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EX-31.1 - EXHIBIT 31.1 - Primis Financial Corp.dex311.htm
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EX-32.1 - EXHIBIT 32.1 - Primis Financial Corp.dex321.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

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

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2011

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  ¨

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  ¨    NO  ¨

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   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    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  ¨    No  x

As of April 29, 2011, there were 11,590,212 shares of common stock outstanding.

 

 

 


SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

March 31, 2011

INDEX

 

            PAGE  
PART 1 - FINANCIAL INFORMATION   
Item 1 - Financial Statements   
     Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010      2   
     Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2011 and 2010      3   
     Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2011      4   
     Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010      5   
     Notes to Consolidated Financial Statements      6- 21   
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations      22-32   
Item 3 – Quantitative and Qualitative Disclosures about Market Risk      33-35   
Item 4 – Controls and Procedures      36   
PART II - OTHER INFORMATION   
Item 1 – Legal Proceedings      36   
Item 1A – Risk Factors      36   
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds      36   
Item 3 – Defaults Upon Senior Securities      36   
Item 4 – (Removed and Reserved)      36   
Item 5 – Other Information      36   
Item 6 - Exhibits      37   

Signatures

     38   

Certifications

     39-41   


ITEM 1 - FINANCIAL INFORMATION

PART I - FINANCIAL STATEMENTS

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

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

 

     March 31,
2011
    December 31,
2010
 

ASSETS

    

Cash and cash equivalents:

    

Cash and due from financial institutions

   $ 2,634      $ 2,180   

Interest-bearing deposits in other financial institutions

     4,948        7,565   
                

Total cash and cash equivalents

     7,582        9,745   
                

Securities available for sale, at fair value

     10,886        11,068   
                

Securities held to maturity, at amortized cost
(fair value of $40,777 and $43,965, respectively)

     41,525        44,895   
                

Covered loans

     85,490        92,171   

Non-covered loans

     377,555        367,266   
                

Total loans

     463,045        459,437   

Less allowance for loan losses

     (5,704     (5,599
                

Net loans

     457,341        453,838   
                

Stock in Federal Reserve Bank and Federal Home Loan Bank

     6,350        6,350   

Bank premises and equipment, net

     4,550        4,659   

Goodwill

     8,713        8,713   

Core deposit intangibles, net

     2,685        2,915   

FDIC indemnification asset

     17,999        18,536   

Bank-owned life insurance

     14,703        14,568   

Other real estate owned

     7,908        4,577   

Deferred tax assets, net

     3,734        3,782   

Other assets

     6,457        7,178   
                

Total assets

   $ 590,433      $ 590,824   
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Noninterest-bearing demand deposits

   $ 32,591      $ 34,529   

Interest-bearing deposits:

    

NOW accounts

     16,324        15,961   

Money market accounts

     150,964        169,861   

Savings accounts

     5,771        5,490   

Time deposits

     226,708        205,133   
                

Total interest-bearing deposits

     399,767        396,445   
                

Total deposits

     432,358        430,974   
                

Securities sold under agreements to repurchase and other short-term borrowings

     19,881        23,908   

Federal Home Loan Bank (FHLB) advances

     35,000        35,000   

Other liabilities

     2,842        1,828   
                

Total liabilities

     490,081        491,710   
                

Commitments and contingencies (See Note 5)

     —          —     

Stockholders’ equity:

    

Preferred stock, $.01 par value. Authorized 5,000,000 shares; no shares issued and outstanding

     —          —     

Common stock, $.01 par value. Authorized 45,000,000 shares; issued and outstanding, 11,590,212 shares at March 31, 2011 and December 31, 2010

     116        116   

Additional paid in capital

     96,504        96,478   

Retained earnings

     6,974        5,854   

Accumulated other comprehensive loss

     (3,242     (3,334
                

Total stockholders’ equity

     100,352        99,114   
                

Total liabilities and stockholders’ equity

   $ 590,433      $ 590,824   
                

See accompanying notes to consolidated financial statements.

 

2


SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

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

 

    

For the Three Months Ended

March 31,

 
     2011     2010  

Interest and dividend income:

    

Interest and fees on loans

   $ 7,121      $ 7,614   

Interest and dividends on taxable securities

     556        734   

Interest and dividends on other earning assets

     52        43   
                

Total interest and dividend income

     7,729        8,391   
                

Interest expense:

    

Interest on deposits

     1,277        1,804   

Interest on borrowings

     318        327   
                

Total interest expense

     1,595        2,131   
                

Net interest income

     6,134        6,260   
                

Provision for loan losses

     1,340        1,300   
                

Net interest income after provision for loan losses

     4,794        4,960   
                

Noninterest income:

    

Account maintenance and deposit service fees

     200        241   

Income from bank-owned life insurance

     135        139   

Net gain (loss) on other real estate owned

     (39     20   

Total other-than-temporary impairment losses

     (32     (7

Portion of loss recognized in other comprehensive income (before taxes)

     —          —     
                

Net credit impairment losses recognized in earnings

     (32     (7

Other

     44        147   
                

Total noninterest income

     308        540   
                

Noninterest expenses:

    

Salaries and benefits

     1,603        1,641   

Occupancy expenses

     539        542   

Furniture and equipment expenses

     136        154   

Amortization of core deposit intangible

     230        236   

Virginia franchise tax expense

     171        184   

FDIC assessment

     154        189   

Data processing expense

     142        155   

Telephone and communication expense

     88        119   

Change in FDIC indemnification asset

     (159     244   

Other operating expenses

     550        514   
                

Total noninterest expenses

     3,454        3,978   
                

Income before income taxes

     1,648        1,522   

Income tax expense

     528        481   
                

Net income

   $ 1,120      $ 1,041   
                

Other comprehensive income :

    

Unrealized gain on available for sale securities

   $ 96      $ 61   

Realized amount on securities sold, net

     —          —     

Non-credit component of other-than-temporary impairment on held-to-maturity securities

     55        76   

Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale

     (11     (30
                

Net unrealized gain (loss)

     140        107   

Tax effect

     (48     (36
                

Other comprehensive income

     92        71   
                

Comprehensive income

   $ 1,212      $ 1,112   
                

Earnings per share, basic and diluted

   $ 0.10      $ 0.09   
                

See accompanying notes to consolidated financial statements.

 

3


SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2011

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

 

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

Balance - January 1, 2011

   $ 116       $ 96,478       $ 5,854       $ (3,334      $ 99,114   

Comprehensive income:

                

Net income

           1,120         $ 1,120         1,120   

Change in unrealized gain on available for sale securities (net of tax, $33)

              63        63         63   

Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $15 and accretion, $11 and amounts recorded into other comprehensive income at transfer)

              29        29         29   

Total comprehensive income

              $ 1,212      
                      

Stock-based compensation expense

        26                 26   
                                              

Balance - March 31, 2011

   $ 116       $ 96,504       $ 6,974       $ (3,242      $ 100,352   
                                              

See accompanying notes to consolidated financial statements.

 

 

4


SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(dollars in thousands) (Unaudited)

 

     2011     2010  

Operating activities:

    

Net income

   $ 1,120      $ 1,041   

Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:

    

Depreciation

     126        136   

Amortization of core deposit intangible

     230        236   

Other amortization , net

     (37     50   

Increase (decrease) in FDIC indemnification asset

     (159     244   

Provision for loan losses

     1,340        1,300   

Earnings on bank-owned life insurance

     (135     (139

Stock based compensation expense

     26        17   

Impairment on securities

     32        7   

Net (gain) loss on other real estate owned

     39        (20

Net (increase) decrease in other assets

     111        (404

Net increase in other liabilities

     1,014        2,218   
                

Net cash and cash equivalents provided by operating activities

     3,707        4,686   
                

Investing activities:

    

Proceeds from paydowns, maturities and calls of securities available for sale

     265        521   

Proceeds from paydowns, maturities and calls of securities held to maturity

     3,486        2,598   

Loan originations and payments, net

     (8,045     9,625   

Net decrease in stock in Federal Reserve Bank and Federal Home Loan Bank

     —          (835

Proceeds from sale of other real estate owned

     388        294   

Payments received on FDIC indemnification asset

     696        —     

Purchases of bank premises and equipment

     (17     (1,672
                

Net cash and cash equivalents provided by (used in) investing activities

     (3,227     10,531   
                

Financing activities:

    

Net increase (decrease) in deposits

     1,384        (6,569

Proceeds from Federal Home Loan Bank advances

     —          5,000   

Net decrease in securities sold under agreement to repurchase and other short-term borrowings

     (4,027     (772
                

Net cash and cash equivalents used in financing activities

     (2,643     (2,341
                

Increase (decrease) in cash and cash equivalents

     (2,163     12,876   

Cash and cash equivalents at beginning of period

     9,745        8,070   
                

Cash and cash equivalents at end of period

   $ 7,582      $ 20,946   
                

Supplemental Disclosure of Cash Flow Information

    

Cash payments for:

    

Interest

   $ 1,640      $ 2,141   

Supplemental schedule of noncash investing and financing activities

    

Transfer from non-covered loans to other real estate owned

     3,759        —     

See accompanying notes to consolidated financial statements.

 

 

5


SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2011

 

1. ACCOUNTING POLICIES

Southern National Bancorp of Virginia, Inc. (“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 12 branches in Virginia located in Fairfax County (Reston, McLean and Fairfax), in Charlottesville, Warrenton (2), Leesburg (2), South Riding, Front Royal, New Market and Clifton Forge, and we also have a branch in Rockville, Maryland.

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

The unaudited consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles (“U. S. GAAP”) for interim financial information and instructions for Form 10-Q and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by U. S. GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in SNBV’s Form 10-K for the year ended December 31, 2010.

