the Company. In March 2020, the World Health Organization declared COVID-19 to be a global pandemic. The spread of COVID-19 has caused significant uncertainty, volatility and disruption in the U.S. and global economy and has disrupted banking and other financial activity in the areas in which the Company operates. Given the ongoing and dynamic nature COVID-19, it is not possible to accurately predict the extent, severity or duration of these conditions or when normal economic and operating conditions will resume. For this reason, the extent to which the COVID-19 pandemic affects our business, operations and financial condition, as well as our regulatory capital and liquidity ratios and credit ratings, is highly uncertain and unpredictable and depends on, among other things, new information that may emerge concerning the scope, duration and severity of the COVID-19 pandemic and actions taken by governmental authorities and other parties in response to the pandemic. If the pandemic is prolonged, the adverse impact on the markets in which we operate and on our business, operations and financial condition could deepen.

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations. The CARES Act includes provisions that temporarily delay the required implementation date of Financial Accounting Standards Board (“FASB”) ASC Topic 326, Financial Instruments—Credit Losses, and suspend the requirements related to accounting for a troubled debt restructuring (“TDR”), for certain entities.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID-19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.

Financial position and results of operations

The Company’s fee income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis. At this time, the Company is unable to project the materiality of such an impact, but recognize the breadth of the economic impact is likely to impact its fee income in future periods.

The Company’s interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

Capital and liquidity

While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses. The Company relies on cash on hand as well as dividends from its subsidiary bank to service its debt. If the Company’s capital deteriorates such that its subsidiary bank is unable to pay dividends to it for an extended period of time, the Company may not be able to service its debt.

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The Company maintains access to multiple sources of liquidity. Wholesale funding markets have remained open to us, but rates for short term funding have recently been volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin. If an extended recession caused large number of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.

Asset valuation

Goodwill is evaluated for impairment on an annual basis or more frequently if events or circumstances warrant. Our annual assessment timing is during the third calendar quarter. Considering the effects of COVID-19, management determined there to be a triggering event in the first quarter of 2020. For the 2020 assessment, we performed a qualitative assessment to determine if it was more likely than not that the fair value of our single reporting unit is less than its carrying amount. We concluded that the fair value of our single reporting unit exceeded its carrying amount and that it was not necessary to perform the quantitative impairmenttest pursuant to ASC 350-20. Our qualitative assessment considered many factors including, but not limited to, our actual and projected operating performance and profitability, as well as consideration of recent bank merger and acquisition transaction metrics. NaN impairment losses were considered necessary based on management’s assessment.

Currently, the Company does not expect COVID-19 to affect its ability to account timely for the assets on its balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

COVID-19 could cause a further and sustained decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform another goodwill impairment test and result in an impairment charge being recorded for that period. In the event that the Company concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

It is possible that the lingering effects of COVID-19 could cause the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform an intangible asset impairment test and result in an impairment charge being recorded for that period. In the event that the Company concludes that all or a portion of its intangible assets are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

Processes, controls and business continuity plan

The Company has invoked its Board approved Pandemic Preparedness Plan that includes a remote working strategy. The Company does not anticipate incurring additional material cost related to its continued deployment of the remote working strategy. No material operational or internal control challenges or risks have been identified to date. The Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraint through the implementation of its business continuity plans.

Lending operations and accommodations to borrowers

As the health crisis unfolded, the Company’s markets and businesses experienced disruptions in normal operations. In keeping with regulatory guidance to work with borrowers during this unprecedented situation, the Company provided certain modifications, including interest only or principal and interest deferments. As of April 30, 2020, total modified loans or loans with requests for modifications were $548.1 million and the Company anticipates additional amounts throughout the second quarter of 2020.

With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company is actively participating in assisting its customers with applications for resources through the

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program. PPP loans have a two-year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of April 30, 2020, the Company has approved and secured funds with the SBA 250 PPP loans representing $52.5 million in funding. An additional 1,726 loans for $202.7 million have been approved for SBA PPP pending funding. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings.

Credit

The Company is working with customers directly affected by COVID-19. The Company is prepared to offer short-term assistance in accordance with regulator guidelines. As a result of the current economic environment caused by the COVID-19 virus, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

Recent Accounting Pronouncements

Adoption of New Accounting Standards:

In ~~February 2016, the~~August 2018, FASB issued ASU ~~2016-02,~~ ~~Leases~~2018-13, Fair Value Measurement (Topic ~~842)~~820). ~~The FASB issued this~~This ASU ~~to increase transparency~~adds, eliminates and ~~comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees~~modifies certain disclosure requirements for ~~those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. In July 2018, the FASB issued ASU 2018-10,~~ ~~Codification Improvements to Topic 842, Leases,~~ ~~which updates narrow aspects of the guidance issued in ASU 2016-02.~~fair value measurements. The amendments in ~~this~~ ASU 2018-13 were effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption of this ASU was permitted for all entities. The Company adopted ASU 2016-02 in the first quarter of 2019 and inventoried and categorized its lease agreements. Upon adoption, the Company recognized right-of-use assets and associated operating lease liabilities of $8.3 million and $9.3 million, respectively. Right-of-use assets and operating lease liabilities are reflected on our consolidated balance sheets. The company currently does not have any finance leases. See Note 5 – Leases for additional disclosures related to leases.

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~~In March 2017, the FASB issued ASU 2017-08,~~ ~~Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities,~~ which shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 became effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2018.~~2019. Early adoption was permitted. The ~~company~~Company adopted ASU ~~2017-08~~2018-13 in the first quarter of ~~2019~~2020. The disclosures were effective using the prospective method for certain disclosures and retrospective for a majority of the disclosures. The Company adopted ASU 2018-13 in the first quarter of 2020 and it did not have a material impact on the Company’s consolidated financial statements.

~~In July 2018, the FASB issued ASU 2018-09,~~ ~~Codification Improvements~~. This ASU makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification. The majority of the amendments in ASU 2018-09 were effective for the Company for fiscal years beginning after December 15, 2018. The Company adopted ASU 2018-09 in the first quarter of 2019 and it did not have a material impact on the Company’s consolidated financial statements.

New Accounting Standards Not Yet Adopted:

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which along with several other subsequent codification updates related to accounting for credit losses, sets forth a “current expected credit loss” ("CECL") model requiring the Company to measure all expected credit losses for financial instruments recorded at amortized cost held at the reporting ~~date~~date. The estimate is to be based on historical experience, current conditions and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. ~~For public business entities that are U.S. Securities and Exchange Commission filers, the~~The amendments ~~in this update are~~were effective for ~~fiscal years~~the Company beginning after December 15, 2019, including interim periods within those fiscal years. Southern National has engaged a third-party to collect data that will be needed to produce historical inputs into any models created as a result of adopting this ASU. We are currently evaluating the impact of theJanuary 1, 2020. The initial adoption of this ASU will result in an increase of approximately $11.3 million in our allowance for loan losses, including transfers of non-accretable discount on ~~our consolidated~~purchased credit-impaired loans. The increase is a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. The adoption of this ASU requires that we establish an allowance for expected credit losses for certain debt securities and other financial ~~statements.~~assets which are not material. We plan to elect the federal banking agencies’ rule providing for an optional three-year phase-in period for the day-one adverse regulatory capital effects upon adopting the standard. The Company elected to defer adoption of CECL until the termination date of the current national emergency, declared by the President on March 31, 2020, under the National Emergencies Act concerning the COVID-19 outbreak, or December 31, 2020.

In ~~January 2017, the~~December 2019, FASB issued ASU ~~2017-04, Intangibles - Goodwill and Other (Topic 350):~~ 2019-12, Simplifying the ~~Test~~Accounting for ~~Goodwill Impairment,~~ ~~which eliminates~~Income Taxes (Topic 740). This ASU simplifies the ~~second step~~accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. This ASU also simplifies aspects of the ~~previous FASB guidance~~accounting for ~~testing goodwill for impairment~~franchise taxes and ~~is intended to reduce cost~~enacted changes in tax laws or rates and ~~complexity~~clarifies the accounting transactions that result in a step-up in the tax basis of ~~goodwill impairment testing. The amendments in this~~goodwill. ASU modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. After determining if the carrying amount of a reporting unit exceeds its fair value, the entity should take an impairment charge of the same amount to the goodwill for that reporting unit, not to exceed the total goodwill amount for that reporting unit. ASU 2017-042019-12 is effective for annual periods beginning after December 15, ~~2019,~~2020, including

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interim periods within those annual periods. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Southern National is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.

~~In August 2018, FASB issued ASU 2018-13,~~ ~~Fair Value measurement (Topic 820)~~. This ASU adds, eliminates and modifies certain disclosure requirements for fair value measurements. The amendments in ASU 2018-13 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. ~~The disclosures are effective using the prospective method for certain disclosures and retrospective for majority of the disclosures.~~ Southern National is currently in the process of evaluating the impact of adopting the new guidance on its consolidated financial statements and disclosures.

2. ~~STOCK-BASED COMPENSATION~~

In 2004, the Company’s 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. The 2010 Stock Awards and Incentive Plan (the “2010 Plan”) was approved by the Company’s Board of Directors in January 2010 and approved by the stockholders at the Annual Stockholder Meeting in April 2010. The 2010 Plan

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authorized the reservation of an additional 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 purposeMarch 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the ~~plan~~Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. The ASU is intended to ~~afford key employees an incentive to remain~~help stakeholders during the global market-wide reference rate transition period. ASU 2020-04 is effective upon issuance and can be applied through December 31, 2022. Southern National is currently in the ~~employment~~process of ~~Southern National~~evaluating the impact of adopting the new guidance on its consolidated financial statements 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.disclosures.

2. STOCK-BASED COMPENSATION

At the June 21, 2017 Annual Meeting of Stockholders of Southern National, the 2017 Equity Compensation Plan (the “2017 Plan”) was approved as recommended by the Board of Directors. The 2017 Plan replaced the 2010 Plan and has a maximum number of 750,000 shares reserved for issuance. The purpose of the 2017 Plan iswas to promote the success of the Company by providing greater incentive to employees, non-employee directors, consultants and advisors to associate their personal interests with the long-term financial success of the Company, including its subsidiaries, and with growth in stockholder value, consistent with the Company’s risk management practices. Because the 2017 Plan was approved, shares under the 2004 stock-option plan or 2010 Plan ~~will~~were to be no longer be awarded.

A summary of the activity in the stock option plan during the three months ended March 31, ~~2019~~2020 follows:


				Weighted
		Weighted		Average	Aggregate
		Average		Remaining	Intrinsic
		Exercise		Contractual	Value
	Shares	Price		Term	(in thousands)

										Weighted
								Weighted		Average	Aggregate
								Average		Remaining	Intrinsic
								Exercise		Contractual	Value
							Shares	Price		Term	(in thousands)
Options outstanding, beginning of period	642,350	$	9.77				555,750	$	10.02	4.3	$	3,518
Forfeited	(1,400)		9.32
Exercised	(17,250)		6.40				(44,600)		7.32
Options outstanding, end of period	623,700	$	9.77	4.9	$	2,988	511,150	$	10.25	4.3	$	(212)


Exercisable at end of period	480,250	$	9.04	4.2	$	2,551	392,730	$	9.45	3.7	$	18

Stock-based compensation expense associated with stock options was ~~$21~~$95 thousand and ~~$39~~$21 thousand for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. As of March 31, ~~2019,~~2020, unrecognized compensation expense associated with stock options was ~~$71~~$24 thousand, which is expected to be recognized over a weighted average period of ~~1.5 years.~~1.1 year.

~~In 2019, 48,500 shares~~A summary of the activity in the restricted stock ~~were granted at a weighted average exercise price~~plan for 2020 follows:


				Weighted
		Weighted		Average
		Average		Remaining
		Exercise		Contractual
	Shares	Price		Term
Unvested restricted stock outstanding, beginning of period	86,500	$	14.85	3.8
Granted	80,000		15.87
Vested	(89,900)		14.54
Unvested restricted stock outstanding, end of period	76,600	$	15.50	4.5

10

Table of $14.15 to certain officers of Southern National under the 2017 Plan and are subject to vesting in five years. These shares are included in the total shares outstanding at March 31, 2019. In 2019, 2,700 shares of restricted stock granted to certain officers of Southern National under the 2017 Plan were forfeited. Contents

Restricted stock compensation expense totaled ~~$83 thousand~~$1.3 million and $6$83 thousand for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. As of March 31, ~~2019,~~2020, unrecognized compensation expense associated with restricted stock was ~~$1.4~~$1.2 million, which is expected to be recognized over a weighted average period of ~~4.4 years.~~4.5 years.

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3. 3. INVESTMENT SECURITIES

The amortized cost and fair value of available for sale investment 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
	Cost		Gains		Losses		Value
March 31, 2020
Residential government-sponsored mortgage-backed securities	$	48,523	$	1,804	$	(48)	$	50,279
Obligations of states and political subdivisions		16,248		592		(11)		16,829
Corporate securities		2,002		12		—		2,014
Trust preferred securities		2,530		101		(365)		2,266
Residential government-sponsored collateralized mortgage obligations		34,591		1,240		—		35,831
Government-sponsored agency securities		19,796		179		—		19,975
Agency commercial mortgage-backed securities		27,424		821		—		28,245
SBA pool securities		13,199		49		(167)		13,081
Total	$	164,313	$	4,798	$	(591)	$	168,520


	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
December 31, 2019
Residential government-sponsored mortgage-backed securities	$	48,540	$	455	$	(16)	$	48,979
Obligations of states and political subdivisions		17,041		541		—		17,582
Corporate securities		2,004		8		—		2,012
Trust preferred securities		2,530		283		(245)		2,568
Residential government-sponsored collateralized mortgage obligations		36,511		217		(39)		36,689
Government-sponsored agency securities		14,823		47		(48)		14,822
Agency commercial mortgage-backed securities		27,557		192		(18)		27,731
SBA pool securities		14,622		11		(196)		14,437
Total	$	163,628	$	1,755	$	(562)	$	164,820

Amortized

Gross Unrealized

Fair


Cost

Gains

Losses

Value
March 31, 2019

Residential government-sponsored mortgage-backed securities

$
42,552

$
15

$
(455)

$
42,112
Obligations of states and political subdivisions

18,235

138

(34)

18,339
Corporate securities

2,007

6

—

2,013
Trust preferred securities

2,589

315

(324)

2,580
Residential government-sponsored collateralized mortgage obligations

42,680

3

(806)

41,877
Government-sponsored agency securities

3,247

—

(64)

3,183
Agency commercial mortgage-backed securities

27,947

—

(542)

27,405
SBA pool securities

18,921

15

(253)

18,683
Total

$
158,178

$
492

$
(2,478)

$
156,192

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Amortized

Gross Unrealized

Fair


Cost

Gains

Losses

Value
December 31, 2018

Residential government-sponsored mortgage-backed securities

$
27,945

$
—

$
(643)

$
27,302
Obligations of states and political subdivisions

18,305

30

(280)

18,055
Corporate securities

2,008

1

(1)

2,008
Trust preferred securities

2,589

356

(304)

2,641
Residential government-sponsored collateralized mortgage obligations

44,095

3

(1,041)

43,057
Government-sponsored agency securities

3,247

—

(122)

3,125
Agency commercial mortgage-backed securities

28,069

—

(765)

27,304
SBA pool securities

20,183

10

(308)

19,885
Total

$
146,441

$
400

$
(3,464)

$
143,377

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


	Amortized		Gross Unrecognized				Fair
	Cost		Gains		Losses		Value
March 31, 2019

									Amortized		Gross Unrecognized				Fair
									Cost		Gains		Losses		Value
March 31, 2020
Residential government-sponsored mortgage-backed securities	$	9,361	$	4	$	(171)	$	9,194	$	36,953	$	853	$	(3)	$	37,803
Obligations of states and political subdivisions		20,693		118		(71)		20,740		12,983		151		—		13,134
Trust preferred securities		2,529		146		(1)		2,674		1,783		—		(25)		1,758
Residential government-sponsored collateralized mortgage obligations		5,351		—		(66)		5,285		2,515		51		—		2,566
Government-sponsored agency securities		52,658		—		(1,884)		50,774		5,000		165		—		5,165
Total	$	90,592	$	268	$	(2,193)	$	88,667	$	59,234	$	1,220	$	(28)	$	60,426

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before their anticipated recovery, management does not consider these investment securities to be other than temporarily impaired as of March 31, ~~2019.~~

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2020.

