which are in Maryland, including a main office in Upper Marlboro and three branch offices in Dunkirk, Brandywine and Huntingtown. Prince George’s FSB has an excellent core deposit base reflecting its tenure in the communities it serves. Its lending activities have historically been focused on residential mortgages. See Footnote 8 for details regarding the merger.

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 January 2014, the FASB issued ASU No. 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-04 is not expected to have a material impact on the Southern National’s Consolidated Financial Statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). These amendments affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g. insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This ASU will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The ASU allows for either full retrospective or modified retrospective adoption. SNBV is assessing the effects of this ASU, which exclude financial instruments from its scope, but does not anticipate that it will have a material impact on its financial position or results of operations.

In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period. The amendments clarify the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Management does not anticipate that this ASU will significantly impact SNBV.

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

Southern National granted 104,750 options during the first nine months of 2014. The fair value of each option granted is estimated on the date of grant using the Black-Scholes options-pricing model. The following weighted-average assumptions were used to value options granted in the nine months ended September 30, 2014:

Expected life	10 years
Expected volatility		29.30	%
Risk-free interest rate		2.48	%
Weighted average fair value per option granted	$	2.88
Dividend yield		2.55	%

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 and nine months ended September 30, 2014 and 2013, stock-based compensation expense was $82 thousand and $233 thousand, respectively, compared to $79 thousand and $205 thousand for the same periods last year. As of September 30, 2014, unrecognized compensation expense associated with the stock options was $984 thousand, which is expected to be recognized over a weighted average period of 3.5 years.

A summary of the activity in the stock option plan during the nine months ended September 30, 2014 follows (dollars in thousands):

						Weighted
				Weighted		Average		Aggregate
				Average		Remaining		Intrinsic
				Exercise		Contractual		Value
	Shares			Price		Term		(in thousands)
Options outstanding, beginning of period		631,075		$	8.21
Granted		104,750			10.47
Forfeited		(12,575	)		8.18
Exercised		(78,100	)		8.82
Options outstanding, end of period		645,150		$	8.51		6.4	$	1,999

Vested or expected to vest		645,150		$	8.51		6.4	$	1,999

Exercisable at end of period		326,865		$	8.06		4.3	$	1,158

3.	SECURITIES

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


	Amortized		Gross Unrealized					Fair
September 30, 2014	Cost		Gains		Losses			Value
Obligations of states and political subdivisions	$	2,296	$	1	$	(26	)	$	2,271

	Amortized		Gross Unrealized					Fair
December 31, 2013	Cost		Gains		Losses			Value
Obligations of states and political subdivisions	$	2,302	$	-	$	(309	)	$	1,993

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


	Amortized		Gross Unrecognized					Fair
September 30, 2014	Cost		Gains		Losses			Value
Residential government-sponsored mortgage-backed securities	$	22,350	$	599	$	(58	)	$	22,891
Residential government-sponsored collateralized mortgage obligations		3,724		-		(88	)		3,636
Government-sponsored agency securities		40,954		162		(1,697	)		39,419
Obligations of states and political subdivisions		15,560		80		(166	)		15,474
Other residential collateralized mortgage obligations		612		-		(2	)		610
Trust preferred securities		6,793		1,690		(1,543	)		6,940
	$	89,993	$	2,531	$	(3,554	)	$	88,970

	Amortized		Gross Unrecognized					Fair
December 31, 2013	Cost		Gains		Losses			Value
Residential government-sponsored mortgage-backed securities	$	25,609	$	673	$	(294	)	$	25,988
Residential government-sponsored collateralized mortgage obligations		4,295		2		(349	)		3,948
Government-sponsored agency securities		29,971		-		(3,994	)		25,977
Obligations of states and political subdivisions		14,388		-		(987	)		13,401
Other residential collateralized mortgage obligations		659		-		(12	)		647
Trust preferred securities		7,521		939		(2,228	)		6,232
	$	82,443	$	1,614	$	(7,864	)	$	76,193

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

The fair value and carrying amount, if different, of debt securities as of September 30, 2014, 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 five to ten years	$	12,685	$	12,436	$	-	$	-
Due after ten years		50,622		49,397		2,296		2,271
Residential government-sponsored mortgage-backed securities		22,350		22,891		-		-
Residential government-sponsored collateralized mortgage obligations		3,724		3,636		-		-
Other residential collateralized mortgage obligations		612		610		-		-
Total	$	89,993	$	88,970	$	2,296	$	2,271

Securities with a carrying amount of approximately $71.4 million and $65.3 million at September 30, 2014 and December 31, 2013, 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”).

Southern National monitors the portfolio for indicators of other than temporary impairment. At September 30, 2014 and December 31, 2013, certain securities’ fair values were below cost. As outlined in the table below, there were securities with fair values totaling approximately $60.3 million in the portfolio with the carrying value exceeding the estimated fair value that are considered temporarily impaired at September 30, 2014. Because the decline in fair value is attributable to changes in interest rates and market illiquidity, and not credit quality, and because we do not have the intent to sell these securities and it is likely that we will not be required to sell the securities before their anticipated recovery, management does not consider these securities to be other-than-temporarily impaired as of September 30, 2014. The following tables present information regarding securities in a continuous unrealized loss position as of September 30, 2014 and December 31, 2013 (in thousands) by duration of time in a loss position:

September 30, 2014
	Less than 12 months				12 Months or More					Total
Available for Sale	Fair value		Unrealized Losses		Fair value		Unrealized Losses			Fair value		Unrealized Losses
Obligations of states and political subdivisions	$	-	$	-	$	1,785	$	(26	)	$	1,785	$	(26	)

	Less than 12 months					12 Months or More					Total
Held to Maturity	Fair value		Unrecognized Losses			Fair value		Unrecognized Losses			Fair value		Unrecognized Losses
Residential government-sponsored mortgage-backed securities	$	11,256	$	(58	)	$	-	$	-		$	11,256	$	(58	)
Residential government-sponsored collateralized mortgage obligations		734		(13	)		2,902		(75	)		3,636		(88	)
Government-sponsored agency securities		943		(18	)		28,296		(1,679	)		29,239		(1,697	)
Obligations of states and political subdivisions		479		(25	)		9,254		(141	)		9,733		(166	)
Other residential collateralized mortgage obligations		610		(2	)		-		-			610		(2	)
Trust preferred securities		-		-			4,031		(1,543	)		4,031		(1,543	)
	$	14,022	$	(116	)	$	44,483	$	(3,438	)	$	58,505	$	(3,554	)

December 31, 2013
	Less than 12 months					12 Months or More					Total
Available for Sale	Fair value		Unrealized Losses			Fair value		Unrealized Losses			Fair value		Unrealized Losses
Obligations of states and political subdivisions	$	409	$	(78	)	$	1,584	$	(231	)	$	1,993	$	(309	)

	Less than 12 months					12 Months or More					Total
Held to Maturity	Fair value		Unrecognized Losses			Fair value		Unrecognized Losses			Fair value		Unrecognized Losses
Residential government-sponsored mortgage-backed securities	$	12,644	$	(294	)	$	-	$	-		$	12,644	$	(294	)
Residential government-sponsored collateralized mortgage obligations		2,984		(349	)		-		-			2,984		(349	)
Government-sponsored agency securities		8,733		(1,250	)		17,244		(2,744	)		25,977		(3,994	)
Obligations of states and political subdivisions		10,327		(588	)		3,064		(399	)		13,391		(987	)
Other residential collateralized mortgage obligations		647		(12	)		-		-			647		(12	)
Trust preferred securities		-		-			4,070		(2,228	)		4,070		(2,228	)
	$	35,335	$	(2,493	)	$	24,378	$	(5,371	)	$	59,713	$	(7,864	)

As of September 30, 2014, we owned pooled trust preferred securities as follows:

																			Previously
																% of Current			Recognized
																Defaults and			Cumulative
		Ratings												Estimated		Deferrals to			Other
	Tranche	When Purchased				Current Ratings								Fair		Total			Comprehensive
Security	Level	Moody’s		Fitch		Moody’s		Fitch		Par Value		Book Value		Value		Collateral			Loss (1)
										(in thousands)
ALESCO VII A1B	Senior	Aaa		AAA			A3	BBB		$	5,773	$	5,249	$	3,829		15	%	$	268
MMCF III B	Senior Sub		A3		A-	Ba1		CC			331		325		202		34	%		6
											6,104		5,574		4,031				$	274

																			Cumulative Other		Cumulative
																			Comprehensive		OTTI Related to
Other Than Temporarily Impaired:																			Loss (2)		Credit Loss (2)
TPREF FUNDING II	Mezzanine		A1		A-	Caa3			C		1,500		509		530		41	%		591	$	400
TRAP 2007-XII C1	Mezzanine		A3		A		C		C		2,170		57		428		28	%		820		1,293
TRAP 2007-XIII D	Mezzanine	NR			A-	NR			C		2,039		-		347		19	%		7		2,032
MMC FUNDING XVIII	Mezzanine		A3		A-	Ca			C		1,095		27		328		21	%		377		691
ALESCO V C1	Mezzanine		A2		A		C		C		2,150		475		609		15	%		1,014		661
ALESCO XV C1	Mezzanine		A3		A-		C		C		3,268		30		85		33	%		679		2,559
ALESCO XVI C	Mezzanine		A3		A-		C		C		2,172		121		582		14	%		871		1,180
											14,394		1,219		2,909				$	4,359	$	8,816

Total										$	20,498	$	6,793	$	6,940

(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 of 11% 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 10% of the collateral issued by banks with assets over $15 billion will prepay in the first year of the forecast, and 15% in the second year.

●

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.