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.

Reclassifications

Some items in the prior year financial statements were reclassified to conform to the current presentation, and the reclassifications had no impact on prior period net income or shareholders’ equity.

 

6


Recent Accounting Pronouncements

In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This amendment clarifies the guidance on the evaluation made by a creditor on whether a restructuring constitutes a troubled debt restructuring. It clarifies the guidance related to a creditor’s evaluation of whether it has granted a concession to a debtor and also clarifies the guidance on a creditor’s evaluation of whether the debtor is experiencing financial difficulties. The amendment is effective for public entities for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The disclosures required which were deferred by ASU No. 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, is effective for interim and annual periods beginning on or after June 15, 2011. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our consolidated financial condition or results of operation.

 

2. STOCK- BASED COMPENSATION

In 2004, the Board of Directors adopted a stock option plan that authorized the reservation of up to 302,500 shares of common stock and provided for the granting of stock options to certain directors, officers and employees. As of March 31, 2011, 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 SNBV and to assist in the attracting and retaining of non-employee directors by affording them an opportunity to share in SNBV’s future success. Under the plan, the option’s price cannot be less than the fair market value of the stock on the grant date. The maximum term of the options is ten years and options granted may be subject to a graded vesting schedule.

SNBV granted 97,750 options during the first three months of 2011. The fair value of each option granted is estimated on the date of grant using the Black-Scholes options-pricing model. The following weighted-average assumptions were used to value options granted in the three months ended March 31, 2011:

 

     2011  

Dividend yield

     0.00

Expected life

     10 years   

Expected volatility

     46.13

Risk-free interest rate

     3.34

Weighted average fair value per option granted

   $ 4.39   

 

   

We have paid no dividends.

 

   

Due to SNBV’s short existence, the volatility was estimated using historical volatility of comparative publicly traded financial institutions in the Virginia market combined with that of SNBV for periods approximating the expected option life.

 

7


   

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

For the three months ended March 31, 2011 and 2010, stock-based compensation expense was $26 thousand and $17 thousand, respectively. As of March 31, 2011, unrecognized compensation expense associated with the stock options was $721 thousand, which is expected to be recognized over a weighted average period of 4.3 years.

A summary of the activity in the stock option plan during the three months ended March 31, 2011 follows (dollars in thousands):

 

      Shares      Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value
 

Options outstanding, beginning of period

     312,675       $ 8.35         

Granted

     97,750         7.20         

Forfeited

     —           —           

Exercised

     —           —           
                 

Options outstanding, end of period

     410,425       $ 8.07         7.0       $ 72   
                                   

Vested or expected to vest

     410,425       $ 8.07         7.0       $ 72   

Exercisable at end of period

     207,745       $ 8.90         4.9       $ 27   

 

3. SECURITIES

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

 

March 31, 2011    Amortized
Cost
     Gross Unrealized      Fair
Value
 
      Gains      Losses     

SBA guaranteed loan pools

   $ 10,544       $ 251       $ —           10,795   

FHLMC preferred stock

     16         75         —           91   

Total

   $ 10,560       $ 326       $ —         $ 10,886   
                                   
December 31, 2010    Amortized
Cost
    

 

Gross Unrealized

     Fair
Value
 
        Gains         Losses      

SBA guaranteed loan pools

   $ 10,822       $ 216       $ —           11,038   

FHLMC preferred stock

     16         14         —           30   
                                   

Total

   $ 10,838       $ 230       $ —         $ 11,068   
                                   

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

 

8


March 31, 2011    Amortized
Cost
     Gross Unrecognized     Fair
Value
 
      Gains      Losses    

Residential government-sponsored mortgage-backed securities

   $ 31,334       $ 1,161       $ (14   $ 32,481   

Residential government-sponsored collateralized mortgage obligations

     153         5         —          158   

Other residential collateralized mortgage obligations

     1,100         4         —          1,104   

Trust preferred securities

     8,938         864         (2,768     7,034   
                                  
   $ 41,525       $ 2,034       $ (2,782   $ 40,777   
                                  
December 31, 2010    Amortized
Cost
     Gross Unrecognized     Fair
Value
 
      Gains      Losses    

Residential government-sponsored mortgage-backed securities

   $ 34,088       $ 1,247       $ —        $ 35,335   

Residential government-sponsored collateralized mortgage obligations

     188         8         —          196   

Other residential collateralized mortgage obligations

     1,166         5         —          1,171   

Trust preferred securities

     9,453         675         (2,865     7,263   
                                  
   $ 44,895       $ 1,935       $ (2,865   $ 43,965   
                                  

The fair value and carrying amount, if different, of debt securities as of March 31, 2011, 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
Cost
     Fair Value      Amortized
Cost
     Fair Value  

Due in one to five years

   $ —         $ —         $ 322       $ 329   

Due in five to ten years

     —           —           1,170         1,194   

Due after ten years

     8,938         7,034         9,052         9,272   

Residential government-sponsored mortgage-backed securities

     31,334         32,481         —           —     

Residential government-sponsored collateralized mortgage obligations

     153         158         —           —     

Other residential collateralized mortgage obligations

     1,100         1,104         —           —     
                                   

Total

   $ 41,525       $ 40,777       $ 10,544       $ 10,795   
                                   

Securities with a carrying amount of approximately $42.3 million and $45.3 million at March 31, 2011 and December 31, 2010, respectively, were pledged to secure public deposits, repurchase agreements and a line of credit for advances from the Federal Home Loan Bank of Atlanta (“FHLB”).

SNBV monitors the portfolio for indicators of other than temporary impairment. At March 31, 2011 and December 31, 2010, certain securities’ fair values were below cost. As outlined in the table below, there were securities with fair values totaling approximately $8.9 million in the portfolio that are considered temporarily impaired at March 31, 2011. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because we do not have the intent to sell these securities and it is likely that we will not be required to sell the securities before their anticipated recovery, management does not consider these securities to be other-than-temporarily impaired as of March 31, 2011. The following tables present information regarding securities in a continuous unrealized loss position as of March 31, 2011 and December 31, 2010 (in thousands) by duration of time in a loss position:

 

March 31, 2011

               
      Less than 12 months     12 Months or More     Total  
Held to Maturity    Fair value      Unrecognized
Losses
    Fair value      Unrecognized
Losses
    Fair value      Unrecognized
Losses
 

Residential government-sponsored mortgage-backed securities

   $ 4,510       $ (14   $ —         $ —        $ 4,510       $ (14

Trust preferred securities

     —           —          4,359         (2,768     4,359         (2,768
                                                   
   $ 4,510       $ (14   $ 4,359       $ (2,768   $ 8,869       $ (2,782
                                                   

December 31, 2010

               
      Less than 12 months     12 Months or More     Total  
Held to Maturity    Fair value      Unrecognized
Losses
    Fair value      Unrecognized
Losses
    Fair value      Unrecognized
Losses
 

Trust preferred securities

   $ —         $ —        $ 4,805       $ (2,865   $ 4,805       $ (2,865
                                                   

 

9


As of March 31, 2011, we owned pooled trust preferred securities as follows:

 

Security

  Tranche    

Ratings

When Purchased

  Current Ratings                 Estimated
Fair
    Current
Defaults and
   

% of Current
Defaults and
Deferrals

to Current

    Previously
Recognized
Cumulative
Other
Comprehensive
 
  Level     Moody’s     Fitch   Moody’s     Fitch     Par Value     Book Value     Value     Deferrals     Collateral     Loss (1)  
    (in thousands)  

ALESCO VII A1B

    Senior        Aaa      AAA     Baa3        BB      $ 7,256      $ 6,486      $ 3,943      $ 204,056        43   $ 313   

MMCF II B

    Senior Sub        A3      AA-     Baa2        BB        496        457        465        34,000        29     39   

MMCF III B

    Senior Sub        A3      A-     Ba1        CC        656        641        416        37,000        32     15   
                                             
              8,408        7,584        4,824          $ 367   
                                             

 

Other Than Temporarily Impaired:                                                               Cumulative
Other

Comprehensive
Loss (2)
    Cumulative
OTTI

Related to
Credit  Loss (2)
 

TPREF FUNDING II

    Mezzanine        A1        A-        Caa3        C        1,500        541        541        127,100        37     682      $ 277   

TRAP 2007-XII C1

    Mezzanine        A3        A        C        C        2,059        126        437        140,705        28     1,354        579   

TRAP 2007-XIII D

    Mezzanine        NR        A-        NR        C        2,032        —          33        231,250        31     —          2,032   

MMC FUNDING XVIII

    Mezzanine        A3        A-        Ca        C        1,046        85        123        111,682        34     491        470   

ALESCO V C1

    Mezzanine        A2        A        Ca        C        2,073        458        576        117,942        41     954        661   

ALESCO XV C1

    Mezzanine        A3        A-        C        C        3,100        29        79        266,100        40     512        2,559   

ALESCO XVI C

    Mezzanine        A3        A-        Ca        C        2,065        115        421        149,900        35     770        1,180   
                                                     
              13,875        1,354        2,210          $ 4,763      $ 7,758   
                                                     

Total

            $ 22,283      $ 8,938      $ 7,034           
                                         

 

(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:

 

   

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

 

   

We assume recoveries ranging from 25% to 50% with a two year lag on all defaults and deferrals.

 

   

We assume 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.

These assumptions resulted in OTTI charges related to credit on one of the trust preferred securities in the amount of $32 thousand during the quarter ended March 31, 2011, compared to no OTTI charges related to credit on the trust preferred securities for the quarter ended March 31, 2010.

