Southern National Bancorp
Southern National Bancorp of Virginia Inc (Form: 10-Q, Received: 11/14/2008 06:27:08)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

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

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2008

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.)

1770 Timberwood Boulevard

Suite 100

Charlottesville, Virginia 22911

(Address of principal executive offices) (zip code)

(434) 973-5242

(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 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   ¨   Smaller reporting company   ¨
Non-accelerated filer   x (Do not check if a smaller reporting company)

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

As of October 31, 2008, there were 6,798,547 shares of common stock outstanding.

 

 

 


Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

September 30, 2008

INDEX

 

     PAGE
PART 1—FINANCIAL INFORMATION

Item 1 – Financial Statements

  
  Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007    2
 

Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2008 and 2007

   3
  Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2008    4
  Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007    5
  Notes to Consolidated Financial Statements    6-15

Item  2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

   16-27
Item 3 – Quantitative and Qualitative Disclosures about Market Risk    28-30
Item 4 – Controls and Procedures    31
PART II—OTHER INFORMATION   
Item 1 – Legal Proceedings    31
Item 1A – Risk Factors    31
Item 6 – Exhibits    31
Signatures    32


Table of Contents

ITEM I—FINANCIAL INFORMATION

PART I—FINANCIAL STATEMENTS

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands) (Unaudited)

 

     September 30,
2008
    December 31,
2007
 

ASSETS

    

Cash and cash equivalents:

    

Cash and due from financial institutions

   $ 3,290     $ 1,299  

Interest-bearing deposits in other financial institutions

     25,212       9  
                

Total cash and cash equivalents

     28,502       1,308  
                

Securities available for sale, at fair value

     15,757       40,734  
                

Securities held to maturity, at amortized cost

    

(fair value of $51,289 and $34,597, respectively)

     61,365       34,267  
                

Loans, net of unearned income

     298,207       261,407  

Less allowance for loan losses

     (4,121 )     (3,476 )
                

Net loans

     294,086       257,931  
                

Stock in Federal Reserve Bank and Federal Home Loan Bank

     4,070       3,908  

Bank premises and equipment, net

     3,725       3,496  

Goodwill

     8,713       8,713  

Core deposit intangibles, net

     3,322       3,867  

Bank-owned life insurance

     13,285       12,847  

Other real estate owned

     3,433       3,648  

Deferred tax assets, net

     4,592       3,292  

Other assets

     3,128       3,272  
                

Total assets

   $ 443,978     $ 377,283  
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Noninterest-bearing demand deposits

   $ 21,542     $ 18,097  

Interest-bearing deposits:

    

NOW accounts

     5,914       7,259  

Money market accounts

     51,296       57,466  

Savings accounts

     1,992       2,400  

Time deposits

     241,531       180,247  
                

Total interest-bearing deposits

     300,733       247,372  
                

Total deposits

     322,275       265,469  
                

Securities sold under agreements to repurchase

     21,063       15,501  

Federal Home Loan Bank (FHLB) advances

     30,000       25,000  

Other liabilities

     2,969       2,038  
                

Total liabilities

     376,307       308,008  
                

Commitments and contingencies

     —         —    

Stockholders’ equity:

    

Common stock, $.01 par value. Authorized 45,000,000 shares; issued and outstanding, 6,798,547 shares at September 30, 2008 and December 31, 2007

     68       68  

Additional paid in capital

     69,508       69,436  

Retained earnings

     683       489  

Accumulated other comprehensive loss

     (2,588 )     (718 )
                

Total stockholders’ equity

     67,671       69,275  
                

Total liabilities and stockholders’ equity

   $ 443,978     $ 377,283  
                

See accompanying notes to consolidated financial statements.

 

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

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

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
     2008     2007     2008     2007

Interest and dividend income :

        

Interest and fees on loans

   $ 4,906     $ 4,565     $ 14,881     $ 12,923

Interest and dividends on taxable securities

     992       904       3,099       2,503

Interest and dividends on other earning assets

     122       80       275       225
                              

Total interest and dividend income

     6,020       5,549       18,255       15,651
                              

Interest expense:

        

Interest on deposits

     2,631       2,689       7,982       7,452

Interest on borrowings

     358       190       1,132       416
                              

Total interest expense

     2,989       2,879       9,114       7,868
                              

Net interest income

     3,031       2,670       9,141       7,783
                              

Provision for loan losses

     500       270       1,207       845
                              

Net interest income after provision for loan losses

     2,531       2,400       7,934       6,938
                              

Noninterest income:

        

Account maintenance and deposit service fees

     133       88       367       238

Income from bank-owned life insurance

     148       121       438       202

Gain on sale of loans

     107       —         107       —  

Net gain (loss) on other real estate owned

     39       21       (136 )     21

Net loss on securities

     (1,234 )     —         (1,358 )     —  

Other

     50       (6 )     133       55
                              

Total noninterest income (loss)

     (757 )     224       (449 )     516
                              

Noninterest expenses:

        

Salaries and benefits

     1,045       872       2,963       2,463

Occupancy expenses

     388       276       1,109       809

Furniture and equipment expenses

     119       112       366       326

Amortization of core deposit intangible

     182       182       545       545

Virginia franchise tax expense

     137       137       411       412

Data processing expense

     64       54       196       168

Telephone and communication expense

     65       61       188       163

Other operating expenses

     300       294       955       863
                              

Total noninterest expenses

     2,300       1,988       6,733       5,749
                              

Income (loss) before income taxes

     (526 )     636       752       1,705

Income tax expense

     231       169       558       116
                              

Net income (loss)

   $ (757 )   $ 467     $ 194     $ 1,589
                              

Comprehensive income (loss)

   $ (828 )   $ 72     $ (1,676 )   $ 1,275
                              

Earnings (loss) per share, basic and diluted

   $ (0.11 )   $ 0.07     $ 0.03     $ 0.23
                              

See accompanying notes to consolidated financial statements.

 

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

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

 

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

Balance—January 1, 2008

   $ 68    $ 69,436    $ 489    $ (718)       $ 69,275  

Comprehensive income:

               

Net income

           194      $ 194       194  

Stock-based compensation expense

        21             21  

Issuance of warrants

        51             51  

Change in unrealized gain (loss) on available for sale securities (net of tax, $963)

              (1,870 )     (1,870 )     (1,870 )
                     

Total comprehensive loss

              $ (1,676 )  
                     
                                       

Balance—September 30, 2008

   $ 68    $ 69,508    $ 683    $ (2,588 )     $ 67,671  
                                       

See accompanying notes to consolidated financial statements.

