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, 2013

Commission File No. 001-33037

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)

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

6830 Old Dominion Drive

McLean, Virginia 22101

(Address of principal executive offices) (zip code)

(703) 893-7400

(Registrant’s telephone number, including area code)

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

YES x            NO o

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

YES x            NO o

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

Large accelerated filer      o                       Accelerated filer x                       Smaller reporting company o

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

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

As of November 1, 2013, there were 11,590,612 shares of common stock outstanding.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

September 30, 2013

INDEX

		PAGE
PART 1 - FINANCIAL INFORMATION
Item 1 -	Financial Statements
	Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012	2
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012	3
	Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2013	4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012	5
	Notes to Consolidated Financial Statements	6- 27
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		28- 41
Item 3 – Quantitative and Qualitative Disclosures about Market Risk		42-45
Item 4 – Controls and Procedures		46
PART II - OTHER INFORMATION
Item 1 – Legal Proceedings		46
Item 1A – Risk Factors		46
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		46
Item 3 – Defaults Upon Senior Securities		46
Item 4 – Mine Safety Disclosures		46
Item 5 – Other Information		46
Item 6 - Exhibits		47
Signatures		48
Certifications		49-51

ITEM I - FINANCIAL INFORMATION

PART I - FINANCIAL STATEMENTS

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

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

	September 30,			December 31,
	2013			2012
ASSETS
Cash and cash equivalents:
Cash and due from financial institutions	$	4,859		$	4,553
Interest-bearing deposits in other financial institutions		27,491			34,647
Total cash and cash equivalents		32,350			39,200
Securities available for sale, at fair value		2,020			2,391
Securities held to maturity, at amortized cost (fair value of $76,117 and $84,827, respectively)		80,831			84,051
Covered loans		53,817			71,328
Non-covered loans		472,215			458,823
Total loans		526,032			530,151
Less allowance for loan losses		(7,443	)		(7,066	)
Net loans		518,589			523,085
Stock in Federal Reserve Bank and Federal Home Loan Bank		5,240			6,212
Bank premises and equipment, net		6,260			6,552
Goodwill		9,160			9,160
Core deposit intangibles, net		912			1,280
FDIC indemnification asset		5,338			6,735
Bank-owned life insurance		18,226			17,782
Other real estate owned		15,699			13,836
Deferred tax assets, net		8,270			8,174
Other assets		5,003			5,354
Total assets	$	707,898		$	723,812
LIABILITIES AND STOCKHOLDERS’ EQUITY
Noninterest-bearing demand deposits	$	46,536		$	49,644
Interest-bearing deposits:
NOW accounts		23,701			22,774
Money market accounts		136,181			163,233
Savings accounts		13,933			9,618
Time deposits		325,603			305,708
Total interest-bearing deposits		499,418			501,333
Total deposits		545,954			550,977
Securities sold under agreements to repurchase and other short-term borrowings		20,481			33,411
Federal Home Loan Bank (FHLB) advances		30,250			30,250
Other liabilities		5,241			5,998
Total liabilities		601,926			620,636
Commitments and contingencies (See Note 5)		-			-
Stockholders’ equity:
Preferred stock, $.01 par value.  Authorized 5,000,000 shares; no shares issued and outstanding		-			-
Common stock, $.01 par value.  Authorized 45,000,000 shares; issued and outstanding, 11,590,612 shares at September 30, 2013 and 11,590,212 at December 31, 2012		116			116
Additional paid in capital		97,048			96,840
Retained earnings		11,977			9,201
Accumulated other comprehensive loss		(3,169	)		(2,981	)
Total stockholders’ equity		105,972			103,176
Total liabilities and stockholders’ equity	$	707,898		$	723,812

See accompanying notes to consolidated financial statements.