The following tables present information regarding investment securities available for sale and held to maturity in a continuous unrealized loss position as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 by duration of time in a loss position (in thousands):


March 31, 2019	Less than 12 months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized

March 31, 2020													Less than 12 months				12 Months or More				Total
													Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Available for Sale	value		Losses		value		Losses		value		Losses		value		Losses		value		Losses		value		Losses
Residential government-sponsored mortgage-backed securities	$	149	$	—	$	26,635	$	(455)	$	26,784	$	(455)	$	3,556	$	(48)	$	—	$	—	$	3,556	$	(48)
Obligations of states and political subdivisions		—		—		6,757		(34)		6,757		(34)		759		(11)		—		—		759		(11)
Corporate securities		—		—		—		—		—		—
Trust preferred securities		—		—		780		(324)		780		(324)		—		—		675		(365)		675		(365)
Residential government-sponsored collateralized mortgage obligations		—		—		41,439		(806)		41,439		(806)
Government-sponsored agency securities		—		—		3,183		(64)		3,183		(64)
Agency commercial mortgage-backed securities		—		—		27,405		(542)		27,405		(542)
SBA pool securities		2,549		(21)		12,026		(232)		14,575		(253)		766		(1)		8,459		(166)		9,225		(167)
Total	$	2,698	$	(21)	$	118,225	$	(2,457)	$	120,923	$	(2,478)	$	5,081	$	(60)	$	9,134	$	(531)	$	14,215	$	(591)


March 31, 2019	Less than 12 months				12 Months or More				Total
	Fair		Unrecognized		Fair		Unrecognized		Fair		Unrecognized

March 31, 2020													Less than 12 months				12 Months or More				Total
													Fair		Unrecognized		Fair		Unrecognized		Fair		Unrecognized
Held to Maturity	value		Losses		value		Losses		value		Losses		value		Losses		value		Losses		value		Losses
Residential government-sponsored mortgage-backed securities	$	—	$	—	$	8,661	$	(171)	$	8,661	$	(171)	$	—	$	—	$	146	$	(3)	$	146	$	(3)
Obligations of states and political subdivisions		—		—		6,300		(71)		6,300		(71)
Trust preferred securities		—		—		60		(1)		60		(1)		1,758		(25)		—		—		1,758		(25)
Residential government-sponsored collateralized mortgage obligations		—		—		5,285		(66)		5,285		(66)
Government-sponsored agency securities		—		—		50,774		(1,884)		50,774		(1,884)
Total	$	—	$	—	$	71,080	$	(2,193)	$	71,080	$	(2,193)	$	1,758	$	(25)	$	146	$	(3)	$	1,904	$	(28)


December 31, 2018	Less than 12 months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized

December 31, 2019													Less than 12 months				12 Months or More				Total
													Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Available for Sale	value		Losses		value		Losses		value		Losses		value		Losses		value		Losses		value		Losses
Residential government-sponsored mortgage-backed securities	$	393	$	(5)	$	26,910	$	(638)	$	27,303	$	(643)	$	2,686	$	(7)	$	1,758	$	(9)	$	4,444	$	(16)
Obligations of states and political subdivisions		2,220		(78)		13,385		(202)		15,605		(280)
Corporate securities		1,008		(1)		—		—		1,008		(1)
Trust preferred securities		—		—		795		(304)		795		(304)		—		—		795		(245)		795		(245)
Residential government-sponsored collateralized mortgage obligations		—		—		42,598		(1,041)		42,598		(1,041)		4,253		(25)		3,133		(14)		7,386		(39)
Government-sponsored agency securities		—		—		3,125		(122)		3,125		(122)		4,924		(48)		—		—		4,924		(48)
Agency commercial mortgage-backed securities		—		—		27,304		(765)		27,304		(765)		2,833		(6)		3,126		(12)		5,959		(18)
SBA pool securities		6,009		(70)		10,546		(238)		16,555		(308)		1,148		(2)		9,420		(194)		10,568		(196)
Total	$	9,630	$	(154)	$	124,663	$	(3,310)	$	134,293	$	(3,464)	$	15,844	$	(88)	$	18,232	$	(474)	$	34,076	$	(562)


December 31, 2019	Less than 12 months				12 Months or More				Total
	Fair		Unrecognized		Fair		Unrecognized		Fair		Unrecognized
Held to Maturity	value		Losses		value		Losses		value		Losses
Residential government-sponsored mortgage-backed securities	$	14,978	$	(41)	$	1,402	$	(11)	$	16,380	$	(52)
Obligations of states and political subdivisions		2,011		(1)		—		—		2,011		(1)
Trust preferred securities		—		—		53		(2)		53		(2)
Residential government-sponsored collateralized mortgage obligations		1,162		(3)		571		(6)		1,733		(9)
Government-sponsored agency securities		—		—		20,833		(162)		20,833		(162)
Total	$	18,151	$	(45)	$	22,859	$	(181)	$	41,010	$	(226)

1213

Table of Contents

December 31, 2018

Less than 12 months

12 Months or More

Total


Fair

Unrecognized

Fair

Unrecognized

Fair

Unrecognized
Held to Maturity

value

Losses

value

Losses

value

Losses
Residential government-sponsored mortgage-backed securities

$
—

$
—

$
8,935

$
(230)

$
8,935

$
(230)
Obligations of states and political subdivisions

3,273

(10)

7,187

(137)

10,460

(147)
Trust preferred securities

—

—

60

(1)

60

(1)
Residential government-sponsored collateralized mortgage obligations

—

—

5,910

(91)

5,910

(91)
Government-sponsored agency securities

—

—

49,532

(3,123)

49,532

(3,123)
Total

$
3,273

$
(10)

$
71,624

$
(3,582)

$
74,897

$
(3,592)

As of March 31, ~~2019,~~2020, we owned pooled trust preferred investment securities as ~~follows:~~follows (in thousands):


												% of		Previously
												Current		Recognized
												Defaults and		Cumulative
		Ratings When								Estimated		Deferrals to		Other
	Tranche	Purchased		Current Ratings		Par		Book		Fair		Total		Comprehensive
Security	Level	Moody's	Fitch	Moody's	Fitch	Value		Value		Value		Collateral		Loss(1)
Held to Maturity
ALESCO VII A1B	Senior	Aaa	AAA	Aa1	AA	$	1,910	$	1,783	$	1,758	17	%	$	219
						$	1,910	$	1,783	$	1,758			$	219

Available for Sale														Cumulative OTTI
Other Than														Related to
Temporarily Impaired:														Credit Loss (2)
TPREF FUNDING II	Mezzanine	A1	A-	Caa3	WD	$	1,500	$	1,040	$	675	32	%	$	400
ALESCO V C1	Mezzanine	A2	A	Caa1	C		2,150		1,490		1,591	15	%		660
						$	3,650	$	2,530	$	2,266			$	1,060

Total						$	5,560	$	4,313	$	4,024

% of

Previously

Current

Recognized

Defaults and

Cumulative

Ratings When

Estimated

Deferrals to

Other

Tranche

Purchased

Current Ratings

Par

Book

Fair

Total

Comprehensive
Security

Level

Moody's

Fitch

Moody's

Fitch

Value

Value

Value

Collateral

Loss (1)
Held to Maturity

ALESCO VII  A1B

Senior

Aaa

AAA

Aa2

AA

$
2,658

$
2,468

$
2,614

17
%
$
219
MMCF III B

Senior Sub

A3

A-

Ba1

BBB

61

61

60

45
%

4











2,719

2,529

2,674



$
223



















Cumulative OTTI
Available for Sale



















Related to
Other Than Temporarily Impaired:



















Credit Loss (2)
TPREF FUNDING II

Mezzanine

A1

A-

Caa3

D

1,500

1,099

775

28
%
$
400
ALESCO V C1

Mezzanine

A2

A

Caa1

C

2,150

1,490

1,805

14
%

660











3,650

2,589

2,580



$
1,060

Total











$
6,369

$
5,118

$
5,254

(1)

~~(1)~~

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

accretion.

(2)

~~(2)~~

~~Pre-tax~~

Pre-tax.

Each of these investment securities has been evaluated for other than temporary impairment. In performing a detailed cash flow analysis of each investment security, Sonabank works with independent third parties to estimate expected cash flows and assist with the evaluation of other than temporary impairment. ~~The~~There have been no changes to our cash flow analyses ~~performed included the following assumptions:~~and assumptions as of March 31, 2020.

·

~~0.5% of the remaining performing collateral will default or defer per annum.~~

·

~~Recoveries of 9% 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 investment security.~~

·

~~Our investment 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~~There were 0 other than temporary impairment charges related to credit losses or sales of these securities during the three months ended March 31, ~~2019~~2020 and ~~2018, respectively.~~

13

~~Table of Contents~~

2019.

Changes in accumulated other comprehensive ~~loss~~income (loss) by component for the three months ended March 31, ~~2019~~2020 and ~~2018~~2019 are shown in the tables below. All amounts are net of tax (in thousands).


	Unrealized Holding
	Losses on		Held to Maturity
For the three months ended March 31, 2019	Available for Sale		Securities		Total

							Unrealized Holding
							Gains on		Held to Maturity
For the three months ended March 31, 2020							Available for Sale		Securities		Total
Beginning balance	$	(2,419)	$	(170)	$	(2,589)	$	943	$	(160)	$	783
Current period other comprehensive income		856		2		858		2,382		2		2,384
Ending balance	$	(1,563)	$	(168)	$	(1,731)	$	3,325	$	(158)	$	3,167

Unrealized Holding

Losses on

Held to Maturity

For the three months ended March 31, 2018

Available for Sale

Securities

Total
Beginning balance

$
(999)

$
(153)

$
(1,152)
Amounts reclassified from accumulated other comprehensive loss due to the adoption of ASU 2018-02

(199)

(30)

(229)
Subtotal

(1,198)

(183)

(1,381)
Current period other comprehensive (loss) income

(1,482)

4

(1,478)
Ending balance

$
(2,680)

$
(179)

$
(2,859)


	Unrealized Holding
	Losses on		Held to Maturity
For the three months ended March 31, 2019	Available for Sale		Securities		Total
Beginning balance	$	(2,419)	$	(170)	$	(2,589)
Current period other comprehensive income		856		2		858
Ending balance	$	(1,563)	$	(168)	$	(1,731)

14

Table of Contents

4. 4. LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table summarizes the composition of our loan portfolio as of March ~~31, 2019~~30, 2020 and December 31, ~~2018~~2019 (in thousands):


	March 31, 2020		December 31, 2019
Loans secured by real estate:
Commercial real estate - owner occupied	$	409,739	$	414,479
Commercial real estate - non-owner occupied		599,987		559,195
Secured by farmland		16,608		17,622
Construction and land loans		115,144		150,750
Residential 1-4 family (1)		624,119		604,777
Multi- family residential		90,652		82,055
Home equity lines of credit (1)		106,820		109,006
Total real estate loans		1,963,069		1,937,884

Commercial loans		223,433		221,447
Consumer loans		25,708		26,304
Subtotal		2,212,210		2,185,635
Plus deferred costs on loans		328		412
Total loans	$	2,212,538	$	2,186,047

March 31, 2019

December 31, 2018
Loans secured by real estate:


Commercial real estate - owner occupied

$
416,750

$
407,031
Commercial real estate - non-owner occupied

549,891

540,698
Secured by farmland

19,682

20,966
Construction and land loans

149,054

146,654
Residential 1-4 family(1)

568,616

565,083
Multi- family residential

83,219

82,516
Home equity lines of credit(1)

121,136

128,225
Total real estate loans

1,908,348

1,891,173

Commercial loans

218,375

255,441
Consumer loans

30,319

32,347
Subtotal

2,157,042

2,178,961
Less deferred costs (fees) on loans

173

(137)
Loans, net of deferred fees

$
2,157,215

$
2,178,824

(1)

~~(1)~~

~~Includes~~ ~~$18.7 million and $18.3~~Included $13.5 million of loans as of ~~March~~December 31, 2019, ~~and December 31, 2018, respectively,~~ acquired in the Greater Atlantic Bank (“GAB”) transaction covered under an FDIC loss-share agreement. The agreement covering single family loans ~~expires in~~expired on December 31, 2019.

~~In the first quarter of 2019, $33.9 million of commercial loans were reclassified into loans secured by real estate, upon review and validation of collateral and Call Report codes.~~

Accounting policy related to the allowance for loan losses is considered a critical policy given the level of estimation, judgment, and uncertainty in 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 Company’s consolidated financial results.

14

~~Table of Contents~~

As part of the GAB acquisition, the Bank and the FDIC entered into loss sharing agreements on approximately $143.4 million (contractual basis) of GAB’s assets. There were two agreements with the FDIC: one for single family loans which is a 10‑year agreement expiring in December 2019, and one for non-single family (commercial) assets which was a 5‑year agreement which expired in December 2014. The Bank will continue to share in the losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharing agreement related to single family loans; 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”. Covered loans totaled $18.7 million and $18.3 million at March 31, 2019 and December 31, 2018, respectively.

Accretable discount on the acquired ~~EVBS, GAB, Prince George’s Federal Savings Bank (“PGFSB”), and the HarVest Bank (“HarVest”)~~ loans totaled ~~$12.6~~$10.6 million and ~~$13.5~~$11.2 million at March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. Accretion ~~of $749 thousand and $816 thousand~~ associated with the acquired loans held for investment of $597 thousand and $816 thousand was recognized induring the three months ended March 31, 2020 and 2019, ~~and 2018,~~ respectively.

~~For the three acquisitions subsequent to the GAB acquisition noted above, management sold the majority~~15

Table of ~~the purchased credit impaired loans immediately after closing of the acquisition.~~Contents

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


	Total Loans
			Unpaid
	Recorded		Principal		Related
March 31, 2020	Investment (1)		Balance		Allowance
With no related allowance recorded
Commercial real estate - owner occupied	$	5,986	$	6,956	$	—
Commercial real estate - non-owner occupied (2)		3,231		3,327		—
Construction and land development		357		802		—
Commercial loans		5,276		6,513		—
Residential 1-4 family (3)		5,103		6,222		—
Other consumer loans		20		20		—
Total	$	19,973	$	23,840	$	—

With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—	$	—
Commercial real estate - non-owner occupied (2)		—		—		—
Construction and land development		—		—		—
Commercial loans		2,415		2,480		1,309
Residential 1-4 family (3)		—		—		—
Other consumer loans		—		—		—
Total	$	2,415	$	2,480	$	1,309
Grand total	$	22,388	$	26,320	$	1,309


	Total Loans
			Unpaid
	Recorded		Principal		Related
December 31, 2019	Investment (1)		Balance		Allowance
With no related allowance recorded
Commercial real estate - owner occupied	$	6,890	$	8,530	$	—
Commercial real estate - non-owner occupied (2)		3,120		3,363		—
Construction and land development		345		747		—
Commercial loans		5,049		8,490		—
Residential 1-4 family (3)		1,021		2,719		—
Other consumer loans		—		—		—
Total	$	16,425	$	23,849	$	—

With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—	$	—
Commercial real estate - non-owner occupied (2)		176		281		1
Construction and land development		—		—		—
Commercial loans		2,498		2,533		957
Residential 1-4 family (3)		2,841		3,243		92
Other consumer loans		39		39		1
Total	$	5,554	$	6,096	$	1,051
Grand total	$	21,979	$	29,945	$	1,051

Total Loans




Unpaid


Recorded

Principal

Related
March 31, 2019

Investment (1)

Balance

Allowance
With no related allowance recorded






Commercial real estate - owner occupied

$
4,540

$
5,989

$
—
Commercial real estate - non-owner occupied (2)

3,927

4,421

—
Construction and land development

353

365

—
Commercial loans

3,560

4,240

—
Residential 1-4 family (3)

2,558

4,966

—
Other consumer loans

19

40

—
Total

$
14,957

$
20,021

$
—

With an allowance recorded






Commercial real estate - owner occupied

$
—

$
—

$
—
Commercial real estate - non-owner occupied (2)

—

—

—
Construction and land development

—

—

—
Commercial loans

2,810

4,670

600
Residential 1-4 family (3)

783

831

—
Other consumer loans

—

—

—
Total

$
3,593

$
5,501

$
600
Grand total

$
18,550

$
25,522

$
600

~~(1) Recorded investment is after cumulative prior charge offs of $2.0 million. These loans also have aggregate SBA guarantees of $4~~.8 ~~million.~~

(1)

~~(2)~~

~~Includes loans secured by farmland and multi-family loans.~~

~~(3)~~

~~Includes home equity lines of credit.~~

15

~~Table of Contents~~

Total Loans




Unpaid


Recorded

Principal

Related
December 31, 2018

Investment (1)

Balance

Allowance
With no related allowance recorded






Commercial real estate - owner occupied

$
2,795

$
4,777

$
—
Commercial real estate - non-owner occupied (2)

171

333

—
Construction and land development

—

336

—
Commercial loans

3,450

6,013

—
Residential 1-4 family (3)

1,591

5,911

—
Other consumer loans

—

—

—
Total

$
8,007

$
17,370

$
—

With an allowance recorded






Commercial real estate - owner occupied

$
—

$
—

$
—
Commercial real estate - non-owner occupied (2)

—

—

—
Construction and land development

—

—

—
Commercial loans

2,626

3,276

612
Residential 1-4 family (3)

1,429

1,476

6
Other consumer loans

—

—

—
Total

$
4,055

$
4,752

$
618
Grand total

$
12,062

$
22,122

$
618

~~(1)~~

Recorded investment is after cumulative prior charge offs of $1.5 ~~million.~~million as of March 31, 2020 and December 31, 2019. These loans also have aggregate SBA guarantees of $~~3.4~~ ~~million.~~

$4.4 million and $3.1 million as of March 31, 2020 and December 31, 2019, respectively.

(2)

~~(2)~~

Includes loans secured by farmland and multi-family residential loans.

(3)

~~(3)~~

Includes home equity lines of credit.

16

Table of Contents

The following tables present the average recorded investment and interest income recognized for impaired loans recognized by class of loans for the three months ended March 31, ~~2019~~2020 and ~~2018~~2019 (in thousands):

Total Loans

Average

Interest

Recorded

Income
Three Months Ended March 31, 2019

Investment

Recognized
With no related allowance recorded




Commercial real estate - owner occupied

$
6,034

$
66
Commercial real estate - non-owner occupied (1)

4,435

37
Construction and land development

370

14
Commercial loans

5,011

11
Residential 1-4 family (2)

5,305

59
Other consumer loans

40

—
Total

$
21,195

$
187

With an allowance recorded




Commercial real estate - owner occupied

$
—

$
—
Commercial real estate - non-owner occupied (1)

—

—
Construction and land development

—

—
Commercial loans

4,712

50
Residential 1-4 family (2)

984

18
Other consumer loans

—

—
Total

$
5,696

$
68
Grand total

$
26,891

$
255


	Total Loans
	Average		Interest
	Recorded		Income
Three Months Ended March 31, 2020	Investment		Recognized
With no related allowance recorded
Commercial real estate - owner occupied	$	6,987	$	91
Commercial real estate - non-owner occupied (1)		3,341		46
Construction and land development		815		14
Commercial loans		3,646		46
Residential 1-4 family (2)		6,229		37
Other consumer loans		20		—
Total	$	21,038	$	234

With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—
Commercial real estate - non-owner occupied (1)		—		—
Construction and land development		—		—
Commercial loans		3,581		49
Residential 1-4 family (2)		—		—
Other consumer loans		—		—
Total	$	3,581	$	49
Grand total	$	24,619	$	283


	Total Loans
	Average		Interest
	Recorded		Income
Three Months Ended March 31, 2019	Investment		Recognized
With no related allowance recorded
Commercial real estate - owner occupied	$	6,034	$	66
Commercial real estate - non-owner occupied (1)		4,435		37
Construction and land development		370		14
Commercial loans		5,011		11
Residential 1-4 family (2)		5,305		59
Other consumer loans		40		—
Total	$	21,195	$	187

With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—
Commercial real estate - non-owner occupied (1)		—		—
Construction and land development		—		—
Commercial loans		4,712		50
Residential 1-4 family (2)		984		18
Other consumer loans		—		—
Total	$	5,696	$	68
Grand total	$	26,891	$	255

(1)

~~(1)~~

Includes loans secured by farmland and multi-family residential loans.

(2)

~~(2)~~

Includes home equity lines of credit.

