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SONA > SEC Filings for SONA > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for SOUTHERN NATIONAL BANCORP OF VIRGINIA INC

Form 10-Q for SOUTHERN NATIONAL BANCORP OF VIRGINIA INC


8-Nov-2012

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of SNBV. This discussion and analysis should be read with the consolidated financial statements, the footnotes thereto, and the other financial data included in this report and in our annual report on Form 10-K for the year ended December 31, 2011. Results of operations for the three and nine month periods ended September 30, 2012 are not necessarily indicative of results that may be attained for any other period.

FORWARD-LOOKING STATEMENTS

Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and involve a number of risks and uncertainties, many of which are beyond our control. The words "believe," "may," "should," "anticipate," "estimate," "expect," "intend," "continue," "would," "could," "hope," "might," "assume," "objective," "seek," "plan," "strive" and similar words, or the negatives of these words, are intended to identify forward-looking statements.

Many possible events or factors could affect our future financial results and performance and could cause our actual results to differ materially from the expectations of future results we express or imply in any forward-looking statements. In addition to the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, factors that could contribute to those differences include, but are not limited to:

? our limited operating history;

? the effects of future economic, business and market conditions and changes, domestic and foreign;

? changes in the local economies in our market areas adversely affect our customers and their ability to transact profitable business with us, including the ability of our borrowers to repay their loans according to their terms or a change in the value of the related collateral;

? changes in the availability of funds resulting in increased costs or reduced liquidity;

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

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

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

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

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

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

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

? the failure of assumptions and estimates underlying the establishment of and provisions made to the allowance for loan losses;

? our ability to expand and grow our business and operations, including the establishment of additional branches and acquisition of additional branches and banks, and our ability to realize the cost savings and revenue enhancements we expect from such activities;


? changes in governmental monetary and fiscal policies, including interest rate policies of the Board of Governors of the Federal Reserve System, or changes in interest rates and market prices, which could reduce our net interest margins, asset valuations and expense expectations;

? increased competition for deposits and loans adversely affecting rates and terms;

? the continued service of key management personnel;

? the potential payment of interest on demand deposit accounts to effectively compete for customers;

? potential environmental liability risk associated with lending activities;

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

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

? legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators, including those associated with the Dodd Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and changes in the scope and cost of Federal Deposit Insurance Corporation ("FDIC") insurance and other coverage;

? increases in regulatory capital requirements for banking organizations generally, which may adversely affect our ability to expand our business or could cause us to shrink our business;

? the effects of war or other conflicts, acts of terrorism or other catastrophic events that may affect general economic conditions;

? changes in accounting policies, rules and practices and applications or determinations made thereunder;

? the risk that our deferred tax assets could be reduced if future taxable income is less than currently estimated, if corporate tax rates in the future are less than current rates, or if sales of our capital stock trigger limitations on the amount of net operating loss carryforwards that we may utilize for income tax purposes; and

? other factors and risks described under "Risk Factors" herein and in any of our subsequent reports that we make with the Securities and Exchange Commission (the "Commission" or "SEC") under the Exchange Act.

Forward-looking statements are not guarantees of performance or results. A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe we have chosen these assumptions or bases in good faith and that they are reasonable. We caution you, however, that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Quarterly Report on Form 10-Q. These statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by applicable law, we undertake no obligation to update publicly these statements in light of new information or future events.

OVERVIEW

Southern National Bancorp of Virginia, Inc. ("Southern National") 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 15 branches in Virginia, located in Fairfax County (Reston, McLean and Fairfax), in Charlottesville, Warrenton (2), Middleburg, Leesburg (2), South Riding, Front Royal, New Market, Richmond, Haymarket and Clifton Forge, and five branches in Maryland (four in Montgomery County and one in Frederick County). We have administrative offices in Warrenton and an executive office in Georgetown, Washington, D.C where senior management is located.