 

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(dollars in thousands) (Unaudited)

 

     2008     2007  

Operating activities:

    

Net income

   $ 194     $ 1,589  

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

    

Depreciation

     399       335  

Amortization, net

     424       407  

Provision for loan losses

     1,207       845  

Income on bank-owned life insurance

     (438 )     (202 )

Stock option expense

     21       4  

Gain on sale of loans

     (107 )     —    

Net loss on securities

     1,358       —    

Net (gain) loss on other real estate owned

     136       (21 )

Net increase in other assets

     (321 )     (895 )

Net increase in other liabilities

     481       772  
                

Net cash and cash equivalents provided by operating activities

     3,354       2,834  
                

Investing activities:

    

Purchases of securities available for sale

     (9,945 )     (11,008 )

Proceeds from sale of securities available for sale

     5,617       —    

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

     6,108       3,871  

Purchases of securities held to maturity

     (15,410 )     (6,940 )

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

     7,555       8,739  

Net increase in loans

     (39,467 )     (43,779 )

Proceeds from sale of SBA loans

     1,895       —    

Purchase of bank-owned life insurance

     —         (12,500 )

Purchase of stock in Federal Reserve Bank and Federal Home Loan Bank

     (162 )     (1,200 )

Proceeds from sale of other real estate owned

     408       320  

Purchases of bank premises and equipment

     (127 )     (445 )
                

Net cash and cash equivalents used in investing activities

     (43,528 )     (62,942 )
                

Financing activities:

    

Net increase in deposits

     56,806       24,307  

Proceeds from Federal Home Loan Bank advances

     5,000       20,000  

Net increase in securities sold under agreement to repurchase

     5,562       9,323  
                

Net cash and cash equivalents provided by financing activities

     67,368       53,630  
                

Increase (decrease) in cash and cash equivalents

     27,194       (6,478 )

Cash and cash equivalents at beginning of period

     1,308       8,126  
                

Cash and cash equivalents at end of period

   $ 28,502     $ 1,648  
                

Supplemental Disclosure of Cash Flow Information

    

Cash payments for:

    

Interest

   $ 8,705     $ 7,228  

Income taxes

     990       1,009  

Supplemental schedule of noncash investing and financing activities

    

Transfer from securities available for sale to securities held to maturity

   $ 19,125     $ —    

Transfer from loans to other real estate owned

   $ 317     $ 4,251  

Transfer from deferred tax valuation allowance to goodwill

   $ —       $ 1,945  

Acquisition of fixed assets related to Leesburg Branch

   $ 501     $ —    

See accompanying notes to consolidated financial statements.

 

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2008

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, N. A. (“Sonabank”) a national bank chartered on April 14, 2005, under the laws of the United States of America. The principal activities of Sonabank are to attract deposits and originate loans as permitted for federally chartered national banks under the laws of the United States of America. Sonabank conducts full-service banking operations in Charlottesville, Clifton Forge, Leesburg, Warrenton and Fairfax County in Virginia.

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, 2007.

Use of Estimates

To prepare financial statements in conformity with U. S. generally accepted accounting principles management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, valuation of deferred tax assets, valuation of goodwill and other intangible assets, loan servicing rights, and fair values of financial instruments are particularly subject to change.

Reclassifications

Some items in the prior financial statements were reclassified to conform to the current presentation.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (FAS 157) . This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157 . This FSP delays the effective date of

 

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FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. See Footnote 9 for the impact of the adoption and required disclosure about fair value measurements.

In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset Is Not Active. The FSP clarifies the application of FAS 157 in a market that is not active and provides an example to illustrate key consideration in determining the fair value of a financial asset when the market for that financial asset is not active.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (FAS 159) . The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. We did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008, the effective date of the standard or subsequently.

In September 2006, the EITF finalized Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This issue is effective for fiscal years beginning after December 15, 2007. Our adoption of this standard did not have a material impact on our consolidated financial statements.

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133(FAS 161). FAS 161 expands the disclosure requirements of FASB Statement No. 133 and requires the reporting entity to provide enhanced disclosures about the objectives and strategies for using derivative instruments, quantitative disclosures about fair values and amounts of gains and losses on derivative contracts, and credit-risk related contingent features in derivative agreements. FAS 161 is effective for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. We plan to include the required disclosures in our first interim reporting period ending March 31, 2009, if applicable.

2. STOCK- BASED COMPENSATION

In 2004, the Board of Directors adopted a stock options plan that authorized the reservation of up to 302,500 shares of common stock and provided for the granting of stock options to certain directors, officers and employees. The 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 plans, the options 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.

 

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SNBV granted 44,500 options during the first quarter of 2008, and no options were granted in the second and third quarters. The fair value of each option granted is estimated on the date of grant using the Black-Scholes options-pricing model. The following weighted-average assumptions were used to value options granted in the nine months ended September 30, 2008:

 

     2008  

Dividend yield

     0.00 %

Expected life

     10 years  

Expected volatility

     19.17 %

Risk-free interest rate

     3.51 %

Weighted average fair value per option granted

   $ 3.51  

 

   

We have paid no dividends.

 

   

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

 

   

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.

SFAS 123R requires the recognition of stock-based compensation expense for the number of awards that are ultimately expected to vest. For the three and nine month periods ended September 30, 2008, stock-based compensation expense recorded was $8 thousand and $21 thousand, respectively, compared to $2 thousand and $4 thousand for the same periods last year. As of September 30, 2008, unrecognized compensation expense associated with the stock options was $136 thousand which is expected to be recognized over a weighted average period of 4.2 years.

A summary of the activity in the stock option plan during the nine months ended September 30, 2008 follows:

 

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

Options outstanding, beginning of period

   173,525     $ 9.27      

Granted

   44,500       9.20      

Forfeited

   (5,100 )     10.39      

Exercised

   —         —        
              

Options outstanding, end of period

   212,925     $ 9.23    7.2    $ —  
                        

Vested or expected to vest

   212,925     $ 9.23    7.2    $ —  

Exercisable at end of period

   168,905     $ 9.12    6.7    $ —  

 

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3. SECURITIES

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

 

     Fair
Value
   Gross Unrealized  
        Gains    Losses  

September 30, 2008

        

Mortgage-backed securities

   $ 15,666    $ 84    $ —    
                      

Total debt securities

     15,666      84      —    

FHLMC preferred stock

     91      —        —    
                      

Total

   $ 15,757    $ 84    $ —    
                      
     Fair
Value
   Gross Unrealized  
      Gains    Losses  

December 31, 2007

        

Mortgage-backed securities

   $ 13,345    $ 292    $ —    

Collateralized mortgage obligations

     3,814      —        (20 )

Corporate Bonds

     22,015      —        (1,360 )
                      

Total debt securities

     39,174      292      (1,380 )

FHLMC preferred stock

     1,560      —        —    
                      

Total

   $ 40,734    $ 292    $ (1,380 )
                      

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

 

     Carrying
Amount
   Gross Unrecognized     Fair
Value
        Gains    Losses    

September 30, 2008

          

Mortgage-backed securities

   $ 36,295    $ 267    $ (185 )   $ 36,377

Corporate Bonds

     19,117      —        (9,647 )     9,470

Collateralized mortgage obligations

     5,953      19      (530 )     5,442
                            
   $ 61,365    $ 286    $ (10,362 )   $ 51,289
                            
     Carrying
Amount
   Gross Unrecognized     Fair
Value
        Gains    Losses    

December 31, 2007

       

Mortgage-backed securities

   $ 25,329    $ 353    $ (19 )   $ 25,663

Collateralized mortgage obligations

     8,938      15      (19 )     8,934
                            
   $ 34,267    $ 368    $ (38 )   $ 34,597
                            

During the quarter ended September 30, 2008, we sold $5.6 million of available for sale mortgage-backed securities resulting in a gain of $111 thousand.