We recognized no OTTI charges during the three months ended September 30, 2014, and we recognized OTTI charges of $41 thousand for the nine months ended September 30, 2014 related to the TPREF Funding II security. We recognized no OTTI charges during the third quarter of 2013 and recognized OTTI charges of $3 thousand during the first nine months of 2013.

The following table presents a roll forward of the credit losses on our securities held to maturity recognized in earnings for the nine months ended September 30, 2014 and 2013 (in thousands):

	2014			2013

Amount of cumulative other-than-temporary impairment
related to credit loss prior to January 1	$	8,911		$	8,964
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		41			3
Reductions due to realized losses		(3	)		(51	)
Amount of cumulative other-than-temporary impairment related to credit loss as of September 30	$	8,949		$	8,916

Changes in accumulated other comprehensive income by component for the three and nine months ended September 30, 2014 and 2013 are shown in the table below. All amounts are net of tax (in thousands).


	Unrealized Holding
	Gains (Losses) on
For the three months ended September 30, 2014	Available for Sale			Held to Maturity
	Securities			Securities			Total
Beginning balance	$	(60	)	$	(2,991	)	$	(3,051	)
Other comprehensive income/(loss) before reclassifications		44			(12	)		32
Amounts reclassified from accumulated other comprehensive income/(loss)		-			-			-
Net current-period other comprehensive income/(loss)		44			(12	)		32
Ending balance	$	(16	)	$	(3,003	)	$	(3,019	)

	Unrealized Holding
	Gains (Losses) on
For the nine months ended September 30, 2014	Available for Sale			Held to Maturity
	Securities			Securities			Total
Beginning balance	$	(203	)	$	(2,987	)	$	(3,190	)
Other comprehensive income/(loss) before reclassifications		187			(16	)		171
Amounts reclassified from accumulated other comprehensive income/(loss)		-			-			-
Net current-period other comprehensive income/(loss)		187			(16	)		171
Ending balance	$	(16	)	$	(3,003	)	$	(3,019	)

	Unrealized Holding
	Gains (Losses) on
For the three months ended September 30, 2013	Available for Sale			Held to Maturity
	Securities			Securities			Total
Beginning balance	$	(178	)	$	(2,975	)	$	(3,153	)
Other comprehensive income/(loss) before reclassifications		(8	)		(8	)		(16	)
Amounts reclassified from accumulated other comprehensive income/(loss)		-			-			-
Net current-period other comprehensive income/(loss)		(8	)		(8	)		(16	)
Ending balance	$	(186	)	$	(2,983	)	$	(3,169	)

	Unrealized Holding
	Gains (Losses) on
For the nine months ended September 30, 2013	Available for Sale			Held to Maturity
	Securities			Securities			Total
Beginning balance	$	44		$	(3,025	)	$	(2,981	)
Other comprehensive income/(loss) before reclassifications		(137	)		43			(94	)
Amounts reclassified from accumulated other comprehensive income/(loss)		(93	)		(1	)		(94	)
Net current-period other comprehensive income/(loss)		(230	)		42			(188	)
Ending balance	$	(186	)	$	(2,983	)	$	(3,169	)

4.	LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table summarizes the composition of our loan portfolio as of September 30, 2014 and December 31, 2013:

	Covered		Non-covered			Total			Covered		Non-covered			Total
	Loans (1)		Loans			Loans			Loans (1)		Loans			Loans
	September 30, 2014								December 31, 2013
Loans secured by real estate:
Commercial real estate - owner-occupied	$	1,363	$	115,971		$	117,334		$	1,603	$	106,225		$	107,828
Commercial real estate - non-owner-occupied		5,791		182,138			187,929			5,829		150,008			155,837
Secured by farmland		-		580			580			100		508			608
Construction and land loans		-		53,302			53,302			1		39,068			39,069
Residential 1-4 family		15,358		118,423			133,781			16,631		66,482			83,113
Multi- family residential		295		22,481			22,776			585		21,496			22,081
Home equity lines of credit		24,341		10,353			34,694			25,769		6,431			32,200
Total real estate loans		47,148		503,248			550,396			50,518		390,218			440,736

Commercial loans		755		114,329			115,084			1,097		104,284			105,381
Consumer loans		78		2,015			2,093			81		1,308			1,389
Gross loans		47,981		619,592			667,573			51,696		495,810			547,506

Less deferred fees on loans		8		(1,747	)		(1,739	)		5		(1,453	)		(1,448	)
Loans, net of deferred fees	$	47,989	$	617,845		$	665,834		$	51,701	$	494,357		$	546,058

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

Accounting policy related to the allowance for loan losses is considered a critical policy given the level of estimation, judgment, and uncertainty in the levels of the allowance required to account for the inherent probable losses in the loan portfolio and the material effect such estimation, judgment, and uncertainty can have on the consolidated financial results.

As part of the Greater Atlantic acquisition, the Bank and the FDIC entered into loss sharing agreements on approximately $143.4 million (contractual basis) of Greater Atlantic Bank’s assets. There are two agreements with the FDIC, one for single family loans which is a 10-year agreement expiring in December 2019, and one for non-single family (commercial) assets which is a 5-year agreement expiring in December 2014. The Bank will share in the losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharing agreements; 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”. As of September 30, 2014, non-covered loans included $36.4 million of loans acquired in the HarVest acquisition and $60.9 million acquired in the PGFSB acquisition.

Accretable discount on the acquired covered loans, the PGFSB loans and the HarVest loans was $10.1 million and $8.9 million at September 30, 2014 and December 31, 2013 respectively.

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

Impaired loans for the covered and non-covered portfolios were as follows (in thousands):


September 30, 2014	Covered Loans						Non-covered Loans						Total Loans
			Unpaid						Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment (1)		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded
Commercial real estate - owner occupied	$	753	$	817	$	-	$	10,875	$	10,980	$	-	$	11,628	$	11,797	$	-
Commercial real estate - non-owner occupied (2)		1,879		2,141		-		-		-		-		1,879		2,141		-
Construction and land development		-		-		-		-		-		-		-		-		-
Commercial loans		-		-		-		9,269		10,078		-		9,269		10,078		-
Residential 1-4 family (4)		1,206		1,420		-		45		47		-		1,251		1,467		-
Other consumer loans		-		-		-		-		-		-		-		-		-

Total	$	3,838	$	4,378	$	-	$	20,189	$	21,105	$	-	$	24,027	$	25,483	$	-

With an allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	-	$	91	$	191	$	91	$	91	$	191	$	91
Commercial real estate - non-owner occupied (2)		-		-		-		-		-		-		-		-		-
Construction and land development		-		-		-		-		-		-		-		-		-
Commercial loans		-		-		-		-		-		-		-		-		-
Residential 1-4 family (4)		-		-		-		6,019		6,168		300		6,019		6,168		300
Other consumer loans		-		-		-		-		-		-		-		-		-

Total	$	-	$	-	$	-	$	6,110	$	6,359	$	391	$	6,110	$	6,359	$	391
Grand total	$	3,838	$	4,378	$	-	$	26,299	$	27,464	$	391	$	30,137	$	31,842	$	391

(1) Recorded investment is after cumulative prior charge offs of $931 thousand These loans also have aggregate SBA guarantees of $3.3 million.

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

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

(4) Includes home equity lines of credit.


December 31, 2013	Covered Loans						Non-covered Loans						Total Loans
			Unpaid						Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment (1)		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded
Commercial real estate - owner occupied	$	745	$	844	$	-	$	7,476	$	7,476	$	-	$	8,221	$	8,320	$	-
Commercial real estate - non-owner occupied (2)		2,145		2,486		-		359		449		-		2,504		2,935		-
Construction and land development		-		-		-		2,107		2,307		-		2,107		2,307		-
Commercial loans		-		-		-		3,155		3,631		-		3,155		3,631		-
Residential 1-4 family (4)		1,220		1,439		-		5,358		5,358		-		6,578		6,797		-
Other consumer loans		-		-		-		-		-		-		-		-		-

Total	$	4,110	$	4,769	$	-	$	18,455	$	19,221	$	-	$	22,565	$	23,990	$	-

With an allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	-	$	400	$	500	$	192	$	400	$	500	$	192
Commercial real estate - non-owner occupied (2)		-		-		-		-		-		-		-		-		-
Construction and land development		-		-		-		-		-		-		-		-		-
Commercial loans		-		-		-		1,718		2,518		325		1,718		2,518		325
Residential 1-4 family (4)		-		-		-		2,637		2,637		200		2,637		2,637		200
Other consumer loans		-		-		-		-		-		-		-		-		-

Total	$	-	$	-	$	-	$	4,755	$	5,655	$	717	$	4,755	$	5,655	$	717
Grand total	$	4,110	$	4,769	$	-	$	23,210	$	24,876	$	717	$	27,320	$	29,645	$	717

(1) Recorded investment is after cumulative prior charge offs of $1.4 million. These loans also have aggregate SBA guarantees of $2.4 million.

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

(3) The Bank recognizes loan impairment 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 and nine months ended September 30, 2014 and 2013 (in thousands):


Three months ended September 30, 2014	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	$	756	$	13	$	10,903	$	175	$	11,659	$	188
Commercial real estate - non-owner occupied (1)		1,884		67		-		-		1,884		67
Construction and land development		-		-		-		-		-		-
Commercial loans		-		-		8,563		95		8,563		95
Residential 1-4 family (2)		1,208		10		15		-		1,223		10
Other consumer loans		-		-		-		-		-		-

Total	$	3,848	$	90	$	19,481	$	270	$	23,329	$	360

With an allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	95	$	3	$	95	$	3
Commercial real estate - non-owner occupied (1)		-		-		-		-		-		-
Construction and land development		-		-		-		-		-		-
Commercial loans		-		-		-		-		-		-
Residential 1-4 family (2)		-		-		5,811		79		5,811		79
Other consumer loans		-		-		-		-		-		-

Total	$	-	$	-	$	5,906	$	82	$	5,906	$	82
Grand total	$	3,848	$	90	$	25,387	$	352	$	29,235	$	442

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

(2) Includes home equity lines of credit.