1617

Table of Contents

Total Loans

Average

Interest

Recorded

Income
Three Months Ended March 31, 2018

Investment

Recognized
With no related allowance recorded




Commercial real estate - owner occupied

$
671

$
9
Commercial real estate - non-owner occupied (1)

877

14
Construction and land development

9,972

—
Commercial loans

4,842

3
Residential 1-4 family (2)

3,548

14
Other consumer loans

—

—
Total

$
19,910

$
40

With an allowance recorded




Commercial real estate - owner occupied

$
—

$
—
Commercial real estate - non-owner occupied (1)

—

—
Construction and land development

—

—
Commercial loans

929

—
Residential 1-4 family (2)

—

—
Other consumer loans

—

—
Total

$
929

$
—
Grand total

$
20,839

$
40

~~(1)~~

~~Includes loans secured by farmland and multi-family loans.~~

~~(2)~~

~~Includes home equity lines of credit.~~

The following tables present the aging of the recorded investment in past due loans by class of loans as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):


	30 - 59		60 - 89		90
	Days		Days		Days		Total		Nonaccrual		Loans Not		Total
March 31, 2020	Past Due		Past Due		or More		Past Due		Loans (3)		Past Due		Loans (4)
Total loans:
Commercial real estate - owner occupied	$	8,716	$	942	$	—	$	9,658	$	—	$	400,081	$	409,739
Commercial real estate - non-owner occupied (1)		10,837		867		—		11,704		—		695,543		707,247
Construction and land development		1,087		—		—		1,087		—		114,057		115,144
Commercial loans		571		109		—		680		5,358		217,395		223,433
Residential 1-4 family (2)		14,531		394		—		14,925		3,563		712,451		730,939
Other consumer loans		211		6		—		217		20		25,471		25,708
Total	$	35,953	$	2,318	$	—	$	38,271	$	8,941	$	2,164,998	$	2,212,210


	30 - 59		60 - 89		90
	Days		Days		Days		Total		Nonaccrual		Loans Not		Total
December 31, 2019	Past Due		Past Due		or More		Past Due		Loans (3)		Past Due		Loans
Total loans:
Commercial real estate - owner occupied	$	813	$	—	$	—	$	813	$	—	$	413,666	$	414,479
Commercial real estate - non-owner occupied (1)		936		—		—		936		—		657,936		658,872
Construction and land development		746		275		—		1,021		—		149,729		150,750
Commercial loans		234		62		—		296		6,337		214,814		221,447
Residential 1-4 family (2)		4,060		—		—		4,060		2,524		707,199		713,783
Other consumer loans		107		—		—		107		39		26,158		26,304
Total	$	6,896	$	337	$	—	$	7,233	$	8,900	$	2,169,502	$	2,185,635

30 - 59

60 - 89










Days

Days

90 Days

Total

Nonaccrual

Loans Not

Total
March 31, 2019

Past Due

Past Due

or More

Past Due

Loans

Past Due

Loans
Total loans:














Commercial real estate - owner occupied

$
3,310

$
164

$
—

$
3,474

$
1,161

$
412,115

$
416,750
Commercial real estate - non-owner occupied (1)

100

200

—

300

1,387

651,105

652,792
Construction and land development

389

28

—

417

—

148,637

149,054
Commercial loans

114

176

—

290

3,375

214,710

218,375
Residential 1-4 family (2)

5,530

331

—

5,861

1,501

682,390

689,752
Other consumer loans

37

—

—

37

20

30,262

30,319
Total

$
9,480

$
899

$
—

$
10,379

$
7,444

$
2,139,219

$
2,157,042

(1)

~~(1)~~

Includes loans secured by farmland and multi-family residential loans.

(2)

~~(2)~~

Includes home equity lines of credit.

(3)	Nonaccrual loans include SBA guaranteed amounts totaling $2.9 million and $4.1 million at March 31, 2020 and December 31, 2019, respectively.

(4)	Includes $547.1 million of loans that were subject to deferrals at April 30, 2020.

1718

Table of Contents

Activity in the allowance for loan and lease losses by class of loan for the three months ended March 31, 2020 and 2019 is summarized below (in thousands):


	Commercial		Commercial
	Real Estate		Real Estate		Construction						Other
	Owner		Non-owner		and Land		Commercial		1-4 Family		Consumer
Three Months Ended March 31, 2020	Occupied		Occupied (1)		Development		Loans		Residential (2)		Loans		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	810	$	1,720	$	683	$	5,418	$	1,266	$	190	$	174	$	10,261
Provision (recovery) for non-purchased loans		253		971		(307)		822		1,387		74		(100)		3,100
Provision for purchase credit impaired loans		—		—		—		350		—		—		—		350
Total provision (recovery)		253		971		(307)		1,172		1,387		74		(100)		3,450
Charge offs		—		—		—		(822)		(245)		(32)		—		(1,099)
Recoveries		5		2		—		65		31		7		—		110
Ending balance	$	1,068	$	2,693	$	376	$	5,833	$	2,439	$	239	$	74	$	12,722

Three Months Ended March 31, 2019
Allowance for loan losses:
Beginning balance	$	802	$	1,669	$	821	$	7,097	$	1,106	$	224	$	564	$	12,283
Provision (recovery)		11		624		99		(887)		56		83		214		200
Charge offs		—		(462)		—		(167)		—		(60)		—		(689)
Recoveries		3		—		—		63		8		6		—		80
Ending balance	$	816	$	1,831	$	920	$	6,106	$	1,170	$	253	$	778	$	11,874

30 - 59

60 - 89










Days

Days

90 Days

Total

Nonaccrual

Loans Not

Total
December 31, 2018

Past Due

Past Due

or More

Past Due

Loans

Past Due

Loans
Total loans:














Commercial real estate - owner occupied

$
577

$
344

$
—

$
921

$
1,284

$
404,826

$
407,031
Commercial real estate - non-owner occupied (1)

581

617

—

1,198

—

642,982

644,180
Construction and land development

851

—

—

851

—

145,803

146,654
Commercial loans

319

168

—

487

3,391

251,563

255,441
Residential 1-4 family (2)

5,523

197

—

5,720

2,055

685,533

693,308
Other consumer loans

142

18

—

160

—

32,187

32,347
Total

$
7,993

$
1,344

$
—

$
9,337

$
6,730

$
2,162,894

$
2,178,961

(1)

~~(1)~~

Includes loans secured by farmland and multi-family residential loans.

(2)

~~(2)~~

Includes home equity lines of credit.

19

Table of Contents

~~Nonaccrual loans include SBA guaranteed amounts totaling $4.8 million and $3.4 million at March 31, 2019 and December 31, 2018, respectively.~~

~~Activity~~The following table presents the balance in the allowance for ~~non-covered~~ loan losses and ~~lease losses for~~ the ~~three months ended~~recorded investment in loans by portfolio segment and based on impairment method as of March 31, ~~2019~~2020 and ~~2018 is summarized below (in thousands):~~

Commercial

Commercial

















Real Estate

Real Estate

Construction

Other

Owner

Non-owner

and Land

Commercial

1-4 Family

Consumer

Three Months Ended March 31, 2019

Occupied

Occupied (1)

Development

Loans

Residential (2)

Loans

Unallocated

Total
Allowance for loan losses:
















Beginning balance

$
802

$
1,669

$
821

$
7,097

$
1,106

$
224

$
564

$
12,283
Provision (recovery)

11

624

99

(887)

56

83

214

200
Charge offs

—

(462)

—

(167)

—

(60)

—

(689)
Recoveries

3

—

—

63

8

6

—

80
Ending balance

$
816

$
1,831

$
920

$
6,106

$
1,170

$
253

$
778

$
11,874

Three Months Ended March 31, 2018

Allowance for loan losses:
















Beginning balance

$
690

$
1,321

$
692

$
4,496

$
1,586

$
612

$
—

$
9,397
Provision (recovery)

165

229

112

831

(34)

297

—

1,600
Charge offs

—

—

—

(230)

(166)

(91)

—

(487)
Recoveries

4

—

—

175

64

2

—

245
Ending balance

$
859

$
1,550

$
804

$
5,272

$
1,450

$
820

$
—

$
10,755

~~(1)~~

~~Includes loans secured by farmland and multi-family loans.~~

~~(2)~~

~~Includes home equity lines of credit.~~

18

~~Table of Contents~~

~~The following tables present~~ the balance in the allowance for loan losses and the recorded investment in non-covered loans by portfolio segment and based on impairment method as of ~~March~~December 31, 2019 ~~and December 31, 2018~~ (in thousands):


	Commercial		Commercial
	Real Estate		Real Estate		Construction						Other
	Owner		Non-owner		and Land		Commercial		1-4 Family		Consumer
March 31, 2020	Occupied		Occupied (1)		Development		Loans		Residential (2)		Loans		Unallocated		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	1,309	$	—	$	—	$	—	$	1,309
Collectively evaluated for impairment		1,068		2,693		376		4,524		2,439		239		74		11,413
Total ending allowance	$	1,068	$	2,693	$	376	$	5,833	$	2,439	$	239	$	74	$	12,722

Loans:
Individually evaluated for impairment	$	5,986	$	3,231	$	357	$	5,276	$	5,103	$	20	$	—	$	19,973
Collectively evaluated for impairment		403,753		704,016		114,787		218,157		725,836		25,688		—		2,192,237
Total ending loan balances	$	409,739	$	707,247	$	115,144	$	223,433	$	730,939	$	25,708	$	—	$	2,212,210

December 31, 2019
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	957	$	85	$	—	$	—	$	1,042
Collectively evaluated for impairment		810		1,720		683		4,461		1,181		190		174		9,219
Total ending allowance	$	810	$	1,720	$	683	$	5,418	$	1,266	$	190	$	174	$	10,261

Loans:
Individually evaluated for impairment	$	6,890	$	3,120	$	345	$	7,544	$	1,443	$	—	$	—	$	19,342
Collectively evaluated for impairment		407,589		655,752		150,405		213,903		712,340		26,304		—		2,166,293
Total ending loan balances	$	414,479	$	658,872	$	150,750	$	221,447	$	713,783	$	26,304	$	—	$	2,185,635

Commercial

Commercial












Real Estate

Real Estate

Construction

Other

Owner

Non-owner

and Land

Commercial

1-4 Family

Consumer

March 31, 2019

Occupied

Occupied (1)

Development

Loans

Residential (2)

Loans

Unallocated

Total
Ending allowance balance attributable to loans:
















Individually evaluated for impairment

$
—

$
—

$
—

$
600

$
—

$
—

$
—

$
600
Collectively evaluated for impairment

816

1,831

920

5,506

1,170

253

778

11,274
Total ending allowance

$
816

$
1,831

$
920

$
6,106

$
1,170

$
253

$
778

$
11,874

Loans:
















Individually evaluated for impairment

$
4,540

$
3,927

$
353

$
3,560

$
2,558

$
19

$
—

$
14,957
Collectively evaluated for impairment

412,210

648,865

148,701

214,815

687,194

30,300

—

2,142,085
Total ending loan balances

$
416,750

$
652,792

$
149,054

$
218,375

$
689,752

$
30,319

$
—

$
2,157,042

December 31, 2018
















Ending allowance balance attributable to loans:
















Individually evaluated for impairment

$
—

$
—

$
—

$
600

$
—

$
—

$
—

$
600
Collectively evaluated for impairment

802

1,669

821

6,497

1,106

224

564

11,683
Total ending allowance

$
802

$
1,669

$
821

$
7,097

$
1,106

$
224

$
564

$
12,283

Loans:
















Individually evaluated for impairment

$
2,795

$
171

$
—

$
3,450

$
1,591

$
—

$
—

$
8,007
Collectively evaluated for impairment

404,236

644,009

146,654

251,991

691,717

32,347

—

2,170,954
Total ending loan balances

$
407,031

$
644,180

$
146,654

$
255,441

$
693,308

$
32,347

$
—

$
2,178,961

(1)

~~(1)~~

Includes loans secured by farmland and multi-family residential loans.

(2)

~~(2)~~

Includes home equity lines of credit.

Troubled Debt Restructurings

A modification is classified as a ~~troubled debt restructuring (“TDR”)~~TDR if both of the following exist: (1) the borrower is experiencing financial difficulty and (2) the Bank has granted a concession to the borrower. The Bank determines that a borrower may be experiencing financial difficulty if the borrower is currently delinquent on any of its debt, or if the Bank is concerned that the borrower may not be able to perform in accordance with the current terms of the loan agreement in the foreseeable future. Many aspects of the borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty, particularly as it relates to commercial borrowers due to the complex nature of the loan structure, business/industry risk and borrower/guarantor structures. Concessions may include the reduction of an interest rate at a rate lower than current market ~~rate~~rates for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, or principal forgiveness. When evaluating whether a concession has been granted, the Bank also considers whether the borrower has provided additional collateral or guarantors and whether such additions adequately compensate the Bank for the restructured terms, or if the revised terms are consistent with those currently being offered to new loan customers. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty and whether a concession has been granted is subjective in nature and management’s judgment is required when determining whether a modification is a TDR.

Although each occurrence is unique to the borrower and is evaluated separately, for all portfolio segments, TDRs are typically modified through reduction in interest rates, reductions in payments, changing the payment terms from principal and interest to interest only, and/or extensions in term maturity.

As20

Table of ~~March 31, 2019, we had two loans in TDRs. One loan was modified in~~Contents

There were 0 TDRs during the ~~year ending December 31, 2018. One TDR which had been modified in 2013 defaulted in 2015. This loan, in the amount of $656 thousand, was current as of~~three months ended March 31, ~~2019.~~

19

~~Table~~2020 and there have been 0 defaults of ~~Contents~~TDRs modified during the past twelve months.

Credit Quality Indicators

Through its system of internal controls, Southern National evaluates and segments loan portfolio credit quality on a quarterly basis using regulatory definitions for Special Mention, Substandard and Doubtful. Special Mention loans are considered to be criticized. Substandard and Doubtful loans are considered to be classified.

Special Mention loans are loans that have a potential weakness that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position.

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

Doubtful loans have all the weaknesses inherent in those classified as ~~substandard,~~Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Southern National had no0 loans classified Doubtful at March 31, ~~2019~~2020 or December 31, ~~2018.~~2019.

As of March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):


	Total Loans
	Special
March 31, 2020	Mention		Substandard (3)		Pass		Total
Commercial real estate - owner occupied	$	3,795	$	4,192	$	401,752	$	409,739
Commercial real estate - non-owner occupied (1)		3,563		173		703,511		707,247
Construction and land development		—		667		114,477		115,144
Commercial loans		3,487		4,212		215,734		223,433
Residential 1-4 family (2)		661		1,308		728,970		730,939
Other consumer loans		116		—		25,592		25,708
Total	$	11,622	$	10,552	$	2,190,036	$	2,212,210


	Total Loans
	Special
December 31, 2019	Mention		Substandard (3)		Pass		Total
Commercial real estate - owner occupied	$	3,821	$	3,975	$	406,683	$	414,479
Commercial real estate - non-owner occupied (1)		4,193		176		654,503		658,872
Construction and land development		—		690		150,060		150,750
Commercial loans		3,432		4,462		213,553		221,447
Residential 1-4 family (2)		666		1,194		711,923		713,783
Other consumer loans		122		—		26,182		26,304
Total	$	12,234	$	10,497	$	2,162,904	$	2,185,635

Total Loans


Special






March 31, 2019

Mention

Substandard (3)

Pass

Total
Commercial real estate - owner occupied

$
3,596

$
5,519

$
407,635

$
416,750
Commercial real estate - non-owner occupied (1)

4,255

185

648,352

652,792
Construction and land development

—

—

149,054

149,054
Commercial loans

5,327

3,218

209,830

218,375
Residential 1-4 family (2)

393

1,957

687,402

689,752
Other consumer loans

137

—

30,182

30,319
Total

$
13,708

$
10,879

$
2,132,455

$
2,157,042

Total Loans


Special






December 31, 2018

Mention

Substandard (3)

Pass

Total
Commercial real estate - owner occupied

$
6,611

$
2,810

$
397,610

$
407,031
Commercial real estate - non-owner occupied (1)

4,382

189

639,609

644,180
Construction and land development

—

—

146,654

146,654
Commercial loans

2,373

2,689

250,379

255,441
Residential 1-4 family (2)

395

1,982

690,931

693,308
Other consumer loans

142

—

32,205

32,347
Total

$
13,903

$
7,670

$
2,157,388

$
2,178,961

(1)

~~(1)~~

Includes loans secured by farmland and multi-family residential loans.

(2)

~~(2)~~

Includes home equity lines of credit.

(3)

~~(3)~~

Includes SBA guarantees of ~~$4.8~~$2.9 million and ~~$3.4~~$4.1 million as of March 31, ~~2019~~2020 and December 31, ~~2018.~~

2019, respectively.

The amount of foreclosed residential real estate property held at March 31, ~~2019~~2020 and December 31, ~~2018~~2019 was $1.2 ~~million.~~million and $1.4 million, respectively. The recorded investment in consumer mortgage loans collateralized by residential

21

Table of Contents

real estate property that are in the process of foreclosure was ~~$1.1~~$2.0 million and ~~$1.5~~$1.9 million at March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

20

~~Table of Contents~~

5.LEASES

The Company leases certain premises and equipment under operating leases. In recognizing lease right-of-use assets and related liabilities, we account for lease and non-lease components (such as taxes, insurance, and common area maintenance costs) separately as such amounts are generally readily determinable under our lease contracts. At March 31, ~~2019,~~2020, the Company had operating lease liabilities totaling ~~$8.9~~$8.5 million and right-of-use assets totaling ~~$7.8~~$7.7 million related to these leases. Operating lease liabilities and right-of-use assets are reflected in our consolidated balance sheets. We do not currently have any financing leases. For the three months ended March 31, 2020 and 2019, our net operating lease cost was $1.0 million and $586 thousand, respectively and was reflected in occupancy expenses on our income statement.

The following table presents supplemental cash flow and other information related to our operating leases:


	For the Three Months Ended
(in thousands except for percent and period data)	March 31, 2020			March 31, 2019
Supplemental cash flow information:
Cash paid for amounts included in the measurement of lease liabilities	$	1,241		$	1,262
Right-of-use assets obtained in exchange for new operating lease liabilities	$	—		$	155

Other information:
Weighted-average remaining lease term - operating leases, in years		5.6			6.1
Weighted-average discount rate - operating leases		2.8	%		3.0	%

For the Three Months Ended

March 31,

(in thousands except for percent and period data)

2019

Cash paid for amounts included in the measurement of lease liabilities

$
670

Right-of-use assets obtained in exchange for new operating lease liabilities

$
155

Weighted-average remaining lease term - operating leases, in years

6.1

Weighted-average discount rate - operating leases

3.0
%

The following table summarizes the maturity of remaining lease liabilities:



	As of
(dollars in thousands)	March 31, 2020
Lease payments due:
Less than one year	$	2,305
One to three years		3,323
Three to five years		2,043
More than five years		1,586
Total lease payments		9,257
Less: imputed interest		(748)
Lease liabilities	$	8,509

As of

March 31,
(dollars in thousands)

2019
Lease payments due:

    Less than one year

$
1,824
    One to three years

3,359
    Three to five years

2,367
    More than five years

2,199
    Total lease payments

9,749
Less: Interest

(893)
Lease liabilities

$
8,856

As of March 31, ~~2019,~~2020, the Company ~~does~~did not have ~~or expect~~ any operating leases that have not yet commenced orthat will create additional lease liabilities and right-of-use assets for the Company.