Effective July 1, 2008, SNBV transferred $23.9 million par value of bank pooled trust preferred securities from its securities available for sale portfolio to its securities held to maturity portfolio. The transferred securities had a fair value of $19.1 million at June 30, 2008, and a weighted average maturity of 29 years. As a result of the transfer, it is expected that $4.0 million of unrealized pre-tax losses associated with the transferred securities that were previously recognized in Accumulated Other Comprehensive Income (Loss) will be recovered in tangible capital over the remaining life of the securities. Unrealized pre-tax losses in the amount of $34 thousand were recovered during the third quarter of 2008. It is also expected that there will be no other future impact on Accumulated Other Comprehensive Income, earnings or capital related to these securities unless the transferred securities are determined to be other than temporarily or permanently impaired.

 

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SNBV monitors the portfolio which is subject to liquidity needs, market rate changes and credit risk changes to see if adjustments are needed. There are 22 securities with stated maturities totaling approximately $38.7 million in the portfolio that are considered temporarily impaired at September 30, 2008. Management has concluded that the fair value is expected to recover as the securities approach their maturity date and/or market conditions improve, and management has the positive intent and ability to hold to recovery. All the securities continue to perform according to the contractual terms. The following tables present information regarding securities in a continuous unrealized loss position as of September 30, 2008 and December 31, 2007 (in thousands) by duration of time in a loss position:

 

     Less than 12 months     12 Months or More     Total  
     Fair value    Unrealized
Losses
    Fair value    Unrealized
Losses
    Fair value    Unrealized
Losses
 

September 30, 2008

               

Mortgage-backed securities

   $ 27,256    $ (185 )   $ —      $ —       $ 27,256    $ (185 )

Collateralized mortgage obligations

     2,000      (530 )     —        —         2,000      (530 )

Corporate bonds

     5,444      (5,161 )     4,026      (4,486 )     9,470      (9,647 )
                                             
   $ 34,700    $ (5,876 )   $ 4,026    $ (4,486 )   $ 38,726    $ (10,362 )
                                             
     Less than 12 months     12 Months or More     Total  
     Fair value    Unrealized
Losses
    Fair value    Unrealized
Losses
    Fair value    Unrealized
Losses
 

December 31, 2007

               

Mortgage-backed securities

   $ 2,597    $ (9 )   $ 2,805    $ (10 )   $ 5,402    $ (19 )

Collateralized mortgage obligations

     —        —         6,713      (39 )     6,713      (39 )

Corporate bonds

     22,015      (1,360 )     —        —         22,015      (1,360 )
                                             
   $ 24,612    $ (1,369 )   $ 9,518    $ (49 )   $ 34,130    $ (1,418 )
                                             

As of September 30, 2008 Sonabank’s investment portfolio included $19.1 million (par value of $23.8 million) of trust preferred securities in ten issues. We evaluated these securities for evidence of other than temporary impairment under EITF 99-20. All of the issues owned by Sonabank have one or more investment grade rating. One of the issues, ALESCO VII A1B, is AAA rated, and the underlying collateral is 67% bank collateral. In the other nine issues the underlying collateral is at least 80% bank collateral. The underlying collateral includes no REIT collateral. The following table sets forth the ratings of the issues we own:

 

Number of
Issues

   Moody’s
Rating
   Fitch
Rating

1

   Aaa    AAA

1

   Baa2    A

1

   NR    A-

1

   A2    AA-

2

   A1    A-

1

   Baa3    A-

1

   Baa1    A-

1

   Ba1    A-

1

   Ba2    A-

All of the issues owned by Sonabank continue to pay principal and interest in accordance with the contractual terms of the securities. Management has reviewed each of the issues at the participant level using the CAMEL ratings provided in the Bank and S&L – Savings Bank Financial Quarterly published by IDC Financial Publishing, Inc. Management has also reviewed the interest coverage of each of the tranches we own as well as expected cash flows. While further deterioration in the entire banking sector is possible, at this time the issues we own are performing and have cushions above known and projected defaults or deferrals.

Unrealized losses on corporate bonds have not been recognized into income because the bonds are of investment-grade quality with at least one rating agency, the bonds continue to perform according to the contractual terms, all interest payments are current, expected cash flows for our tranches have not been adversely impacted, and management has the intent and ability to hold for the foreseeable

 

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future. The fair value is expected to recover as the bonds approach maturity. Due to current market conditions, all of these assets are extremely illiquid, and as such, the fair value is difficult to estimate due to the volatility in the financial sector resulting from the following market factors:

 

  1. Pooled trust preferred issuance in the years from 2000 through 2007 is estimated to have been $45 billion, peaking at over $10 billion in 2006. In 2008, there was no issuance activity.

 

  2. FTN Financial’s data show that secondary market trading activity was robust through the first quarter of 2008 (with $242.9 million traded) but fell precipitously in the second quarter (to $71.2 million) and fell further in the third quarter ($25.8 million). This is indicative of very little liquidity in the market.

We own 80,000 shares of the Freddie Mac perpetual preferred stock Series V. In December 2007 we recorded an “other than temporary impairment” (OTTI) charge of $440 thousand, an additional $124 thousand OTTI in the second quarter of 2008 and finally, in this quarter, an OTTI of $1.3 million as FHLMC was taken into conservatorship and the securities were downgraded. In accordance with SFAS 115, when a decline in fair value below cost is deemed other than temporary, the unrealized loss must be recognized as a charge to earnings. As current market conditions make it difficult to precisely forecast a time period for the security to fully recover, an impairment charge was recorded.

4. ALLOWANCE FOR LOAN LOSSES

The following summarizes activity in the allowance for loan losses for the nine months ended September 30, 2008 and 2007 (in thousands):

 

     2008     2007  

Balance, beginning of period

   $ 3,476     $ 2,726  

Provision charged to operations

     1,207       845  

Recoveries credited to allowance

     8       —    
                

Total

     4,691       3,571  

Loans charged off

     (570 )     (405 )
                

Balance, end of period

   $ 4,121     $ 3,166  
                

 

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5. FEDERAL HOME LOAN BANK (FHLB) ADVANCES

 

     September 30, 2008    December 31, 2007
     (dollars in thousands)

FHLB fixed rate advance maturing January 2010 with a rate of 2.82%

   $ 5,000    $ —  

FHLB convertible advances maturing from August 2012 through October 2012 with a weighted average interest rate of 4.05% (1)

     25,000      25,000
             

Total FHLB advances

   $ 30,000    $ 25,000
             

 

(1) These advances have a five year maturity and are convertible to adjustable rate advances at the option of the FHLB of Atlanta after the first year and quarterly thereafter. If converted, the adjustable rate advances will be priced at a spread to 3-month LIBOR.