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

As previously announced Sonabank assumed substantially all of the deposits and liabilities and acquired substantially all of the assets of the HarVest Bank of Maryland from the FDIC as receiver. The acquisition included HarVest Bank's branches in Bethesda, North Rockville, Germantown and Frederick. Adding the new branches to an existing branch in Rockville brings Sonabank's total number of branches in Maryland to five, four of which are in Montgomery County. This was a strategic acquisition for Sonabank given the expansion into an affluent market. This was not simply a financial transaction but an opportunity to broaden and deepen our deposit base. HarVest's branches have been integrated into the Sonabank branch system, and the core processing systems were succesfully merged in the third quarter of 2012. Full details on the transaction are contained in an 8-K/A filed on July 13, 2012.

RESULTS OF OPERATIONS

Net Income

Net income for the quarter and nine months ended September 30, 2012 was $1.2 million and $5.3 million compared to $1.4 million and $4.1 million during the third quarter and the first nine months of 2011.

Net Interest Income

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

Net interest income was $8.1 million in the quarter ended September 30, 2012 up from $7.2 million during the same period last year. The accretion of the discount on Greater Atlantic Bank's loans contributed $674 thousand to third quarter 2012 net interest income compared to $786 thousand during the third quarter of 2011. The accretion of the discount on HarVest's loans contributed $241 thousand in the third quarter of 2012. Average loans increased $55.6 million for the third quarter of 2012 compared to the quarter ended September 30, 2011, and the cost of funds decreased from 1.25% to 1.08%. Sonabank's net interest margin was 5.14% in the third quarter of 2012 compared to 5.22% during the comparable quarter last year and 5.07% during the second quarter of 2012.

Net interest income was $23.6 million during the nine months ended September 30, 2012, compared to $20.3 million during the comparable period in the prior year. Average loans during the first nine months of 2012 were $523.2 million compared to $472.2 million during the same period last year. The Greater Atlantic Bank loan discount accretion contributed $2.9 million to net interest income during the first nine months of 2012, compared to $2.6 million during the nine months ended September 30, 2011. The loan discount accretion on the HarVest Bank portfolio contributed $412 thousand through the third quarter of 2012. The net interest margin in the nine months ended September 30, 2012 was 5.26% compared to 5.08% for the same period last year.


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

                                                    Average Balance Sheets and Net Interest
                                                        Analysis For the Quarters Ended
                                             9/30/2012                                        9/30/2011
                                                Interest                                      Interest
                            Average             Income/           Yield/        Average       Income/         Yield/
                            Balance             Expense            Rate         Balance       Expense          Rate
                                                         (Dollar amounts in thousands)
Assets
Interest-earning
assets:
Loans, net of
unearned income (1)
(2)                      $     541,405       $        9,008           6.62 %   $ 485,773     $    8,165           6.67 %
Investment securities           69,802                  490           2.81 %      50,018            457           3.65 %
Other earning assets            17,520                  102           2.32 %      11,370             66           2.30 %

Total earning assets           628,727                9,600           6.07 %     547,161          8,688           6.30 %
Allowance for loan
losses                          (7,246 )                                          (6,544 )
Total non-earning
assets                          71,482                                            64,666
Total assets             $     692,963                                         $ 605,283

Liabilities and
stockholders' equity
Interest-bearing
liabilities:
NOW accounts             $      19,460                   13           0.27 %   $  15,578             11           0.27 %
Money market accounts          167,313                  333           0.79 %     141,580            305           0.85 %
Savings accounts                 8,926                   13           0.58 %       6,092              9           0.58 %
Time deposits                  290,432                  945           1.29 %     228,414            892           1.55 %
Total
interest-bearing
deposits                       486,131                1,304           1.07 %     391,664          1,217           1.23 %
Borrowings                      54,879                  165           1.20 %      81,616            272           1.32 %
Total
interest-bearing
liabilities                    541,010                1,469           1.08 %     473,280          1,489           1.25 %
Noninterest-bearing
liabilities:
Demand deposits                 44,117                                            30,766
Other liabilities                3,909                                             2,987
Total liabilities              589,036                                           507,033
Stockholders' equity           103,927                                            98,250
Total liabilities and
stockholders'
equity                   $     692,963                                         $ 605,283
Net interest income                                   8,131                                  $    7,199
Interest rate spread                                                  4.99 %                                      5.05 %
Net interest margin                                                   5.14 %                                      5.22 %