We also own $1.1 million of SARM 2005-22 1A2. This residential collateralized mortgage obligation was originally rated AAA by Standard and Poors. After a series of downgrades this security has been evaluated for potential impairment. Based on our review of the trustee report, shock analysis and current information regarding delinquencies, nonperforming loans and credit support it has been determined that no OTTI charge for credit was required for the quarter ended March 31, 2011. The assumptions used in the analysis included a 5.5% prepayment speed, 15%

 

10


default rate, a 50% loss severity and an accounting yield of 2.60%. We recorded OTTI charges for credit on this security of $7 thousand in the first quarter of 2010.

The following table presents a roll forward of the credit losses for the trust preferred securities and the residential collateralized mortgage obligation recognized in earnings for the three months ended March 31, 2011 and 2010 (in thousands):

 

     2011      2010  

Amount of cumulative other-than-temporary impairment related to credit loss prior to January 1

   $ 8,002       $ 7,714   

Amounts related to credit loss for which an other-than-temporary impairment was previously recognized

     32         7   
                 

Amount of cumulative other-than-temporary impairment related to credit loss as of March 31

   $ 8,034       $ 7,721   
                 

4. LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table summarizes the composition of our loan portfolio as of March 31, 2011 and December 31, 2010:

 

      Covered
Loans
     Non-covered
Loans
    Total
Loans
    Covered
Loans
     Non-covered
Loans
    Total
Loans
 
      March 31, 2011     December 31, 2010  

Mortgage loans on real estate:

              

Commercial real estate - owner-occupied

   $ 4,812       $ 86,407      $ 91,219      $ 5,246       $ 81,487      $ 86,733   

Commercial real estate - non-owner-occupied

     10,341         85,634        95,975        13,898         76,068        89,966   

Secured by farmland

     —           3,507        3,507        —           3,522        3,522   

Construction and land loans

     998         32,079        33,077        1,098         39,480        40,578   

Residential 1-4 family

     28,944         57,029        85,973        29,935         58,900        88,835   

Multi- family residential

     558         23,289        23,847        563         19,177        19,740   

Home equity lines of credit

     38,865         9,581        48,446        40,287         10,532        50,819   
                                                  

Total real estate loans

     84,518         297,526        382,044        91,027         289,166        380,193   

Commercial loans

     830         78,687        79,517        998         76,644        77,642   

Consumer loans

     142         2,061        2,203        146         2,010        2,156   
                                                  

Gross loans

     85,490         378,274        463,764        92,171         367,820        459,991   

Less unearned income on loans

     —           (719     (719     —           (554     (554
                                                  

Loans, net of unearned income

   $ 85,490       $ 377,555      $ 463,045      $ 92,171       $ 367,266      $ 459,437   
                                                  

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 not acquired from Greater Atlantic Bank are referred to as “non-covered loans.” The covered loans are 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. There has been no incremental provision recorded on covered loans since acquisition. The FDIC indemnification asset is reduced for cash payments received, and adjusted each quarter for changes in expected recoveries from the FDIC based on the expected cash flows from the covered loans. The adjustment amount is recorded through earnings.

 

11


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

Impaired loans were as follows (in thousands):

 

March 31, 2011   Covered Loans     Non-covered Loans     Total Loans  
     Recorded
Investment
    Allowance
for Loan
Losses Allocated
    Recorded
Investment (1)
    Allowance
for Loan
Losses Allocated
    Recorded
Investment
    Allowance
for Loan
Losses Allocated
 

With no related allowance recorded

           

Commercial real estate - owner occupied

  $ 141      $ —        $ 413      $ —        $ 554      $ —     

Commercial real estate - non-owner occupied (2)

    1,702        —          4,669        —          6,371        —     

Construction and land development

    701        —          1,789        —          2,490        —     

Commercial loans

    217        —          2,364        —          2,581        —     

Residential 1-4 family

    599        —          2,062        —          2,661        —     

Other consumer loans

    —          —          —          —          —          —     
                                               

Total

  $ 3,360      $ —        $ 11,297      $ —        $ 14,657      $ —     
                                               

With an allowance recorded

           

Commercial real estate - owner occupied

  $ —        $ —        $ —          $ —        $ —     

Commercial real estate - non-owner occupied (2)

    —          —          —            —          —     

Construction and land development

    —          —          2,014        52        2,014        52   

Commercial loans

    —          —          1,389        427        1,389        427   

Residential 1-4 family

    —          —          4,564        20        4,564        20   

Other consumer loans

    —          —          —          —          —          —     
                                               

Total

  $ —        $ —        $ 7,967      $ 499      $ 7,967      $ 499   
                                               

Grand total

  $ 3,360      $ —        $ 19,264      $ 499      $ 22,624      $ 499   
                                               

 

(1) Recorded investment is after charge offs of $5.9 million and includes SBA guarantees of $2.0 million.
(2) Includes loans secured by farmland and multi-family residential loans.

 

December 31, 2010   Covered Loans     Non-covered Loans     Total Loans  
     Recorded
Investment
    Allowance
for Loan
Losses Allocated
    Recorded
Investment (1)
    Allowance
for Loan
Losses Allocated
    Recorded
Investment
    Allowance
for Loan
Losses Allocated
 

With no related allowance recorded

           

Commercial real estate - owner occupied

  $ 141      $ —        $ 358      $ —        $ 499      $ —     

Commercial real estate - non-owner occupied (2)

    1,807        —          5,508        —          7,315        —     

Construction and land development

    1,055        —          4,844        —          5,899        —     

Commercial loans

    285        —          1,558        —          1,843        —     

Residential 1-4 family

    108        —          2,969        —          3,077        —     

Other consumer loans

    77        —          —          —          77        —     
                                               

Total

  $ 3,473      $ —        $ 15,237      $ —        $ 18,710      $ —     
                                               

With an allowance recorded

           

Commercial real estate - owner occupied

  $ —        $ —        $ —        $ —        $ —        $ —     

Commercial real estate - non-owner occupied (2)

    —          —          1,076        50        1,076        50   

Construction and land development

    —          —          —          —          —          —     

Commercial loans

    —          —          935        376        935        376   

Residential 1-4 family

    —          —          4,564        20        4,564        20   

Other consumer loans

    —          —          —          —          —          —     
                                               

Total

  $ —        $ —        $ 6,575      $ 446      $ 6,575      $ 446   
                                               

Grand total

  $ 3,473      $ —        $ 21,812      $ 446      $ 25,285      $ 446   
                                               

 

(1) Recorded investment is after charge offs of $7.8 million and includes SBA guarantees of $1.7 million.
(2) Includes loans secured by farmland and multi-family residential loans.

The following table presents the average recorded investment and interest income for impaired loans recognized by class of loans for the three months ended March 31, 2011 (in thousands):

 

12


     Covered Loans     Non-covered Loans     Total Loans  
     Average
Recorded
Investment
    Interest
Income
Recognized
    Average
Recorded
Investment
    Interest
Income
Recognized
    Average
Recorded
Investment
    Interest
Income
Recognized
 

With no related allowance recorded

           

Commercial real estate - owner occupied

  $ 141      $ 5      $ 323      $ 6      $ 464      $ 11   

Commercial real estate - non-owner occupied (2)

    1,748        21        5,119        44        6,867        65   

Construction and land development

    702        26        1,789        26        2,491        52   

Commercial loans

    218        5        1,842        13        2,060        18   

Residential 1-4 family

    225        3        2,062        —          2,287        3   

Other consumer loans

        —          —          —          —     
                                               

Total

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

With an allowance recorded

           

Commercial real estate - owner occupied

  $ —        $ —        $ —        $ —        $ —        $ —     

Commercial real estate - non-owner occupied (2)

    —          —          —          —          —          —     

Construction and land development

    —          —          2,014        31        2,014        31   

Commercial loans

    —          —          1,048        —          1,048        —     

Residential 1-4 family

    —          —          4,564        74        4,564        74   

Other consumer loans

    —          —          —          —          —          —     
                                               

Total

  $ —        $ —        $ 7,626      $ 105      $ 7,626      $ 105   
                                               

Grand total

  $ 3,034      $ 60      $ 18,761      $ 194      $ 21,795      $ 254   
                                               

 

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

The following tables present the recorded investment in nonaccrual and loans past due over 90 days and still accruing by class of loans as of March 31, 2011 and December 31, 2010 (in thousands):

 

March 31, 2011   Covered Loans     Non-covered Loans     Total Loans  
    Nonaccrual
Loans
    Loans Past Due
90 Days or More
Still on Accrual
    Nonaccrual
Loans
    Loans Past Due
90 Days or More
Still on Accrual
    Nonaccrual
Loans
    Loans Past Due
90 Days or More
Still on Accrual
 

Commercial real estate - owner occupied

  $ —        $ —        $ 290      $ —        $ 290      $ —     

Commercial real estate - non-owner occupied (1)

    1,784        —          2,001        —          3,785        —     

Construction and land development

      —          204        —          204        —     

Commercial loans

      —          2,016        —          2,016        —     

Residential 1-4 family

    600        —          2,062        —          2,662        —     

Other consumer loans

    —          —          —          —          —          —     
                                               

Total

  $ 2,384      $ —        $ 6,573      $ —        $ 8,957      $ —     
                                               
December 31, 2010   Covered Loans     Non-covered Loans     Total Loans  
    Nonaccrual
Loans
    Loans Past Due
90 Days or More
Still on Accrual
    Nonaccrual
Loans
    Loans Past Due
90 Days or More
Still on Accrual
    Nonaccrual
Loans
    Loans Past Due
90 Days or More
Still on Accrual
 

Commercial real estate - owner occupied

  $ —        $ —        $ 358      $ —        $ 358      $ —     

Commercial real estate - non-owner occupied (1)

    1,796        —          2,600        —          4,396        —     

Construction and land development

    —          —          2,304        —          2,304        —     

Commercial loans

    67        —          1,516        —          1,583        —     

Residential 1-4 family

    108        —          2,807        —          2,915        —     

Other consumer loans

    77        234        —          —          77        234   
                                               

Total

  $ 2,048      $ 234      $ 9,585      $ —        $ 11,633      $ 234   
                                               

 

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

Non-covered nonaccrual loans include SBA guaranteed amounts totaling $2.0 million and $1.4 million at March 31, 2011 and December 31, 2010, respectively.