6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

Southern National 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, standby letters of credit and guarantees of credit card accounts. 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 Southern National 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 ~~$19.2~~$17.6 million and $17.7 million as of March 31, ~~2019~~2020 and December 31, ~~2018.~~2019, respectively.

22

Table of Contents

Our exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit is based on the contractual amount of these instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Unless noted otherwise, we do not require collateral or other security to support financial instruments with credit risk.

21

~~Table of Contents~~

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 March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, we had unfunded lines of credit and undisbursed construction loan funds totaling ~~$338.2~~$341.0 million and ~~$339.2~~$324.8 million, respectively. Virtually all of our unfunded lines of credit and undisbursed construction loan funds are variable rate.

7. EARNINGS PER SHARE

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


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

								Weighted
								Average
						Income		Shares	Per Share
						(Numerator)		(Denominator)	Amount
For the three months ended March 31, 2020
Basic EPS						$	27	24,168	$	0.00
Effect of dilutive stock options and unvested restricted stock							—	220		—
Diluted EPS						$	27	24,388	$	0.00

For the three months ended March 31, 2019
Basic EPS	$	6,020	24,012	$	0.25	$	6,020	24,012	$	0.25
Effect of dilutive stock options		—	299		—
Effect of dilutive stock options and unvested restricted stock							—	299		—
Diluted EPS	$	6,020	24,311	$	0.25	$	6,020	24,311	$	0.25

For the three months ended March 31, 2018
Basic EPS	$	8,259	23,962	$	0.34
Effect of dilutive stock options and warrants		—	271		—
Diluted EPS	$	8,259	24,233	$	0.34

The Company did ~~not~~0t have any anti-dilutive options in ~~2019~~2020 and ~~2018.~~2019.

23

Table of Contents

8. FAIR VALUE

ASC 820 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

22

~~Table of Contents~~

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:

Assets Measured on a Recurring Basis:

Investment Securities Available for Sale

Where quoted prices are available in an active market, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include highly liquid government bonds and mortgage products. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of investment securities with similar characteristics or discounted cash flow. Level 2 investment securities 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, investment securities are classified within Level 3 of the valuation hierarchy. Currently, a majority of Southern National’s available for sale debt investment securities are considered to be Level 2 investment securities, except for a few corporate securities that are classified as Level 3 investment securities.

24

Table of Contents

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


			Fair Value Measurements Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Total at		Identical Assets		Inputs		Inputs

											Fair Value Measurements Using
													Significant
											Quoted Prices in		Other		Significant
											Active Markets for		Observable		Unobservable
									Total at		Identical Assets		Inputs		Inputs
(dollars in thousands)	March 31, 2019		(Level 1)		(Level 2)		(Level 3)		March 31, 2020		(Level 1)		(Level 2)		(Level 3)
Available for sale securities
Residential government-sponsored mortgage-backed securities	$	42,112	$	—	$	42,112	$	—	$	50,279	$	—	$	50,279	$	—
Obligations of states and political subdivisions		18,339		—		18,339		—		16,829		—		16,829		—
Corporate securities		2,013		—		1,013		1,000		2,014		—		1,014		1,000
Trust preferred securities		2,580		—		2,580		—		2,266		—		2,266		—
Residential government-sponsored collateralized mortgage obligations		41,877		—		41,877		—		35,831		—		35,831		—
Government-sponsored agency securities		3,183		—		3,183		—		19,975		—		19,975		—
Agency commercial mortgage-backed securities		27,405		—		27,405		—		28,245		—		28,245		—
SBA pool securities		18,683		—		18,683		—		13,081		—		13,081		—
Total	$	156,192	$	—	$	155,192	$	1,000	$	168,520	$	—	$	167,520	$	1,000


			Fair Value Measurements Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Total at		Identical Assets		Inputs		Inputs
(dollars in thousands)	December 31, 2019		(Level 1)		(Level 2)		(Level 3)
Available for sale securities
Residential government-sponsored mortgage-backed securities	$	48,979	$	—	$	48,979	$	—
Obligations of states and political subdivisions		17,582		—		17,582		—
Corporate securities		2,012		—		1,012		1,000
Trust preferred securities		2,568		—		2,568		—
Residential government-sponsored collateralized mortgage obligations		36,689		—		36,689		—
Government-sponsored agency securities		14,822		—		14,822		—
Agency commercial mortgage-backed securities		27,731		—		27,731		—
SBA pool securities		14,437		—		14,437		—
Total	$	164,820	$	—	$	163,820	$	1,000

23

~~Table of Contents~~

Fair Value Measurements Using

Significant

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Total at

Identical Assets

Inputs

Inputs
(dollars in thousands)

December 31, 2018

(Level 1)

(Level 2)

(Level 3)
Available for sale securities








Residential government-sponsored mortgage-backed securities

$
27,302

$
—

$
27,302

$
—
Obligations of states and political subdivisions

18,055

—

18,055

—
Corporate securities

2,008

—

1,008

1,000
Trust preferred securities

2,641

—

2,641

—
Residential government-sponsored collateralized mortgage obligations

43,057

—

43,057

—
Government-sponsored agency securities

3,125

—

3,125

—
Agency commercial mortgage-backed securities

27,304

—

27,304

—
SBA pool securities

19,885

—

19,885

—
Total

$
143,377

$
—

$
142,377

$
1,000

No corporate securities that are classified as Level 3 above were purchased or sold during 2020 or 2019. These corporate securities did not have a material impact on the income statement for the three months ended March 31, 2020 and 2019.

Assets and Liabilities Measured on a Non-recurring Basis:

Impaired Loans

Generally, we measure the impairment for impaired loans considering the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral is determined by an independent appraisal or evaluation less estimated costs related to selling the collateral. In some cases appraised value is net of costs to sell. Estimated selling costs range from 6%5% to 10% of collateral valuation at March 31, ~~2019~~2020 and December 31, ~~2018.~~2019. Fair value is classified as Level 3 in the fair value hierarchy. Loans identified as impaired totaled ~~$18.6~~$22.4 million (including SBA guarantees of ~~$4.8~~$3.1 million) as of March 31, ~~2019~~2020 with no$1.3 million allocation made to the allowance for loan losses compared to a carrying amount of ~~$12.1~~$22.0 million (including SBA guarantees of ~~$3.4~~$4.4 million) with no$1.1 million allocation made to the allowance for loan losses at December 31, ~~2018.~~2019.

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Table of Contents

Assets ~~held~~Held for ~~sale~~Sale

In connection with the merger with EVBS, SNBV acquired ~~four~~4 properties that were either former EVBS administrative locations or previously anticipated to be future EVBS administrative locations. As of March 31, 2020, all 4 of these properties have been sold. Assets held for sale are measured at fair value less cost to sell, based on appraisals conducted by an independent, licensed appraiser outside of the Company using observable market data. If the fair value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. Assets held for sale are measured at fair value on a non-recurring ~~basis.~~basis and are included in other assets in the consolidated balance sheets. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the consolidated statements of comprehensive income.

Other Real Estate Owned (“OREO”)

OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or evaluation less cost to sell. In some cases appraised value is net of costs to sell. Selling costs have been in the range from ~~5.0%~~5% to ~~7.6%~~10% of collateral valuation at March 31, ~~2019~~2020 and December 31, ~~2018.~~2019. Fair value is classified as Level 3 in the fair value hierarchy. OREO is further evaluated quarterly for any additional impairment. At March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, the total amount of OREO was ~~$5.0~~$5.9 million and ~~$5.1~~$6.2 million, respectively.

24

~~Table of Contents~~

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


			Fair Value Measurements Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Total at		Identical Assets		Inputs		Inputs

											Fair Value Measurements Using
													Significant
											Quoted Prices in		Other		Significant
											Active Markets for		Observable		Unobservable
									Total at		Identical Assets		Inputs		Inputs
(dollars in thousands)	March 31, 2019		(Level 1)		(Level 2)		(Level 3)		March 31, 2020		(Level 1)		(Level 2)		(Level 3)
Impaired loans:
Commercial real estate - owner occupied	$	4,540	$	—	$	—	$	4,540	$	5,986	$	—	$	—	$	5,986
Commercial real estate - non-owner occupied (1)		3,927		—		—		3,927		3,231		—		—		3,231
Construction and land development										357		—		—		357
Commercial loans		6,370		—		—		6,370		7,691		—		—		7,691
Residential 1-4 family (2)		3,341		—		—		3,341		5,103		—		—		5,103
Assets held for sale		600		—		—		600
Consumer										20		—		—		20
Other real estate owned:
Commercial real estate - owner occupied (1)		908		—		—		908		1,984		—		—		1,984
Construction and land development		2,902		—		—		2,902		2,666		—		—		2,666
Residential 1-4 family (2)		1,231		—		—		1,231		1,226		—		—		1,226

Fair Value Measurements Using

Significant

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Total at

Identical Assets

Inputs

Inputs
(dollars in thousands)

December 31, 2018

(Level 1)

(Level 2)

(Level 3)
Impaired loans:







Commercial real estate - owner occupied

$
2,795

$
—

$
—

$
2,795
Commercial real estate - non-owner occupied (1)

171

—

—

171
Commercial loans

6,076

—

—

6,076
Residential 1-4 family (2)

3,020

—

—

3,020
Assets held for sale

600

—

—

600
Other real estate owned:








Commercial real estate - owner occupied (1)

908

—

—

908
Construction and land development

2,938

—

—

2,938
Residential 1-4 family (2)

1,231

—

—

1,231

26

Table of Contents


			Fair Value Measurements Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Total at		Identical Assets		Inputs		Inputs
(dollars in thousands)	December 31, 2019		(Level 1)		(Level 2)		(Level 3)
Impaired loans:
Commercial real estate - owner occupied	$	6,890	$	—	$	—	$	6,890
Commercial real estate - non-owner occupied (1)		3,296		—		—		3,296
Construction and land development		345		—		—		345
Commercial loans		7,547		—		—		7,547
Residential 1-4 family (2)		3,862		—		—		3,862
Consumer		39		—		—		39
Other real estate owned:
Commercial real estate - owner occupied (1)		1,984		—		—		1,984
Construction and land development		2,874		—		—		2,874
Residential 1-4 family (2)		1,366		—		—		1,366

(1)

~~(1)~~

Includes loans secured by farmland and multi-family residential loans.

(2)

~~(2)~~

Includes home equity lines of credit.

25

~~Table of Contents~~

Fair Value of Financial Instruments

The carrying amount, estimated fair values and fair value hierarchy levels (previously defined) of financial instruments were as follows (in thousands) for the periods indicated:


		March 31, 2020				December 31, 2019
	Fair Value	Carrying		Fair		Carrying		Fair
	Hierarchy Level	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	Level 1	$	55,865	$	55,865	$	31,928	$	31,928
Securities available for sale	Level 2 & Level 3		168,520		168,520		164,820		164,820
Securities held to maturity	Level 2		59,234		60,426		72,448		72,666
Stock in Federal Reserve Bank and Federal Home Loan Bank	Level 2		21,396		21,396		17,832		17,832
Equity investment in mortgage affiliate	Level 3		5,251		5,251		5,020		5,020
Preferred investment in mortgage affiliate	Level 3		3,305		3,305		3,305		3,305
Net loans	Level 3		2,199,816		2,217,962		2,175,786		2,180,487
Accrued interest receivable	Level 2 & Level 3		8,548		8,548		8,210		8,210
Financial liabilities:
Demand deposits and NOW accounts	Level 2	$	719,072	$	719,072	$	730,325	$	730,325
Money market and savings accounts	Level 2		629,066		629,066		611,353		611,353
Time deposits	Level 3		727,216		736,513		783,040		786,420
Securities sold under agreements to repurchase	Level 1		13,179		13,179		12,883		12,883
FHLB short term advances	Level 1		205,140		205,140		121,640		121,640
Junior subordinated debt	Level 2		9,645		8,787		9,632		9,206
Senior subordinated notes	Level 2		47,041		48,044		47,051		48,156
Accrued interest payable	Level 1 & Level 3		5,025		5,025		4,907		4,907

March 31, 2019

December 31, 2018


Fair Value

Carrying

Fair

Carrying

Fair

Hierarchy Level

Amount

Value

Amount

Value
Financial assets:










Cash and cash equivalents

Level 1

$
31,841

$
31,841

$
28,611

$
28,611
Securities available for sale

Level 2 & Level 3

156,192

156,192

143,377

143,377
Securities held to maturity

Level 2

90,592

88,667

92,462

89,109
Stock in Federal Reserve Bank and Federal Home Loan Bank

Level 2

18,427

18,427

19,522

19,522
Equity investment in mortgage affiliate

Level 3

3,847

3,847

3,829

3,829
Preferred investment in mortgage affiliate

Level 3

3,305

3,305

3,305

3,305
Net loans

Level 3

2,145,341

2,123,900

2,166,541

2,134,021
Accrued interest receivable

Level 2 & Level 3

8,963

8,963

8,745

8,745
Financial liabilities:



Demand deposits

Level 2

$
690,109

690,109

$
665,640

665,640
Money market and savings accounts

Level 2

574,619

574,619

506,519

506,519
Certificates of deposit

Level 3

846,325

843,136

925,441

919,175
Securities sold under agreements to repurchase

Level 1

13,623

13,623

18,721

18,721
FHLB short term advances

Level 1

135,640

135,640

163,340

163,340
Junior subordinated debt

Level 2

9,596

12,880

9,584

12,065
Senior subordinated notes

Level 2

47,080

58,178

47,089

57,173
Accrued interest payable

Level 1 & Level 3

4,347

4,347

3,985

3,985

27

Table of Contents

Carrying amount is the estimated fair value for cash and cash equivalents (including federal funds sold), ~~equity investments in our mortgage affiliate, preferred investments in our mortgage affiliate,~~ accrued interest receivable and payable, demand deposits, savings accounts, money market accounts ~~securities sold under agreements to repurchase,~~ and short-term debt (FHLB short-term advances and securities sold under agreements to repurchase).

The investment in common stock of our mortgage affiliate is accounted for using the equity method. Under the equity method, the carrying value of Southern National’s investment in STM was originally recorded at cost but is adjusted periodically to record Southern National’s proportionate share of STM’s earnings or losses through noninterest income and decreased by the amount of cash dividends or similar distributions received from STM. The investment in preferred stock of our mortgage affiliate is considered to be a non-marketable equity security that does not have a readily determinable fair value. Non-marketable equity securities with no recurring market value data available are reviewed periodically and any observable market value change are adjusting through noninterest income. Southern National evaluates its investments in this non-marketable equity security for impairment and recoverability of the recorded investment by considering positive and negative evidence, including the profitability and asset quality of STM, dividend payment history and recent redemption experience. Impairment is assessed at each reporting period and if identified, is recognized in noninterest income. NaN impairment was recorded for the three month periods ended March 31, 2020 and 2019.

Fair value of long-term debt is based on current rates for similar financing. Carrying amount of Federal Reserve Bank and FHLB stock is a reasonable estimate of fair value as these securities are not readily marketable and are based on the ultimate recoverability of the par value. The fair value of off-balance-sheet items is not considered material. Fair value of net loans, ~~certificates of~~time deposits, junior subordinated debt, and senior subordinated notes are measured using the exit-price ~~notion in accordance with the adoption of ASU 2016‑01 in 2018.~~notion.

9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERM BORROWINGS

Other short-term borrowings can consist of FHLB of Atlanta overnight advances, other FHLB advances maturing within one year, federal funds purchased and securities sold under agreements to repurchase (“repo”) that mature within one year, which are secured transactions with customers. The balance in repo accounts at March 31, ~~2019~~2020 and December 31, ~~2018~~2019 was ~~$13.6~~$13.2 million and ~~$18.7~~$12.9 million, respectively.

10. JUNIOR SUBORDINATED DEBT AND SENIOR SUBORDINATED NOTES

In connection with our merger with EVBS, the Company assumed $10.3 million ~~(fair value adjustment of $801 thousand)~~ of trust preferred securities that were issued on September 17, 2003 and placed through the Trust in a pooled underwriting totaling approximately $650 million. The trust issuer has invested the total proceeds from the sale of the trust preferred

26

~~Table of Contents~~

securities in Floating Rate Junior Subordinated Deferrable Interest Debentures (“Junior Subordinated Debt”) issued by EVBS. At March 31, 2020 and December 31, 2019, we had $9.6 million of Junior Subordinated Debt. The trust preferred securities pay cumulative cash distributions quarterly at a variable rate per annum, reset quarterly, equal to the three-month LIBOR plus 2.95%. As of March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, the interest rate was ~~5.56%~~3.79% and ~~5.73%~~4.85%, respectively. The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax purposes. The trust preferred securities have a mandatory redemption date of September 17, 2033, and became subject to varying call provisions beginning on September 17, 2008. The Company has fully and unconditionally guaranteed the trust preferred securities through the combined operation of the Junior Subordinated Debt and other related documents. The Company’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company.

The trust preferred securities may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. At March 31, ~~2019,~~2020, all of the trust preferred securities qualified as Tier 1 capital.

Subject to certain exceptions and limitations, the Company is permitted to elect from time to time to defer regularly scheduled interest payments on its outstanding Junior Subordinated Debt relating to its trust preferred securities. If the Company defers interest payments on the Junior Subordinated Debt for more than 20 consecutive quarters, the Company would be in default under the governing agreements for such notes and the amount due under such agreements would be immediately due and payable.

On January 20, 2017, Southern National completed the sale of $27.0 million of its fixed-to-floating rate Subordinated Notes due 2027 (the “SNBV Senior Subordinated Notes”). The SNBV Senior Subordinated Notes will initially bear interest at 5.875% per annum until January 31, 2022; thereafter, the SNBV Senior Subordinated Notes will be payable at an annual floating rate equal to three-month LIBOR plus a spread of 3.95% until maturity or early redemption. At March 31, ~~2019,~~2020, all of the SNBV Senior Subordinated Notes qualified as Tier 2 capital. At March 31, ~~2019,~~2020, the remaining unamortized debt issuance costs related to the SNBV Senior Subordinated Notes totaled ~~$737~~$643 thousand.