6. 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 $1.6 million and $1.2 million as of September 30, 2008 and December 31, 2007, 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 it does for on-balance sheet instruments. Unless noted otherwise, we do not require collateral or other security to support financial instruments with credit risk.

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

At September 30, 2008 and December 31, 2007, we had unfunded lines of credit and undisbursed construction loan funds totaling $41.8 million and $54.5 million, respectively. Our approved loan commitments were zero and $10.8 million at September 30, 2008 and December 31, 2007, respectively.

 

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7. 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 (Loss)
(Numerator)
    Weighted
Average
Shares
(Denominator)
   Per Share
Amount
 

For the three months ended September 30, 2008

       

Basic EPS

   $ (757 )   6,799    $ (0.11 )

Effect of dilutive stock options and warrants

     —       —        —    
                     

Diluted EPS

   $ (757 )   6,799    $ (0.11 )
                     

For the three months ended September 30, 2007

       

Basic EPS

   $ 467     6,799    $ 0.07  

Effect of dilutive stock options and warrants

     —       74      —    
                     

Diluted EPS

   $ 467     6,873    $ 0.07  
                     

For the nine months ended September 30, 2008

       

Basic EPS

   $ 194     6,799    $ 0.03  

Effect of dilutive stock options and warrants

     —       —        —    
                     

Diluted EPS

   $ 194     6,799    $ 0.03  
                     

For the nine months ended September 30, 2007

       

Basic EPS

   $ 1,589     6,799    $ 0.23  

Effect of dilutive stock options and warrants

     —       86      —    
                     

Diluted EPS

   $ 1,589     6,885    $ 0.23  
                     

There were 356,425 anti-dilutive options and warrants for the three and nine months ended September 30, 2008, and there were 5,500 anti-dilutive options and warrants for the three and nine months ended September 30, 2007.

8. FAIR VALUE

FAS 157 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

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

 

          Fair Value Measurements Using
(dollars in thousands)    Total at
September 30, 2008
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs

(Level 3)

Assets:

           

Available for sale securities

   $ 15,757    $ —      $ 15,757    $ —  
                           

 

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The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities

Where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U. S. agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy. Currently, all of SNBV’s securities are considered to be level 2 securities.

Assets and Liabilities Measured on a Non-recurring Basis:

Impaired Loans

SFAS 157 applies to loans measured for impairment using the practical expedients permitted by SFAS 114 at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent 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. After charge-offs in the amount of $265 thousand and allocated allowance for loan losses totaling $435 thousand, loans identified as impaired in accordance with SFAS 114 totaled $595 thousand as of September 30, 2008.

Other Real Estate Owned

Certain assets such as other real estate owned are measured at fair value less cost to sell. Management believes that the fair value component in its valuation follows the provisions of SFAS 157. Other real estate owned was recorded at $3.4 million at September 30, 2008.

 

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9. WARRANTS

As part of the purchase price of the fixed assets related to the Leesburg branch, SNBV issued 61,000 warrants for the purchase of its common stock at an exercise price of $12.73 per share during the first quarter of 2008. The warrants expire in three years. The fair value of each warrant issued was estimated using the Black-Scholes options-pricing model. The following weighted-average assumptions were used to value the warrants:

 

Dividend yield

     0.00 %

Expected life

     3 years  

Expected volatility

     19.17 %

Risk-free interest rate

     2.11 %

Weighted average fair value per warrant

   $ 0.84  

 

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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 dated December 31, 2007 on Form 10-K. Results of operations for the three and nine month periods ended September 30, 2008 are not necessarily indicative of results that may be attained for any other period.

FORWARD-LOOKING STATEMENTS

Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualified words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements concerning opinions or judgment of the Company and its management about future events. Although we believe that its expectations with respect to certain forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of SNBV will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, changes in the stock and bond markets, technology, and consumer spending and savings habits. We do not update any forward-looking statements that may be made from time to time by or on behalf of SNBV.

OVERVIEW

Southern National Bancorp of Virginia, Inc. (“SNBV”), a Virginia corporation, is the holding company for Sonabank, a nationally chartered commercial bank. We opened Sonabank’s first branch in Charlottesville, Virginia on April 14, 2005. We also have full service branches in Fairfax County (McLean, Reston and Fairfax), Warrenton, Clifton Forge and Leesburg, all in Virginia. We also have loan production offices in Charlottesville, Warrenton, Fredericksburg and Richmond. Our administrative offices are in Warrenton, Virginia, and we also have executive offices in Georgetown, Washington D.C. where senior management is located.

On December 19 th , 2007, SNBV announced that it had entered into an agreement with Founders Corporation of Leesburg, Virginia to purchase certain assets and to assume its lease at 1 East Market Street in Leesburg in the 100 year old Loudoun National Bank building. Sonabank received approval from the Office of the Comptroller of the Currency (OCC) to open a branch at that location. The branch was opened February 11, 2008. The OCC has also approved the opening of a drive-through/ATM facility that was opened on April 7, 2008.

 

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RESULTS OF OPERATIONS

Net Income

For the three months ended September 30, 2008, we recorded a net loss of $757 thousand after the recognition of an other than temporary impairment charge in the amount of $1.3 million on Freddie Mac perpetual preferred stock, on which we had taken impairment charges in December 2007 and June 2008. Tax law allowing the Freddie Mac perpetual preferred stock impairment losses to be recorded as ordinary losses was enacted on October 3, 2008. But, according to FASB Statement No. 109, the tax benefit from an enacted tax law change should be recorded in the period in which the tax law change occurred. As a consequence, a tax benefit of $457 thousand will be recorded in the fourth quarter of 2008 related to the impairment.

Earnings before the impairment charge of $1.3 million were $588 thousand for the quarter. Earnings for the first nine months of 2008 before the impairment charge and before taxes were $2.2 million. Earnings before taxes for the nine months ended September 30, 2007 were $1.7 million.