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


                                                   Average Balance Sheets and Net Interest
                                                      Analysis For the Nine Months Ended
                                            9/30/2012                                        9/30/2011
                                               Interest                                      Interest
                            Average             Income/          Yield/        Average       Income/         Yield/
                            Balance             Expense           Rate         Balance       Expense          Rate
                                                        (Dollar amounts in thousands)
Assets
Interest-earning
assets:
Loans, net of
unearned income (1)
(2)                      $     523,182       $      26,387           6.74 %   $ 472,222     $   23,255           6.58 %
Investment securities           59,976               1,401           3.11 %      51,998          1,495           3.83 %
Other earning assets            16,689                 247           1.98 %      10,676            169           2.12 %

Total earning assets           599,847              28,035           6.24 %     534,896         24,919           6.23 %
Allowance for loan
losses                          (7,075 )                                         (6,154 )
Total non-earning
assets                          71,758                                           62,465
Total assets             $     664,530                                        $ 591,207

Liabilities and
stockholders' equity
Interest-bearing
liabilities:
NOW accounts             $      18,431                  46           0.33 %   $  15,560             31           0.27 %
Money market accounts          159,859                 959           0.80 %     148,272            989           0.89 %
Savings accounts                 7,873                  35           0.60 %       5,874             26           0.60 %
Time deposits                  277,455               2,763           1.33 %     225,999          2,698           1.60 %
Total
interest-bearing
deposits                       463,618               3,803           1.10 %     395,705          3,744           1.26 %
Borrowings                      51,270                 628           1.64 %      64,563            857           1.77 %
Total
interest-bearing
liabilities                    514,888               4,431           1.15 %     460,268          4,601           1.34 %
Noninterest-bearing
liabilities:
 Demand deposits                40,986                                           31,347
 Other liabilities               6,694                                            2,872
Total liabilities              562,568                                          494,487
Stockholders' equity           101,962                                           96,720
Total liabilities and
stockholders'
 equity                  $     664,530                                        $ 591,207
Net interest income                          $      23,604                                  $   20,318
Interest rate spread                                                 5.09 %                                      4.89 %
Net interest margin                                                  5.26 %                                      5.08 %

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

Provision for Loan Losses

The provision for loan losses is a current charge to earnings made in order to increase the allowance for loan losses to a level deemed appropriate by management based on an evaluation of the loan portfolio, current economic conditions, changes in the nature and volume of lending, historical loan experience and other known internal and external factors affecting loan collectability. Our loan loss allowance is calculated by segmenting the loan portfolio by loan type and applying historical loss factors to each segment. The historical loss factors may be qualitatively adjusted by considering regulatory and peer data, and the application of management's judgment.

The provision for loan losses in the third quarter of 2012 was $1.8 million compared to $1.6 million in the third quarter of 2011. For the nine months ended September 30, 2012, the provision for loan losses was $4.6 million compared to $5.1 million for the same period last year.

Net charge-offs during the third quarter of 2012 were $1.6 million, compared to net charge-offs during the third quarter of 2011 of $1.5 million.

Net charge-offs during the nine months ended September 30, 2012 were $4.0 million compared to $4.7 million during the first nine months of 2011.


Noninterest Income

The following table presents the major categories of noninterest income for the
three and nine months ended September 30, 2012 and 2011:

                                                        For the Three Months Ended
                                                               September 30,
                                                       2012         2011        Change
                                                          (dollars in thousands)
Account maintenance and deposit service fees        $      222     $   218     $      4
Income from bank-owned life insurance                      148         129           19
Net gain on other real estate owned                         24           -           24
Net gain on sale of available for sale securities          287           -          287
OTTI losses recognized in earnings                        (480 )       (43 )       (437 )
Other                                                       63          62            1
  Total noninterest income                          $      264     $   366     $   (102 )