Also in connection with our merger with EVBS, the Company assumed the Senior Subordinated Note Purchase Agreement previously entered into by EVBS on April 22, 2015 with certain institutional accredited investors pursuant to

28

Table of Contents

which EVBS sold $20.0 million (fair value adjustment of $1.9 million) in aggregate principal amount of its 6.50% Fixed-to-Floating Rate Subordinated Notes due 2025 (the “EVBS Senior Subordinated Notes”) to the investors at a price equal to 100% of the aggregate principal amount of the EVBS Senior Subordinated Notes. The EVBS Senior Subordinated Notes bear interest at an annual rate of 6.50%, payable semi-annually in arrears on May 1 and November 1 of each year ending on May 1, 2020. From and including May 1, 2020 to, but excluding, the maturity date, the EVBS Senior Subordinated Notes will bear interest at an annual rate, reset quarterly, equal to LIBOR determined on the determination date of the applicable interest period plus 502 basis points, payable quarterly in arrears on February 1, May 1, August 1 and November 1 of each year, beginning on August 1, 2020. The Company may, at its option, redeem, in whole or in part, the EVBS Senior Subordinated Notes as early as May 1, 2020, and any partial redemption would be made pro rata among all of the holders. At March 31, ~~2019~~2020 all of the EVBS Senior Subordinated Notes qualified as Tier 2 capital.

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Table of Contents

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~~10-K for the year ended December 31, ~~2018.~~2019. Results of operations for the three months ended March 31, ~~2019~~2020 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. Forward-looking statements are not historical facts and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and ~~expectations of~~beyond our ~~future financial and operating performance and growth plans, taking into account~~control, particularly with regard to developments related to the ~~information currently available to us. These~~novel coronavirus (“COVID-19”). Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of ~~historical fact.~~the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. The words “believe,” “may,” “forecast,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “continue,” “would,” “could,” “hope,” “might,” “assume,” “objective,” “seek,” “plan,” “strive” or similar words, or the negatives of these words, identify forward-looking statements.

Forward-looking statements involve risks and uncertainties that may 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 Factor contained in this Quarterly Report on Form ~~10‑Q,~~10-Q, as well as the Risk Factors previously disclosed in our Annual Report on Form ~~10‑K~~10-K for the year ended December 31, ~~2018,~~2019, factors that could contribute to those differences include, but are not limited to:

·

●

the effects of future economic, business and market conditions and disruptions in the credit and financial markets, domestic and foreign;

·

●

the impact of COVID-19 on our business, including the impact of the actions taken by governmental authorities to contain the virus or address the impact of the virus on the United States economy (including, without limitation, the Coronavirus Aid, Relief and Economic Security (“CARES” Act)), and the resulting effect of all of such items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;

●

changes in the local economies in our market areas which 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, as well as the adequacy of our cash flow from operations and borrowings to meet our short-term liquidity needs;

·

●

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

·

●

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

·

●

the incurrence and possible impairment of goodwill associated with current or future acquisitions 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;

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Table of Contents

·

●

failure to prevent a breach to our Internet-based system and online commerce security;

·

●

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;

·

●

government intervention in the U.S. financial system, including the effects of ~~recent~~ legislative, tax, accounting and regulatory actions and reforms, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Jumpstart Our Business Startups Act, the Consumer Financial Protection

28

~~Table of Contents~~

Bureau, the capital ratios of Basel III as adopted by the federal banking authorities and the Tax Cuts and Jobs ~~Act;~~

Act of 2017;

·

●

uncertainty related to the transition away from or methods of calculating the LIBOR;

●

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 properties that we assume upon foreclosure;

·

●

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

·

●

risks of current or future mergers and acquisitions, including the related time and cost of implementing transactions and the potential failure to achieve expected gains, revenue growth or expense savings;

·

●

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;

·

●

acts of God or of war or other conflicts, acts of terrorism, pandemics or other catastrophic events that may affect general economic conditions;

·

●

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

·

●

fraudulent and negligent acts by loan applicants, mortgage brokers and our employees;

·

●

failure to maintain effective internal controls and procedures;

·

●

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;

·

●

our ability to attract and retain qualified employees; and

·

●

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

Forward-looking statements are not guarantees of performance or results and should not be relied upon as representing management’s views as of any subsequent date. 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 refer to the risk factors and other cautionary statements in this Quarterly Report on Form ~~10‑Q~~10-Q and in our periodic and current reports filed with the SEC for specific factors that could cause our actual results to be different from those expressed or implied by our forward-looking statements. These statements speak only as of the date of this Quarterly Report on Form ~~10‑Q~~10-Q (or an earlier date to the extent applicable). Except as required by applicable law, we undertake no obligation to update publicly these statements in light of new information or future events.

OVERVIEW

SNBV is a corporation that was formed on July 28, 2004 under the laws of the Commonwealth of Virginia and is the holding company for Sonabank a Virginia state-chartered bank which commenced operations on April 14, 2005. ~~As of the close of business on~~On June 23, 2017, SNBV completed its merger with EVBS and the merger of EVBS’s wholly-owned subsidiary, EVB, with and into SNBV’s wholly-owned subsidiary, Sonabank. Sonabank provides a range of financial services to individuals and small and medium sized businesses.

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Table of Contents

At March 31, ~~2019,~~2020, Sonabank had ~~thirty-eight~~forty-five full-service branches. Thirty-eight full-service retail branches are in Virginia, located in the counties of Chesterfield (2), Essex (2), Fairfax (Reston, McLean and Fairfax), Gloucester (2), Hanover (3), King William, Lancaster, Middlesex (3), New Kent, Northumberland (3), Southampton, Surry, Sussex, and inAshland, Burgess, Callao, Central Garage, Charlottesville, Chester, Clifton Forge, Colonial Heights, Courtland, Deltaville, Fairfax, Front Royal, Gloucester, Gloucester Point, Hampton, Hartfield, Haymarket, Heathsville, Kilmarnock, Leesburg, McLean, Mechanicsville (2), Middleburg, Midlothian, New Market, Newport News, Quinton, Reston, Richmond, South Riding, Surry, Tappahannock (2), Urbanna, Warrenton, Waverly, and Williamsburg, and seven full-service retail branches in Maryland, located in Bethesda, Brandywine, Huntingtown, Owings, Rockville, Shady Grove, ~~Bethesda,~~and Upper ~~Marlboro, Brandywine, Owings and Huntingtown.~~

Marlboro. We have administrative offices in Warrenton and Glen Allen, Virginia, and executive offices in Georgetown, Washington, D.C. and Glen Allen, Virginia where senior management is located.

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~~Table of Contents~~

RESULTS OF OPERATIONS

Net Income

Three-Month Comparison.Net income for the three months ended March 31, ~~2019~~2020 was ~~$6.0 million,~~$27 thousand, or ~~$0.25~~$0.00 basic and diluted earnings per share, compared to net income of ~~$8.3~~$6.0 million, or ~~$0.34 per~~$0.25 basic and diluted earnings per share for the three months ended March 31, ~~2018.~~ 2019.

Net income declined $6.0 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The decline in net income was driven by a one-time charge of $4.4 million, net of taxes of salary and benefits expense related to the restructuring of executive management and a $378 thousand, net of taxes, one-time charge to occupancy for the pending closure of three underperforming branch offices. During the ~~first quarter of 2019,~~three months ended March 31, 2020, the Company ~~had~~made certain adjustments to its qualitative factors in response to the impact of COVID-19 that increased the provision by $3.1 million. Net income was also impacted by lower income tax expenses in the current year.

During the three months ended March 31, 2019, net income was impacted by a nonrecurring other loss of ~~$3.2~~$2.5 million and related legal expense of ~~$502 thousand.~~

~~For the first quarter~~$397 thousand, net of 2018, net income was impacted positively by the $1.2 million of accreted income from the acquired loan discounts, $1.5 million of income from recoveries of legacy investment securities and loans charged off by EVBS before it merged into Southern National in June of 2017, and the reduced federal income tax rate of 21% from 34% due to the enactment of the Tax Cuts and Jobs Act of 2017, which became effective on January 1, 2018.

taxes.

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.

Three-Month Comparison.Net interest income was $20.5 million for the three months ended March 31, 2020 compared to $21.0 million for the ~~quarter~~three months ended March 31, ~~2019 compared to $22.5 million for the first quarter of 2018, which was a direct result of the rising costs of funds including deposits and borrowings.~~2019. Southern National’s net interest margin for the three months ended March 31, ~~2019~~2020 was ~~3.41%~~3.32% compared to ~~3.66% for the three months ended December 31, 2018 and 3.82%~~3.41% for the three months ended March 31, ~~2018.~~2019. Total income on interest-earning assets was ~~$30.3~~$28.5 million and ~~$28.0~~$30.3 million for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. The yield on average interest-earning assets ~~was~~decreased 33 basis points to 4.61% during the three months ended March 31, 2020 compared to the 4.94% ~~and 4.75% for~~yield on average interest-earning assets during the ~~first quarter~~three months ended March 31, 2019. The cost of ~~2019 and 2018, respectively.~~average interest-bearing liabilities decreased 26 basis points to 1.60% during the three months ended March 31, 2020 when comparing to the 1.86% cost on average interest-bearing liabilities during the three months ended March 31, 2019. Interest and fees on loans totaled ~~$28.0~~$26.7 million and ~~$26.0~~$28.0 million for the first ~~quarter~~quarters of ~~2019~~2020 and ~~2018,~~2019, respectively. The accretion of the discount on loans acquired in the acquisitions of EVBS, Greater Atlantic Bank, HarVest and Prince Georges Federal Savings Bank contributed ~~$816~~$597 thousand to net interest income during the three months ended March 31, ~~2019~~2020 compared to ~~$1.2 million~~$816 thousand during the three months ended March 31, ~~2018.~~2019. The decrease in accretion was due to the slowdown in the volume of acquired loan prepayments and payoffs. Average loans during the first quarter of ~~2019~~2020 were ~~$2.16~~$2.20 billion compared to ~~$2.08~~$2.16 billion during the first quarter of ~~2018.~~2019.

Total interest expense was ~~$9.4~~$8.0 million and ~~$5.5~~$9.4 million for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. Interest on deposits was ~~$7.5~~$6.5 million and ~~$3.3~~$7.5 million for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. Total average interest-bearing deposits for the first quarter of 2020 and 2019 ~~and 2018~~ were ~~$1.82~~$1.75 billion and ~~$1.53~~$1.82 billion, respectively. The yield on total average interest-bearing deposits was ~~1.66%~~1.49% and ~~0.87%~~1.66% for the quarter ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. Interest expense on total average borrowings, which include securities sold under agreements to repurchase, FHLB advances, junior subordinated debt, and senior subordinated notes, was ~~$1.9~~$1.5 million and ~~$2.2~~

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$1.9 million for the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. Total average borrowings were ~~$214.0~~$251.8 million and ~~$426.0~~$214.0 million for the three months ended March 31, 2020 and 2019, ~~and 2018,~~ respectively.

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~~Table of Contents~~

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


	Average Balance Sheets and Net Interest
	Analysis For the Three Months Ended
	March 31, 2020						March 31, 2019
			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 deferred fees (1) (2)	$	2,200,926	$	26,741	4.89	%	$	2,155,252	$	27,974	5.26	%
Investment securities		231,794		1,361	2.36	%		237,420		1,581	2.70	%
Other earning assets		54,800		379	2.79	%		90,370		748	3.36	%
Total earning assets		2,487,520		28,481	4.61	%		2,483,041		30,303	4.94	%
Allowance for loan losses		(10,928)						(12,296)
Total non-earning assets		263,627						257,217
Total assets	$	2,740,220					$	2,727,963

Liabilities and stockholders' equity
Interest-bearing liabilities:
NOW and other demand accounts	$	379,531	$	786	0.83	%	$	345,935	$	642	0.75	%
Money market accounts		469,651		1,575	1.35	%		401,615		1,828	1.85	%
Savings accounts		147,697		116	0.32	%		147,589		115	0.32	%
Time deposits		756,055		4,026	2.14	%		926,137		4,877	2.14	%
Total interest-bearing deposits		1,752,934		6,503	1.49	%		1,821,276		7,462	1.66	%
Borrowings		251,830		1,463	2.34	%		213,929		1,889	3.58	%
Total interest-bearing liabilities		2,004,764		7,966	1.60	%		2,035,205		9,351	1.86	%
Noninterest-bearing liabilities:
Demand deposits		333,408						320,299
Other liabilities		21,781						19,414
Total liabilities		2,359,953						2,374,919
Stockholders' equity		380,267						353,044
Total liabilities and stockholders' equity	$	2,740,220					$	2,727,963
Net interest income			$	20,515					$	20,952
Interest rate spread					3.01	%					3.08	%
Net interest margin					3.32	%					3.41	%

Average Balance Sheets and Net Interest

Analysis For the Three Months Ended

March 31,

2019

2018

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 deferred fees (1) (2)

$
2,155,252

$
27,974

5.26
%
$
2,075,887

$
25,905

5.06
%
Investment securities

237,420

1,581

2.70
%

257,630

1,641

2.58
%
Other earning assets

90,370

685

3.08
%

58,284

474

3.30
%
Total earning assets

2,483,041

30,241

4.94
%

2,391,801

28,020

4.75
%
Allowance for loan losses

(12,296)

(10,386)



Total non-earning assets

257,217

255,063



Total assets

$
2,727,963

$
2,636,478



Liabilities and stockholders' equity













Interest-bearing liabilities:













NOW and other demand accounts

$
345,935

$
642

0.75
%
$
327,395

$
315

0.39
%
Money market accounts

401,615

1,828

1.85
%

342,706

560

0.66
%
Savings accounts

147,589

115

0.32
%

163,143

127

0.32
%
Time deposits

926,137

4,877

2.14
%

699,008

2,268

1.32
%
Total interest-bearing deposits

1,821,276

7,462

1.66
%

1,532,252

3,270

0.87
%
Borrowings

213,929

1,889

3.58
%

425,982

2,250

2.14
%
Total interest-bearing liabilities

2,035,205

9,351

1.86
%

1,958,234

5,520

1.14
%
Noninterest-bearing liabilities:













Demand deposits

320,299

329,299





Other liabilities

19,414

18,471





Total liabilities

2,374,919

2,306,004





Stockholders' equity

353,044

330,474





Total liabilities and stockholders' equity

$
2,727,963

$
2,636,478





Net interest income

$
20,890



$
22,500



Interest rate spread

3.08
%





3.61
%
Net interest margin

3.41
%





3.82
%

(1)

~~(1)~~

Includes loan fees in both interest income and the calculation of the yield on loans.

(2)

~~(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~~adjust the allowance for loan losses to aan appropriate level for inherent probable losses in the loan portfolio 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 allowance for loan ~~loss allowance~~losses is calculated by segmenting the loan portfolio by loan type and applying risk factors to each segment. The risk factors are determined by considering historical loss data, peer data, as well as applying management’s judgment.

The Company elected to defer adoption of the CECL model until the earlier of the national emergency being lifted or December 31, 2020, as provided for by the CARES Act. During the three months ended March 31, 2020, the Company made certain adjustments to its qualitative factors in response to the impact of COVID-19 that increased the provision by $3.1 million. For the three months ended March 31, 2020 and 2019, the provision for loan losses ~~for the quarter ended March 31, 2019~~was $3.5 million and ~~2018 was $200~~

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$200 thousand, ~~and $1.6 million,~~ respectively. Net charge offs for the three months ended March 31, 2020 and 2019 was $990 thousand and ~~2018 was~~ $609 thousand, ~~and $242 thousand,~~ respectively.

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Noninterest Income

The following table presents the major categories of noninterest income for the three months ended March 31, ~~2019~~2020 and ~~2018:~~2019:


	For the Three Months Ended
	March 31,

							For the Three Months Ended
							March 31,
(dollars in thousands)	2019		2018		Change		2020		2019		Change
Account maintenance and deposit service fees	$	1,687	$	1,408	$	279	$	1,698	$	1,687	$	11
Income from bank-owned life insurance		523		307		216		386		523		(137)
Equity income (loss) from mortgage affiliate		18		(317)		335
Equity gain from mortgage affiliate								231		18		213
Recoveries related to acquired charged-off loans and investment securities		591		1,483		(892)		184		591		(407)
Other		243		198		45		321		243		78
Total noninterest income	$	3,062	$	3,079	$	(17)	$	2,820	$	3,062	$	(242)

~~Southern National had noninterest~~Noninterest income ~~of $3.1 million during the first quarter of 2019 and 2018. Account maintenance and deposit service fees, which totaled $1.7 million for the first quarter of 2019, increased $279 thousand compared~~decreased 7.9% to prior year. Income from bank-owned life insurance, which totaled $523 thousand for the first quarter of 2019, increased $216 thousand when compared to $307 thousand of income in first quarter of 2018. The first quarter increase was driven by income from the purchase of an additional $12.0 million in bank-owned life insurance early in the second quarter of 2018. Income from the investment in STM totaled $18 thousand during the first quarter of 2019 compared to the loss of ($317) thousand during the first quarter of 2018. The increase was driven by strengthened management and operational improvements within STM. Other noninterest income, which totaled $243 thousand for the first quarter of 2019, increased $45 thousand when compared to the prior year. For the three months ended March 31, 2019, other noninterest income has benefited, from $591 thousand of recoveries of legacy investment securities and loans charged off by EVBS premerger compared to $1.5$2.8 million for the three months ended March 31, ~~2018.~~

2020 compared to $3.1 million for the three months ended March 31, 2019. The $242 thousand decrease was primarily driven by a $407 thousand decrease in recoveries related to acquired charged-off loans and investment securities. The decrease was also attributable to a $137 thousand decrease in income from bank-owned life insurance due to death benefits paid in the first quarter of 2019. These decreases were partially offset by an increase of $213 thousand in equity gain from mortgage affiliate. Other noninterest income benefited from $321 thousand in income on other equity investments during the three months ended March 31, 2020 compared to $243 thousand for the three months ended March 31, 2019.