The following tables present the aging of the recorded investment in past due loans by class of loans as of March 31, 2011 and December 31, 2010 (in thousands):

 

13


March 31, 2011    30 - 59
Days
Past Due
     60 - 89
Days
Past Due
     90 Days
or More
     Total
Past Due
     Nonaccrual
Loans
     Loans Not
Past Due
     Total
Loans
 

Covered loans:

                    

Commercial real estate - owner occupied

   $ 725       $ —         $ —         $ 725       $ —         $ 4,087       $ 4,812   

Commercial real estate - non-owner occupied (1)

     234         —           —           234         1,784         8,881         10,899   

Construction and land development

     106         —           —           106            892         998   

Commercial loans

     —           —           —           —              830         830   

Residential 1-4 family

     452         —           —           452         600         66,757         67,809   

Other consumer loans

     1         —           —           1         —           141         142   
                                                              

Total

   $ 1,518       $ —         $ —         $ 1,518       $ 2,384       $ 81,588       $ 85,490   
                                                              

Non-covered loans:

                    

Commercial real estate - owner occupied

   $ 556       $ 511       $ —         $ 1,067       $ 290       $ 85,050       $ 86,407   

Commercial real estate - non-owner occupied (1)

     —           —           —           —           2,001         110,429         112,430   

Construction and land development

     28         —           —           28         204         31,847         32,079   

Commercial loans

     1,752         —           —           1,752         2,016         74,919         78,687   

Residential 1-4 family

     1,034         744         —           1,778         2,062         62,770         66,610   

Other consumer loans

     7         13         —           20         —           2,041         2,061   
                                                              

Total

   $ 3,377       $ 1,268       $ —         $ 4,645       $ 6,573       $ 367,056       $ 378,274   
                                                              

Total loans:

                    

Commercial real estate - owner occupied

   $ 1,281       $ 511       $ —         $ 1,792       $ 290       $ 89,137       $ 91,219   

Commercial real estate - non-owner occupied (1)

     234         —           —           234         3,785         119,310         123,329   

Construction and land development

     134         —           —           134         204         32,739         33,077   

Commercial loans

     1,752         —           —           1,752         2,016         75,749         79,517   

Residential 1-4 family

     1,486         744         —           2,230         2,662         129,527         134,419   

Other consumer loans

     8         13         —           21         —           2,182         2,203   
                                                              

Total

   $ 4,895       $ 1,268       $ —         $ 6,163       $ 8,957       $ 448,644       $ 463,764   
                                                              

 

December 31, 2010    30 - 59
Days
Past Due
     60 - 89
Days
Past Due
     90 Days
or More
     Total
Past Due
     Nonaccrual
Loans
     Loans Not
Past Due
     Total
Loans
 

Covered loans:

                    

Commercial real estate - owner occupied

   $ 316       $ 412       $ —         $ 728       $ —         $ 4,518       $ 5,246   

Commercial real estate - non-owner occupied (1)

     436         —           —           436         1,796         12,229         14,461   

Construction and land development

     —           —           —           —           —           1,098         1,098   

Commercial loans

     —           —           —           —           67         931         998   

Residential 1-4 family

     —           134         —           134         108         29,693         29,935   

Other consumer loans

     —           39         234         273         77         40,083         40,433   
                                                              

Total

   $ 752       $ 585       $ 234       $ 1,571       $ 2,048       $ 88,552       $ 92,171   
                                                              

Non-covered loans:

                    

Commercial real estate - owner occupied

   $ 551       $ 719       $ —         $ 1,270       $ 358       $ 79,859       $ 81,487   

Commercial real estate - non-owner occupied (1)

     868         —           —           868         2,600         95,299         98,767   

Construction and land development

     30         —           —           30         2,304         37,146         39,480   

Commercial loans

     1,646         30         —           1,676         1,516         73,452         76,644   

Residential 1-4 family

     3,739         32         —           3,771         2,807         52,322         58,900   

Other consumer loans

     10         134         —           144         —           12,398         12,542   
                                                              

Total

   $ 6,844       $ 915       $ —         $ 7,759       $ 9,585       $ 350,476       $ 367,820   
                                                              

Total loans:

                    

Commercial real estate - owner occupied

   $ 867       $ 1,131       $ —         $ 1,998       $ 358       $ 84,377       $ 86,733   

Commercial real estate - non-owner occupied (1)

     1,304         —           —           1,304         4,396         107,528         113,228   

Construction and land development

     30         —           —           30         2,304         38,244         40,578   

Commercial loans

     1,646         30         —           1,676         1,583         74,383         77,642   

Residential 1-4 family

     3,739         166         —           3,905         2,915         82,015         88,835   

Other consumer loans

     10         173         234         417         77         52,481         52,975   
                                                              

Total

   $ 7,596       $ 1,500       $ 234       $ 9,330       $ 11,633       $ 439,028       $ 459,991   
                                                              

 

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

Activity in the allowance for loan and lease losses for the three months ended March 31, 2011, is summarized below (in thousands):

 

14


     Commercial
Real Estate
Owner
Occupied
    Commercial
Real Estate
Non-owner
Occupied (1)
    Construction
and Land
Development
    Commercial
Loans
    1-4 Family
Residential
    Other
Consumer
Loans
     Unallocated      Total  

Allowance for loan losses:

                  

Beginning balance

   $ 562      $ 1,265      $ 326      $ 2,425      $ 999      $ 9       $ 13       $ 5,599   

Charge offs

     (60     (600     (7     (521     (102     —           —           (1,290

Recoveries

     —          —          5        36        13        1         —           55   

Provision

     243        334        580        (135     (16     17         317         1,340   
                                                                  

Ending balance

   $ 745      $ 999      $ 904      $ 1,805      $ 894      $ 27       $ 330       $ 5,704   
                                                                  

 

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

The following tables present the balance in the allowance for loan losses and the recorded investment in non-covered loans by portfolio segment and based on impairment method as of March 31, 2011 and December 31, 2010 (in thousands):

 

     Commercial
Real Estate
Owner
Occupied
     Commercial
Real Estate
Non-owner
Occupied (1)
     Construction
and Land
Development
     Commercial
Loans
     1-4 Family
Residential
     Other
Consumer
Loans
     Unallocated      Total  

March 31, 2011

                       

Ending allowance balance attributable to loans:

                       

Individually evaluated for impairment

   $ —         $ 50       $ 2       $ 427       $ 20       $ —         $ —         $ 499   

Collectively evaluated for impairment

     745         949         902         1,378         874         27         330         5,205   
                                                                       

Total ending allowance

   $ 745       $ 999       $ 904       $ 1,805       $ 894       $ 27       $ 330       $ 5,704   
                                                                       

Loans:

                       

Individually evaluated for impairment

   $ —         $ 6,159       $ 2,727       $ 3,590       $ 6,788       $ —         $ —         $ 19,264   

Collectively evaluated for impairment

     86,407         106,271         29,352         75,097         59,822         2,061         —           359,010   
                                                                       

Total ending loan balances

   $ 86,407       $ 112,430       $ 32,079       $ 78,687       $ 66,610       $ 2,061       $ —         $ 378,274   
                                                                       

December 31, 2010

                       

Ending allowance balance attributable to loans:

                       

Individually evaluated for impairment

   $ —         $ 50       $ —         $ 376       $ 20       $ —         $ —         $ 446   

Collectively evaluated for impairment

     562         1,215         326         2,049         979         9         13         5,153   
                                                                       

Total ending allowance

   $ 562       $ 1,265       $ 326       $ 2,425       $ 999       $ 9       $ 13       $ 5,599   
                                                                       

Loans:

                       

Individually evaluated for impairment

   $ 358       $ 6,584       $ 4,844       $ 2,493       $ 7,533       $ —         $ —         $ 21,812   

Collectively evaluated for impairment

     81,129         92,183         34,636         74,151         61,899         2,010         —           346,008   
                                                                       

Total ending loan balances

   $ 81,487       $ 98,767       $ 39,480       $ 76,644       $ 69,432       $ 2,010       $ —         $ 367,820   
                                                                       

 

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

It is Sonabank’s practice to charge off collateral dependent loans to recoverable value rather than establish a specific reserve. Charge offs on loans individually evaluated for impairment totaled approximately $1.3 million during the first quarter of 2011.

Troubled Debt Restructurings

At March 31, 2011, we had three restructured loans included in impaired loans totaling $6.6 million with borrowers who experienced deterioration in financial condition. These loans are secured by single-family residential properties or commercial real estate properties. These restructured loans totaled $6.6 million as of December 31, 2010. Management believes these loans are well secured and the borrowers have the ability to repay the loans in accordance with the renegotiated terms. These restructured loans were on accrual status as payments were being made according to the restructured loan terms.

SNBV allocated $72 thousand of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2011.