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 for the three months ended September 30, 2008 was $3.0 million compared to $2.7 million for the same period last year. Average interest-earning assets for the three months ended September 30, 2008 increased $96.2 million over the same period in 2007. Approximately $70.2 million of this growth was an increase in average loans outstanding. Average investment securities increased by $12.6 million in the quarter ended September 30, 2008, compared to the same period last year. The average yield on interest-earning assets decreased from 7.51% in 2007 to 6.15% in 2008 primarily because of the prime rate decreases of 225 basis points during the first half of 2008 which accompanied the Federal Reserve Board’s reductions in its federal funds target rate. Average interest-bearing liabilities for the three months ended September 30, 2008 increased $97.3 million compared to the same period in 2007. Average interest-bearing deposits increased by $66.0 million, while average borrowings increased by $31.4 million compared to the third quarter of 2007. The average cost of interest-bearing liabilities decreased from 4.80% in 2007 to 3.54% in 2008. The interest rate spread for the three months ended September 30, 2008 decreased from 2.71% to 2.61% compared to the same period last year. The net interest margin for the three months ended September 30, 2008 decreased to 3.10% from 3.61% compared to the same period last year. The decline in the interest margin was a result of several factors. In addition to the prime rate decreases previously discussed, we have much more cash in our investment account at the Federal Home Loan Bank of Atlanta than we’ve ever had. We pre-funded our total brokered certificate of deposit (“CD”) maturities through November 2008. As a result, our cash and cash equivalents at September 30, 2008 were $28.5 million compared to $1.3 million at the end of last year. The negative carry on our overnight investment account cost us 5 basis points. Also, the failure of our Freddie Mac preferred stock to pay dividends during the quarter cost us 2 basis points.

Net interest income for the nine months ended September 30, 2008 was $9.1 million compared to $7.8 million for the same period last year. Average interest-earning assets for the nine months ended September 30, 2008 increased $91.1 million over the same period in 2007. Approximately $68.0 million of this growth was an increase in average loans outstanding. Average investment securities increased by $17.5 million in the first nine months of 2008, compared to the same period last year. The average yield on

 

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interest-earning assets decreased from 7.49% in 2007 to 6.58% in 2008. Average interest-bearing liabilities for the nine months ended September 30, 2008 increased $96.8 million compared to the same period in 2007. Average interest-bearing deposits increased by $62.5 million, while average borrowings increased by $34.3 million compared to the first nine months of 2007. The average cost of interest-bearing liabilities decreased from 4.80% in 2007 to 3.85% in 2008. The interest rate spread for the nine months ended September 30, 2008 increased from 2.69% to 2.73% compared to the same period last year. The net interest margin for the nine months ended September 30, 2008 decreased to 3.30% from 3.73% compared to the same period last year. The reasons for the changes for the nine months ended September 30, 2008 compared to the same period last year are the same as mentioned in the discussion of the quarterly comparison.

Our commercial loans (non-real estate), acquisition and development loans, construction loans and SBA loans are predominately priced to a spread over the prime rate. Commercial real estate loans are generally priced at a spread over the one, three or five year constant maturity treasury yield (CMT) or our marginal cost of funds and fixed for one, three or five years. On the liability side of the balance sheet we have a large segment of our funding which floats; however, the prime rate loans reprice virtually immediately, but the liabilities reprice only at maturity resulting in a lag which can adversely affect net interest income and the net interest margin when interest rates decline. The decreases in the federal funds target rate during the second half of 2007 and the first half of 2008 have had a negative impact on our net interest margin. Since October 1, 2008, the Federal Reserve has lowered the federal funds target rate by 100 basis points, which will further compress our net interest margin.

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

 

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Table of Contents
     Average Balance Sheets and Net Interest
Analysis For the Quarters Ended
 
     9/30/2008     9/30/2007  
     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)

   $ 294,208     $ 4,906    6.63 %   $ 223,979     $ 4,565    8.09 %

Investment securities

     76,068       992    5.22 %     63,506       904    5.69 %

Other earning assets

     19,146       122    2.53 %     5,731       80    5.54 %
                                  

Total earning assets

     389,422       6,020    6.15 %     293,216       5,549    7.51 %
                      

Allowance for loan losses

     (4,037 )          (2,978 )     

Total non-earning assets

     41,509            37,698       
                          

Total assets

   $ 426,894          $ 327,936       
                          

Liabilities and stockholders’ equity

              

Interest-bearing liabilities:

              

NOW accounts

   $ 6,348       4    0.24 %   $ 6,477       4    0.27 %

Money market accounts

     52,185       268    2.04 %     46,353       523    4.48 %

Savings accounts

     2,121       1    0.25 %     2,697       4    0.51 %

Time deposits

     226,616       2,358    4.14 %     165,786       2,158    5.16 %
                                  

Total interest-bearing deposits

     287,270       2,631    3.64 %     221,313       2,689    4.82 %

Borrowings

     48,241       358    2.95 %     16,852       190    4.47 %
                                  

Total interest-bearing liabilities

     335,511       2,989    3.54 %     238,165       2,879    4.80 %
                      

Noninterest-bearing liabilities:

              

Demand deposits

     19,610            18,144       

Other liabilities

     2,881            2,073       
                          

Total liabilities

     358,002            258,382       

Stockholders’ equity

     68,892            69,554       
                          

Total liabilities and stockholders’ equity

   $ 426,894          $ 327,936       
                          

Net interest income

       3,031          2,670   
                      

Interest rate spread

        2.61 %        2.71 %

Net interest margin

        3.10 %        3.61 %

 

(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.

 

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     Average Balance Sheets and Net Interest
Analysis For the Nine Months Ended
 
     9/30/2008     9/30/2007  
     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)

   $ 282,710     $ 14,881    7.03 %   $ 214,745     $ 12,923    8.05 %

Investment securities

     76,751       3,099    5.38 %     59,197       2,503    5.64 %

Other earning assets

     10,927       275    3.36 %     5,377       225    5.59 %
                                  

Total earning assets

     370,388       18,255    6.58 %     279,319       15,651    7.49 %
                      

Allowance for loan losses

     (3,867 )          (2,854 )     

Total non-earning assets

     41,097            30,732       
                          

Total assets

   $ 407,618          $ 307,197       
                          

Liabilities and stockholders’ equity

              

Interest-bearing liabilities:

              

NOW accounts

   $ 6,296       11    0.24 %   $ 6,814       14    0.27 %

Money market accounts

     54,024       1,017    2.51 %     36,841       1,174    4.26 %

Savings accounts

     2,254       4    0.25 %     2,727       10    0.49 %

Time deposits

     206,912       6,949    4.49 %     160,595       6,254    5.21 %
                                  

Total interest-bearing deposits

     269,486       7,982    3.96 %     206,977       7,452    4.81 %

Borrowings

     46,396       1,132    3.26 %     12,115       416    4.59 %
                                  

Total interest-bearing liabilities

     315,882       9,114    3.85 %     219,092       7,868    4.80 %
                      

Noninterest-bearing liabilities:

              

Demand deposits

     19,649            17,389       

Other liabilities

     2,684            1,697       
                          

Total liabilities

     338,215            238,178       

Stockholders’ equity

     69,403            69,019       
                          

Total liabilities and stockholders’ equity

   $ 407,618          $ 307,197       
                          

Net interest income

     $ 9,141        $ 7,783   
                      

Interest rate spread

        2.73 %        2.69 %

Net interest margin

        3.30 %        3.73 %

 

(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 as well as current environmental 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 allowance for loan losses methodology is based on the Interagency Policy Statement on the Allowance for Loan and Lease Losses (ALLL) contained in OCC Bulletin 2006-47. The Policy Statement reiterates key concepts and requirements included in U S. GAAP. The amount of the allowance for loan losses is higher both as a percentage of loans and as a percentage of past due loans and non-accruals than the weighted average of institutions considered to be our peers in the Commonwealth of Virginia. We believe the allowance for loan losses is sufficient to cover estimated credit losses.