Noninterest Expense

The following table presents the major categories of noninterest expense for the three months ended March 31, ~~2019~~2020 and ~~2018:~~2019:


	For the Three Months Ended
	March 31,

							For the Three Months Ended
							March 31,
(dollars in thousands)	2019		2018		Change		2020		2019		Change
Salaries and benefits	$	5,812	$	6,772	$	(960)	$	12,309	$	5,812	$	6,497
Occupancy expenses		1,803		1,650		153		1,939		1,803		136
Furniture and equipment expenses		710		797		(87)		619		710		(91)
Amortization of core deposit intangible		363		362		1		341		363		(22)
Virginia franchise tax expense		563		364		199		570		563		7
FDIC assessment		—		335		(335)
Data processing expense		512		466		46		707		512		195
Telephone and communication expense		375		594		(219)		368		375		(7)
Net (gain) loss on other real estate owned		(2)		200		(202)		71		(2)		73
Professional fees								1,193		—		1,193
Other operating expenses		6,154		2,079		4,075		1,735		6,154		(4,419)
Total noninterest expenses	$	16,290	$	13,619	$	2,671	$	19,852	$	16,290	$	3,562

Noninterest ~~expense was $16.3 million and $13.6~~expenses were $19.9 million during the three months ended March 31, ~~2019 and 2018, respectively.~~2020, compared to $16.3 million during the three months ended March 31, 2019. The 21.9% increase in noninterest expenses was primarily due to an increase in employee compensation and benefits expense and higher legal and professional services expense, partially offset by lower other operating expenses. Employee compensation and benefits expense totaled $12.3 million and $5.8 million for the three months ended March 31, 2020 and 2019, respectively. The increase was associated with a pre-tax management restructuring expenses of $5.6 million in the current year. Professional fees increased $1.2 million for the three months ended March 31, 2020, when compared to the three months ended March 31, 2019 mainly due to costs incurred as part of our implementation efforts for the 2020 adoption of the CECL accounting standard, enhancements to

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our compliance and Bank Secrecy Act programs, and general legal expense for corporate matters in 2020. The decrease in other operating expenses was driven by a pre-tax nonrecurring ~~other~~ loss of $3.2 million with related legal expense of $502 thousand during the first quarter of ~~2019. Employee compensation and benefits expense totaled $5.8 million and $6.8 million for the first quarter of~~ 2019, and 2018, respectively. The decrease was due to a reduction in staffing. Occupancy expenses and equipment expenses remained flat year over year. The Company recognized a gain of $2 thousand on the sale of other real estate owned (“OREO”) during the first quarter of 2019 compared to a $200 thousand loss for the first quarter of 2018. Other expenses totaled $6.0 million and $1.9 million for three months ended March 31, 2019 and 2018, respectively.that did not recur.

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~~Table of Contents~~

FINANCIAL CONDITION

Balance Sheet Overview

Total assets were ~~$2.70~~$2.76 billion as of March 31, ~~2019~~2020 and $2.72 billion as of December 31, ~~2018.~~2019. Total loans ~~decreased 1.0%~~increased 1.21%, from ~~$2.18~~$2.19 billion at December 31, ~~2018~~2019 to ~~$2.16~~$2.21 billion at March 31, ~~2019, primarily due to unanticipated large~~2020 with loan ~~payoffs of $50.0 million, partially offset by growth of $29.4 million during~~production in the ~~first~~ quarter ~~of 2019.~~centered mostly on the Company’s adjustable rate mortgage offerings with 1-4 family mortgages. Total deposits were ~~$2.11~~$2.08 billion at March 31, ~~2019~~2020 compared to ~~$2.10~~$2.12 billion at December 31, ~~2018~~2019 and total equity was ~~$352.7~~$378.8 million and ~~$348.3~~$377.2 million at March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

Loan Portfolio

Total loans were $2.21 billion and $2.19 billion at March 31, 2020 and December 31, 2019, respectively. Loan demand remains strong in the Company’s markets. Loan growth in the first three months of 2019 of $29.4 million was offset by $40.0 million in five hospitality loans that paid off due to property sales and under-market rates offered by other financial institutions and a $10.0 million construction loan moved to a competitor on a nonrecourse basis. Additionally,production in the first quarter of ~~2019, $33.9 million of~~2020 centered mostly on the Company’s adjustable rate mortgage offerings with 1-4 family mortgages. The Company experienced no overall growth in its combined commercial ~~loans were reclassified into loans secured by~~ real estate ~~upon review~~portfolio and ~~validation~~construction and development loans during the three months ended March 31, 2020 and were only $1.12 billion or 50.84% of ~~collateral~~total loans as of March 31, 2020.

As of March 31, 2020, the Company had hotel loans of $279.7 million. For the year ended December 31, 2019, the portfolio of hotel loans had debt coverage of approximately 147% and ~~Call Report codes.~~

weighted average loan to value of approximately 68%. 99% of the Company’s hotel loans are to national brands (Marriott, Hilton, Choice, IHG, Best Western, and Wyndham) with 93% of the portfolio being to limited service hotels with historically lower operating costs.

The composition of our loan portfolio consisted of the following at March 31, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):


	March 31, 2019		December 31, 2018
						��
					March 31, 2020		December 31, 2019
Loans secured by real estate:
Commercial real estate - owner occupied	$	416,750	$	407,031	$	409,739	$	414,479
Commercial real estate - non-owner occupied		549,891		540,698		599,987		559,195
Secured by farmland		19,682		20,966		16,608		17,622
Construction and land loans		149,054		146,654		115,144		150,750
Residential 1-4 family		568,616		565,083		624,119		604,777
Multi-family residential		83,219		82,516		90,652		82,055
Home equity lines of credit		121,136		128,225		106,820		109,006
Total real estate loans		1,908,348		1,891,173		1,963,069		1,937,884


Commercial loans		218,375		255,441		223,433		221,447
Consumer loans		30,319		32,347		25,708		26,304
Gross loans		2,157,042		2,178,961
Less deferred fees on loans		173		(137)
Loans, net of deferred fees	$	2,157,215	$	2,178,824
Subtotal						2,212,210		2,185,635
Plus deferred costs on loans						328		412
Total loans					$	2,212,538	$	2,186,047

As of March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, substantially all of our loans were to customers located in Virginia and Maryland. We are not dependent on any single customer or group of customers whose insolvency would have a material adverse effect on operations.

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Table of Contents

Asset Quality

Asset quality remained high during the first ~~three months~~quarter of ~~2019.~~2020. The outbreak of COVID-19 will likely have an impact on our asset quality, but it is unknown to what extent at this point. We will generally place a loan on nonaccrual status when it becomes 90 days past due. Loans will also be placed on nonaccrual status in cases where we are uncertain whether the borrower can satisfy the contractual terms of the loan agreement. Cash payments received while a loan is categorized as nonaccrual will be recorded as a reduction of principal as long as doubt exists as to future collections.

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

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~~Table of Contents~~

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.

~~Other real estate owned ("OREO")~~OREO at March 31, ~~2019~~2020 was ~~$5.0~~$5.9 million compared to ~~$5.1~~$6.2 million at December 31, ~~2018.~~ 2019. The decrease was driven by a write-down on OREO during the first quarter of 2020.

~~Non-covered nonaccrual~~Loans acquired in the GAB transaction covered under an FDIC loss-share agreement expired on December 31, 2019 and therefore any references to “non-covered” do not apply to any periods after December 31, 2019. Nonaccrual loans were ~~$1.9~~$6.1 million (excluding ~~$4.8~~$2.9 million of loans fully covered by SBA guarantees) at March 31, ~~2019~~2020 compared to ~~$2.5~~$4.8 million ~~(excluding $3.4~~(non-covered and excluding $4.1 million of loans fully covered by SBA guarantees) ~~as of~~at December 31, ~~2018.~~2019. The ratio of non-covered nonperforming assets (excluding the SBA guaranteed loans) to total non-covered assets ~~decreased from 0.28%~~was 0.41% at December 31, ~~2018~~2019 and the ratio of nonperforming assets (excluding the SBA guaranteed loans) to ~~0.26%~~total assets was 0.43% at March 31, ~~2019.~~2020, an increase of 2 basis points.

Southern National’s allowance for loan losses as a percentage of total ~~non-covered~~ loans at March 31, ~~2019~~2020 was ~~0.56%~~0.58%, compared to ~~0.57%~~0.47% at December 31, ~~2018. The allowance for loan losses as a percentage of~~2019 (based on total non-covered ~~non-acquired loans was 0.82% and 0.85% at March 31, 2019 and December 31, 2018, respectively.~~loans).

We have an internal loan review and a loan committee, both of which provide on-going monitoring to identify and address issues with problem loans. The loan loss provision is determined after consideration of all known relevant internal and external factors affecting loan collectability to maintain the allowance for loan and lease losses at a level necessary to absorb estimated credit losses.

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Table of Contents

The following table presents a comparison of ~~non-covered~~ nonperforming assets as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):


	March 31,			December 31,
	2020			2019 (1)
Nonaccrual loans	$	8,941		$	8,900
Loans past due 90 days and accruing interest		—			—
Total nonperforming loans		8,941			8,900
Other real estate owned		5,876			6,224
Total nonperforming assets	$	14,817		$	15,124

Troubled debt restructurings	$	694		$	697
SBA guaranteed amounts included in nonaccrual loans	$	2,889		$	4,129

Allowance for loan losses to nonperforming loans		142.28	%		115.30	%
Allowance for loan losses to total loans		0.58	%		0.47	%
Nonperforming assets excluding SBA guaranteed loans to total assets		0.43	%		0.41	%

March 31,

December 31,

2019

2018

Nonaccrual loans

$
7,418

$
6,709

Loans past due 90 days and accruing interest

—

—

Total nonperforming loans

7,418

6,709

Other real estate owned

5,041

5,077

Total non-covered nonperforming assets

$
12,459

$
11,786

Troubled debt restructurings

$
688

$
692

SBA guaranteed amounts included in nonaccrual loans

$
4,762

$
3,391

Allowance for loan losses to nonperforming loans

178.26
%

207.63
%
Allowance for loan losses to total non-covered loans

0.56
%

0.57
%
Nonperforming assets excluding SBA guaranteed loans to total non-covered assets

0.26
%

0.28
%

(1)

December 31, 2019 included non-covered loans and non-covered assets.

Investment Securities

Investment securities, available for sale and held to maturity, totaled ~~$246.8~~$227.8 million at March 31, ~~2019 up~~2020 down from ~~$235.8~~$237.3 million at December 31, ~~2018.~~2019.

Investment securities in our portfolio as of March 31, ~~2019~~2020 were as follows:

·

●

residential government-sponsored collateralized mortgage obligations in the amount of ~~$47.3~~$38.3 million;

·

●

agency residential mortgage-backed securities in the amount ~~$51.5~~$87.2 million;

·

●

corporate bonds in the amount of $2.0 million;

·

●

commercial mortgage-backed securities in the amount of ~~$27.4~~$28.2 million;

·

●

SBA loan pool securities in the amount of ~~$18.7~~$13.1 million;

·

●

callable agency securities in the amount of ~~$55.8~~$25.0 million;

·

●

trust preferred securities in the amount of ~~$5.1~~$4.0 million; and

34

~~Table of Contents~~

·

●

municipal bonds in the amount of ~~$39.0~~$29.8 million (fair value of $30.0 million) with a taxable equivalent yield of 3.0% and ratings as of March 31, ~~2019~~2020 as follows:



Moody's	Amount		Standard & Poor's	Amount		Amount		Standard & Poor's	Amount
Rating	(in thousands)		Rating	(in thousands)		(in thousands)		Rating	(in thousands)
Aaa	$	6,332	AAA	$	7,021	$	5,997	AAA	$	5,571
Aa1		11,459	AA+		7,526		6,567	AA+		6,636
Aa2		3,146	AA		11,532		3,917	AA		8,533
Aa3		1,879	AA-		1,774		693	AA-		1,798
A1		1,862	A+		1,028		2,346	A+		1,003
A2		1,536	A		842		1,003	A		842
Baa1		1,017	BBB+		1,017		—	BBB+		—
NA		11,849	NA		8,340		9,441	NA		5,581
Total	$	39,080	Total	$	39,080	$	29,964	Total	$	29,964

~~$15.3~~During the three months ended March 31, 2020, $10.0 million of available for sale investment securities and $15.2 million of held to maturity investment securities were ~~purchased during the first quarter of 2019.~~purchased. No investment securities were sold during the first ~~three months~~quarter of 2020 and 2019.

37

Table of Contents

At March 31, ~~2019,~~2020, we owned pooled trust preferred securities as follows (in thousands):


												% of		Previously
												Current		Recognized
												Defaults and		Cumulative
		Ratings								Estimated		Deferrals to		Other
	Tranche	When Purchased		Current Ratings		Par		Book		Fair		Total		Comprehensive
Security	Level	Moody's	Fitch	Moody's	Fitch	Value		Value		Value		Collateral		Loss(1)
						(in thousands)
Held to Maturity
ALESCO VII A1B	Senior	Aaa	AAA	Aa1	AA	$	1,910	$	1,783	$	1,758	17	%	$	219
						$	1,910	$	1,783	$	1,758			$	219

															Cumulative OTTI
Available for Sale														Related to
Other Than Temporarily Impaired:														Credit Loss (2)
TPREF FUNDING II	Mezzanine	A1	A-	Caa3	WD	$	1,500	$	1,040	$	675	32	%	$	400
ALESCO V C1	Mezzanine	A2	A	Caa1	C		2,150		1,490		1,591	15	%		660
						$	3,650	$	2,530	$	2,266			$	1,060

Total						$	5,560	$	4,313	$	4,024

% of

Previously

Current

Recognized

Defaults and

Cumulative

Ratings

Estimated

Deferrals to

Other

Tranche

When Purchased

Current Ratings

Par

Book

Fair

Total

Comprehensive
Security

Level

Moody's

Fitch

Moody's

Fitch

Value

Value

Value

Collateral

Loss (1)

(in thousands)

Held to Maturity




















ALESCO VII A1B

Senior

Aaa

AAA

Aa2

AA

$
2,658

$
2,468

$
2,614

17
%
$
219
MMCF III B

Senior Sub

A3

A-

Ba1

BBB

61

61

60

45
%

4



2,719

2,529

2,674



$
223

















Cumulative OTTI
Available for Sale

















Related to
Other Than Temporarily Impaired:

















Credit Loss (2)
TPREF FUNDING II

Mezzanine

A1

A-

Caa3

D

1,500

1,099

775

28
%
$
400
ALESCO V C1

Mezzanine

A2

A

Caa1

C

2,150

1,490

1,805

14
%

660



3,650

2,589

2,580



$
1,060

Total



$
6,369

$
5,118

$
5,254

(1)

~~(1)~~

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

accretion.

(2)

~~(2)~~

~~Pre-tax~~

Pre-tax.

Each of these investment securities has been evaluated for potential impairment under accounting guidelines. In performing a detailed cash flow analysis of each investment security, Sonabank works with independent third parties to identify the most reflective estimate of the cash flow estimated to be collected. If this estimate results in a present value of expected cash flows that is less than the amortized cost basis of an investment security (that is, credit loss exists), an other than temporary impairment is considered to have occurred. If there is no credit loss, any impairment is considered temporary.

We recognized no other than temporary impairment charges during the three months ended March 31, 2020 and 2019, ~~and 2018,~~ respectively.

Liquidity and Funds Management

The objective of our liquidity management is to ~~assure~~ensure 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

35

~~Table of Contents~~

deposit accounts, customer certificates of deposit and payments on our loans and investments. Historically, our level of core deposits has been insufficient to fully fund our lending activities. As a result, we have sought funding from additional sources, including institutional certificates of deposit and the sale of available for sale investment securities. In addition, we maintain lines of credit with the FHLB of Atlanta, federal funds lines of credit with three correspondent banks and utilize securities sold under agreements to repurchase and reverse repurchase agreement borrowings from approved securities dealers.

We prepare a cash flow forecast ~~for one year with the first three months prepared~~ on a ~~weekly~~30, 60 and 90 day basis along with a one and on a ~~monthly basis thereafter.~~two year basis. The projections incorporate expected cash flows on loans, investment securities, and deposits based on data used to prepare our interest rate risk analyses. To estimate loan growth, ~~over the one year period,~~ the projection incorporates the scheduled loan closings in the Loan Pipeline Report along with other management estimates.

During the three months ended March 31, ~~2019,~~2020, we funded our financial obligations with deposits and borrowings from the FHLB of ~~Atlanta and the proceeds from issuance of the SNBV Senior Subordinated Notes in January 2018.~~Atlanta. At March 31, ~~2019,~~2020, we had ~~$334.2~~$341.0 million of unfunded ~~commitments.~~lines of credit and undisbursed construction loan funds. The amount of certificate of deposit accounts maturing in 2020 is $540.8 million as of March 31,

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Table of Contents

2020. Management anticipates that funding requirements for these commitments can be met from the normal sources of funds.

Capital Resources

The following table provides a comparison of ~~our leverage and risk-weighted capital ratios and~~ the leverage and risk-weighted capital ratios of ~~the Company and the Bank~~Sonabank at the ~~dates~~periods indicated to the minimum and well-capitalized required regulatory ~~standards (dollars in thousands):~~standards:


	Minimum
	Required for
	Capital				Actual Ratio at
	Adequacy		To Be Categorized		March 31,		December 31,
	Purposes		as Well Capitalized (1)		2020		2019
Sonabank
Common equity tier 1 capital ratio	4.50	%	6.50	%	14.44	%	14.81	%
Tier 1 risk-based capital ratio	6.00	%	8.00	%	14.44	%	14.81	%
Total risk-based capital ratio	8.00	%	10.00	%	15.04	%	15.29	%
Leverage ratio	4.00	%	5.00	%	11.86	%	12.07	%

Required for Capital

To Be Categorized as

Actual

Adequacy Purposes (1)

Well Capitalized (2)

March 31, 2019

Amount

Ratio

Amount

Ratio

Amount

Ratio

Southern National

Common equity tier 1 capital ratio

$
243,458

11.75
%
$
93,235

4.50
%

n/a

n/a

Tier 1 risk-based capital ratio

253,458

12.23
%

124,313

6.00
%

n/a

n/a

Total risk-based capital ratio

312,333

15.07
%

165,751

8.00
%

n/a

n/a

Leverage ratio

253,458

9.69
%

104,671

4.00
%

n/a

n/a

Sonabank

Common equity tier 1 capital ratio

$
292,517

13.88
%
$
94,808

4.50
%
$
136,945

6.50
%
Tier 1 risk-based capital ratio

292,517

13.88
%

126,411

6.00
%

168,548

8.00
%
Total risk-based capital ratio

304,391

14.44
%

168,548

8.00
%

210,685

10.00
%
Leverage ratio

292,517

11.17
%

104,740

4.00
%

105,342

5.00
%

December 31, 2018

Southern National

Common equity tier 1 capital ratio

$
239,554

11.57
%
$
93,135

4.50
%

n/a

n/a

Tier 1 risk-based capital ratio

249,554

12.06
%

124,180

6.00
%

n/a

n/a

Total risk-based capital ratio

308,838

14.92
%

165,573

8.00
%

n/a

n/a

Leverage ratio

249,554

9.57
%

104,338

4.00
%

n/a

n/a

Sonabank

Common equity tier 1 capital ratio

$
288,018

13.64
%
$
95,020

4.50
%
$
137,251

6.50
%
Tier 1 risk-based capital ratio

288,018

13.64
%

126,693

6.00
%

168,924

8.00
%
Total risk-based capital ratio

300,301

14.22
%

168,924

8.00
%

211,156

10.00
%
Leverage ratio

288,018

11.03
%

104,420

4.00
%

105,578

5.00
%

(1)

~~(1)~~

When fully phased-in on January 1, 2019, the Basel III capital rules included a capital conservation buffer of 2.5% that is added on top of each of the minimum risk-based capital ratios noted above. Implementation began on January 1, 2016 at the 0.625% level and increased each subsequent January 1, until it reached 2.5% on January 1, 2019.