Three months ended September 30, 2013	Covered Loans				Non-covered Loans				Total Loans
	Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized
With no related allowance recorded
Commercial real estate - owner occupied	$	135	$	5	$	7,564	$	132	$	7,699	$	137
Commercial real estate - non-owner occupied (1)		1,448		30		365		9		1,813		39
Construction and land development		-		-		2,241		-		2,241		-
Commercial loans		44		1		2,408		26		2,452		27
Residential 1-4 family (2)		1,504		19		2,917		35		4,421		54
Other consumer loans		-		-		-		-		-		-

Total	$	3,131	$	55	$	15,495	$	202	$	18,626	$	257

With an allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	119	$	4	$	119	$	4
Commercial real estate - non-owner occupied (1)		-		-		967		17		967		17
Construction and land development		-		-		-		-		-		-
Commercial loans		-		-		1,831		-		1,831		-
Residential 1-4 family (2)		-		-		5,325		85		5,325		85
Other consumer loans		-		-		-		-		-		-

Total	$	-	$	-	$	8,242	$	106	$	8,242	$	106
Grand total	$	3,131	$	55	$	23,737	$	308	$	26,868	$	363

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

(2) Includes home equity lines of credit.


Nine months ended September 30, 2014
	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	$	746	$	40	$	7,942	$	372	$	8,688	$	412
Commercial real estate - non-owner occupied (1)		1,889		91		-		-		1,889		91
Construction and land development		-		-		-		-		-		-
Commercial loans		-		-		5,195		137		5,195		137
Residential 1-4 family (2)		1,212		31		5		-		1,217		31
Other consumer loans		-		-		-		-		-		-

Total	$	3,847	$	162	$	13,142	$	509	$	16,989	$	671

With an allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	106	$	11	$	106	$	11
Commercial real estate - non-owner occupied (1)		-		-		-		-		-		-
Construction and land development		-		-		-		-		-		-
Commercial loans		-		-		-		-		-		-
Residential 1-4 family (2)		-		-		5,598		236		5,598		236
Other consumer loans		-		-		-		-		-		-

Total	$	-	$	-	$	5,704	$	247	$	5,704	$	247
Grand total	$	3,847	$	162	$	18,846	$	756	$	22,693	$	918

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

(2) Includes home equity lines of credit.


Nine months ended September 30, 2013
	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	$	14	$	6,144	$	308	$	6,280	$	322
Commercial real estate - non-owner occupied (1)		1,464		92		373		28		1,837		120
Construction and land development		-		-		903		-		903		-
Commercial loans		44		4		1,718		47		1,762		51
Residential 1-4 family (2)		1,464		53		2,892		101		4,356		154
Other consumer loans		-		-		-		-		-		-

Total	$	3,108	$	163	$	12,030	$	484	$	15,138	$	647

With an allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	125	$	13	$	125	$	13
Commercial real estate - non-owner occupied (1)		-		-		972		50		972		50
Construction and land development		-		-		-		-		-		-
Commercial loans		-		-		1,951		-		1,951		-
Residential 1-4 family (2)		-		-		5,434		253		5,434		253
Other consumer loans		-		-		-		-		-		-

Total	$	-	$	-	$	8,482	$	316	$	8,482	$	316
Grand total	$	3,108	$	163	$	20,512	$	800	$	23,620	$	963

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

(2) Includes home equity lines of credit.

The following tables present the aging of the recorded investment in past due loans by class of loans as of September 30, 2014 and December 31, 2013 (in thousands):


September 30, 2014	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	$	-	$	-	$	-	$	-	$	-	$	1,363	$	1,363
Commercial real estate - non-owner occupied (1)		342		-		-		342		-		5,744		6,086
Construction and land development		-		-		-		-		-		-		-
Commercial loans		-		-		-		-		-		755		755
Residential 1-4 family (2)		83		42		-		125		819		38,755		39,699
Other consumer loans		-		-		-		-		-		78		78

Total	$	425	$	42	$	-	$	467	$	819	$	46,695	$	47,981

Non-covered loans:
Commercial real estate - owner occupied	$	978	$	2,106	$	-	$	3,084	$	67	$	112,820	$	115,971
Commercial real estate - non-owner occupied (1)		-		-		-		-		-		205,199		205,199
Construction and land development		-		717		-		717		-		52,585		53,302
Commercial loans		463		36		-		499		3,195		110,635		114,329
Residential 1-4 family (2)		668		-		-		668		886		127,222		128,776
Other consumer loans		20		-		-		20		-		1,995		2,015

Total	$	2,129	$	2,859	$	-	$	4,988	$	4,148	$	610,456	$	619,592

Total loans:
Commercial real estate - owner occupied	$	978	$	2,106	$	-	$	3,084	$	67	$	114,183	$	117,334
Commercial real estate - non-owner occupied (1)		342		-		-		342		-		210,943		211,285
Construction and land development		-		717		-		717		-		52,585		53,302
Commercial loans		463		36		-		499		3,195		111,390		115,084
Residential 1-4 family (2)		751		42		-		793		1,705		165,977		168,475
Other consumer loans		20		-		-		20		-		2,073		2,093

Total	$	2,554	$	2,901	$	-	$	5,455	$	4,967	$	657,151	$	667,573

December 31, 2013	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	$	-	$	-	$	-	$	-	$	-	$	1,603	$	1,603
Commercial real estate - non-owner occupied (1)		503		-		-		503		245		5,766		6,514
Construction and land development		-		-		-		-		-		1		1
Commercial loans		-		-		-		-		-		1,097		1,097
Residential 1-4 family (2)		41		-		-		41		1,377		40,982		42,400
Other consumer loans		-		-		-		-		-		81		81

Total	$	544	$	-	$	-	$	544	$	1,622	$	49,530	$	51,696

Non-covered loans:
Commercial real estate - owner occupied	$	708	$	283	$	-	$	991	$	-	$	105,234	$	106,225
Commercial real estate - non-owner occupied (1)		359		-		-		359		-		171,653		172,012
Construction and land development		8		3		-		11		2,107		36,950		39,068
Commercial loans		522		968		-		1,490		3,070		99,724		104,284
Residential 1-4 family (2)		957		98		-		1,055		2,637		69,221		72,913
Other consumer loans		14		-		-		14		-		1,294		1,308

Total	$	2,568	$	1,352	$	-	$	3,920	$	7,814	$	484,076	$	495,810

Total loans:
Commercial real estate - owner occupied	$	708	$	283	$	-	$	991	$	-	$	106,837	$	107,828
Commercial real estate - non-owner occupied (1)		862		-		-		862		245		177,419		178,526
Construction and land development		8		3		-		11		2,107		36,951		39,069
Commercial loans		522		968		-		1,490		3,070		100,821		105,381
Residential 1-4 family (2)		998		98		-		1,096		4,014		110,203		115,313
Other consumer loans		14		-		-		14		-		1,375		1,389

Total	$	3,112	$	1,352	$	-	$	4,464	$	9,436	$	533,606	$	547,506

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

(2) Includes home equity lines of credit.

Non-covered nonaccrual loans include SBA guaranteed amounts totaling $3.3 million and $1.9 million at September 30, 2014 and December 31, 2013, respectively.

Activity in the allowance for non-covered loan and lease losses for the three and nine months ended September 30, 2014 and 2013 is summarized below (in thousands):


	Commercial			Commercial
	Real Estate			Real Estate			Construction									Other
Non-covered loans:	Owner			Non-owner			and Land			Commercial			1-4 Family			Consumer
Three months ended September 30, 2014	Occupied			Occupied (1)			Development			Loans			Residential (2)			Loans			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	596		$	933		$	1,400		$	2,926		$	785		$	59		$	616		$	7,315
Charge offs		(2	)		-			-			(1,057	)		(149	)		-			-			(1,209	)
Recoveries		2			5			4			9			2			-			-			22
Provision		21			16			78			592			441			(6	)		(168	)		975
Ending balance	$	617		$	954		$	1,482		$	2,470		$	1,079		$	53		$	448		$	7,103

Three months ended September 30, 2013
Allowance for loan losses:
Beginning balance	$	732		$	1,090		$	1,026		$	2,742		$	1,407		$	55		$	178		$	7,230
Charge offs		-			-			(350	)		(806	)		-			(2	)		-			(1,158	)
Recoveries		4			87			1			23			4			1			-			120
Provision		(33	)		(198	)		484			552			49			-			346			1,200
Ending balance	$	703		$	979		$	1,161		$	2,511		$	1,460		$	54		$	524		$	7,392

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

(2) Includes home equity lines of credit.


	Commercial			Commercial
	Real Estate			Real Estate			Construction									Other
Non-covered loans:	Owner			Non-owner			and Land			Commercial			1-4 Family			Consumer
Nine months ended September 30, 2014	Occupied			Occupied (1)			Development			Loans			Residential			Loans			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	814		$	985		$	1,068		$	2,797		$	1,302		$	54		$	19	$	7,039
Charge offs		(73	)		-			-			(1,905	)		(449	)		-			-		(2,427	)
Recoveries		10			17			4			101			4			5			-		141
Provision		(134	)		(48	)		410			1,477			222			(6	)		429		2,350
Ending balance	$	617		$	954		$	1,482		$	2,470		$	1,079		$	53		$	448	$	7,103

Nine months ended September 30, 2013
Allowance for loan losses:
Beginning balance	$	932		$	1,474		$	970		$	2,110		$	1,163		$	33		$	285	$	6,967
Charge offs		-			(199	)		(650	)		(1,471	)		(518	)		(143	)		-		(2,981	)
Recoveries		12			138			7			97			126			2			-		382
Provision		(241	)		(434	)		834			1,775			689			162			239		3,024
Ending balance	$	703		$	979		$	1,161		$	2,511		$	1,460		$	54		$	524	$	7,392

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

(2) Includes home equity lines of credit.