Credit Quality Indicators

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

 

15


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

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

As of March 31, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):

 

March 31, 2011    Covered Loans      Non-covered Loans      Total Loans  
     Classified/
Criticized  (1)
     Pass      Total      Special
Mention
     Substandard      Pass      Total      Classified/
Criticized
     Pass      Total  

Commercial real estate - owner occupied

   $ 141       $ 4,671       $ 4,812       $ 1,863       $ 413       $ 84,131       $ 86,407       $ 2,417       $ 88,802       $ 91,219   

Commercial real estate - non-owner occupied (2)

     1,702         9,197         10,899         —           4,669         107,762         112,431         6,371         116,959         123,330   

Construction and land development

     701         297         998         —           3,803         28,276         32,079         4,504         28,573         33,077   

Commercial loans

     217         613         830         5,694         3,753         68,855         78,302         9,664         69,468         79,132   

Residential 1-4 family

     599         67,210         67,809         706         6,626         59,663         66,995         7,931         126,873         134,804   

Other consumer loans

     —           142         142         —           —           2,060         2,060         —           2,202         2,202   
                                                                                         

Total

   $ 3,360       $ 82,130       $ 85,490       $ 8,263       $ 19,264       $ 350,747       $ 378,274       $ 30,887       $ 432,877       $ 463,764   
                                                                                         

 

December 31, 2010    Covered Loans      Non-covered Loans      Total Loans  
     Classified/
Criticized  (1)
     Pass      Total      Special
Mention
     Substandard      Pass      Total      Classified/
Criticized
     Pass      Total  

Commercial real estate - owner occupied

   $ 141       $ 5,105       $ 5,246       $ 557       $ 358       $ 80,572       $ 80,572       $ 1,056       $ 85,677       $ 86,733   

Commercial real estate - non-owner occupied (2)

     1,807         12,654         14,461         867         6,585         91,315         91,315         9,259         103,969         113,228   

Construction and land development

     1,055         43         1,098         —           4,844         34,636         34,636         5,899         34,679         40,578   

Commercial loans

     285         713         998         233         2,492         73,919         73,919         3,010         74,632         77,642   

Residential 1-4 family

     108         29,827         29,935         40         7,533         61,859         69,432         7,681         91,686         99,367   

Other consumer loans

     77         40,356         40,433         —           —           2,010         2,010         77         42,366         42,443   
                                                                                         

Total

   $ 3,473       $ 88,698       $ 92,171       $ 1,697       $ 21,812       $ 344,311       $ 351,884       $ 26,982       $ 433,009       $ 459,991   
                                                                                         

 

(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.

 

5. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

SNBV is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve elements of credit and funding risk in excess of the amount recognized in the consolidated balance sheet. Letters of credit are written conditional commitments issued by SNBV to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. We had letters of credit outstanding totaling $6.6 million and $2.4 million as of March 31, 2011 and December 31, 2010, respectively.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit is based on the contractual amount of these instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments are made predominately for adjustable rate loans, and generally have fixed expiration dates of up to three months or other termination clauses and usually require payment of a fee. Since many of the commitments may

 

16


expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis.

At March 31, 2011 and December 31, 2010, we had unfunded lines of credit and undisbursed construction loan funds totaling $111.9 million and $104.9 million, respectively. Our approved loan commitments were $7.6 million and $35.0 million at March 31, 2011 and December 31, 2010, respectively.

 

6. EARNINGS PER SHARE

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

 

     Income
(Numerator)
     Weighted
Average
Shares
(Denominator)
     Per Share
Amount
 

For the three months ended March 31, 2011

        

Basic EPS

   $ 1,120         11,590       $ 0.10   

Effect of dilutive stock options and warrants

     —           4         —     
                          

Diluted EPS

   $ 1,120         11,594       $ 0.10   
                          

For the three months ended March 31, 2010

        

Basic EPS

   $ 1,041         11,590       $ 0.09   

Effect of dilutive stock options and warrants

     —           3         —     
                          

Diluted EPS

   $ 1,041         11,593       $ 0.09   
                          

Anti-dilutive options and warrants totaled 550,365 and 414,766 for the three months ended March 31, 2011and 2010, respectively, as the exercise price exceeded the average share price during the period.

 

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:

 

17


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 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 SNBV’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  
(dollars in thousands)   Total at
March 31, 2011
    Quoted Prices in
Active  Markets for
Identical Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Financial assets:

       

Available for sale securities

       

SBA guaranteed loan pools

  $ 10,795      $ —        $ 10,795      $ —     

FHLMC preferred stock

    91        91        —          —     
                               

Total available-for-sale securities

  $ 10,886      $ 91      $ 10,795      $ —     
                               
          Fair Value Measurements Using  
(dollars in thousands)   Total at
December 31, 2010
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Financial assets:

       

Available for sale securities

       

SBA guaranteed loan pools

  $ 11,038      $ —        $ 11,038      $ —     

FHLMC preferred stock

    30        30        —          —     
                               

Total available-for-sale securities

  $ 11,068      $ 30      $ 11,038      $ —     
                               

Assets and Liabilities Measured on a Non-recurring Basis:

Trust Preferred Securities Classified as Held-to-Maturity

The base input in calculating fair value is a Bloomberg Fair Value Index yield curve for single issuer trust preferred securities which correspond to the ratings of the securities we own. We also use composite rating indices to fill in the gaps where the bank rating indices did not correspond to the ratings in our portfolio. When a bank index that matches the rating of our security is not available, we used the bank index that most closely matches the rating, adjusted by the spread between the composite index that most closely matches the security’s rating and the composite index with a rating that matches the bank index used. Then, we use the adjusted index yield, which is further adjusted by a liquidity premium, as the discount rate to be used in the calculation of the present value of the same cash flows used to evaluate the securities for OTTI. The liquidity premiums were derived in consultation with a securities advisor. The liquidity premiums we used ranged from 2% to 5%, and the adjusted discount rates ranged from 9.86% to 14.97%. 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.

 

18


Based on our analysis in the first three months of 2011, we recorded OTTI charges related to credit on trust preferred securities in the amount of $32 thousand. There were no OTTI charges on trust preferred securities during the first three months of 2010.

Other Residential Collateralized Mortgage Obligation Classified as Held-to Maturity

The fair value was estimated within Level 2 fair value hierarchy, as the fair value is based on either pricing models, quoted market prices of securities with similar characteristics, or discounted cash flows. We have evaluated this security for potential impairment and, based on our review of the trustee report, shock analysis and current information regarding delinquencies, nonperforming loans and credit support, it has been determined that no OTTI charge for credit exists for the three months ended March 31, 2011. The assumptions used in the analysis included a 5.5% prepayment speed, 15% default rate, a 50% loss severity and an accounting yield of 2.60%. We recorded OTTI charges for credit on this security of $7 thousand in the first quarter of 2010.

Other Securities Classified as Held-to-Maturity

Our other securities classified as held-to-maturity include residential government sponsored mortgage-backed securities and residential government sponsored collateralized mortgage obligations. There was no OTTI recorded on these securities. Currently, all of SNBV’s other securities classified as held-to-maturity are considered to be level 2 securities.

Impaired Loans

Generally, we measure the impairment for impaired loans considering the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral is determined by appraisals or other valuation which is then adjusted for the cost related to liquidation of the collateral. Fair value is classified as Level 3 in the fair value hierarchy. Non-covered loans identified as impaired totaled $19.3 million as of March 31, 2011 with an allocated allowance for loan losses totaling $499 thousand compared to a carrying amount of $21.8 million with an allocated allowance for loan losses totaling $446 thousand at December 31, 2010. Charge offs related to the impaired loans at March 31, 2011 totaled $1.1 million during the first quarter of 2011, compared to $730 thousand during the three months ended March 31, 2010.

Other Real Estate Owned (OREO)

OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or internal market evaluation less cost to sell. OREO is further evaluated quarterly for any additional impairment. Fair value is classified as Level 3 in the fair value hierarchy. At March 31, 2011, the total amount of OREO was $7.9 million, of which $7.2 million was non-covered and $676 thousand was covered.

At December 31, 2010, the total amount of OREO was $4.6 million, of which $3.9 million was non-covered and $676 thousand was covered.

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

 

19


          Fair Value Measurements Using  
(dollars in thousands)   Total at
March 31, 2011
    Quoted Prices in
Active  Markets for
Identical Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Trust preferred securities, held to maturity

  $ 541      $ —        $ —        $ 541   

Impaired non-covered loans:

       

Commercial real estate - owner occupied

    413        —          —          413   

Commercial real estate - non-owner occupied (1)

    4,669        —          —          4,669   

Construction and land development

    3,751        —          —          3,751   

Commercial loans

    3,326        —          —          3,326   

Residential 1-4 family

    6,606        —          —          6,606   

Impaired covered loans:

       

Commercial real estate - owner occupied

    141        —          —          141   

Commercial real estate - non-owner occupied (1)

    1,702        —          —          1,702   

Construction and land development

    701        —          —          701   

Commercial loans

    217        —          —          217   

Residential 1-4 family

    599        —          —          599   

Other consumer loans

    —          —          —          —     

Non-covered other real estate owned:

       

Commercial real estate - owner occupied

    953        —          —          953   

Construction and land development

    5,435        —          —          5,435   

Residential 1-4 family

    844        —          —          844   

Covered other real estate owned:

       

Commercial real estate - owner occupied

    597        —          —          597   

Commercial

    79        —          —          79   
          Fair Value Measurements Using  
(dollars in thousands)   Total at
December 31, 2010
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Trust preferred securities, held to maturity

  $ 973      $ —        $ —        $ 973   

Other residential collateralized mortgage obligations

    1,171        —          1,171      $ —     

Impaired non-covered loans:

       

Commercial real estate - owner occupied

    358        —          —          358   

Commercial real estate - non-owner occupied (1)

    6,534        —          —          6,534   

Construction and land development

    4,844        —          —          4,844   

Commercial loans

    2,117        —          —          2,117   

Residential 1-4 family

    7,513        —          —          7,513   

Impaired covered loans:

       

Commercial real estate - owner occupied

    141        —          —          141   

Commercial real estate - non-owner occupied (1)

    1,807        —          —          1,807   

Construction and land development

    1,055        —          —          1,055   

Commercial loans

    285        —          —          285   

Residential 1-4 family

    108        —          —          108   

Other consumer loans

    77        —          —          77   

Non-covered other real estate owned:

       

Commercial real estate - owner occupied

    578        —          —          578   

Construction and land development

    2,797        —          —          2,797   

Residential 1-4 family

    526        —          —          526   

Covered other real estate owned:

       

Commercial real estate - owner occupied

    597        —          —          597   

Commercial

    79        —          —          79   

 

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

 

20


Fair Value of Financial Instruments

The carrying amount and estimated fair values of financial instruments were as follows (in thousands):

 

     March 31, 2011      December 31, 2010  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Financial assets:

           

Cash and cash equivalents

   $ 7,582       $ 7,582       $ 9,745       $ 9,745   

Securities available for sale

     10,886         10,886         11,068         11,068   

Securities held to maturity

     41,525         40,777         44,895         43,965   

Stock in Federal Reserve Bank and Federal Home Loan Bank

     6,350         n/a         6,350         n/a   

Net non-covered loans

     371,851         369,168         361,667         360,016   

Net covered loans

     85,490         84,729         92,171         91,661   

Accrued interest receivable

     2,381         2,381         2,141         2,141   

FDIC indemnification asset

     17,999         17,999         18,536         18,536   

Financial liabilities:

           

Deposits:

           

Demand deposits

     48,915         48,915         50,490         50,490   

Money market and savings accounts

     156,735         156,735         175,351         175,351   

Certificates of deposit

     226,708         228,392         205,133         207,221   

Securities sold under agreements to repurchase and other short-term borrowings

     19,881         19,881         23,908         23,908   

FHLB advances

     35,000         36,097         35,000         36,458   

Accrued interest payable

     370         370         415         415   

Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, demand deposits, savings accounts, money market accounts, short-term debt, and variable rate loans that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life. It was not practicable to determine the fair value of Federal Reserve Bank and Federal Home Loan Bank stock due to restrictions placed on its transferability. Fair value of long-term debt is based on current rates for similar financing. The FDIC indemnification asset was measured at estimated fair value on the date of acquisition. The fair value was determined by discounting estimated future cash flows using the long-term risk free rate plus a premium. Subsequent additions to the asset are valued at par as it is anticipated that these amounts will be shortly received. The fair value of off-balance-sheet items is not considered material.

8. FEDERAL HOME LOAN BANK (“FHLB”) ADVANCES

On March 28, 2011, SNBV completed a restructuring of $25 million of convertible advances with the FHLB of Atlanta. These advances had a weighted average interest rate of 4.05% and maturities ranging from August 2012 through October 2012. The existing advances were replaced by $25 million of fixed rate, non-callable advances with a weighted average interest rate of 3.19% and maturities ranging from September 2013 through September 2014. The effect of the restructuring was to reduce the cost of the advances by 86 basis points and increase the duration of the advances from 1.41 to 2.84 years. The restructuring was accounted for as a modification of debt, rather than an extinguishment of debt.

 

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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, 2010. Results of operations for the three month period ended March 31, 2011 are not necessarily indicative of results that may be attained for any other period.

SPECIAL CAUTIONARY NOTE REGARDING 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, 2010, factors that could contribute to those differences include, but are not limited to:

 

   

our limited operating history;

 

   

changes in the strength of the United States economy in general and 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;

 

   

our reliance on brokered deposits;

 

   

a deterioration or downgrade in the credit quality and credit agency ratings of the securities in our securities portfolio;

 

   

impairment concerns and risks related to our investment portfolio of collateralized mortgage obligations, agency mortgage-backed securities and pooled trust preferred securities;

 

   

the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations;

 

   

increased credit risk in our assets and increased operating risk caused by a material change in commercial, consumer and/or real estate loans as a percentage of our total loan portfolio;

 

   

the concentration of our loan portfolio in loans collateralized by real estate;

 

   

our level of construction and land development and commercial real estate loans;

 

   

changes in the levels of loan prepayments and the resulting effects on the value of our loan portfolio;

 

   

the failure of assumptions 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

 

22


 

banks, and our ability to realize the cost savings and revenue enhancements we expect from such activities;

 

   

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;

 

   

increases in FDIC deposit insurance premiums and assessments;

 

   

the continued service of key management personnel;

 

   

increased asset levels and changes in the composition of assets and the resulting impact on our capital levels and regulatory capital ratios;

 

   

our ability to acquire, operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive but necessary technological changes; and

 

   

fiscal and governmental policies of the United States federal government.

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. (“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 bank. Sonabank was originally chartered as a national bank under the laws of the United States of America on April 14, 2005. On January 1, 2009, Sonabank converted from a nationally chartered bank to a state chartered bank and moved its headquarters from Charlottesville to McLean, Virginia. Sonabank is now regulated by the State Corporation Commission of Virginia and the Federal Reserve Bank of Richmond. Sonabank conducts full-service banking operations in Charlottesville, Clifton Forge, Leesburg, Warrenton, New Market, Front Royal, South Riding and Fairfax County in Virginia and in Rockville, Maryland. We have received regulatory approval and expect to open a new branch in Middleburg, Virginia in May of 2011.We also have loan production offices in Charlottesville, Fredericksburg, Warrenton and Richmond in Virginia. 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 March 31, 2011 was $1.1 million compared to $1.0 million during the first quarter of 2010.

 

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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 $6.1 million for the first quarter of 2011, compared to $6.3 million for the first quarter of 2010. The decline resulted primarily from a decline in average earning assets quarter to quarter as loans were almost flat but the average balance of investment securities declined by over $20.0 million. The accretion of the discount on the Greater Atlantic Bank loan portfolio amounted to $575 thousand in the first quarter of 2011, compared to $667 thousand in the first quarter of 2010. The net interest margin was 4.77% in the quarter ended March 31, 2011, up from 4.62% in the first quarter of 2010. This was the result of two factors. There was a small decline in the yield on earning assets which resulted primarily from the reduction in securities as a percentage of earning assets. The weighted average rate paid on deposits also declined largely as a result of the repricing of certain money market accounts at the beginning of 2011.

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

 

24


    

Average Balance Sheets and Net Interest

Analysis For the Three Months Ended

 
     3/31/2011     3/31/2010  
     Average
Balance
    Interest
Income/
Expense
     Yield/
Rate
    Average
Balance
    Interest
Income/
Expense
     Yield/
Rate
 
     (Dollar amounts in thousands)  

Assets

              

Interest-earning assets:

              

Loans, net of unearned income (1) (2)

   $ 455,558      $ 7,121         6.34   $ 459,267      $ 7,614         6.72

Investment securities

     54,342        556         4.09     74,872        734         3.92

Other earning assets

     11,568        52         1.82     14,785        43         1.18
                                      

Total earning assets

     521,468        7,729         6.01     548,924        8,391         6.20
                          

Allowance for loan losses

     (5,979          (5,293     

Total non-earning assets

     68,312             72,054        
                          

Total assets

   $ 583,801           $ 615,685        
                          

Liabilities and stockholders’ equity

              

Interest-bearing liabilities:

              

NOW accounts

   $ 15,869        11         0.27   $ 15,227        12         0.31

Money market accounts

     158,811        365         0.93     146,425        633         1.75

Savings accounts

     5,616        9         0.62     4,669        7         0.64

Time deposits

     213,613        893         1.70     256,521        1,152         1.82
                                      

Total interest-bearing deposits

     393,909        1,277         1.31     422,842        1,804         1.73

Borrowings

     55,499        318         2.32     55,463        327         2.39
                                      

Total interest-bearing liabilities

     449,408        1,595         1.44     478,305        2,131         1.81
                          

Noninterest-bearing liabilities:

              

Demand deposits

     32,113             33,540        

Other liabilities

     2,135             6,741        
                          

Total liabilites

     483,656             518,586        

Stockholders’ equity

     100,145             97,099        
                          

Total liabilities and stockholders’ equity

   $ 583,801           $ 615,685        
                          

Net interest income

     $ 6,134           $ 6,260      
                          

Interest rate spread

          4.57          4.39

Net interest margin

          4.77          4.62

 

(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 risk factors to each segment. The risk factors are determined by considering peer data, as well as applying management’s judgment.

The provision for loan losses in the first quarter of 2011 was $1.3 million, and the provision was also $1.3 million in the first quarter of 2010. Net charge offs during the quarter ended March 31, 2011 were $1.2 million compared to $1.1 million during the first quarter of 2010. The charge-offs were related to various credits including a C&I loan and a commercial real estate loan.

 

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Noninterest Income

The following table presents the major categories of noninterest income for the three months ended March 31, 2011 and 2010:

 

     For the Three Months Ended
March 31,
 
     2011     2010     Change  
     (dollars in thousands)  

Account maintenance and deposit service fees

   $ 200      $ 241      $ (41

Income from bank-owned life insurance

     135        139        (4

Net gain (loss) on other real estate owned

     (39     20        (59

Net impairment losses recognized in earnings

     (32     (7     (25

Other

     44        147        (103
                        

Total noninterest income

   $ 308      $ 540      $ (232
                        

Noninterest income was $308 thousand during the first quarter of 2011, compared to $540 thousand during the same quarter of 2010. The major part of this decline was attributable to a decrease of $111 thousand in fees on letters of credit related to a short-term letter of credit which expired in June 2010. Also, during the first quarter of 2011, there were net losses on other real estate owned (“OREO”) of $39 thousand compared to gains of $20 thousand during the first quarter of 2010. There were other than temporary impairment (“OTTI”) charges of $32 thousand during the quarter ended March 31, 2011, compared to $7 thousand for the same period last year.