2

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Interest and dividend income :
Interest and fees on loans	$	8,168		$	9,008		$	24,277		$	26,387
Interest and dividends on taxable securities		504			490			1,540			1,401
Interest and dividends on tax exempt securities		71			-			159			-
Interest and dividends on other earning assets		104			102			443			247
Total interest and dividend income		8,847			9,600			26,419			28,035
Interest expense:
Interest on deposits		966			1,304			3,086			3,803
Interest on borrowings		157			165			465			628
Total interest expense		1,123			1,469			3,551			4,431
Net interest income		7,724			8,131			22,868			23,604
Provision for loan losses		1,197			1,830			3,015			4,605
Net interest income after provision for loan losses		6,527			6,301			19,853			18,999
Noninterest income:
Account maintenance and deposit service fees		198			222			593			624
Income from bank-owned life insurance		147			148			445			649
Bargain purchase gain on acquisition		-			-			-			3,484
Gain on sale of loans		-			-			-			657
Gain on other assets		-			-			13			14
Net gain on sale of available for sale securities		-			287			142			274
Total other-than-temporary impairment losses (OTTI)		-			(480	)		(3	)		(721	)
Portion of OTTI recognized in other comprehensive income (before taxes)		-			-			-			4
Net credit related OTTI recognized in earnings		-			(480	)		(3	)		(717	)
Other		30			63			169			198
Total noninterest income		375			240			1,359			5,183
Noninterest expenses:
Salaries and benefits		2,338			2,073			6,760			5,868
Occupancy expenses		768			753			2,280			2,040
Furniture and equipment expenses		197			149			524			448
Amortization of core deposit intangible		123			236			368			694
Virginia franchise tax expense		115			145			357			436
Merger expenses		-			11			-			360
FDIC assessment		218			146			676			417
Data processing expense		131			175			433			474
Telephone and communication expense		166			183			507			418
Change in FDIC indemnification asset		113			242			350			481
Net (gain)  loss on other real estate owned		(698	)		(24	)		(580	)		2,376
Other operating expenses		790			665			2,334			2,417
Total noninterest expenses		4,261			4,754			14,009			16,429
Income before income taxes		2,641			1,787			7,203			7,753
Income tax expense		861			579			2,341			2,487
Net income	$	1,780		$	1,208		$	4,862		$	5,266
Other comprehensive income (loss):
Unrealized loss on available for sale securities	$	(12	)	$	(107	)	$	(207	)	$	(26	)
Realized amount on securities sold, net		-			(287	)		(142	)		(274	)
Non-credit component of other-than-temporary impairment on held-to-maturity securities		-			475			97			676
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale		(12	)		(17	)		(32	)		(77	)
Net unrealized gain (loss)		(24	)		64			(284	)		299
Tax effect		8			(21	)		96			(101	)
Other comprehensive income (loss)		(16	)		43			(188	)		198
Comprehensive income	$	1,764		$	1,251		$	4,674		$	5,464
Earnings per share, basic and diluted	$	0.15		$	0.10		$	0.42		$	0.45

 See accompanying notes to consolidated financial statements.

3

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013
(dollars in thousands, except per share amounts) (Unaudited)
								Accumulated
			Additional					Other
	Common		Paid in		Retained			Comprehensive
	Stock		Capital		Earnings			Loss			Total
Balance - January 1, 2013	$	116	$	96,840	$	9,201		$	(2,981	)	$	103,176
Comprehensive income:
Net income						4,862						4,862
Change in unrealized loss  on securities available for sale (net of tax benefit, $119)									(230	)		(230	)
Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $23 and accretion, $32 and amounts recorded into other comprehensive income at transfer)									42			42
Dividends on common stock ($.18 per share)						(2,086	)					(2,086	)
Issuance of common stock under Stock Incentive Plan (400 shares)				3								3
Stock-based compensation expense				205								205
Balance - September 30, 2013	$	116	$	97,048	$	11,977		$	(3,169	)	$	105,972
See accompanying notes to consolidated financial statements.

4

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(dollars in thousands) (Unaudited)