Activity in the allowance for covered loan and lease losses by class of loan for the three and nine months ended September 30, 2014 and 2013 is summarized below (in thousands).


	Commercial		Commercial
	Real Estate		Real Estate		Construction						Other
Covered loans:	Owner		Non-owner		and Land		Commercial		1-4 Family		Consumer
Three months ended September 30, 2014	Occupied		Occupied (1)		Development		Loans		Residential (3)		Loans			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	-	$	-	$	-	$	-	$	17	$	4		$	-	$	21
Charge offs		-		-		-		-		-		-			-		-
Recoveries		-		-		-		-		-		-			-		-
Adjustments (2)		-		-		-		-		-		-			-		-
Provision		-		-		-		-		-		-			-		-
Ending balance	$	-	$	-	$	-	$	-	$	17	$	4		$	-	$	21

Three months ended September 30, 2013
Allowance for loan losses:
Beginning balance	$	-	$	45	$	-	$	-	$	-	$	21		$	-	$	66
Charge offs		-		-		-		-		-		-			-		-
Recoveries		-		-		-		-		-		-			-		-
Adjustments (2)		-		-		-		-		-		(12	)		-		(12	)
Provision		-		-		-		-		-		(3	)		-		(3	)
Ending balance	$	-	$	45	$	-	$	-	$	-	$	6		$	-	$	51

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

(2) Represents the portion of increased expected losses which is covered by the loss sharing agreement with the FDIC.

(3) Includes home equity lines of credit.


	Commercial		Commercial
	Real Estate		Real Estate			Construction							Other
Covered loans:	Owner		Non-owner			and Land		Commercial			1-4 Family		Consumer
Nine months ended September 30, 2014	Occupied		Occupied (1)			Development		Loans			Residential (3)		Loans			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	-	$	45		$	-	$	-		$	-	$	6		$	-	$	51
Charge offs		-		-			-		-			-		-			-		-
Recoveries		-		-			-		-			-		-			-		-
Adjustments (2)		-		(36	)		-		-			14		(2	)		-		(24	)
Provision		-		(9	)		-		-			3		-			-		(6	)
Ending balance	$	-	$	-		$	-	$	-		$	17	$	4		$	-	$	21

Nine months ended September 30, 2013
Allowance for loan losses:
Beginning balance	$	-	$	45		$	-	$	43		$	-	$	11		$	-	$	99
Charge offs		-		-			-		-			-		-			-		-
Recoveries		-		-			-		-			-		-			-		-
Adjustments (2)		-		-			-		(35	)		-		(4	)		-		(39	)
Provision		-		-			-		(8	)		-		(1	)		-		(9	)
Ending balance	$	-	$	45		$	-	$	-		$	-	$	6		$	-	$	51

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

(2) Represents the portion of increased expected losses which is covered by the loss sharing agreement with the FDIC.

(3) Includes home equity lines of credit.

The following tables present the balance in the allowance for loan losses and the recorded investment in non-covered loans by portfolio segment and based on impairment method as of September 30, 2014 and December 31, 2013 (in thousands):

	Commercial		Commercial
	Real Estate		Real Estate		Construction						Other
	Owner		Non-owner		and Land		Commercial		1-4 Family		Consumer
Non-covered loans:	Occupied		Occupied (1)		Development		Loans		Residential (2)		Loans		Unallocated		Total
September 30, 2014
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	91	$	-	$	-	$	-	$	300	$	-	$	-	$	391
Collectively evaluated for impairment		526		954		1,482		2,470		779		53		448		6,712
Total ending allowance	$	617	$	954	$	1,482	$	2,470	$	1,079	$	53	$	448	$	7,103

Loans:
Individually evaluated for impairment	$	10,966	$	-	$	-	$	9,269	$	6,064	$	-	$	-	$	26,299
Collectively evaluated for impairment		105,005		205,199		53,302		105,060		122,712		2,015		-		593,293
Total ending loan balances	$	115,971	$	205,199	$	53,302	$	114,329	$	128,776	$	2,015	$	-	$	619,592

December 31, 2013
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	192	$	-	$	-	$	325	$	200	$	-	$	-	$	717
Collectively evaluated for impairment		622		985		1,068		2,472		1,102		54		19		6,322
Total ending allowance	$	814	$	985	$	1,068	$	2,797	$	1,302	$	54	$	19	$	7,039

Loans:
Individually evaluated for impairment	$	7,876	$	359	$	2,107	$	4,873	$	7,995	$	-	$	-	$	23,210
Collectively evaluated for impairment		98,349		171,653		36,961		99,411		64,918		1,308		-		472,600
Total ending loan balances	$	106,225	$	172,012	$	39,068	$	104,284	$	72,913	$	1,308	$	-	$	495,810

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

(2) Includes home equity lines of credit.

The following tables present the balance in the allowance for covered loan losses and the recorded investment in covered loans by portfolio segment and based on impairment method as of September 30, 2014 and December 31, 2013 (in thousands):


	Commercial		Commercial
	Real Estate		Real Estate		Construction						Other
	Owner		Non-owner		and Land		Commercial		1-4 Family		Consumer
Covered loans:	Occupied		Occupied (1)		Development		Loans		Residential (2)		Loans		Unallocated		Total
September 30, 2014
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Collectively evaluated for impairment		-		-		-		-		17		4		-		21
Total ending allowance	$	-	$	-	$	-	$	-	$	17	$	4	$	-	$	21

Loans:
Individually evaluated for impairment	$	753	$	1,879	$	-	$	-	$	1,206	$	-	$	-	$	3,838
Collectively evaluated for impairment		610		4,207		-		755		38,493		78		-		44,143
Total ending loan balances	$	1,363	$	6,086	$	-	$	755	$	39,699	$	78	$	-	$	47,981

December 31, 2013
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Collectively evaluated for impairment		-		45		-		-		-		6		-		51
Total ending allowance	$	-	$	45	$	-	$	-	$	-	$	6	$	-	$	51

Loans:
Individually evaluated for impairment	$	745	$	2,145	$	-	$	-	$	1,220	$	-	$	-	$	4,110
Collectively evaluated for impairment		858		4,369		1		1,097		41,180		81		-		47,586
Total ending loan balances	$	1,603	$	6,514	$	1	$	1,097	$	42,400	$	81	$	-	$	51,696

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

(2) Includes home equity lines of credit.

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

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

During the three and nine months ending September 30, 2014, there were no loans modified in troubled debt restructurings. No TDRs defaulted during the three and nine months ending September 30, 2014, which had been modified in the previous 12 months.

Credit Quality Indicators

Through its system of internal controls Southern National 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. Southern National had no loans classified Doubtful at September 30, 2014 or December 31, 2013.

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

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

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

As of September 30, 2014 and December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):


September 30, 2014	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	$	753	$	610	$	1,363	$	784	$	10,966	$	104,221	$	115,971	$	12,503	$	104,831	$	117,334
Commercial real estate - non-owner occupied (2)		1,879		4,207		6,086		-		-		205,199		205,199		1,879		209,406		211,285
Construction and land development		-		-		-		614		-		52,688		53,302		614		52,688		53,302
Commercial loans		-		755		755		30		9,269		105,030		114,329		9,299		105,785		115,084
Residential 1-4 family (4)		1,206		38,493		39,699		165		6,064		122,547		128,776		7,435		161,040		168,475
Other consumer loans		-		78		78		-		-		2,015		2,015		-		2,093		2,093

Total	$	3,838	$	44,143	$	47,981	$	1,593	$	26,299	$	591,700	$	619,592	$	31,730	$	635,843	$	667,573


December 31, 2013	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	$	745	$	858	$	1,603	$	802	$	7,876	$	97,547	$	106,225	$	9,423	$	98,405	$	107,828
Commercial real estate - non-owner occupied (2)		2,145		4,369		6,514		-		359		171,653		172,012		2,504		176,022		178,526
Construction and land development		-		1		1		618		2,107		36,343		39,068		2,725		36,344		39,069
Commercial loans		-		1,097		1,097		31		4,873		99,380		104,284		4,904		100,477		105,381
Residential 1-4 family (4)		1,220		41,180		42,400		176		7,995		64,742		72,913		9,391		105,922		115,313
Other consumer loans		-		81		81		-		-		1,308		1,308		-		1,389		1,389

Total	$	4,110	$	47,586	$	51,696	$	1,627	$	23,210	$	470,973	$	495,810	$	28,947	$	518,559	$	547,506

(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 $3.3 million and $2.4 million as of September 30, 2014 and December 31, 2013, respectively.

(4) Includes home equity lines of credit.

5. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

Southern National 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 Southern National 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 $8.7 million and $6.9 million as of September 30, 2014 and December 31, 2013, 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. Unless noted otherwise, we do not require collateral or other security to support financial instruments with credit risk.

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

At September 30, 2014 and December 31, 2013, we had unfunded lines of credit and undisbursed construction loan funds totaling $109.9 million and $105.8 million, respectively. We had approved loan commitments of $6.3 million at September 30, 2014, and we had no approved loan commitments as of December 31, 2013. Virtually all of our unfunded lines of credit, undisbursed construction loan funds and approved loan commitments are variable rate.