Noninterest Expense

The following table presents the major categories of noninterest expense for the three months ended March 31, 2011 and 2010:

 

     For the Three Months Ended
March 31,
 
     2011     2010      Change  
     (dollars in thousands)  

Salaries and benefits

   $ 1,603      $ 1,641       $ (38

Occupancy expenses

     539        542         (3

Furniture and equipment expenses

     136        154         (18

Amortization of core deposit intangible

     230        236         (6

Virginia franchise tax expense

     171        184         (13

FDIC assessment

     154        189         (35

Data processing expense

     142        155         (13

Telephone and communication expense

     88        119         (31

Change in FDIC indemnification asset

     (159     244         (403

Other operating expenses

     550        514         36   
                         

Total noninterest expense

   $ 3,454      $ 3,978       $ (524
                         

Noninterest expense was $3.5 million for the first quarter of 2011 compared to $4.0 million for the first quarter of 2010. During the first quarter of 2011, there has been accretion of the FDIC indemnification asset of $159 thousand. During the first quarter of 2010, the accretion was offset by a charge to the FDIC indemnification asset due to impaired covered loans that paid off.

 

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The efficiency ratio improved from 58.61% during the quarter ended March 31, 2010, to 53.03% during the first quarter of 2011.

FINANCIAL CONDITION

Balance Sheet Overview

Total assets of Southern National Bancorp of Virginia were $590.4 million as of March 31, 2011 compared to $590.8 million as of December 31, 2010. Net loans receivable increased from $453.8 million at the end of 2010 to $457.3 million at March 31, 2011. Within that total, covered loans declined by $6.7 million while the non-covered loan portfolio increased by $10.3 million. Our loan pipeline is reasonably strong and we expect continued growth going forward, partially offset by continued declines in the covered portfolio.

Total deposits were $432.4 million at March 31, 2011 compared to $431.0 million at December 31, 2010. Certificates of deposit increased $21.6 million during the quarter. This was partially offset by a decrease in money market accounts of $18.9 million during the quarter ended March 31, 2011. We had paid rates in excess of market on large money market accounts for former Greater Atlantic Bank customers to retain them during 2010, and as of the beginning of 2011, we reduced those rates. Brokered certificates of deposit have decreased from $27.0 million at December 31, 2010, to $22.0 million as of March 31, 2011. Noninterest-bearing deposits were $32.6 million at March 31, 2011 and $34.5 million at December 31, 2010.

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 March 31, 2011 and December 31, 2010:

 

     Covered
Loans
     Non-covered
Loans
    Total
Loans
    Covered
Loans
     Non-covered
Loans
    Total
Loans
 
     March 31, 2011     December 31, 2010  

Mortgage loans on real estate:

              

Commercial real estate - owner-occupied

   $ 4,812       $ 86,407      $ 91,219      $ 5,246       $ 81,487      $ 86,733   

Commercial real estate - non-owner-occupied

     10,341         85,634        95,975        13,898         76,068        89,966   

Secured by farmland

     —           3,507        3,507        —           3,522        3,522   

Construction and land loans

     998         32,079        33,077        1,098         39,480        40,578   

Residential 1-4 family

     28,944         57,029        85,973        29,935         58,900        88,835   

Multi- family residential

     558         23,289        23,847        563         19,177        19,740   

Home equity lines of credit

     38,865         9,581        48,446        40,287         10,532        50,819   
                                                  

Total real estate loans

     84,518         297,526        382,044        91,027         289,166        380,193   

Commercial loans

     830         78,687        79,517        998         76,644        77,642   

Consumer loans

     142         2,061        2,203        146         2,010        2,156   
                                                  

Gross loans

     85,490         378,274        463,764        92,171         367,820        459,991   

Less unearned income on loans

     —           (719     (719     —           (554     (554
                                                  

Loans, net of unearned income

   $ 85,490       $ 377,555      $ 463,045      $ 92,171       $ 367,266      $ 459,437   
                                                  

 

27


As of March 31, 2011 and December 31, 2010, substantially all of our loans were to customers located in Virginia and Maryland. We are not dependent on any single customer or group of customers whose insolvency would have a material adverse effect on operations.

Asset Quality

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

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

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

Non-covered Loans and Assets

Non-covered loans identified as impaired totaled $19.3 million with allocated allowance for loan losses in the amount of $499 thousand as of March 31, 2011, including $6.7 million of nonaccrual loans and $6.6 million of restructured loans. The restructured loans are well secured, but the borrowers were experiencing financial difficulties. As a consequence, we agreed to defer some interest payments, and payments are being made in accordance with the restructured terms. This compares to $21.8 million of impaired loans with allocated allowance for loan losses in the amount of $446 thousand at December 31, 2010, including $9.6 million of nonaccrual loans and $6.6 million of restructured loans. The nonaccrual loans included SBA guaranteed amounts of $2.0 million and $1.4 million at March 31, 2011 and December 31, 2010, respectively. At March 31, 2011 and December 31, 2010, there were no loans past due 90 days or more and accruing interest.

Non-covered nonperforming assets increased from $13.5 million at December 31, 2010 to $13.8 million at March 31, 2011.

Our OREO in the non-covered portfolio is comprised of the Culpeper property, which contains 33 finished 2 to 4 acre lots, the Kluge development property which was a non-performing loan at the end of 2010 which we foreclosed on during the first quarter, two commercial properties and two residential properties. Non-covered OREO at March 31, 2011 was $7.2 million compared to $3.9 million at December 31, 2010.

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

 

28


estimated credit losses. We believe the allowance for loan losses is sufficient to cover probable incurred credit losses at March 31, 2011.

The following table sets forth selected asset quality ratios as of the dates indicated:

 

    As of  
    March 31,
2011
    December 31,
2010
 

Allowance for loan losses to total non-covered loans

    1.51     1.52

Non-covered nonperforming assets to total non-covered assets

    2.74     2.71

Non-covered nonperforming assets excluding SBA guaranteed loans to total non-covered assets

    2.33     2.43

We do not have a formal loan modification program. Rather, we work with individual customers on a case-by-case basis to facilitate the orderly collection of our principal and interest before a loan becomes a non-performing loan. If a customer is unable to make contractual payments, we review the circumstances of the customer’s situation and negotiate a revised payment stream. In other words, we identify performing customers experiencing financial difficulties and through negotiations, we permit them to pay interest only or lesser principal payments. We do not forgive principal payments. Our goal when restructuring a credit is to afford the customer a reasonable period of time to remedy the issue causing cash flow constraints within their business so that they can return to performing status over time.

Our loan modifications have taken the form of deferral of interest payments and/or curtailment of scheduled principal payments. Our restructured loans are all collateral secured loans. If a customer fails to perform under the modified terms, we place the loan on non-accrual status and begin the process of working with the customer to liquidate the underlying collateral to satisfy the debt.

At March 31, 2011, we had three restructured loans totaling $6.6 million with borrowers who experienced deterioration in financial condition. These loans were included in impaired loans. All of these loans were granted interest rate deferrals to provide cash flow relief to customers experiencing cash flow difficulties. There were no concessions made to forgive principal or interest relative to these loans. These loans are secured by first liens on single-family residential or commercial real estate properties. Management believes these loans are well secured and the borrowers have the ability to repay the loans in accordance with the renegotiated terms. As such, these restructured loans were on accrual status at the balance sheet date as payments were being made according to the restructured loan terms. These loans have not had a partial charge-off. We continue to report restructured loans as restructured until such time as the loan has developed a reasonable repayment history, the borrower displays the financial capacity to repay, and the loan terms return to the terms in place prior to the restructure. If the customer fails to perform, we place the loan on non-accrual status and seek to liquidate the underlying collateral for these loans. Changes in value for impairment, including the amount attributed to the passage of time, are recorded entirely within the provision for loans losses.

We consider any loan that is restructured for a borrower experiencing financial difficulties due to a borrower’s potential inability to pay in accordance with contractual terms of the loan a troubled debt restructure (“TDR”). Specifically, we consider a concession involving a modification of the loan terms, such as (i) temporary reduction of the stated interest rate, (ii) temporary reduction or deferral of principal, (iii) temporary reduction or deferral of accrued interest at a stated interest rate lower than the current market rate for new debt with similar risk all to be TDRs. When a

 

29


modification of terms is made for a competitive reason, we do not consider that to be a TDR. The primary example of a competitive modification would be an interest rate reduction for a performing credit worthy customer to a market rate as the result of a market decline in rates.

Covered Loans and Assets

Covered loans identified as impaired totaled $3.4 million as of March 31, 2011 and $3.5 million at December 31, 2010. Nonaccrual loans were $2.4 million and $2.0 million at March 31, 2011 and December 31, 2010, respectively. At March 31, 2011, there were no loans past due 90 days or more and accruing interest, and at December 31, 2010, there were loans past due 90 days or more and accruing interest in the amount of $234 thousand.

Securities

Investment securities, available for sale and held to maturity, were $52.4 million at March 31, 2011 and $56.0 million at December 31, 2010.