~~(2)~~

Prompt corrective action provisions are not applicable at the bank holding company level.

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~~Table of Contents~~

~~The most recent regulatory notification categorized Sonabank as well~~Sonabank’s capital position is consistent with being well- capitalized under the regulatory framework for prompt corrective action. ~~There are no conditions or events since that notification that management believes have changed Sonabank’s category.~~

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 net interest income, without having to incur unacceptable levels of credit or investment risk.

We use simulation modeling to manage our interest rate risk, and we review quarterly interest ~~sensitivity reports prepared for us by FTN Financial using the Fiserv Prologue Risk Manager ALM Analysis System.~~sensitivity. This approach uses a model which generates estimates of the change in our economic value of equity (“EVE”) over a range of interest rate scenarios. EVE is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts using 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 EVE resulting from instantaneous and sustained parallel shifts in the yield curve (plus 400 basis points or minus ~~200~~100 basis points, measured in 100 basis point increments) as of March 31, ~~2019~~2020 and as of December 31, ~~2018.~~2019. All changes are within

39

Table of Contents

our Asset/Liability Risk Management Policy guidelines except for the change resulting from the 100 ~~and 200~~ basis point decrease in interest rates at March 31, ~~2019~~2020 and December 31, ~~2018.~~2019.


	Sensitivity of Economic Value of Equity
	As of March 31, 2019
							Economic Value of
	Economic Value of Equity						Equity as a % of

											Sensitivity of Economic Value of Equity
											As of March 31, 2020
																	Economic Value of
											Economic Value of Equity						Equity as a % of
Change in Interest Rates			$ Change		% Change		Total		Equity				$ Change		% Change		Total		Equity
in Basis Points (Rate Shock)	Amount		From Base		From Base		Assets		Book Value		Amount		From Base		From Base		Assets		Book Value
	(dollar amounts in thousands)
											(dollar amounts in thousands)
Up 400	$	346,269	$	(27,638)	(7.39)	%	12.81	%	97.39	%	$	306,663	$	(39,915)	(11.52)	%	11.10	%	80.95	%
Up 300		354,226		(19,681)	(5.26)	%	13.10	%	99.63	%		320,069		(26,509)	(7.65)	%	11.59	%	84.49	%
Up 200		362,350		(11,557)	(3.09)	%	13.40	%	101.91	%		332,231		(14,347)	(4.14)	%	12.03	%	87.70	%
Up 100		369,289		(4,618)	(1.24)	%	13.66	%	103.86	%		345,560		(1,018)	(0.29)	%	12.51	%	91.22	%
Base		373,907		—	—	%	13.83	%	105.16	%		346,578		—	—	%	12.55	%	91.49	%
Down 100		339,139		(34,768)	(9.30)	%	12.55	%	95.38	%		311,696		(34,882)	(10.06)	%	11.28	%	82.28	%
Down 200		300,104		(73,803)	(19.74)	%	11.10	%	84.41	%


	Sensitivity of Economic Value of Equity
	As of December 31, 2018
							Economic Value of
	Economic Value of Equity						Equity as a % of

											Sensitivity of Economic Value of Equity
											As of December 31, 2019
																	Economic Value of
											Economic Value of Equity						Equity as a % of
Change in Interest Rates			$ Change		% Change		Total		Equity				$ Change		% Change		Total		Equity
in Basis Points (Rate Shock)	Amount		From Base		From Base		Assets		Book Value		Amount		From Base		From Base		Assets		Book Value
	(dollar amounts in thousands)
											(dollar amounts in thousands)
Up 400	$	338,853	$	(33,298)	(8.95)	%	12.54	%	97.03	%	$	323,871	$	(45,102)	(12.22)	%	11.90	%	85.85	%
Up 300		347,409		(24,742)	(6.65)	%	12.85	%	99.48	%		336,822		(32,151)	(8.71)	%	12.37	%	89.29	%
Up 200		356,429		(15,722)	(4.22)	%	13.19	%	102.07	%		349,192		(19,781)	(5.36)	%	12.83	%	92.56	%
Up 100		362,312		(9,839)	(2.64)	%	13.40	%	103.75	%		363,935		(5,038)	(1.37)	%	13.37	%	96.47	%
Base		372,151		—	0.00	%	13.77	%	106.57	%		368,973		—	0.00	%	13.55	%	97.81	%
Down 100		341,397		(30,754)	(8.26)	%	12.63	%	97.76	%		353,371		(15,602)	(4.23)	%	12.98	%	93.67	%
Down 200		303,809		(68,342)	(18.36)	%	11.24	%	87.00	%

37

~~Table of Contents~~

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 (“NII”) over a range of interest rate scenarios. NII depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. In this regard, the model assumes that the composition of our interest sensitive assets and liabilities existing at March 31, ~~2019~~2020 and December 31, ~~2018~~2019 remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. All changes are within our Asset/Liability Risk Management Policy guidelines at March 31, ~~2019~~2020 and December 31, ~~2018.~~2019.


	Sensitivity of Net Interest Income
	As of March 31, 2020
	Adjusted Net Interest Income				Net Interest Margin
Change in Interest Rates			$ Change				% Change
in Basis Points (Rate Shock)	Amount		From Base		Percent		From Base
	(dollar amounts in thousands)
Up 400	$	72,221	$	(8,822)	2.92	%	(0.36)	%
Up 300		74,682		(6,361)	3.02	%	(0.26)	%
Up 200		76,962		(4,081)	3.11	%	(0.16)	%
Up 100		79,482		(1,561)	3.21	%	(0.06)	%
Base		81,043		—	3.27	%	—	%
Down 100		80,892		(151)	3.27	%	(0.01)	%

Sensitivity of Net Interest Income

As of March 31, 2019

Adjusted Net Interest Income

Net Interest Margin

Change in Interest Rates

$Change

% Change

in Basis Points (Rate Shock)

Amount

From Base

Percent

From Base

(dollar amounts in thousands)

Up 400

$
96,292

$
7,575

3.87
%
0.26
%
Up 300

94,542

5,825

3.81
%
0.20
%
Up 200

92,584

3,867

3.74
%
0.13
%
Up 100

90,861

2,144

3.68
%
0.07
%
Base

88,717

—

3.61
%
—
%
Down 100

88,863

146

3.62
%
0.01
%
Down 200

88,725

8

3.62
%
0.01
%

40

Table of Contents


	Sensitivity of Net Interest Income
	As of December 31, 2018
	Adjusted Net Interest Income				Net Interest Margin

									Sensitivity of Net Interest Income
									As of December 31, 2019
									Adjusted Net Interest Income				Net Interest Margin
Change in Interest Rates			$ Change				% Change				$ Change				% Change
in Basis Points (Rate Shock)	Amount		From Base		Percent		From Base		Amount		From Base		Percent		From Base
	(dollar amounts in thousands)
									(dollar amounts in thousands)
Up 400	$	101,121	$	9,785	4.05	%	0.35	%	$	74,096	$	(8,158)	3.00	%	(0.33)	%
Up 300		97,784		6,448	3.97	%	0.23	%		76,355		(5,899)	3.09	%	(0.24)	%
Up 200		96,305		4,969	3.88	%	0.16	%		78,458		(3,796)	3.18	%	(0.15)	%
Up 100		93,719		2,383	3.78	%	0.07	%		80,649		(1,605)	3.27	%	(0.07)	%
Base		91,336		—	3.70	%	—	%		82,254		—	3.33	%	—	%
Down 100		91,719		383	3.72	%	0.04	%		81,273		(981)	3.29	%	(0.04)	%
Down 200		91,165		(171)	3.70	%	0.03	%

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in EVE 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 EVE tables and NII 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 NII. Sensitivity of EVE and NII are modeled using different assumptions and approaches.

ITEM 4 – CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this quarterly report on Form ~~10‑Q,~~10-Q, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules ~~13a‑15(e)~~13a-15(e) and 15d -15(e) under the Securities Exchange Act of 1934) utilizing the framework established in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that these controls and procedures are effective as of the end of the period covered by this Quarterly Report on Form ~~10‑Q.~~

38

~~Table of Contents~~

10-Q.

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

Southern National and Sonabank are from time to time a party, as both plaintiff and defendant, to various claims and proceedings arising in the ordinary course of the Bank’s business, including administrative and/or legal proceedings that may include employment-related claims, as well as claims of lender liability, breach of contract, and other similar lending-related claims. While the ultimate resolution of these matters cannot be determined at this time, the Bank’s management presently believes that such matters, individually and in the aggregate, will not have a material adverse effect on the Bank’s financial condition or results of operations. There are no proceedings pending, or to management’s knowledge, threatened, that represent a significant risk against Southern National or Sonabank as of March 31, ~~2019.~~2020.

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Table of Contents

ITEM 1A – RISK FACTORS

~~As of March 31, 2019, there have been no material changes to the~~The Company disclosed risk factors ~~faced by Southern National from those previously disclosed on our~~in its Annual Report on Form ~~10‑K~~10-K for the year ended December 31, ~~2018.~~2019. The risks described may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition, and/or operating results. The following risk factors have been included in this Quarterly Report on Form 10-Q in response to the global market disruptions that have resulted from the COVID-19 pandemic.

The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.

Global health concerns relating to the COVID-19 outbreak and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.

The outbreak has adversely impacted and is likely to further adversely impact our workforce and operations and the operations of our borrowers, customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our borrowers, customers or business partners, including but not limited to:

●

credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, energy, retail and restaurant industries, but across other industries as well;

●

declines in collateral values;

●

third party disruptions, including outages at network providers and other suppliers;

●

increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity;

●

risk of litigation or other third party claims in connection with our lending practices, including our participating in the PPP; and

●

operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.

These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 outbreak has subsided.

The spread of COVID-19 has caused us to modify our business practices (including restricting employee travel, and developing work from home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities.

The extent to which the coronavirus outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.

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Table of Contents

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of our known risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019.

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

Not ~~applicable~~applicable.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

Not ~~applicable~~applicable.

ITEM 4 – MINE SAFETY DISCLOSURES

Not ~~applicable~~applicable.

ITEM 5 – OTHER INFORMATION

Not ~~applicable~~applicable.

3943

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ITEM 6 - EXHIBITS

(a) Exhibits.


Exhibit No.		Description
~~Exhibit No.~~		~~Description~~

3.1		Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to Southern National’s Registration Statement on Form ~~S‑1~~S-1 (Registration No. ~~333‑136285)~~333-136285))

3.2		Certificate of Amendment to the Articles of Incorporation dated January 31, 2005 (incorporated herein by reference to Exhibit 3.2 to Southern National’s Registration Statement on Form ~~S‑1~~S-1 (Registration No. ~~333‑136285)~~333-136285))

3.3		Certificate of Amendment to the Articles of Incorporation dated April 13, 2006 (incorporated herein by reference to Exhibit 3.3 to Southern National’s Registration Statement on Form ~~S‑1~~S-1 (Registration No. ~~333‑136285)~~333-136285))

3.4		Amended and Restated Bylaws (incorporated by reference to Exhibit 3.4 to Southern National’s Annual Report on Form ~~10‑K~~10-K for the year ended December 31, 2006)

3.5		Amendment No. 1 to Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.1 to Southern National’s Current Report on Form ~~8‑K~~8-K filed on October 14, 2009)

3.6		Amendment No. 2 to Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.1 to Southern National’s Current Report on Form ~~8‑K~~8-K filed on April 5, 2017)

10.1+*		~~Employment~~Separation Agreement, dated as of February ~~28, 2019,~~20, 2020, by and between ~~George C. Sheflett~~Joe A. Shearin and Southern National Bancorp of Virginia, Inc.

10.2+*		Employment Agreement, dated as of February 20, 2020, by and between Dennis J. Zember and Southern National Bancorp of Virginia, Inc.

44

Table of Contents

10.3+*		Separation Agreement, dated as of March 30, 2020, by and between Georgia S. Derrico and Southern National Bancorp of Virginia, Inc.

10.4+*		Separation Agreement, dated as of March 30, 2020, by and between R. Roderick Porter and Southern National Bancorp of Virginia, Inc.

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.

101		The following materials from Southern National Bancorp of Virginia, Inc. Quarterly Report on Form ~~10‑Q~~10-Q for the quarter ended March 31, ~~2019,~~2020, formatted in Inline XBRL (Extensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income and Comprehensive Income (unaudited), (iii) Consolidated Statement of Changes in Stockholders’ Equity (unaudited), (iv) Consolidated Statements of Cash Flows (unaudited), and (v) Notes to Consolidated Financial Statements (unaudited).

104		The cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document).

+ Management contract or compensatory plan or arrangement

* Filed with this Quarterly Report on Form ~~10‑Q~~10-Q

** Furnished with this Quarterly Report on Form ~~10‑Q~~10-Q

4045

Table of Contents

~~Signatures~~

Signatures

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


			Southern National Bancorp of Virginia, Inc.
			(Registrant)


May ~~9, 2019~~8, 2020			/s/ ~~Joe A. Shearin~~Dennis J. Zember
(Date)			~~Joe A. Shearin,~~Dennis J. Zember,
			Chief Executive Officer
			(~~Principal~~President and Executive Officer)


May ~~9, 2019~~8, 2020			/s/ Jeffrey L. Karafa
(Date)			Jeffrey L. Karafa,
			Executive Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer)

4146


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


Title of each class:	Trading symbol	Name of each exchange on which registered:
Common Stock	SONA	NASDAQ


Large accelerated filer ☐	Accelerated filer ☒	Smaller reporting company ☐
~~Large accelerated filer~~ ☐	~~Accelerated filer~~ ☒	~~Smaller reporting company~~ ☒
Non-accelerated filer ☐	Emerging growth company ☐
~~Non-accelerated filer~~ ☐	~~Emerging growth company~~ ☐


~~Title of each class:~~	~~Trading symbol~~	~~Name of each exchange on which registered:~~
~~Common Stock~~	~~SONA~~	~~NASDAQ~~

INDEX		PAGE
PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements
Consolidated Balance Sheets as of March 31, ~~2019~~2020 and December 31, ~~2018~~2019		2
Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, ~~2019~~2020 and ~~2018~~2019		3
Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, ~~2019~~2020 and ~~2018~~2019		4
Consolidated Statements of Cash Flows for the three months ended March 31, ~~2019~~2020 and ~~2018~~2019		5
Notes to Unaudited Consolidated Financial Statements		6

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		28 30

Item 3 – Quantitative and Qualitative Disclosures about Market Risk		37 39

Item 4 – Controls and Procedures		38 41

PART II - OTHER INFORMATION

Item 1 – Legal Proceedings		39 41

Item 1A – Risk Factors		39 42

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		39 43

Item 3 – Defaults Upon Senior Securities		39 43

Item 4 – Mine Safety Disclosures		39 43

Item 5 – Other Information		39 43

Item 6 - Exhibits		40 44

Signatures		41 46


	March 31,		December 31,
	2019		2018
	(unaudited)		*
ASSETS
Cash and cash equivalents:
Cash and due from financial institutions	$	6,868	$	6,939
Interest-bearing deposits in other financial institutions		24,973		20,877
Federal funds sold		—		795
Total cash and cash equivalents		31,841		28,611

Securities available for sale, at fair value		156,192		143,377

Securities held to maturity, at amortized cost (fair value of $88,667 and $89,109, respectively)		90,592		92,462

Total loans		2,157,215		2,178,824
Less allowance for loan losses		(11,874)		(12,283)
Net loans		2,145,341		2,166,541

Stock in Federal Reserve Bank and Federal Home Loan Bank		18,427		19,522
Equity investment in mortgage affiliate		3,847		3,829
Preferred investment in mortgage affiliate		3,305		3,305
Bank premises and equipment, net		31,478		32,352
Operating lease right-of-use assets		7,865		—
Goodwill		101,954		101,954
Core deposit intangibles, net		8,246		8,609
Bank-owned life insurance		62,674		62,495
Other real estate owned		5,041		5,077
Deferred tax assets, net		13,876		14,104
Other assets		23,516		19,057
Total assets	$	2,704,195	$	2,701,295

LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits	$	328,808	$	320,043
Interest-bearing deposits:
NOW accounts		361,301		345,597
Money market accounts		426,072		355,469
Savings accounts		148,547		151,050
Time deposits		846,325		925,441
Total interest-bearing deposits		1,782,245		1,777,557
Total deposits		2,111,053		2,097,600

Securities sold under agreements to repurchase - short term		13,623		18,721
Federal Home Loan Bank (FHLB) advances - short term		135,640		163,340
Junior subordinated debt - long term		9,596		9,584
Senior subordinated notes - long term		47,080		47,089
Operating lease liabilities		8,856		—
Other liabilities		25,658		16,671
Total liabilities		2,351,506		2,353,005

Commitments and contingencies (See Note 6)

Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 5,000,000 shares; no shares issued and outstanding		—		—
Common stock, $0.01 par value. Authorized 45,000,000 shares; 24,107,103 and 24,052,253 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively		241		240
Additional paid in capital		305,879		305,654
Retained earnings		48,300		44,985
Accumulated other comprehensive loss		(1,731)		(2,589)
Total stockholders' equity		352,689		348,290
Total liabilities and stockholders' equity	$	2,704,195	$	2,701,295