	2013			2012
Operating activities:
Net income	$	4,862		$	5,266
Adjustments to reconcile net income to net cash and cash equivalents provided  by operating activities:
Depreciation		495			430
Amortization of core deposit intangible		368			694
Other amortization, net		275			210
Accretion of loan discount		(2,725	)		(3,277	)
Amortization of FDIC indemnification asset		350			481
Provision for loan losses		3,015			4,605
Earnings on bank-owned life insurance		(445	)		(649	)
Stock based compensation expense		205			146
Bargain purchase gain on acquisition		-			(3,484	)
Net gain on sale of available for sale securities		(142	)		(274	)
Gain on sale of loans		-			(657	)
Impairment on securities		3			717
Net (gain) loss on other real estate owned		(580	)		2,376
Net (increase) decrease in other assets		2,261			(456	)
Net increase (decrease) in other liabilities		(757	)		399
Net cash and cash equivalents provided by operating activities		7,185			6,527
Investing activities:
Purchases of available for sale securities		-			(3,128	)
Proceeds from sales of available for sale securities		159			22,914
Proceeds from paydowns, maturities and calls of available for sale securities		-			1,318
Purchases of  held to maturity securities		(11,345	)		(27,410	)
Proceeds from paydowns, maturities and calls of held to maturity securities		14,497			8,973
Loan originations and payments, net		(2,996	)		11,238
Proceeds from sale of HarVest loans		-			7,568
Proceeds from sale of SBA loans		-			5,713
Net cash received in HarVest acquisition		-			47,257
Net decrease in stock in Federal Reserve Bank and Federal Home Loan Bank		972			1,630
Proceeds from cash surrender value of bank-owned life insurance		-			395
Payments received on FDIC indemnification asset		1,016			155
Proceeds from sale of other real estate owned		3,902			1,137
Purchases of bank premises and equipment		(204	)		(557	)
Net cash and cash equivalents provided by investing activities		6,001			77,203
Financing activities:
Net decrease in deposits		(5,023	)		(64,328	)
Cash dividends paid - common stock		(2,086	)		(638	)
Issuance of common stock under Stock Incentive Plan		3			-
Repayment of Federal Home Loan Bank advances		-			(16,488	)
Net increase (decrease) in securities sold under agreement to repurchase and other short-term borrowings		(12,930	)		14,977
Net cash and cash equivalents used in financing activities		(20,036	)		(66,477	)
Increase (decrease) in cash and cash equivalents		(6,850	)		17,253
Cash and cash equivalents at beginning of period		39,200			5,035
Cash and cash equivalents at end of period	$	32,350		$	22,288
Supplemental disclosure of cash flow information
Cash payments for:
Interest	$	3,419		$	4,464
Income taxes		3,113			1,788
Supplemental schedule of noncash investing and financing activities
Transfer from non-covered loans to other real estate owned		3,044			1,959
Transfer from covered loans to other real estate owned		4,158			-
See accompanying notes to consolidated financial statements.

5

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2013

1.   ACCOUNTING POLICIES

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

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

The unaudited consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles (“U. S. GAAP”) for interim financial information and instructions for Form 10-Q and follow general practice within the banking industry.  Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by U. S. GAAP for complete financial statements.  However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in Southern National’s Form 10-K for the year ended December 31, 2012.

Use of Estimates

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

Recent Accounting Pronouncements

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This standard update requires companies to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in the consolidated statements of comprehensive income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. We adopted this standard in the first quarter of 2013 and have included the additional disclosures.

6

2. STOCK- BASED COMPENSATION

In 2004, the Board of Directors adopted a stock option plan that authorized the reservation of up to 302,500 shares of common stock and provided for the granting of stock options to certain directors, officers and employees.  As of September 30, 2013, options to purchase an aggregate of 302,500 shares of common stock were outstanding and no shares remained available for issuance. The 2010 Stock Awards and Incentive Plan was approved by the Board of Directors in January 2010 and approved by the stockholders at the Annual Meeting in April 2010. The 2010 plan authorized the reservation of 700,000 shares of common stock for the granting of stock awards. The options granted to officers and employees are incentive stock options and the options granted to non-employee directors are non-qualified stock options.  The purpose of the plan is to afford key employees an incentive to remain in the employ of Southern National and to assist in the attracting and retaining of non-employee directors by affording them an opportunity to share in Southern National’s future success.  Under the plan, the option’s price cannot be less than the fair market value of the stock on the grant date.  The maximum term of the options is ten years and options granted may be subject to a graded vesting schedule.

Southern National granted 120,250 options during the first nine months of 2013. 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, 2013:

Expected life	10 years
Expected volatility		34.21	%
Risk-free interest rate		2.42	%
Weighted average fair value per option granted	$	3.58
Dividend yield		1.29	%

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

For the three and nine months ended September 30, 2013 and 2012, stock-based compensation expense was $79 thousand and $205 thousand, respectively, compared to $49 thousand and $146 thousand for the same periods last year.  As of September 30, 2013, unrecognized compensation expense associated with the stock options was $1.0 million, which is expected to be recognized over a weighted average period of 3.8 years.