As of March 31, 2011 we owned pooled trust preferred securities as follows:

 

          Ratings                       Estimated     Current    

% of Current

Defaults and

Deferrals

   

Previously

Recognized

Cumulative

Other

       

Security

  Tranche
Level
    When Purchased   Current Ratings               Fair
Value
    Defaults  and
Deferrals
    to Current
Collateral
    Comprehensive
Loss (1)
       
    Moody’s   Fitch   Moody’s   Fitch   Par Value     Book Value            
                          (in thousands)                      

ALESCO VII A1B

    Senior     Aaa   AAA   Baa3   BB   $ 7,256      $ 6,486      $ 3,943      $ 204,056        43   $ 313     

MMCF II B

    Senior Sub      A3   AA-   Baa2   BB     496        457        465        34,000        29     39     

MMCF III B

    Senior Sub      A3   A-   Ba1   CC     656        641        416        37,000        32     15     
                                               
              8,408        7,584        4,824          $ 367     
                                               
Other Than Temporarily Impaired:                                                       Cumulative
Other Comprehensive
Loss (2)
    Cumulative
OTTI Related to
Credit Loss (2)
 

TPREF FUNDING II

    Mezzanine      A1   A-   Caa3   C     1,500        541        541        127,100        37     682      $ 277   

TRAP 2007-XII C1

    Mezzanine      A3   A   C   C     2,059        126        437        140,705        28     1,354        579   

TRAP 2007-XIII D

    Mezzanine      NR   A-   NR   C     2,032        —          33        231,250        31     —          2,032   

MMC FUNDING XVIII

    Mezzanine      A3   A-   Ca   C     1,046        85        123        111,682        34     491        470   

ALESCO V C1

    Mezzanine      A2   A   Ca   C     2,073        458        576        117,942        41     954        661   

ALESCO XV C1

    Mezzanine      A3   A-   C   C     3,100        29        79        266,100        40     512        2,559   

ALESCO XVI C

    Mezzanine      A3   A-   Ca   C     2,065        115        421        149,900        35     770        1,180   
                                                     
              13,875        1,354        2,210          $ 4,763      $ 7,758   
                                                     

Total

            $ 22,283      $ 8,938      $ 7,034           
                                         

 

(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:

 

   

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

 

   

We assume recoveries ranging from 25% to 50% with a two year lag on all defaults and deferrals.

 

   

We assume 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

 

30


 

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 plus original spread to discount projected cash flows to present values.

These assumptions resulted in OTTI charges related to credit on one of the trust preferred securities in the amount of $32 thousand during the quarter ended March 31, 2011, compared to no OTTI charges related to credit on the trust preferred securities for the quarter ended March 31, 2010.

We also own $1.1 million of SARM 2005-22 1A2. This residential collateralized mortgage obligation was originally rated AAA by Standard and Poors. After a series of downgrades this security has been evaluated for potential impairment. Based on our review of the trustee report, shock analysis and current information regarding delinquencies, nonperforming loans and credit support it has been determined that no OTTI charge for credit was required for the quarter ended March 31, 2011. The assumptions used in the analysis included a 5.5% prepayment speed, 15% default rate, a 50% loss severity and an accounting yield of 2.60%. We recorded OTTI charges for credit on this security of $7 thousand in the first quarter of 2010.

Liquidity and Funds Management

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

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

During the three months ended March 31, 2011, we funded our financial obligations with deposits, securities sold under agreements to repurchase and borrowings from the Federal Home Loan Bank of Atlanta. At March 31, 2011, we had $111.9 million of unfunded lines of credit and undisbursed construction loan funds. Our approved loan commitments were $7.6 million at March 31, 2011. 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):

 

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     Actual     Required
For Capital
Adequacy Purposes
    To Be Categorized as
Well Capitalized
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

March 31, 2011

               

SNBV

               

Tier 1 risk-based capital ratio

   $ 91,691         20.78   $ 17,647         4.00   $ 26,471         6.00

Total risk-based capital ratio

     97,208         22.03     35,294         8.00     44,118         10.00

Leverage ratio

     91,691         16.04     22,867         4.00     28,583         5.00

Sonabank

               

Tier 1 risk-based capital ratio

   $ 88,229         20.00   $ 17,642         4.00   $ 26,484         6.00

Total risk-based capital ratio

     93,724         21.25     35,285         8.00     44,106         10.00

Leverage ratio

     88,229         15.43     22,867         4.00     28,583         5.00

December 31, 2010

               

SNBV

               

Tier 1 risk-based capital ratio

   $ 90,214         20.52   $ 17,585         4.00   $ 26,377         6.00

Total risk-based capital ratio

     95,689         21.77     35,169         8.00     43,961         10.00

Leverage ratio

     90,214         15.23     23,701         4.00     29,626         5.00

Sonabank

               

Tier 1 risk-based capital ratio

   $ 86,757         19.74   $ 17,580         4.00   $ 26,370         6.00

Total risk-based capital ratio

     92,231         20.99     35,160         8.00     43,950         10.00

Leverage ratio

     86,757         14.64     23,701         4.00     29,626         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.

 

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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

The following tables are based on an analysis prepared by FTN Financial setting forth an analysis of our interest rate risk as measured by the estimated change in MVPE resulting from instantaneous and sustained parallel shifts in the yield curve (plus or minus 300 basis points, measured in 100 basis point increments) as of March 31, 2011 and December 31, 2010, and all changes are within our ALM Policy guidelines:

 

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

Change in

Interest Rates

in Basis Points

(Rate Shock)

   Market Value of Portfolio Equity     Market Value of
Portfolio Equity as a % of
 
   Amount      $ Change
From Base
    % Change
From Base
    Total
Assets
    Portfolio
Equity
Book Value
 
     (Dollar amounts in thousands)  

Up 300

   $ 97,431       $ (2,255     -2.26     16.50     97.09

Up 200

     98,599         (1,087     -1.09     16.70     98.25

Up 100

     98,763         (923     -0.93     16.73     98.42

Base

     99,686         —          0.00     16.88     99.34

Down 100

     96,392         (3,294     -3.30     16.33     96.05

Down 200

     92,066         (7,620     -7.64     15.59     91.74

Down 300

     89,289         (10,397     -10.43     15.12     88.98

 

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     Sensitivity of Market Value of Portfolio Equity
As of December 31, 2010
 
Change in    Market Value of Portfolio Equity     Market Value of
Portfolio Equity as a % of
 

Interest Rates

in Basis Points

(Rate Shock)

   Amount      $ Change
From Base
    % Change
From Base
    Total
Assets
    Portfolio
Equity
Book Value
 
     (Dollar amounts in thousands)  

Up 300

   $ 99,642       $ (1,643     -1.62     16.86     100.20

Up 200

     100,576         (709     -0.70     17.01     101.14

Up 100

     100,578         (707     -0.70     17.01     101.14

Base

     101,285         —          0.00     17.13     101.85

Down 100

     97,672         (3,613     -3.57     16.52     98.22

Down 200

     93,048         (8,237     -8.13     15.74     93.57

Down 300

     90,390         (10,895     -10.76     15.29     90.90

Our interest rate sensitivity is also monitored by management through the use of a model run by FTN Financial that generates estimates of the change in the net interest income over a range of interest rate scenarios. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. In this regard, the model assumes that the composition of our interest sensitive assets and liabilities existing at March 31, 2011 and December 31, 2010 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.

 

Change in    Sensitivity of Net Interest Income
As of March 31, 2011
 
Interest Rates    Adjusted Net Interest Income      Net Interest Margin  

in Basis Points

(Rate Shock)

   Amount      $ Change
From Base
     Percent     % Change
From Base
 
     (Dollar amounts in thousands)  

Up 300

   $ 27,703       $ 2,985         5.16     0.54

Up 200

     26,659         1,941         4.97     0.35

Up 100

     25,478         760         4.76     0.14

Base

     24,718         —           4.62     0.00

Down 100

     25,032         314         4.68     0.06

Down 200

     25,030         312         4.68     0.06

Down 300

     25,115         397         4.69     0.07

 

34


Change in    Sensitivity of Net Interest Income
As of December 31, 2010
 
Interest Rates    Adjusted Net Interest Income      Net Interest Margin  

in Basis Points

(Rate Shock)

   Amount      $ Change
From Base
     Percent     % Change
From Base
 
     (Dollar amounts in thousands)  

Up 300

   $ 27,668       $ 3,361         5.09     0.61

Up 200

     26,466       $ 2,159         4.87     0.39

Up 100

     25,193       $ 886         4.64     0.16

Base

     24,307       $ —           4.48     0.00

Down 100

     24,670       $ 363         4.55     0.07

Down 200

     24,676       $ 369         4.55     0.07

Down 300

     24,747       $ 440         4.56     0.08

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in MVPE requires the making of certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. Accordingly, although the MVPE tables and Sensitivity of Net Interest Income 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.

 

35


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 on 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. Other than the remediation of the material weakness related to the misidentification of a subsequent event described in our Annual Report on Form 10-K for the year ended December 31, 2010, there have been no other changes in SNBV’s internal control over financial reporting that occurred during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, SNBV’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

SNBV and Sonabank may, from time to time, be a party to various legal proceedings arising in the ordinary course of business. Sonabank is a party to two small lawsuits considered to be in the ordinary course of business. There are no other proceedings pending, or to management’s knowledge, threatened, against SNBV or Sonabank as of March 31, 2011.

ITEM 1A – RISK FACTORS

As of March 31, 2011 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, 2010.

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

Not applicable

ITEM 3. – DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. – (REMOVED AND RESERVED)

ITEM 5. – OTHER INFORMATION

Not applicable

 

36


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

 

37


Signatures

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

 

      Southern National Bancorp of Virginia, Inc.
     

(Registrant)

May 9, 2011      

/s/ Georgia S. Derrico

(Date)

      Georgia S. Derrico,
      Chairman of the Board and Chief Executive Officer
May 9, 2011      

/s/ William H. Lagos

(Date)

      William H. Lagos,
      Senior Vice President and Chief Financial Officer

 

38