6. EARNINGS PER SHARE

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


			Weighted
			Average
	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
For the three months ended September 30, 2014
Basic EPS	$	2,108		11,971	$	0.18
Effect of dilutive stock options and warrants		-		92		-
Diluted EPS	$	2,108		12,063	$	0.17

For the three months ended September 30, 2013
Basic EPS	$	1,780		11,590	$	0.15
Effect of dilutive stock options and warrants		-		47		-
Diluted EPS	$	1,780		11,637	$	0.15

For the nine months ended September 30, 2014
Basic EPS	$	5,522		11,724	$	0.47
Effect of dilutive stock options and warrants		-		48		-
Diluted EPS	$	5,522		11,772	$	0.47

For the nine months ended September 30, 2013
Basic EPS	$	4,862		11,590	$	0.42
Effect of dilutive stock options and warrants		-		35		-
Diluted EPS	$	4,862		11,625	$	0.42

There were 637,502 and 681,590 anti-dilutive options and warrants for the three and nine months ended September 30, 2014, respectively. Anti-dilutive options and warrants totaled 668,468 and 680,206 for the three and nine months ended September 30, 2013, 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

September 30, 2014

(Level 1)

(Level 2)

(Level 3)

(dollars in thousands)

Financial assets:

Available for sale securities

Obligations of states and political subdivisions

2,271

Fair Value Measurements Using

Significant

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Total at

Identical Assets

Inputs

December 31, 2013

(Level 1)

(Level 2)

(Level 3)

(dollars in thousands)

Financial assets:

Available for sale securities

Obligations of states and political subdivisions

1,993

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 8.91% to 13.95% at September 30, 2014. The liquidity premiums we used ranged from 2% to 5%, and the adjusted discount rates ranged from 10.97% to 14.97% at December 31, 2013. Due to current market conditions as well as the limited trading activity of these securities, the market value of the securities is highly sensitive to assumption changes and market volatility. We have determined that our trust preferred securities are classified within Level 3 of the fair value hierarchy.

Other Residential Collateralized Mortgage Obligation Classified as Held-to Maturity

The fair value was estimated within Level 2 fair value hierarchy, as the fair value is based on either pricing models, quoted market prices of securities with similar characteristics, or discounted cash flows. We have evaluated this security for potential impairment and, based on our review of the trustee report, shock analysis and current information regarding delinquencies, nonperforming loans and credit support, it has been determined that no OTTI charge for credit exists for the three months ended September 30, 2014. The assumptions used in the analysis included a 6.3% prepayment speed, 1.4% default rate, a 72% loss severity and an accounting yield of 2.39% at September 30, 2014. The assumptions used in the analysis at December 31, 2013, included a 4.3% prepayment speed, 8.9% default rate, a 51% loss severity and an accounting yield of 1.38%.

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 an independent appraisal or evaluation less estimated costs related to selling the collateral. In some cases appraised value is net of costs to sell. Estimated selling costs range from 6% to 10% of collateral valuation at September 30, 2014 and December 31, 2013. Fair value is classified as Level 3 in the fair value hierarchy. Non-covered loans identified as impaired totaled $26.3 million (including SBA guarantees of $3.3 million and HarVest loans of $1.2 million) as of September 30, 2014 with an allocated allowance for loan losses totaling $391 thousand compared to a carrying amount of $23.2 million (including SBA guarantees of $2.4 million) with an allocated allowance for loan losses totaling $717 thousand at December 31, 2013.

Other Real Estate Owned (OREO)

OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or evaluation less cost to sell. In some cases appraised value is net of costs to sell. Selling costs have been in the range from 6% to 7.6% of collateral valuation at September 30, 2014 and December 31, 2013. Fair value is classified as Level 3 in the fair value hierarchy. OREO is further evaluated quarterly for any additional impairment. At September 30, 2014, the total amount of OREO was $13.0 million, of which $11.5 million was non-covered and $1.5 million was covered.

At December 31, 2013, the total amount of OREO was $11.8 million, of which $9.6 million was non-covered (including $509 thousand acquired from HarVest) and $2.2 million was covered.

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


			Fair Value Measurements Using
				Significant
			Quoted Prices in	Other	Significant
			Active Markets for	Observable	Unobservable
	Total at		Identical Assets	Inputs	Inputs
(dollars in thousands)	September 30, 2014		(Level 1)	(Level 2)	(Level 3)
Impaired non-covered loans:
Commercial real estate - owner occupied	$	10,875			$	10,875
Commercial loans		9,269				9,269
Residential 1-4 family		5,764				5,764
Impaired covered loans:
Commercial real estate - owner occupied		753				753
Commercial real estate - non-owner occupied (1)		1,879				1,879
Residential 1-4 family		1,206				1,206
Non-covered other real estate owned:
Commercial real estate - owner occupied		461				461
Construction and land development		6,970				6,970
Residential 1-4 family		4,074				4,074
Covered other real estate owned:
Commercial real estate - non-owner occupied (1)		1,450				1,450


			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, 2013		(Level 1)	(Level 2)	(Level 3)
Impaired non-covered loans:
Commercial real estate - owner occupied	$	7,684			$	7,684
Commercial real estate - non-owner occupied (1)		359				359
Construction and land development		2,107				2,107
Commercial loans		4,548				4,548
Residential 1-4 family		7,795				7,795
Impaired covered loans:
Commercial real estate - owner occupied		745				745
Commercial real estate - non-owner occupied (1)		2,145				2,145
Residential 1-4 family		1,220				1,220
Non-covered other real estate owned:
Commercial real estate - owner occupied		461				461
Commercial real estate - non-owner occupied (1)		1,342				1,342
Construction and land development		6,066				6,066
Residential 1-4 family		1,710				1,710
Covered other real estate owned:
Commercial real estate - owner occupied		557				557
Commercial real estate - non-owner occupied (1)		1,450				1,450
Commercial		79				79
Residential 1-4 family		127				127

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

Fair Value of Financial Instruments

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


		September 30, 2014				December 31, 2013
	Fair Value	Carrying		Fair		Carrying		Fair
	Hierarchy Level	Amount		Value		Amount		Value

Financial assets:
Cash and cash equivalents	Level 1	$	45,803	$	45,803	$	20,856	$	20,856
Securities available for sale	See previous table		2,271		2,271		1,993		1,993
Securities held to maturity	Level 2 & Level 3		89,993		88,970		82,443		76,193
Stock in Federal Reserve Bank and Federal
Home Loan Bank	n/a		6,131		n/a		5,915		n/a
Net non-covered loans	Level 3		610,742		617,574		487,318		493,472
Net covered loans	Level 3		47,968		53,957		51,650		57,564
Accrued interest receivable	Level 2 & Level 3		2,439		2,439		2,186		2,186
FDIC indemnification asset	Level 3		3,970		2,268		5,804		4,220
Financial liabilities:
Demand deposits	Level 1		94,337		94,337		68,940		68,940
Money market and savings accounts	Level 1		179,437		179,437		147,854		147,854
Certificates of deposit	Level 3		424,311		424,345		323,565		324,733
Securities sold under agreements to
repurchase and other short-term borrowings	Level 1		37,779		37,779		34,545		34,545
FHLB advances	Level 3		25,000		25,547		30,250		31,168
Accrued interest payable	Level 1 & Level 3		490		490		341		341

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. A discount for liquidity risk was not considered necessary in estimating the fair value of loans. 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. ACQUISTIONS

The merger with Prince George’s Federal Savings Bank (PGFSB) was completed on August 1, 2014. Southern National acquired PGFSB in a cash and stock transaction. PGFSB was founded in 1931 and is headquartered in Upper Marlboro, which is the County Seat of Prince George’s County, Maryland. Prince George’s FSB has four offices, all of which are in Maryland, including a main office in Upper Marlboro and three branch offices in Dunkirk, Brandywine and Huntingtown. Prince George’s FSB has an excellent core deposit base reflecting its tenure in the communities it serves, and its lending activities have historically been focused on residential mortgages.

The acquisition was accounted for under the acquisition method of accounting. The assets and liabilities were recorded at their estimated fair values as of the August 1, 2014 acquisition date. A summary of the net assets acquired is as follows (in thousands):


Total purchase price	$	11,497
Fair value of assets acquired:
Cash on hand and in banks	$	28,179
Loans		61,832
Loans held for sale		3,499
Land and buildings		3,023
Other assets		1,022
Core deposit intangible		761
Total assets acquired	$	98,316

Fair value of liabilities assumed:
Noninterest-bearing deposits	$	19,233
Interest-bearing deposits		69,995
Other liabilities		504
Total liabilities assumed	$	89,732

Net assets acquired	$	8,584
Goodwill		2,913
	$	11,497

A valuation of the acquired loans and core deposit intangible was performed with the assistance of a third-party valuation consultant. The unpaid principal balance and fair value of performing loans was $64.2 million and $61.2 million, respectively. The discount of $3.0 million will be accreted through interest income over the life of the loans in accordance with Accounting Standards Codification (ASC) topic 310-20. The unpaid principal balance and estimated fair value of acquired and retained non-performing loans was $1.5 million and $682 thousand, respectively. The discount of $790 thousand for these credit impaired loans will not be accreted in accordance with ASC 310-30. We also acquired nonperforming loans with a fair value of $3.5 million which were sold immediately after acquisition.

Merger costs related to the PGFSB acquisition were $445 thousand, consisting primarily of legal, investment banking and data processing expenses. We recorded goodwill in the amount of $2.9 million which is the difference between the total purchase price and the net assets acquired.

The PGFSB branches have been integrated into the Sonabank branch system.