7

A summary of the activity in the stock option plan during the nine months ended September 30, 2013 follows (dollars in thousands):

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
Options outstanding, beginning of period		512,825		$	7.98
Granted		120,250			9.18
Forfeited		-			-
Exercised		(400	)		6.90
Options outstanding, end of period		632,675		$	8.21		6.3	$	915
Vested or expected to vest		632,675		$	8.21		6.3	$	915
Exercisable at end of period		304,695		$	8.36		4.0	$	405

3.    SECURITIES

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

	Amortized		Gross Unrealized					Fair
September 30, 2013	Cost		Gains		Losses			Value
Obligations of states and political subdivisions	$	2,303	$	-	$	(283	)	$	2,020
	Amortized		Gross Unrealized					Fair
December 31, 2012	Cost		Gains		Losses			Value
Obligations of states and political subdivisions	$	2,309	$	2	$	(22	)	$	2,289
FHLMC preferred stock		16		86		-			102
Total	$	2,325	$	88	$	(22	)	$	2,391

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

	Amortized		Gross Unrecognized					Fair
September 30, 2013	Cost		Gains		Losses			Value
Residential government-sponsored mortgage-backed securities	$	26,964	$	751	$	(105	)	$	27,610
Residential government-sponsored collateralized mortgage obligations		4,538		5		(292	)		4,251
Government-sponsored agency securities		29,970		-		(3,042	)		26,928
Obligations of states and political subdivisions		10,991		-		(871	)		10,120
Other residential collateralized mortgage obligations		713		-		(17	)		696
Trust preferred securities		7,655		975		(2,118	)		6,512
	$	80,831	$	1,731	$	(6,445	)	$	76,117

	Amortized		Gross Unrecognized					Fair
December 31, 2012	Cost		Gains		Losses			Value
Residential government-sponsored mortgage-backed securities	$	35,375	$	1,559	$	-		$	36,934
Residential government-sponsored collateralized mortgage obligations		5,444		81		-			5,525
Government-sponsored agency securities		29,983		52		(4	)		30,031
Obligations of states and political subdivisions		4,689		1		(69	)		4,621
Other residential collateralized mortgage obligations		817		-		(24	)		793
Trust preferred securities		7,743		1,422		(2,242	)		6,923
	$	84,051	$	3,115	$	(2,339	)	$	84,827

8

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

During the nine months ended September 30, 2013, we sold 55 thousand shares of available for sale FHLMC preferred stock resulting in a gain of $142 thousand.

The fair value and carrying amount, if different, of debt securities as of September 30, 2013, by contractual maturity were as follows (in thousands).  Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations, are shown separately.

	Held to Maturity				Available for Sale
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
Due in five to ten years	$	4,254	$	4,035	$	-	$	-
Due after ten years		44,362		39,525		2,303		2,020
Residential government-sponsored mortgage-backed securities		26,964		27,610		-		-
Residential government-sponsored collateralized mortgage obligations		4,538		4,251		-		-
Other residential  collateralized mortgage obligations		713		696		-		-
Total	$	80,831	$	76,117	$	2,303	$	2,020

Securities with a carrying amount of approximately 64.3 million and $62.3 million at September 30, 2013 and December 31, 2012, respectively, were pledged to secure public deposits, repurchase agreements and a line of credit for advances from the Federal Home Loan Bank of Atlanta (“FHLB”).

9

Southern National monitors the portfolio for indicators of other than temporary impairment.  At September 30, 2013 and December 31, 2012, certain securities’ fair values were below cost. As outlined in the table below, there were securities with fair values totaling approximately $61.1 million in the portfolio with the carrying value exceeding the estimated fair value that are considered temporarily impaired at September 30, 2013.  Because the decline in fair value is attributable to changes in interest rates and market illiquidity, and not credit quality, and because we do not have the intent to sell these securities and it is likely that we will not be required to sell the securities before their anticipated recovery, management does not consider these securities to be other-than-temporarily impaired as of September 30, 2013. The following tables present information regarding securities in a continuous unrealized loss position as of September 30, 2013 and December 31, 2012 (in thousands) by duration of time in a loss position:

September 30, 2013
	Less than 12 months					12 Months or More					Total
Available for Sale	Fair value		Unrealized Losses			Fair value		Unrealized Losses			Fair value		Unrealized Losses
Obligations of states and political subdivisions	$	2,020	$	(283	)	$	-	$	-		$	2,020	$	(283	)
	Less than 12 months					12 Months or More					Total
Held to Maturity	Fair value		Unrecognized Losses			Fair value		Unrecognized Losses			Fair value		Unrecognized Losses
Residential government-sponsored mortgage-backed securities	$	13,312	$	(105	)	$	-	$	-		$	13,312	$	(105	)
Residential government-sponsored collateralized mortgage obligations		3,161		(292	)		-		-			3,161		(292	)
Government-sponsored agency securities		26,928		(3,042	)		-		-			26,928		(3,042	)
Obligations of states and political subdivisions		10,120		(871	)							10,120		(871	)
Other residential collateralized mortgage obligations		696		(17	)		-		-			696		(17	)
Trust preferred securities		-		-			4,830		(2,118	)		4,830		(2,118	)
	$	54,217	$	(4,327	)	$	4,830	$	(2,118	)	$	59,047	$	(6,445	)
December 31, 2012
	Less than 12 months					12 Months or More					Total
Available for Sale	Fair value		Unrealized Losses			Fair value		Unrealized Losses			Fair value		Unrealized Losses
Obligations of states and political subdivisions	$	1,552	$	(22	)	$	-	$	-		$	1,552	$	(22	)
	Less than 12 months					12 Months or More					Total
Held to Maturity	Fair value		Unrecognized Losses			Fair value		Unrecognized Losses			Fair value		Unrecognized Losses
Obligations of states and political subdivisions	$	4,189	$	(69	)	$	-	$	-		$	4,189	$	(69	)
Government-sponsored agency securities		4,996		(4	)		-		-			4,996		(4	)
Other residential collateralized mortgage obligations		793		(24	)		-		-			793		(24	)
Trust preferred securities		-		-			4,849		(2,242	)		4,849		(2,242	)
	$	9,978	$	(97	)	$	4,849	$	(2,242	)	$	14,827	$	(2,339	)

As of September 30, 2013, we owned pooled trust preferred securities as follows:

																			Previously
																% of Current			Recognized
																Defaults and			Cumulative
		Ratings												Estimated		Deferrals to			Other
	Tranche	When Purchased				Current Ratings								Fair		Total			Comprehensive
Security	Level	Moody’s		Fitch		Moody’s		Fitch		Par Value		Book Value		Value		Collateral			Loss (1)
										(in thousands)
ALESCO VII  A1B	Senior		Aaa		AAA	Baa3		BB		$	6,654	$	6,020	$	4,077		16	%	$	281
MMCF III B	Senior Sub		A3		A-	Ba1		CC			421		413		241		30	%		8
											7,075		6,433		4,318				$	289
																			Cumulative Other		Cumulative
																			Comprehensive		OTTI Related to
Other Than Temporarily Impaired:																			Loss (2)		Credit Loss (2)
TPREF FUNDING II	Mezzanine		A1		A-	Caa3			C		1,500		515		512		41	%		626	$	359
TRAP 2007-XII C1	Mezzanine		A3		A		C		C		2,140		56		104		39	%		791		1,293
TRAP 2007-XIII D	Mezzanine		NR		A-		NR		C		2,039		-		76		29	%		7		2,032
MMC FUNDING XVIII	Mezzanine		A3		A-		Ca		C		1,084		27		239		30	%		366		691
ALESCO V C1	Mezzanine		A2		A		C		C		2,150		475		586		18	%		1,014		661
ALESCO XV C1	Mezzanine		A3		A-		C		C		3,222		30		105		35	%		633		2,559
ALESCO XVI  C	Mezzanine		A3		A-		C		C		2,143		119		572		15	%		844		1,180
											14,278		1,222		2,194				$	4,281	$	8,775
Total										$	21,353	$	7,655	$	6,512
(1) Pre-tax, and represents unrealized losses at date of transfer from available-for-sale to held-to-maturity, net of accretion
(2)  Pre-tax

10

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

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

● Recoveries ranging from 23% to 39% with a two year lag on all defaults and deferrals.