 

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The provision for loan losses charged to operations for the three months ended September 30, 2008 and 2007 were $500 thousand and $270 thousand, respectively. Charge offs during the third quarter of 2008 were $390 thousand, consisting of $325 thousand related to single family residential mortgage loans and $65 thousand related to one commercial mortgage loan. Charge offs during the third quarter of 2007 were $2 thousand.

The provision for loan losses charged to operations for the nine months ended September 30, 2008 and 2007 were $1.2 million and $845 thousand, respectively. We had charge-offs totaling $570 thousand and $405 thousand during the nine months ended September 30, 2008 and 2007, respectively. We had recoveries totaling $8 thousand during the first nine months of 2008 and there were none during the same period last year.

Noninterest Income (Loss)

The following table presents the major categories on noninterest income (loss) for the three and nine months ended September 30, 2008 and 2007:

 

     For the Three Months Ended
September 30,
 
     2008     2007     Change  
     (dollars in thousands)  

Account maintenance and deposit service fees

   $ 133     $ 88     $ 45  

Income from bank-owned life insurance

     148       121       27  

Gain on sale of loans

     107       —         107  

Net gain on other real estate owned

     39       21       18  

Net loss on securities

     (1,234 )     —         (1,234 )

Other

     50       (6 )     56  
                        

Total noninterest income (loss)

   $ (757 )   $ 224     $ (981 )
                        
     For the Nine Months Ended
September 30,
 
     2008     2007     Change  
     (dollars in thousands)  

Account maintenance and deposit service fees

   $ 367     $ 238     $ 129  

Income from bank-owned life insurance

     438       202       236  

Gain on sale of loans

     107       —         107  

Net gain (loss) on other real estate owned

     (136 )     21       (157 )

Net loss on securities

     (1,358 )     —         (1,358 )

Other

     133       55       78  
                        

Total noninterest income (loss)

   $ (449 )   $ 516     $ (965 )
                        

Noninterest loss was $757 thousand during the third quarter of 2008, compared to income of $224 thousand during the same quarter of the prior year. The decline in noninterest income was largely attributable to the other than temporary impairment charge of $1.3 million on the Freddie Mac preferred stock. Absent the loss on the Freddie Mac preferred stock, noninterest income would have been $588 thousand, which included gains of $107 thousand from the sale of the guaranteed portion of SBA loans and gains of $111 thousand from the sale of $5.6 million of available-for-sale mortgage-backed securities. Income from account maintenance fees and bank-owned life insurance also increased compared to the third quarter of 2007.

 

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Noninterest loss was $449 thousand during the nine months ended September 30, 2008, compared to income of $516 thousand for the same period last year. Noninterest income would have been $1.0 million excluding the impairment charges of $1.5 million during the nine months ended September 30, 2008, an increase of 98%. The reasons for the increase are the same as documented for the three month periods.

Noninterest Expense

The following table presents the major categories on noninterest expense for the three and nine months ended September 30, 2008 and 2007:

 

     For the Three Months Ended
September 30,
 
     2008    2007    Change  
     (dollars in thousands)  

Salaries and benefits

   $ 1,045    $ 872    $ 173  

Occupancy expenses

     388      276      112  

Furniture and equipment expenses

     119      112      7  

Amortization of core deposit intangible

     182      182      —    

Virginia franchise tax expense

     137      137      —    

Data processing expense

     64      54      10  

Telephone and communication expense

     65      61      4  

Other operating expenses

     300      294      6  
                      

Total noninterest expense

   $ 2,300    $ 1,988    $ 312  
                      
     For the Nine Months Ended
September 30,
 
     2008    2007    Change  
     (dollars in thousands)  

Salaries and benefits

   $ 2,963    $ 2,463    $ 500  

Occupancy expenses

     1,109      809      300  

Furniture and equipment expenses

     366      326      40  

Amortization of core deposit intangible

     545      545      —    

Virginia franchise tax expense

     411      412      (1 )

Data processing expense

     196      168      28  

Telephone and communication expense

     188      163      25  

Other operating expenses

     955      863      92  
                      

Total noninterest expense

   $ 6,733    $ 5,749    $ 984  
                      

The increase in noninterest expense is due to a full nine months of expense related to the Warrenton branch which was opened in April 2007, and eight months of expenses related to the Leesburg branch which was opened in February 2008. As of September 30, 2008, we had seven full-service branches and one drive-through facility compared to six full-service branches at the end of September 2007.

Despite the rapid growth of the Bank’s assets and the addition of branches in Warrenton and Leesburg and a loan production office in Richmond, our operating expenses were well controlled. The efficiency ratio (excluding gains and write-downs on OREO, gains on loans and gains and losses on securities) improved to 67% during the first nine months of 2008 from 69% in 2007.

 

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FINANCIAL CONDITION

Balance Sheet Overview

Total assets were $444.0 million at September 30, 2008, as compared to $377.3 million at December 31, 2007. Our asset growth has been funded primarily by growth in deposits. Net loans grew from $257.9 million at the end of 2007 to $294.1 million at September 30, 2008. Investment securities, available for sale and held to maturity, increased to $77.1 million at September 30, 2008 compared to $75.0 million at December 31, 2007.

As of September 30, 2008, total deposits were $322.3 million compared to $265.5 million as of December 31, 2007. The growth was attributable mostly to an increase in brokered certificates of deposit and noninterest-bearing demand deposits. Brokered certificates of deposit were $156.7 million at September 30, 2008, compared to $101.3 million at December 31, 2007. Noninterest-bearing demand deposits increased from $18.1 million at December 31, 2007, to $21.5 million at September 30, 2008.

Loan Portfolio

The commercial real estate loan category increased by 25.7%, rising from $84.1 million at year-end to $105.7 million at September 30, 2008. 1-4 family residential real estate loans were up 18.1% to $61.3 million. The commercial and industrial loan category increased by 9.3% to $58.2 million.

The following table summarizes the composition of our loan portfolio as of September 30, 2008 and December 31, 2007:

 

     September 30, 2008     December 31, 2007  
     (dollars in thousands)  

Mortgage loans on real estate:

    

Commercial

   $ 105,690     $ 84,099  

Construction, residential

     4,268       6,133  

Other construction, land and other loans

     50,752       47,428  

Residential 1-4 family

     61,260       51,862  

Multi- family residential

     4,956       8,273  

Home equity lines of credit

     10,326       8,428  
                

Total real estate loans

     237,252       206,223  

Commercial loans

     58,165       53,208  

Consumer loans

     3,378       2,476  
                

Gross loans

     298,795       261,907  

Less unearned income on loans

     (588 )     (500 )
                

Loans, net of unearned income

   $ 298,207     $ 261,407  
                

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.