On May 15, 2014, Southern National Bancorp of Virginia Inc., Jerry Flowers of Southern Trust Mortgage (STM), and Eastern Virginia Bankshares (EVB), the holding company for EVB, completed the purchase of the 62 percent of STM previously owned by Middleburg Bank. Jerry Flowers and other STM executives now own 51.1 percent of STM, Sonabank owns 44 percent and EVB owns 4.9 percent.

Sonabanks’s investment in STM totaled $5.0 million, including preferred shares in the amount of $1.8 million. The investment is being accounted for under the equity method.

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, 2013. Results of operations for the nine month period ended September 30, 2014 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, 2013, factors that could contribute to those differences include, but are not limited to:

●

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, obligations of states and political subdivisions 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;

●

risks of mergers and acquisitions, including the related time and cost of implementing transactions and the potential failure to achieve expected gains, revenue growth or expense savings;

●

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”, “we” or “our”) is the bank holding company for Sonabank (“Sonabank” or the “Bank”), a Virginia state chartered bank which commenced operations on April 14, 2005. Sonabank conducts full-service community banking operations from locations in Fairfax County (Reston, McLean and Fairfax), in Charlottesville, Warrenton (2), Loudoun County (Middleburg, Leesburg (2), and South Riding), Front Royal, New Market, Richmond, Haymarket and Clifton Forge, and nine branches in Maryland (four in Montgomery County, four in Prince George’s County and one in Frederick County) and maintains loan production offices in Richmond, Charlottesville, Warrenton and Fredericksburg. We have administrative offices in Warrenton and an executive office in Georgetown, Washington, D.C where senior management is located.

RESULTS OF OPERATIONS

Net Income

Net income for the quarter ended September 30, 2014 was $2.1 million and $5.5 million for the first nine months of 2014. That compares to $1.8 million and $4.9 million for the three and nine months ended September 30, 2013.

Net Interest Income

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

Net interest income was $8.8 million in the quarter ended September 30, 2014 up from $7.7 million during the same period last year. Sonabank’s net interest margin was 4.59% in the third quarter of 2014, compared to 4.85% in the third quarter of 2013. Although we are seeing some egregious examples from new participants in the Richmond market in regards to low loan rates, the irrational exuberance of a year to a year and a half ago has largely subsided. Average loans were $642.6 million in the third quarter of 2014 compared to $562.5 million in the second quarter of 2014. Approximately $62.6 million of the increase was attributable to the Prince George’s FSB acquisition.

We have been loath to invest in securities for some time, believing that yields adjusted for interest rate risk would not adequately compensate us for the inherent risk. Average securities outstanding in the third quarter of 2014 were $91.4 million, compared to $88.2 million last quarter and to $84.2 million in the third quarter of last year. We are well positioned to withstand a rise in interest rates based on the interest sensitivity on our balance sheet. However, during the fourth quarter we will need to expand our securities portfolio modestly for liquidity and collateral purposes.

Net interest income was $24.3 million during the nine months ended September 30, 2014, compared to $22.9 million during the same period in the prior year. Average loans during the first nine months of 2014 were $583.4 million compared to $513.6 million during the same period last year. The Greater Atlantic Bank loan discount accretion contributed $1.5 million to net interest income during the first nine months of 2014, compared to $1.2 million during the nine months ended September 30, 2013. The loan discount accretion on the HarVest Bank portfolio contributed $734 thousand during the nine months ended September 30, 2014, compared to $1.5 million in same period last year. The accretion of the Prince George’s FSB discount contributed $95 thousand during the two months since the closing.

The following tables detail average balances of interest-earning assets and interest-bearing liabilities, the amount of interest earned/paid on such assets and liabilities, and the yield/rate for the periods indicated:


	Average Balance Sheets and Net Interest
	Analysis For the Quarters Ended
	9/30/2014								9/30/2013
				Interest								Interest
	Average			Income/		Yield/			Average			Income/		Yield/
	Balance			Expense		Rate			Balance			Expense		Rate
	(Dollar amounts in thousands)
Assets
Interest-earning assets:
Loans, net of unearned income (1) (2)	$	642,622		$	9,181		5.67	%	$	521,569		$	8,169		6.21	%
Investment securities		91,446			652		2.85	%		84,200			574		2.73	%
Other earning assets		26,935			151		2.22	%		26,617			104		1.55	%

Total earning assets		761,003			9,984		5.21	%		632,386			8,847		5.55	%
Allowance for loan losses		(7,392	)							(7,896	)
Total non-earning assets		81,521								71,941
Total assets	$	835,132							$	696,431

Liabilities and stockholders’ equity
Interest-bearing liabilities:
NOW accounts	$	23,836			6		0.11	%	$	22,720			15		0.26	%
Money market accounts		132,382			89		0.27	%		141,317			97		0.27	%
Savings accounts		35,379			54		0.61	%		12,823			19		0.59	%
Time deposits		387,024			836		0.86	%		319,201			835		1.04	%
Total interest-bearing deposits		578,621			985		0.68	%		496,061			966		0.77	%
Borrowings		74,397			187		1.00	%		45,513			157		1.37	%
Total interest-bearing liabilities		653,018			1,172		0.71	%		541,574			1,123		0.82	%
Noninterest-bearing liabilities:
Demand deposits		64,995								43,449
Other liabilities		5,307								5,598
Total liabilities		723,320								590,621
Stockholders’ equity		111,812								105,810
Total liabilities and stockholders’ equity	$	835,132							$	696,431
Net interest income					8,812								7,724
Interest rate spread							4.50	%							4.73	%
Net interest margin							4.59	%							4.85	%

(1) Includes loan fees in both interest income and the calculation of the yield on loans.
(2) Calculations include non-accruing loans in average loan amounts outstanding.

	Average Balance Sheets and Net Interest
	Analysis For the Nine Months Ended
	9/30/2014								9/30/2013
				Interest								Interest
	Average			Income/		Yield/			Average			Income/		Yield/
	Balance			Expense		Rate			Balance			Expense		Rate
	(Dollar amounts in thousands)
Assets
Interest-earning assets:
Loans, net of unearned income (1) (2)	$	583,432		$	25,037		5.74	%	$	513,577		$	24,277		6.32	%
Investment securities		88,115			1,923		2.91	%		84,095			1,699		2.69	%
Other earning assets		23,044			591		3.43	%		41,230			443		1.44	%

Total earning assets		694,591			27,551		5.30	%		638,902			26,419		5.53	%
Allowance for loan losses		(7,434	)							(7,619	)
Total non-earning assets		74,971								71,558
Total assets	$	762,128							$	702,841

Liabilities and stockholders’ equity
Interest-bearing liabilities:
NOW accounts	$	23,552			19		0.11	%	$	23,520			46		0.26	%
Money market accounts		128,133			264		0.28	%		151,889			411		0.36	%
Savings accounts		24,220			113		0.62	%		11,232			48		0.57	%
Time deposits		356,167			2,383		0.89	%		315,522			2,581		1.09	%
Total interest-bearing deposits		532,072			2,779		0.70	%		502,163			3,086		0.82	%
Borrowings		62,305			514		1.10	%		46,182			465		1.35	%
Total interest-bearing liabilities		594,377			3,293		0.74	%		548,345			3,551		0.87	%
Noninterest-bearing liabilities:
Demand deposits		53,743								44,313
Other liabilities		4,899								5,380
Total liabilities		653,019								598,038
Stockholders’ equity		109,109								104,803
Total liabilities and stockholders’ equity	$	762,128							$	702,841
Net interest income				$	24,258							$	22,868
Interest rate spread							4.56	%							4.66	%
Net interest margin							4.67	%							4.79	%

(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 loan loss provision for the third quarter and the nine months ended September 30, 2014 was $975 thousand and $2.3 million, respectively, compared to $1.2 million and $3.0 million for the same periods last year. Charge offs for the three and nine months ended September 30, 2014 were $1.2 million and $2.4 million, respectively, compared to $1.2 million and $3.0 million for the same periods in 2013.

Noninterest Income

The following tables present the major categories of noninterest income for the three and nine months ended September 30, 2014 and 2013:


	For the Three Months Ended
	September 30,
	2014			2013			Change
	(dollars in thousands)
Account maintenance and deposit service fees	$	220		$	198		$	22
Income from bank-owned life insurance		159			147			12
Equity income from mortgage affiliate		176			-			176
Other		54			30			24
Total noninterest income	$	609		$	375		$	234

	For the Nine Months Ended
	September 30,
		2014			2013		Change
	(dollars in thousands)
Account maintenance and deposit service fees	$	594		$	593		$	1
Income from bank-owned life insurance		455			445			10
Equity income from mortgage affiliate		507			-			507
Gain on other assets		202			13			189
Net gain on sale of available for sale securities		-			142			(142	)
Net impairment losses recognized in earnings		(41	)		(3	)		(38	)
Other		145			169			(24	)
Total noninterest income	$	1,862		$	1,359		$	503

During the third quarter of 2014 Sonabank had noninterest income of $609 thousand compared to noninterest income of $375 thousand during the third quarter of 2013. We recognized income from our investment in STM in the amount of $176 thousand.

Noninterest income increased to $1.9 million in the first nine months of 2014 from $1.4 million during the first nine months of 2013. In addition to income from the STM investment in the amount of $507 thousand, we sold part of our investment in CapitalSouth Partners Fund III, a Small Business Investment Company, for a gain of $202 thousand.