                                                         For the Nine Months Ended
                                                               September 30,
                                                       2012          2011       Change
                                                          (dollars in thousands)
Account maintenance and deposit service fees        $      624     $   636     $    (12 )
Income from bank-owned life insurance                      649       1,196         (547 )
Bargain purchase gain on acquisition                     3,484           -        3,484
Gain on sale of loans                                      657           -          657
Net loss on other real estate owned                     (2,376 )      (147 )     (2,229 )
Gain on other assets                                        14           -           14
Net gain on sale of available for sale securities          274           -          274
OTTI losses recognized in earnings                        (717 )      (113 )       (604 )
Other                                                      198         151           47
  Total noninterest income                          $    2,807     $ 1,723     $  1,084

During the third quarter of 2012 Sonabank had noninterest income of $264 thousand compared to noninterest income of $366 thousand during the third quarter of 2011. The decline was primarily related to an OTTI charge on trust preferred securities in the amount of $480 thousand which was partially offset by a gain on the sale of SBA pooled securities in the amount of $287 thousand.

Noninterest income increased to $2.8 million in the first nine months of 2012 from $1.7 million in the first nine months of 2011. The increase resulted from the bargain purchase gain of $3.5 million from the HarVest transaction which was partially offset by the recognition of impairment in the values of five OREO properties in the Charlottesville market and one in the Culpeper market during the second quarter of 2012. In addition to the OTTI charge recognized in the third quarter of 2012, there was an OTTI of $235 thousand in one trust preferred security during the second quarter of 2012 compared to $38 thousand in OTTI charges during the second quarter of 2011. Also, during the first quarter of 2012 the bank sold the guaranteed portions of SBA loans and realized a $657 thousand gain. Income from bank owned life insurance ("BOLI") contributed $649 thousand during the nine months ended September 30, 2012, compared to $1.2 million during the nine months ended September 30, 2011. Both periods were affected by death benefits; however, the death benefit received in the 2011 period was $800 thousand as compared to $195 in the 2012 period.


Noninterest Expense

The following table presents the major categories of noninterest expense for the
three and nine months ended September 30, 2012 and 2011:

                                                   For the Three Months Ended
                                                         September 30,
                                              2012             2011           Change
                                                           (As Restated)
                                                     (dollars in thousands)
 Salaries and benefits                     $    2,073     $         1,759     $   314
 Occupancy expenses                               753                 573         180
 Furniture and equipment expenses                 149                 140           9
 Amortization of core deposit intangible          236                 230           6
 Virginia franchise tax expense                   145                 171         (26 )
 Merger expenses                                   11                   -          11
 FDIC assessment                                  146                 125          21
 Data processing expense                          175                 126          49
 Telephone and communication expense              183                 101          82
 Change in FDIC indemnification asset             242                 (13 )       255
 Other operating expenses                         665                 702         (37 )
  Total noninterest expense                $    4,778     $         3,914     $   864

                                                   For the Nine Months Ended
                                                         September 30,
                                                 2012                2011     Change
                                                           (As Restated)
                                                     (dollars in thousands)
 Salaries and benefits                     $    5,868     $         5,066     $   802
 Occupancy expenses                             2,040               1,667         373
 Furniture and equipment expenses                 448                 406          42
 Amortization of core deposit intangible          694                 690           4
 Virginia franchise tax expense                   436                 514         (78 )
 Merger expenses                                  360                   -         360
 FDIC assessment                                  417                 397          20
 Data processing expense                          474                 400          74
 Telephone and communication expense              418                 289         129
 Change in FDIC indemnification asset             481                 (85 )       566
 Other operating expenses                       2,417               1,809         608
  Total noninterest expense                $   14,053     $        11,153     $ 2,900


Noninterest expenses were $4.8 million and $14.1 million during the third quarter and the first nine months of 2012, respectively, compared to $3.9 million and $11.2 million during the same periods in 2011. Occupancy and furniture and equipment expenses were $902 thousand during the quarter compared to $713 thousand during the third quarter of 2011. $134 thousand of the increase resulted from operating five more branches this quarter, and $43 thousand was a result of expenses related to the HarVest administrative office on a lease which has now been terminated. As a result of recasting estimated recoveries under the FDIC indemnification agreement for the Greater Atlantic Bank acquisition in the second quarter of 2012, amortization expense was $242 thousand for the quarter . . .

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