 

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We maintain appraisals on loans secured by real estate, particularly those categorized as non-performing 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 possible write-down to their net realizable values. 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.

In accordance with Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” (SFAS 114) the Bank employs systems and processes necessary to identify “impaired loans.” After charge-offs in the amount of $265 thousand and specific allocations totaling $435 thousand, loans identified as impaired in accordance with SFAS 114 totaled $595 thousand as of September 30, 2008. This compares to $4.2 million of impaired loans, net of charge-offs in the amount of $125 thousand, at December 31, 2007. The decrease in impaired loans since December 31, 2007 is attributable to loans totaling $2.1 million which are no longer considered impaired based on improved performance and cash flows, a loan in the amount of $800 thousand which was paid in full, a loan in the amount of $238 thousand transferred to other real estate owned, and a loan which was written down by $220 thousand.

Nonaccrual loans were $474 thousand and $371 thousand at September 30, 2008 and December 31, 2007, respectively. There were no loans past due 90 days or more and accruing interest at September 30, 2008 and December 31, 2007. Nonperforming assets including OREO were $3.9 million at September 30, 2008, compared to $4.0 million at December 31, 2007.

The bulk of our OREO balance continues to be comprised of one property, which contains 33 finished 2 to 4 acre lots in Culpeper. We took a deed in lieu of foreclosure in June 2007. There are no new developments on that property. It is worth noting that those lots were originally under contract to a very large regional builder for $230,000 per lot. We have written them down to approximately 42% of that level based on new market data.

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

 

     As of  
     September 30,
2008
    December 31,
2007
 

Allowance for loan losses to total loans

   1.38 %   1.33 %

Nonperforming assets to allowance for loan losses

   94.78 %   115.62 %

Nonperforming assets to total assets

   0.88 %   1.07 %

 

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Investment Securities

Investment securities, available for sale and held to maturity, were $77.1 million at September 30, 2008 compared to $75.0 million at December 31, 2007. We evaluate our securities portfolio on a quarterly basis for evidence of other than temporary impairment under the guidance of FSP 115, FAS 115, EITF 99-20, and SAB 59. At September 30, 2008 the securities portfolio (held to maturity and available for sale) was comprised of the following:

 

   

We own 80,000 shares of the Freddie Mac perpetual preferred stock Series V. In December 2007 we recorded an other than temporary impairment (OTTI) charge of $440 thousand, an additional $124 thousand OTTI in the second quarter of 2008 and finally, in this quarter, an OTTI of $1.3 million.

 

   

As of September 30, 2008 Sonabank’s investment portfolio included the carrying amount of $11.2 million ( par value of $14.9 million) of trust preferred securities in nine issues. All of the issues owned by Sonabank have one or more investment grade rating. In these nine issues the underlying collateral is at least 80% bank collateral. The underlying collateral includes no REIT collateral.

During the third quarter the secondary market for trust preferred securities, partly as a result of the Treasury failing to protect Fannie Mae and Freddie Mac perpetual preferred stock as noted above, was in disarray. “Mark to market” prices of pooled trust preferred securities have fallen to levels which reflect illiquidity and extreme distress.

All of the nine issues owned by Sonabank continue to pay principal and interest in accordance with the contractual terms of the securities, and there has been no evidence of adverse impact to expected cash flows for the tranches we own. Management has reviewed each of the issues at the participant level using the CAMEL ratings provided in the IDC Ratings quarterly. Management has also reviewed the interest coverage of each of the tranches we own. While further deterioration in the entire banking sector is possible, at this time the issues we own are performing and have cushions above the known defaults or deferrals.

Realistically, as we write this it is impossible to know how the Troubled Asset Relief Program (TARP) Capital Purchase Program would affect these securities. If the Treasury were to wish to shore up the community banks, this would clearly be a cheap and effective way to support the pooled trust preferred securities market.

 

   

In addition, we owned $7.9 million (par value of $9.0 million) of the AAA rated tranche of the ALESCO VII A1B security. During the third quarter of 2008 we had a principal paydown of $55 thousand. The interest coverage ratio on our tranche was 231%. As of September 30, 2008 the fair market value of this security was $4.6 million.

 

   

We also own $2.6 million of the SARM 2005-22 1A2. This CMO is still rated AAA by Fitch and Standard and Poors. This security was originated in 2005. The average FICO score of the underlying loans at origination was 748. As of September 30, 2008, delinquencies of more than 60 days, foreclosures, REO and bankruptcies totaled 15.7% compared to 14% at June 30, 2008. However, credit support is 16.36 compared to 14 when originally issued, which provides coverage of 2.86 times projected losses in the collateral. The fair market value is estimated at $2.0 million as of September 30, 2008.

 

   

As of September 30, 2008 we owned $52.0 million of FNMA and FHLMC mortgage-backed securities, up from $46.3 million at June 30, 2008. Since the conservatorship, these securities carry the full faith and credit of the US Government. As of September 30, 2008 the fair market value of these securities was $52.0 million.

 

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Table of Contents

As of September 30, 2008, all of our securities except for $15.7 million of FHLMC and FNMA mortgage-backed securities are designated as held-to-maturity. Changes in the fair market value of available-for-sale securities are reflected in tangible book value through accumulated other comprehensive income or loss.

Effective July 1, 2008, SNBV transferred $23.9 million par value of bank pooled trust preferred securities from its securities available for sale portfolio to its securities held to maturity portfolio. The transferred securities had a fair value of $19.1 million at June 30, 2008, and a weighted average maturity of 29 years. As a result of the transfer, it is expected that $4.0 million of unrealized pre-tax losses associated with the transferred securities that were previously recognized in Accumulated Other Comprehensive Income (Loss) will be recovered in tangible capital over the remaining life of the securities. Unrealized pre-tax losses in the amount of $34 thousand were recovered during the third quarter of 2008. It is also expected that there will be no other future impact on Accumulated Other Comprehensive Income, earnings or capital related to these securities unless the transferred securities are determined to be other than temporarily or permanently impaired.

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 available-for-sale investment securities. In addition, we maintain lines credit from the Federal Home Loan Bank of Atlanta and the Community Bankers Bank and utilize securities sold under agreements to repurchase from approved securities dealers and retail customers.