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

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

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

We recognized no OTTI charges during the third quarter of 2013 and recognized OTTI charges of $3 thousand during the first nine months of 2013 compared to OTTI charges related to credit on the trust preferred securities totaling $480 thousand and $717 thousand during the same periods of 2012.

The following table presents a roll forward of the credit losses on our securities held to maturity recognized in earnings for the nine months ended September 30, 2013 and 2012 (in thousands):

	2013			2012
Amount of cumulative other-than-temporary impairment related to credit loss prior to January 1	$	8,964		$	8,277
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized		-			-
Amounts related to credit loss for which an other-than-temporary impairment was previously recognized		3			717
Reductions due to realized losses		(51	)		(25	)
Amount of cumulative other-than-temporary impairment related to credit loss as of September 30	$	8,916		$	8,969

11

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

	Unrealized Holding
	Gains (Losses) on
For the three months ended September 30, 2013	Available for Sale			Held to Maturity
	Securities			Securities			Total
Beginning balance	$	(178	)	$	(2,975	)	$	(3,153	)
Other comprehensive income/(loss) before reclassifications		(8	)		(8	)		(16	)
Amounts reclassified from accumulated other comprehensive income/(loss)		-			-			-
Net current-period other comprehensive income/(loss)		(8	)		(8	)		(16	)
Ending balance	$	(186	)	$	(2,983	)	$	(3,169	)
	Unrealized Holding
	Gains (Losses) on
For the nine months ended September 30, 2013	Available for Sale			Held to Maturity
	Securities			Securities			Total
Beginning balance	$	44		$	(3,025	)	$	(2,981	)
Other comprehensive income/(loss) before reclassifications		(137	)		43			(94	)
Amounts reclassified from accumulated other comprehensive income/(loss)		(93	)		(1	)		(94	)
Net current-period other comprehensive income/(loss)		(230	)		42			(188	)
Ending balance	$	(186	)	$	(2,983	)	$	(3,169	)

  4.           LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table summarizes the composition of our loan portfolio as of September 30, 2013 and December 31, 2012:

	Covered		Non-covered			Total			Covered		Non-covered			Total
	Loans (1)		Loans			Loans			Loans (1)		Loans			Loans
	September 30, 2013								December 31, 2012
Loans secured by real estate:
Commercial real estate - owner-occupied	$	1,618	$	100,182		$	101,800		$	4,143	$	93,288		$	97,431
Commercial real estate - non-owner-occupied		5,863		139,773			145,636			10,246		130,152			140,398
Secured by farmland		101		512			613			-		1,479			1,479
Construction and land loans		4		31,872			31,876			1,261		44,946			46,207
Residential 1-4 family		17,933		65,658			83,591			21,005		61,319			82,324
Multi- family residential		590		21,570			22,160			614		18,774			19,388
Home equity lines of credit		26,457		6,667			33,124			31,292		9,178			40,470
Total real estate loans		52,566		366,234			418,800			68,561		359,136			427,697
Commercial loans		1,162		105,959			107,121			2,672		99,081			101,753
Consumer loans		85		1,300			1,385			88		1,623			1,711
Gross loans		53,813		473,493			527,306			71,321		459,840			531,161
Less deferred fees on loans		4		(1,278	)		(1,274	)		7		(1,017	)		(1,010	)
Loans, net of deferred fees	$	53,817	$	472,215		$	526,032		$	71,328	$	458,823		$	530,151

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

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

As part of the Greater Atlantic acquisition, the Bank and the FDIC entered into a loss sharing agreement on approximately $143.4 million (contractual basis) of Greater Atlantic Bank’s assets.  The Bank will share in the losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharing agreement; we refer to these assets collectively as “covered assets.”  Loans that are not covered in the loss sharing agreement are referred to as “non-covered loans.” Non-covered loans included $41.3 million of loans acquired in the HarVest acquisition. Accretable discount on the acquired covered loans and the HarVest loans was $9.7 million and $11.7 million at September 30, 2013 and December 31, 2012, respectively.

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

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

September 30, 2013	Covered Loans			Non-covered Loans		Total Loans
		Unpaid			Unpaid		Unpaid
	Recorded	Principal	Related	Recorded