							Accumulated
			Additional				Other
	Common		Paid in		Retained		Comprehensive
	Stock		Capital		Earnings		Loss		Total
Balance - December 31, 2018	$	240	$	305,654	$	44,985	$	(2,589)	$	348,290
Net income		—		—		6,020		—		6,020
Changes in other comprehensive income on investment securities (net of tax, $229, and accretion of $3)		—		—		—		858		858
Dividends on common stock ($0.09 per share)		—		—		(2,170)		—		(2,170)
Issuance of common stock under Stock Incentive Plan (17,250 shares, net)		1		121		—		—		122
Impact of adoption of ASU 2016-02		—		—		(535)		—		(535)
Stock-based compensation expense		—		104		—		—		104
Balance - March 31, 2019	$	241	$	305,879	$	48,300	$	(1,731)	$	352,689


							Accumulated
			Additional				Other
	Common		Paid in		Retained		Comprehensive
	Stock		Capital		Earnings		Loss		Total
Balance - December 31, 2017	$	239	$	304,932	$	18,753	$	(1,152)	$	322,772
Net income		—		—		8,259		—		8,259
Changes in other comprehensive loss on investment securities (net of tax, $394, and accretion of $3)		—		—		—		(1,478)		(1,478)
Dividends on common stock ($0.08 per share)		—		—		(1,917)		—		(1,917)
Issuance of common stock under Stock Incentive Plan (51,200 shares, net)		1		353		—		—		354
Reclassification from accumulated other comprehensive loss to retained earnings due to adoption of ASU 2018-02		—		—		229		(229)		—
Stock-based compensation expense		—		75		—		—		75
Balance - March 31, 2018	$	240	$	305,360	$	25,324	$	(2,859)	$	328,065


	For the Three Months Ended March 31, 2020
							Accumulated
			Additional				Other
	Common		Paid in		Retained		Comprehensive
	Stock		Capital		Earnings		Income		Total
Balance - December 31, 2019	$	241	$	306,755	$	69,462	$	783	$	377,241
Net income		—		—		27		—		27
Changes in other comprehensive income on investment securities (net of tax $634)		—		—		—		2,384		2,384
Dividends on common stock ($0.10 per share)		—		—		(2,428)		—		(2,428)
Issuance of common stock under Stock Incentive Plan (44,600 shares)		1		193		—		—		194
Stock-based compensation expense		—		1,404		—		—		1,404
Balance - March 31, 2020	$	242	$	308,352	$	67,061	$	3,167	$	378,822

	For the Three Months Ended March 31, 2019
							Accumulated
			Additional				Other
	Common		Paid in		Retained		Comprehensive
	Stock		Capital		Earnings		Loss		Total
Balance - December 31, 2018	$	240	$	305,654	$	44,985	$	(2,589)	$	348,290
Net income		—		—		6,020		—		6,020
Changes in other comprehensive loss on investment securities (net of tax $229)		—		—		—		858		858
Dividends on common stock ($0.09 per share)		—		—		(2,170)		—		(2,170)
Issuance of common stock under Stock Incentive Plan (17,250 shares)		1		121		—		—		122
Impact of adoption of ASU 2016-02		—		—		(535)		—		(535)
Stock-based compensation expense		—		104		—		—		104
Balance - March 31, 2019	$	241	$	305,879	$	48,300	$	(1,731)	$	352,689


	For the Years Ended March 31,
	2020		2019
Operating activities:
Net income	$	27	$	6,020
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation and amortization		1,364		1,741
Amortization of operating lease right-of-use assets		1,038		586
Accretion of loan discount		(597)		(816)
Amortization of FDIC indemnification asset		—		177
Provision for loan losses		3,450		200
Earnings on bank-owned life insurance		(386)		(523)
Equity gain on mortgage affiliate		(231)		(18)
Stock-based compensation expense		1,404		104
(Gain) loss on other real estate owned		71		(2)
Net (increase) decrease in other assets		464		(4,420)
Net increase in other liabilities		3,687		8,641
Net cash and cash equivalents provided by operating activities		10,291		11,690
Investing activities:
Purchases of held to maturity investment securities		(15,197)		—
Purchases of available for sale investment securities		(9,980)		(15,313)
Proceeds from paydowns, maturities and calls of available for sale investment securities		8,907		3,172
Proceeds from paydowns, maturities and calls of held to maturity investment securities		28,271		1,778
Net (increase) decrease of FRB and FHLB stock		(3,564)		1,095
Net (increase) decrease in loans		(26,883)		21,815
Proceeds from bank-owned life insurance death benefit		—		344
Sales of other real estate owned, net of improvements		277		38
Purchases of bank premises and equipment		(383)		(7)
Net cash and cash equivalents provided by (used in) investing activities		(18,552)		12,922
Financing activities:
Net increase (decrease) in deposits		(49,364)		13,464
Cash dividends paid on common stock		(2,428)		(2,170)
Issuance of common stock under Stock Incentive Plan		194		122
Net decrease (increase) in short-term borrowings		83,796		(32,798)
Net cash and cash equivalents provided by (used in) financing activities		32,198		(21,382)
Increase in cash and cash equivalents		23,937		3,230
Cash and cash equivalents at beginning of period		31,928		28,611
Cash and cash equivalents at end of period	$	55,865	$	31,841
Supplemental disclosure of cash flow information
Cash payments for:
Interest	$	7,848	$	8,989
Non-cash investing and financing activities:
Initial recognition of operating lease right-of-use assets	$	—	$	8,296
Initial recognition of operating lease liabilities		—		9,305


	2019		2018
Operating activities:
Net income	$	6,020	$	8,259
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation and amortization - premises and equipment		881		841
Amortization of operating lease right-of-use assets		586		—
Amortization of core deposit intangible		363		362
Other amortization		497		677
Accretion of loan discount		(816)		(1,212)
Amortization of FDIC indemnification asset		177		173
Provision for loan losses		200		1,600
Earnings on bank-owned life insurance		(523)		(307)
Equity (gain) loss on mortgage affiliate		(18)		317
Stock-based compensation expense		104		75
(Gain) loss on other real estate owned		(2)		200
Net (increase) decrease in other assets		(4,420)		1,353
Net increase in other liabilities		8,641		2,064
Net cash and cash equivalents provided by operating activities		11,690		14,402
Investing activities:
Purchases of available for sale investment securities		(15,313)		—
Proceeds from paydowns, maturities and calls of available for sale investment securities		3,172		3,414
Proceeds from paydowns, maturities and calls of held to maturity investment securities		1,778		1,190
Sales (purchases) of FRB and FHLB stock		1,095		(26)
Net (increase) decrease in loans		21,815		(43,445)
Proceeds from bank-owned life insurance death benefit		344		—
Proceeds from sales of other real estate owned, net of improvements		38		52
Proceeds from sales of bank premise and equipment and assets held for sale		—		2,136
Purchases of bank premises and equipment		(7)		(1,623)
Net cash and cash equivalents provided by (used in) investing activities		12,922		(38,302)
Financing activities:
Net increase in deposits		13,464		29,315
Cash dividends paid on common stock		(2,170)		(1,917)
Issuance of common stock under Stock Incentive Plan		122		354
Net decrease in short-term borrowings		(32,798)		(690)
Net cash and cash equivalents provided by (used in) financing activities		(21,382)		27,062
Increase in cash and cash equivalents		3,230		3,162
Cash and cash equivalents at beginning of period		28,611		25,463
Cash and cash equivalents at end of period	$	31,841	$	28,625
Supplemental disclosure of cash flow information
Cash payments for:
Interest	$	8,989	$	4,898
Income taxes		—		471
Non-cash investing and financing activities:
Initial recognition of operating lease right-of-use assets		8,296		—
Initial recognition of operating lease liabilities		9,305		—


	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
March 31, 2019
Residential government-sponsored mortgage-backed securities	$	42,552	$	15	$	(455)	$	42,112
Obligations of states and political subdivisions		18,235		138		(34)		18,339
Corporate securities		2,007		6		—		2,013
Trust preferred securities		2,589		315		(324)		2,580
Residential government-sponsored collateralized mortgage obligations		42,680		3		(806)		41,877
Government-sponsored agency securities		3,247		—		(64)		3,183
Agency commercial mortgage-backed securities		27,947		—		(542)		27,405
SBA pool securities		18,921		15		(253)		18,683
Total	$	158,178	$	492	$	(2,478)	$	156,192


												% of		Previously
												Current		Recognized
												Defaults and		Cumulative
		Ratings When								Estimated		Deferrals to		Other
	Tranche	Purchased		Current Ratings		Par		Book		Fair		Total		Comprehensive
Security	Level	Moody's	Fitch	Moody's	Fitch	Value		Value		Value		Collateral		Loss (1)
Held to Maturity
ALESCO VII A1B	Senior	Aaa	AAA	Aa2	AA	$	2,658	$	2,468	$	2,614	17	%	$	219
MMCF III B	Senior Sub	A3	A-	Ba1	BBB		61		61		60	45	%		4
							2,719		2,529		2,674			$	223

														Cumulative OTTI
Available for Sale														Related to
Other Than Temporarily Impaired:														Credit Loss (2)
TPREF FUNDING II	Mezzanine	A1	A-	Caa3	D		1,500		1,099		775	28	%	$	400
ALESCO V C1	Mezzanine	A2	A	Caa1	C		2,150		1,490		1,805	14	%		660
							3,650		2,589		2,580			$	1,060

Total						$	6,369	$	5,118	$	5,254


	Total Loans
			Unpaid
	Recorded		Principal		Related
March 31, 2019	Investment (1)		Balance		Allowance
With no related allowance recorded
Commercial real estate - owner occupied	$	4,540	$	5,989	$	—
Commercial real estate - non-owner occupied (2)		3,927		4,421		—
Construction and land development		353		365		—
Commercial loans		3,560		4,240		—
Residential 1-4 family (3)		2,558		4,966		—
Other consumer loans		19		40		—
Total	$	14,957	$	20,021	$	—

With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—	$	—
Commercial real estate - non-owner occupied (2)		—		—		—
Construction and land development		—		—		—
Commercial loans		2,810		4,670		600
Residential 1-4 family (3)		783		831		—
Other consumer loans		—		—		—
Total	$	3,593	$	5,501	$	600
Grand total	$	18,550	$	25,522	$	600


	30 - 59		60 - 89
	Days		Days		90 Days		Total		Nonaccrual		Loans Not		Total
March 31, 2019	Past Due		Past Due		or More		Past Due		Loans		Past Due		Loans
Total loans:
Commercial real estate - owner occupied	$	3,310	$	164	$	—	$	3,474	$	1,161	$	412,115	$	416,750
Commercial real estate - non-owner occupied (1)		100		200		—		300		1,387		651,105		652,792
Construction and land development		389		28		—		417		—		148,637		149,054
Commercial loans		114		176		—		290		3,375		214,710		218,375
Residential 1-4 family (2)		5,530		331		—		5,861		1,501		682,390		689,752
Other consumer loans		37		—		—		37		20		30,262		30,319
Total	$	9,480	$	899	$	—	$	10,379	$	7,444	$	2,139,219	$	2,157,042


	Commercial		Commercial
	Real Estate		Real Estate		Construction						Other
	Owner		Non-owner		and Land		Commercial		1-4 Family		Consumer
Three Months Ended March 31, 2019	Occupied		Occupied (1)		Development		Loans		Residential (2)		Loans		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	802	$	1,669	$	821	$	7,097	$	1,106	$	224	$	564	$	12,283
Provision (recovery)		11		624		99		(887)		56		83		214		200
Charge offs		—		(462)		—		(167)		—		(60)		—		(689)
Recoveries		3		—		—		63		8		6		—		80
Ending balance	$	816	$	1,831	$	920	$	6,106	$	1,170	$	253	$	778	$	11,874

Three Months Ended March 31, 2018
Allowance for loan losses:
Beginning balance	$	690	$	1,321	$	692	$	4,496	$	1,586	$	612	$	—	$	9,397
Provision (recovery)		165		229		112		831		(34)		297		—		1,600
Charge offs		—		—		—		(230)		(166)		(91)		—		(487)
Recoveries		4		—		—		175		64		2		—		245
Ending balance	$	859	$	1,550	$	804	$	5,272	$	1,450	$	820	$	—	$	10,755


	Total Loans
	Special
March 31, 2019	Mention		Substandard (3)		Pass		Total
Commercial real estate - owner occupied	$	3,596	$	5,519	$	407,635	$	416,750
Commercial real estate - non-owner occupied (1)		4,255		185		648,352		652,792
Construction and land development		—		—		149,054		149,054
Commercial loans		5,327		3,218		209,830		218,375
Residential 1-4 family (2)		393		1,957		687,402		689,752
Other consumer loans		137		—		30,182		30,319
Total	$	13,708	$	10,879	$	2,132,455	$	2,157,042



	For the Three Months Ended
	March 31,
(in thousands except for percent and period data)	2019
Cash paid for amounts included in the measurement of lease liabilities	$	670
Right-of-use assets obtained in exchange for new operating lease liabilities	$	155
Weighted-average remaining lease term - operating leases, in years		6.1
Weighted-average discount rate - operating leases		3.0	%



	As of
	March 31,
(dollars in thousands)	2019
Lease payments due:
Less than one year	$	1,824
One to three years		3,359
Three to five years		2,367
More than five years		2,199
Total lease payments		9,749
Less: Interest		(893)
Lease liabilities	$	8,856


		March 31, 2019				December 31, 2018
	Fair Value	Carrying		Fair		Carrying		Fair
	Hierarchy Level	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	Level 1	$	31,841	$	31,841	$	28,611	$	28,611
Securities available for sale	Level 2 & Level 3		156,192		156,192		143,377		143,377
Securities held to maturity	Level 2		90,592		88,667		92,462		89,109
Stock in Federal Reserve Bank and Federal Home Loan Bank	Level 2		18,427		18,427		19,522		19,522
Equity investment in mortgage affiliate	Level 3		3,847		3,847		3,829		3,829
Preferred investment in mortgage affiliate	Level 3		3,305		3,305		3,305		3,305
Net loans	Level 3		2,145,341		2,123,900		2,166,541		2,134,021
Accrued interest receivable	Level 2 & Level 3		8,963		8,963		8,745		8,745
Financial liabilities:
Demand deposits	Level 2	$	690,109		690,109	$	665,640		665,640
Money market and savings accounts	Level 2		574,619		574,619		506,519		506,519
Certificates of deposit	Level 3		846,325		843,136		925,441		919,175
Securities sold under agreements to repurchase	Level 1		13,623		13,623		18,721		18,721
FHLB short term advances	Level 1		135,640		135,640		163,340		163,340
Junior subordinated debt	Level 2		9,596		12,880		9,584		12,065
Senior subordinated notes	Level 2		47,080		58,178		47,089		57,173
Accrued interest payable	Level 1 & Level 3		4,347		4,347		3,985		3,985


	Average Balance Sheets and Net Interest
	Analysis For the Three Months Ended
	March 31,
	2019						2018
			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 deferred fees (1) (2)	$	2,155,252	$	27,974	5.26	%	$	2,075,887	$	25,905	5.06	%
Investment securities		237,420		1,581	2.70	%		257,630		1,641	2.58	%
Other earning assets		90,370		685	3.08	%		58,284		474	3.30	%
Total earning assets		2,483,041		30,241	4.94	%		2,391,801		28,020	4.75	%
Allowance for loan losses		(12,296)						(10,386)
Total non-earning assets		257,217						255,063
Total assets	$	2,727,963					$	2,636,478

Liabilities and stockholders' equity
Interest-bearing liabilities:
NOW and other demand accounts	$	345,935	$	642	0.75	%	$	327,395	$	315	0.39	%
Money market accounts		401,615		1,828	1.85	%		342,706		560	0.66	%
Savings accounts		147,589		115	0.32	%		163,143		127	0.32	%
Time deposits		926,137		4,877	2.14	%		699,008		2,268	1.32	%
Total interest-bearing deposits		1,821,276		7,462	1.66	%		1,532,252		3,270	0.87	%
Borrowings		213,929		1,889	3.58	%		425,982		2,250	2.14	%
Total interest-bearing liabilities		2,035,205		9,351	1.86	%		1,958,234		5,520	1.14	%
Noninterest-bearing liabilities:
Demand deposits		320,299						329,299
Other liabilities		19,414						18,471
Total liabilities		2,374,919						2,306,004
Stockholders' equity		353,044						330,474
Total liabilities and stockholders' equity	$	2,727,963					$	2,636,478
Net interest income			$	20,890					$	22,500
Interest rate spread					3.08	%					3.61	%
Net interest margin					3.41	%					3.82	%


					Required for Capital				To Be Categorized as
		Actual			Adequacy Purposes (1)				Well Capitalized (2)
March 31, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio
Southern National
Common equity tier 1 capital ratio	$	243,458	11.75	%	$	93,235	4.50	%		n/a	n/a
Tier 1 risk-based capital ratio		253,458	12.23	%		124,313	6.00	%		n/a	n/a
Total risk-based capital ratio		312,333	15.07	%		165,751	8.00	%		n/a	n/a
Leverage ratio		253,458	9.69	%		104,671	4.00	%		n/a	n/a
Sonabank
Common equity tier 1 capital ratio	$	292,517	13.88	%	$	94,808	4.50	%	$	136,945	6.50	%
Tier 1 risk-based capital ratio		292,517	13.88	%		126,411	6.00	%		168,548	8.00	%
Total risk-based capital ratio		304,391	14.44	%		168,548	8.00	%		210,685	10.00	%
Leverage ratio		292,517	11.17	%		104,740	4.00	%		105,342	5.00	%

December 31, 2018
Southern National
Common equity tier 1 capital ratio	$	239,554	11.57	%	$	93,135	4.50	%		n/a	n/a
Tier 1 risk-based capital ratio		249,554	12.06	%		124,180	6.00	%		n/a	n/a
Total risk-based capital ratio		308,838	14.92	%		165,573	8.00	%		n/a	n/a
Leverage ratio		249,554	9.57	%		104,338	4.00	%		n/a	n/a
Sonabank
Common equity tier 1 capital ratio	$	288,018	13.64	%	$	95,020	4.50	%	$	137,251	6.50	%
Tier 1 risk-based capital ratio		288,018	13.64	%		126,693	6.00	%		168,924	8.00	%
Total risk-based capital ratio		300,301	14.22	%		168,924	8.00	%		211,156	10.00	%
Leverage ratio		288,018	11.03	%		104,420	4.00	%		105,578	5.00	%