Noninterest Expense

The following tables present the major categories of noninterest expense for the three and nine months ended September 30, 2014 and 2013:


	For the Three Months Ended
	September 30,
	2014			2013			Change
	(dollars in thousands)
Salaries and benefits	$	2,671		$	2,338		$	333
Occupancy expenses		804			768			36
Furniture and equipment expenses		195			197			(2	)
Amortization of core deposit intangible		61			123			(62	)
Virginia franchise tax expense		113			115			(2	)
Merger expenses		65			-			65
FDIC assessment		149			218			(69	)
Data processing expense		146			131			15
Telephone and communication expense		198			166			32
Change in FDIC indemnification asset		403			113			290
Net (gain) loss on other real estate owned		(194	)		(698	)		504
Other operating expenses		678			790			(112	)
Total noninterest expense	$	5,289		$	4,261		$	1,028

	For the Nine Months Ended
	September 30,
		2014			2013		Change
	(dollars in thousands)
Salaries and benefits	$	7,487		$	6,760		$	727
Occupancy expenses		2,335			2,280			55
Furniture and equipment expenses		571			524			47
Amortization of core deposit intangible		151			368			(217	)
Virginia franchise tax expense		342			357			(15	)
Merger expenses		487			-			487
FDIC assessment		401			676			(275	)
Data processing expense		406			433			(27	)
Telephone and communication expense		556			507			49
Change in FDIC indemnification asset		837			350			487
Net (gain) loss on other real estate owned		(433	)		(580	)		147
Other operating expenses		2,313			2,334			(21	)
Total noninterest expense	$	15,453		$	14,009		$	1,444

Noninterest expenses were $5.3 million and $15.5 million during the third quarter and the first nine months of 2014, respectively, compared to $4.3 million and $14.0 million during the same periods in 2013. Merger expenses were $64 thousand in the third quarter of 2014 and $487 thousand during the first nine months of 2014. There were no such expenses in 2013.

The net gain on Other Real Estate Owned (OREO) for the three months ended September 30, 2014 was $194 thousand compared to a net gain on OREO of $698 thousand for the same period in 2013. During the three months ended September 30, 2014, we sold three OREO properties resulting in gains of $354 thousand and recognized impairment in the amount of $160 thousand on two OREO properties. The gain of $698 thousand in the third quarter of 2013 consisted of a gain of $1.1 million on two OREO properties and loss and impairment charges totaling $410 thousand on four OREO properties.

The net gain on OREO for the nine months ended September 30, 2014 was $433 thousand compared to a gain on OREO of $580 thousand for the first nine months of 2013. The gain in 2014 resulted from the sale of eight OREO properties at a gain of $1.1 million, the sale of three properties at a loss of $466 thousand, and impairment of $160 thousand on two properties. The gain of $580 thousand in 2013 consisted of a gain of $1.3 million on four OREO properties and losses and impairment totaling $733 thousand on six OREO properties.

As a result of the analysis of the FDIC indemnification asset in the second quarter of 2014, the amortization expense of the indemnification asset increased from $350 thousand for the nine months ended September 30, 2013, to $837 thousand for the nine months ended September 30, 2014. For the quarter ended September 30, 2014, the amortization expense was $403 thousand compared to $113 thousand for the third quarter of 2013.

FINANCIAL CONDITION

Balance Sheet Overview

Total assets were $883.0 million as of September 30, 2014 compared to $716.2 million as of December 31, 2013. Net loans receivable increased from $539.0 million at the end of 2013 to $658.7 million at September 30, 2014.

Total deposits increased to $698.1 million at September 30, 2014 from $540.4 million as of December 31, 2013 largely as a result of the Prince George’s FSB acquisition. Notably, non-interest bearing demand deposits increased from a year-end 2013 level of $44.6 million to $70.7 million as of September 30, 2014. Similarly, savings account balances increased from $17.0 million to $41.0 million, and money market account balances increased from $130.9 million to $138.4 million over the same period. Prince George’s FSB was an 83 year old institution with deep relationships in its communities.

Loan Portfolio

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 following table summarizes the composition of our loan portfolio as of September 30, 2014 and December 31, 2013:

	Covered		Non-covered			Total			Covered		Non-covered			Total
	Loans (1)		Loans			Loans			Loans (1)		Loans			Loans
	September 30, 2014								December 31, 2013
Loans secured by real estate:
Commercial real estate - owner-occupied	$	1,363	$	115,971		$	117,334		$	1,603	$	106,225		$	107,828
Commercial real estate - non-owner-occupied		5,791		182,138			187,929			5,829		150,008			155,837
Secured by farmland		-		580			580			100		508			608
Construction and land loans		-		53,302			53,302			1		39,068			39,069
Residential 1-4 family		15,358		118,423			133,781			16,631		66,482			83,113
Multi- family residential		295		22,481			22,776			585		21,496			22,081
Home equity lines of credit		24,341		10,353			34,694			25,769		6,431			32,200
Total real estate loans		47,148		503,248			550,396			50,518		390,218			440,736

Commercial loans		755		114,329			115,084			1,097		104,284			105,381
Consumer loans		78		2,015			2,093			81		1,308			1,389
Gross loans		47,981		619,592			667,573			51,696		495,810			547,506

Less deferred fees on loans		8		(1,747	)		(1,739	)		5		(1,453	)		(1,448	)
Loans, net of deferred fees	$	47,989	$	617,845		$	665,834		$	51,701	$	494,357		$	546,058

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

As of September 30, 2014 and December 31, 2013, substantially all of our loans were to customers located in Virginia and Maryland. We are not dependent on any single customer or group of customers whose insolvency would have a material adverse effect on operations.

Loan growth has been strong in 2014. The loan portfolio, excluding the Prince George’s FSB acquisition, grew by 10.8% ($58.9 million) from December 31, 2013, mostly in commercial real estate and commercial loans. The Prince George’s FSB acquisition added another $60.9 million, or 11.1%.

The large increase in the residential 1-4 family portfolio from year-end 2013 to September 30, 2014 was attributable to the Prince George’s FSB merger ($50.6 million), and to loans purchased from STM ($7.3 million). As of September 30, 2014, there was $11.3 million in the pipeline with STM.

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.

Non-covered Loans and Assets

Non-covered loans evaluated for impairment totaled $26.3 million with allocated allowance for loan losses in the amount of $391 thousand as of September 30, 2014, including $4.1 million of nonaccrual loans. This compares to $23.2 million of impaired loans with allocated allowance for loan losses in the amount of $717 thousand at December 31, 2013, including $7.8 million of nonaccrual loans. The nonaccrual loans included SBA guaranteed amounts of $3.3 million and $1.9 million at September 30, 2014 and December 31, 2013, respectively. At September 30, 2014 and December 31, 2013 there were no loans past due 90 days or more and accruing interest.

Non-covered nonperforming assets decreased from $17.4 million at December 31, 2013 to $15.7 million at September 30, 2014.

Non-covered OREO as of September 30, 2014 was $11.5 million compared to $9.6 million as of the end of 2013. During the first nine months of 2014 we disposed of five non-covered properties in the aggregate amount of $2.3 million. In addition, OREO increased by an aggregate of $4.7 million as a result of foreclosures. We also recognized impairment losses on four properties totaling $400 thousand.

Sonabank has an internal loan review and a loan committee, both of which provide on-going monitoring to identify and address issues with problem loans. The loan loss provision is determined after consideration of all known relevant internal and external factors affecting loan collectability to maintain the allowance for loan and lease losses at a level necessary to absorb estimated credit losses. We believe the allowance for loan losses is sufficient to cover probable incurred credit losses at September 30, 2014.

The following table presents a comparison of non-covered nonperforming assets as of September 30, 2014 and December 31, 2013 (in thousands):

	September 30,			December 31,
	2014			2013

Nonaccrual loans	$	4,148		$	7,814
Loans past due 90 days and accruing interest		-			-
Total nonperforming loans		4,148			7,814
Other real estate owned		11,505			9,579
Total nonperforming assets	$	15,653		$	17,393

SBA guaranteed amounts included in nonaccrual loans	$	3,261		$	1,852

Allowance for loan losses to nonperforming loans		171.24	%		90.08	%
Allowance for loan losses to total non-covered loans		1.15	%		1.42	%
Nonperforming assets excluding SBA guaranteed loans to
total non-covered assets		1.71	%		2.35	%

The allowance for loan losses as a percentage of non-covered loans at September 30, 2014 was 1.15%, compared to 1.42% at the end of 2013. The ratio has declined largely because the loans acquired from Prince George’s FSB were booked at fair value and are not subject to a loan loss reserve. At September 30, 2014, the allowance for loan losses as a percentage of non-covered loans less the acquired Prince George’s FSB loans was 1.28%. Management believes the allowance is adequate at this time but monitors trends in past due and non-performing loans to determine whether the allowance should be increased.

Covered Loans and Assets

Covered loans identified as impaired totaled $3.8 million as of September 30, 2014 and $4.1million as of December 31, 2013. Nonaccrual loans were $819 thousand and $1.6 million at September 30, 2014 and December 31, 2013, respectively. At September 30, 2014 and December 31, 2013, there were no loans past due 90 days or more and accruing interest.

Securities

Investment securities, available for sale and held to maturity, were $92.3 million at September 30, 2014 and $84.4 million at December 31, 2013. The increase was primarily due to the purchases of $11.0 million in callable agency securities and $1.3 million in municipal bonds net of repayments in the first nine months of 2014.

