XNAS:SONA Southern National Bancorp of Virginia Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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• FORM 10-Q • EXHIBIT 31.1 • EXHIBIT 31.2 • EXHIBIT 32.1 • XBRL INSTANCE DOCUMENT • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2012

Commission File No. 001-33037

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)

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

6830 Old Dominion Drive

McLean, Virginia 22101

(Address of principal executive offices) (zip code)

(703) 893-7400

(Registrant’s telephone number, including area code)

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

YES x NO o

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

YES x NO o

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

Large accelerated filer o Accelerated filer x Smaller reporting company o

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

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

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

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

June 30, 2012

INDEX

		PAGE

PART 1 - FINANCIAL INFORMATION

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

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

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

Item 4 – Controls and Procedures		46

PART II - OTHER INFORMATION

Item 1 – Legal Proceedings		48

Item 1A – Risk Factors		48

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

Item 3 – Defaults Upon Senior Securities		48

Item 4 – Mine Safety Disclosures		48

Item 5 – Other Information		48

Item 6 - Exhibits		48

Signatures		49

Certifications

ITEM I - FINANCIAL INFORMATION
PART I - FINANCIAL STATEMENTS

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

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

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

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

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

Total assets	$	711,991		$	611,373

LIABILITIES AND STOCKHOLDERS' EQUITY

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

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

Commitments and contingencies (See Note 5)		-			-

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

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

See accompanying notes to consolidated financial statements.

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

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

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

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

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

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

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

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

See accompanying notes to consolidated financial statements.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2012

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

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

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

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

See accompanying notes to consolidated financial statements.

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

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

See accompanying notes to consolidated financial statements.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2012

1. ACCOUNTING POLICIES

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

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

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

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

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

Use of Estimates

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

Recent Accounting Pronouncements

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

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

2.	STOCK- BASED COMPENSATION

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

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

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

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

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

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

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

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

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

3. SECURITIES

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(2) Pre-tax

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

●

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

●

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

●

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

●

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

●

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

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

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

	2012			2011

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

4. LOANS AND ALLOWANCE FOR LOAN LOSSES

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

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

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

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

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

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

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

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

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

Impaired loans were as follows (in thousands):

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

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

With an allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	-	$	-	$	-	$	-
Commercial real estate - non-owner occupied (2)		-		-		1,550		50