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. Management anticipates that future funding requirements will 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 periods indicated to the minimum and well-capitalized regulatory standards:

 

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Table of Contents
     Actual     Required
For Capital
Adequacy Purposes
    To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
     Amount    Ratio     Amount    Ratio     Amount    Ratio  

September 30, 2008

               

SNBV

               

Tier 1 risk-based capital ratio

   $ 57,643    17.47 %   $ 13,183    4.00 %     N/A    N/A  

Total risk-based capital ratio

     61,764    18.71 %     26,365    8.00 %     N/A    N/A  

Leverage ratio

     57,643    13.92 %     16,544    4.00 %     N/A    N/A  

Sonabank

               

Tier 1 risk-based capital ratio

   $ 55,199    16.73 %   $ 13,180    4.00 %   $ 19,770    6.00 %

Total risk-based capital ratio

     59,320    17.98 %     26,360    8.00 %     32,950    10.00 %

Leverage ratio

     55,199    13.33 %     16,544    4.00 %     20,680    5.00 %

December 31, 2007

               

SNBV

               

Tier 1 risk-based capital ratio

   $ 56,662    18.50 %   $ 12,253    4.00 %     N/A    N/A  

Total risk-based capital ratio

     60,138    19.63 %     24,506    8.00 %     N/A    N/A  

Leverage ratio

     56,662    16.03 %     14,136    4.00 %     N/A    N/A  

Sonabank

               

Tier 1 risk-based capital ratio

   $ 54,237    17.71 %   $ 12,251    4.00 %   $ 18,376    6.00 %

Total risk-based capital ratio

     57,713    18.84 %     24,502    8.00 %     30,628    10.00 %

Leverage ratio

     54,237    15.35 %     14,136    4.00 %     17,670    5.00 %

The most recent regulatory notification categorized the Bank 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 the Bank’s category.

 

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Table of Contents

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 September 30, 2008 and December 31, 2007:

 

     Sensitivity of Market Value of Portfolio Equity  
     As of September 30, 2008  

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

   $ 72,181    $ 976     1.37 %   16.26 %   106.66 %

Up 200

     72,014      809     1.14 %   16.22 %   106.42 %

Up 100

     71,841      636     0.89 %   16.18 %   106.16 %

Base

     71,205      —       0.00 %   16.04 %   105.22 %

Down 100

     69,378      (1,827 )   -2.57 %   15.63 %   102.52 %

Down 200

     65,966      (5,239 )   -7.36 %   14.86 %   97.48 %

Down 300

     62,113      (9,092 )   -12.77 %   13.99 %   91.79 %

 

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Table of Contents
     Sensitivity of Market Value of Portfolio Equity  
     As of December 31, 2007  

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

   $ 77,007    $ 2,366     3.17 %   20.41 %   111.16 %

Up 200

     76,473    $ 1,832     2.45 %   20.27 %   110.39 %

Up 100

     75,713    $ 1,072     1.44 %   20.07 %   109.29 %

Base

     74,641    $ —       0.00 %   19.78 %   107.75 %

Down 100

     72,501    $ (2,140 )   -2.87 %   19.22 %   104.66 %

Down 200

     69,495    $ (5,146 )   -6.89 %   18.42 %   100.32 %

Down 300

     66,479    $ (8,162 )   -10.94 %   17.62 %   95.96 %

Our interest rate sensitivity is also monitored by management through the use of a model run by FTN Financial that generates estimates of the change in the net interest income over a range of interest rate scenarios. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. In this regard, the model assumes that the composition of our interest sensitive assets and liabilities existing at September 30, 2008 and December 31, 2007 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.

 

     Sensitivity of Net Interest Income  
     As of September 30, 2008  

Change in Interest Rates in Basis Points (Rate Shock)

   Adjusted Net Interest Income     Net Interest Margin  
   Amount    $ Change
From Base
    Percent     % Change
From Base
 
     (Dollar amounts in thousands)  

Up 300

   $ 14,630    $ 2,450     3.57 %   0.58 %

Up 200

     13,835      1,655     3.38 %   0.39 %

Up 100

     13,035      855     3.19 %   0.20 %

Base

     12,180      —       2.99 %   0.00 %

Down 100

     11,175      (1,005 )   2.74 %   -0.25 %

Down 200

     10,001      (2,179 )   2.46 %   -0.53 %

Down 300

     9,129      (3,051 )   2.25 %   -0.74 %

 

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Table of Contents
     Sensitivity of Net Interest Income  
     As of December 31, 2007  

Change in Interest Rates in Basis Points (Rate Shock)

   Adjusted Net Interest Income     Net Interest Margin  
   Amount    $ Change
From Base
    Percent     % Change
From Base
 
     (Dollar amounts in thousands)  

Up 300

   $ 12,733    $ 2,675     3.67 %   0.76 %

Up 200

     11,859      1,801     3.42 %   0.51 %

Up 100

     10,971      913     3.17 %   0.26 %

Base

     10,058      —       2.91 %   0.00 %

Down 100

     8,980      (1,078 )   2.60 %   -0.31 %

Down 200

     7,780      (2,278 )   2.26 %   -0.65 %

Down 300

     6,574      (3,484 )   1.91 %   -1.00 %

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.

 

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ITEM 4—CONTROLS AND PROCEDURES

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 of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our chief executive officer and chief financial officer have concluded that these controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

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.

PART II—OTHER INFORMATION

ITEM 1—LEGAL PROCEEDINGS

While SNBV and Sonabank may, from time to time, be a party to various legal proceedings arising in the ordinary course of business, there are no proceedings pending, or to management’s knowledge, threatened, against SNBV or Sonabank at this time.

ITEM 1A—RISK FACTORS

As of September 30, 2008 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, 2007.

ITEM 6—EXHIBITS

(a) Exhibits.

The following exhibits are filed as part of this Form 10-Q and this list includes the Exhibit Index:

 

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.

 

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Table of Contents

Signatures

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

 

 

Southern National Bancorp of Virginia, Inc.

                              (Registrant)
November 14, 2008  

/s/ Georgia S. Derrico

          (Date)   Georgia S. Derrico,
  Chairman of the Board and Chief Executive Officer
November 14, 2008  

/s/ William H. Lagos

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

 

32

Exhibit 31.1

CERTIFICATIONS

I, Georgia S. Derrico, certify that:

1. I have reviewed this report on Form 10-Q of Southern National Bancorp of Virginia, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and we have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2008

 

/s/ Georgia S. Derrico

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

 

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Exhibit 31.2

CERTIFICATIONS

I, William H. Lagos, certify that:

1. I have reviewed this report on Form 10-Q of Southern National Bancorp of Virginia, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and we have:

 

  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2008

 

/s/ William H. Lagos

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

 

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Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Southern National Bancorp of Virginia, Inc. (“SNBV”) on Form 10-Q for the period ending September 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned Chief Executive Officer and Chief Financial officer of SNBV hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 that based on their knowledge and belief: 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of SNBV as of and for the periods covered in the Report.

 

/s/ Georgia S. Derrico

Georgia S. Derrico, Chief Executive Officer

/s/ William H. Lagos

William H. Lagos, Chief Financial Officer
November 14, 2008

 

35