At September 30, 2014, we owned pooled trust preferred securities as follows (in thousands):

														Previously
												% of Current		Recognized
												Defaults and		Cumulative
		Ratings								Estimated		Deferrals to		Other
	Tranche	When Purchased		Current Ratings						Fair		Total		Comprehensive
Security	Level	Moody’s	Fitch	Moody’s	Fitch	Par Value		Book Value		Value		Collateral		Loss (1)
						(in thousands)
ALESCO VII A1B	Senior	Aaa	AAA	A3	BBB	$	5,773	$	5,249	$	3,829	15	%	$	268
MMCF III B	Senior Sub	A3	A-	Ba1	CC		331		325		202	34	%		6
							6,104		5,574		4,031			$	274

														Cumulative Other		Cumulative
														Comprehensive		OTTI Related to
Other Than Temporarily Impaired:														Loss (2)		Credit Loss (2)
TPREF FUNDING II	Mezzanine	A1	A-	Caa3	C		1,500		509		530	41	%		591	$	400
TRAP 2007-XII C1	Mezzanine	A3	A	C	C		2,170		57		428	28	%		820		1,293
TRAP 2007-XIII D	Mezzanine	NR	A-	NR	C		2,039		-		347	19	%		7		2,032
MMC FUNDING XVIII	Mezzanine	A3	A-	Ca	C		1,095		27		328	21	%		377		691
ALESCO V C1	Mezzanine	A2	A	C	C		2,150		475		609	15	%		1,014		661
ALESCO XV C1	Mezzanine	A3	A-	C	C		3,268		30		85	33	%		679		2,559
ALESCO XVI C	Mezzanine	A3	A-	C	C		2,172		121		582	14	%		871		1,180
							14,394		1,219		2,909			$	4,359	$	8,816

Total						$	20,498	$	6,793	$	6,940

(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

Our largest pooled trust preferred security is ALESCO VII A 1B , which was rated triple A at acquisition which is now rated A3 (Moody’s,) BBB (Fitch) and B+ (S&P).

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

We recognized no OTTI charges during the three months ended September 30, 2014, and we recognized OTTI charges of $41 thousand and nine months ended September 30, 2014 related to the TPREF Funding II security. We recognized no OTTI charges during the third quarter of 2013 and recognized OTTI charges of $3 thousand during the first nine months of 2013.

Other securities in our investment portfolio are as follows:

residential government-sponsored mortgage-backed securities in the amount of $22.4 million and residential government-sponsored collateralized mortgage obligations totaling $3.7 million

callable agency securities in the amount of $41.0 million

municipal bonds in the amount of $17.8 million with a taxable equivalent yield of 3.17% and ratings as follows:

Rating		Amount
Service	Rating	(in thousands)
Moody’s	Aaa	$	505
Moody’s	Aa2		3,631
Moody’s	Aa3		718
Moody’s	A1		1,180
Standard & Poor’s	AAA		3,136
Standard & Poor’s	AA+		580
Standard & Poor’s	AA		7,478
Standard & Poor’s	AA-		603
		$	17,831

In accordance with regulatory guidance we have performed an independent analysis on each security and monitor the portfolio on an ongoing basis.

SARM 2005-22 1A2 in the amount of $612 thousand, a residential collateralized mortgage obligation that is not government-sponsored

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 cash flow forecast for one year with the first three months prepared on a weekly basis and on a monthly basis thereafter. The projections incorporate all scheduled maturities of loans excluding impaired loans and all scheduled maturities of out of area certificates of deposit. In addition, prepayments on investment securities are estimated by using a projection produced by our bond accounting system. To estimate loan growth over the one year period, the projection incorporates the scheduled loan closings in the Loan Pipeline Report along with other management estimates.

During the nine months ended September 30, 2014, we funded our financial obligations with deposits, securities sold under agreements to repurchase and borrowings from the Federal Home Loan Bank of Atlanta. At September 30, 2014, we had $109.9 million of unfunded lines of credit and undisbursed construction loan funds. Our approved loan commitments were $6.3 million at September 30, 2014. Management anticipates that funding requirements for these commitments can be met from the normal sources of funds.

Capital Resources

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

						Required
						For Capital					To Be Categorized as
	Actual					Adequacy Purposes					Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2014
Southern National
Tier 1 risk-based capital ratio	$	105,877		16.36	%	$	25,887		4.00	%	$	38,831		6.00	%
Total risk-based capital ratio		113,002		17.46	%		51,774		8.00	%		64,718		10.00	%
Leverage ratio		105,877		12.88	%		32,881		4.00	%		41,102		5.00	%
Sonabank
Tier 1 risk-based capital ratio	$	104,211		16.11	%	$	25,874		4.00	%	$	38,811		6.00	%
Total risk-based capital ratio		111,336		17.21	%		51,748		8.00	%		64,685		10.00	%
Leverage ratio		104,211		12.68	%		32,868		4.00	%		41,085		5.00	%

December 31, 2013
Southern National
Tier 1 risk-based capital ratio	$	99,700		18.56	%	$	21,489		4.00	%	$	32,234		6.00	%
Total risk-based capital ratio		106,406		19.81	%		42,978		8.00	%		53,723		10.00	%
Leverage ratio		99,700		14.22	%		28,038		4.00	%		35,048		5.00	%
Sonabank
Tier 1 risk-based capital ratio	$	98,958		18.43	%	$	21,478		4.00	%	$	32,217		6.00	%
Total risk-based capital ratio		105,660		19.68	%		42,956		8.00	%		53,695		10.00	%
Leverage ratio		98,958		14.12	%		28,027		4.00	%		35,034		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 simulation modeling 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 economic value of equity (EVE) over a range of interest rate scenarios. EVE is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts using assumptions about estimated loan prepayment rates, reinvestment rates and deposit decay rates.

During the fourth quarter of 2012, we converted to an enhanced model with FTN Financial that uses detailed data on loans and deposits that is extracted directly from the loan and deposit applications and requires more detailed assumptions about interest rates on new volumes. The new model also accommodates the analysis of floors, ceilings, etc. on a loan-by-loan basis. The greater level of input detail provides more meaningful reports compared to the summarized input data previously used.

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 EVE resulting from instantaneous and sustained parallel shifts in the yield curve (plus 400 basis points or minus 200 basis points, measured in 100 basis point increments) as of September 30, 2014 and as of December 31, 2013, and all changes are within our ALM Policy guidelines. The effect of the PGFSB merger was less negative than anticipated. The impact from the fixed rate mortgage loans acquired was offset by the lengthening of certificate of deposit maturities. Overall the duration of deposits increased and the duration of loans decreased.

	Sensitivity of Economic Value of Equity
	As of September 30, 2014

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

Up 400	$	118,323	$	(19,108	)		-13.90	%		13.40	%		101.67	%
Up 300		121,894		(15,537	)		-11.31	%		13.80	%		104.74	%
Up 200		126,228		(11,203	)		-8.15	%		14.30	%		108.46	%
Up 100		131,831		(5,600	)		-4.07	%		14.93	%		113.28	%
Base		137,431		-			0.00	%		15.56	%		118.09	%
Down 100		132,749		(4,682	)		-3.41	%		15.03	%		114.07	%
Down 200		127,891		(9,540	)		-6.94	%		14.48	%		109.89	%

	Sensitivity of Economic Value of Equity
	As of December 31, 2013

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

Up 400	$	104,514	$	(15,340	)		-12.80	%		14.59	%		98.03	%
Up 300		106,947		(12,907	)		-10.77	%		14.93	%		100.31	%
Up 200		110,177		(9,677	)		-8.07	%		15.38	%		103.34	%
Up 100		114,794		(5,060	)		-4.22	%		16.03	%		107.67	%
Base		119,854		-			0.00	%		16.74	%		112.42	%
Down 100		117,479		(2,375	)		-1.98	%		16.40	%		110.19	%
Down 200		114,952		(4,902	)		-4.09	%		16.05	%		107.82	%

Our interest rate sensitivity is also monitored by management through the use of a model run by FTN Financial that generates estimates of the change in the net interest income over a range of interest rate scenarios. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. In this regard, the model assumes that the composition of our interest sensitive assets and liabilities existing at September 30, 2014 and December 31, 2013 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. The effect of the PGFSB merger was less negative than anticipated as previously mentioned in the discussion of EVE.

	Sensitivity of Net Interest Income
	As of September 30, 2014

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	$	38,911	$	7,678			4.67	%		0.91	%
Up 300		36,678		5,445			4.40	%		0.64	%
Up 200		34,517		3,284			4.15	%		0.39	%
Up 100		32,679		1,446			3.93	%		0.17	%
Base		31,233		-			3.76	%		0.00	%
Down 100		31,056		(177	)		3.74	%		-0.02	%
Down 200		30,565		(668	)		3.68	%		-0.08	%

	Sensitivity of Net Interest Income
	As of December 31, 2013

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	$	32,376	$	5,627			4.87	%		0.83	%
Up 300		30,565	$	3,816			4.60	%		0.56	%
Up 200		28,856	$	2,107			4.35	%		0.31	%
Up 100		27,547	$	798			4.16	%		0.12	%
Base		26,749	$	-			4.04	%		0.00	%
Down 100		27,206	$	457			4.11	%		0.07	%
Down 200		26,319	$	(430	)		3.97	%		-0.07	%

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in EVE 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 EVE 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 EVE 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. There have been no changes in Southern National’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our 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 proceedings pending, or to management’s knowledge, threatened, against Southern National or Sonabank as of September 30, 2014.

ITEM 1A – RISK FACTORS

As of September 30, 2014 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, 2013.

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

Not applicable

ITEM 3. – DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. – MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. – OTHER INFORMATION

Not applicable

ITEM 6 - EXHIBITS

(a) Exhibits.

	Exhibit No.		Description
	31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

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

* Filed with this Quarterly Report on Form 10-Q

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

Signatures

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

	Southern National Bancorp of Virginia, Inc.
	(Registrant)

November 10, 2014		/s/ Georgia S. Derrico
(Date)		Georgia S. Derrico,
		Chairman of the Board and Chief Executive Officer

November 10, 2014		/s/ William H. Lagos
(Date)		William H. Lagos,
		Senior Vice President and Chief Financial Officer