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Primis Financial Corp. - Quarter Report: 2020 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2020

Commission File No. 001-33037

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)

Virginia

20-1417448

(State or other jurisdiction

(I.R.S. Employer Identification No.)

of incorporation or organization)

6830 Old Dominion Drive

McLean, Virginia 22101

(Address of principal executive offices) (zip code)

(703) 893-7400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

Trading symbol

Name of each exchange on which registered:

Common Stock, par value $0.01 per share

SONA

NASDAQ Global Market

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

Yes        No 

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

Yes        No 

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

Large accelerated filer 

Accelerated filer 

Smaller reporting company 

Non-accelerated filer 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  No 

As of November 2, 2020, there were 24,368,612 shares of common stock, $0.01 par value, outstanding.

Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

September 30, 2020

INDEX

    

PAGE

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019

2

Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2020 and 2019

3

Consolidated Statement of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019

4

Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019

6

Notes to Unaudited Consolidated Financial Statements

7

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

34

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

47

Item 4 – Controls and Procedures

49

PART II - OTHER INFORMATION

Item 1 – Legal Proceedings

49

Item 1A – Risk Factors

50

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

51

Item 3 – Defaults Upon Senior Securities

51

Item 4 – Mine Safety Disclosures

51

Item 5 – Other Information

51

Item 6 - Exhibits

52

Signatures

54

Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share amounts)

    

September 30, 

    

December 31, 

2020

2019

(unaudited)

*

ASSETS

Cash and cash equivalents:

 

  

 

  

Cash and due from financial institutions

$

7,186

 

$

7,909

Interest-bearing deposits in other financial institutions

 

142,086

 

24,019

Total cash and cash equivalents

 

149,272

 

31,928

Securities available for sale, at fair value

 

157,896

 

164,820

Securities held to maturity, at amortized cost (fair value of $50,551 and $72,666, respectively)

 

49,323

 

72,448

Total loans

 

2,523,709

 

2,186,047

Less allowance for loan losses

 

(25,779)

 

(10,261)

Net loans

 

2,497,930

 

2,175,786

Stock in Federal Reserve Bank and Federal Home Loan Bank

 

16,927

 

17,832

Equity investment in mortgage affiliate

 

13,238

 

5,020

Preferred investment in mortgage affiliate

 

3,305

 

3,305

Bank premises and equipment, net

 

30,679

 

31,184

Operating lease right-of-use assets

7,033

8,013

Goodwill

 

101,954

 

101,954

Core deposit intangibles, net

 

6,168

 

7,191

Bank-owned life insurance

 

65,015

 

63,850

Other real estate owned

 

5,388

 

6,224

Deferred tax assets, net

 

14,477

 

11,788

Accrued interest receivable

21,076

8,210

Other assets

 

14,892

 

12,617

Total assets

$

3,154,573

 

$

2,722,170

LIABILITIES AND STOCKHOLDERS' EQUITY

 

  

 

  

Noninterest-bearing demand deposits

$

467,581

 

$

339,153

Interest-bearing deposits:

 

  

 

  

NOW accounts

 

472,553

 

391,172

Money market accounts

 

534,899

 

466,867

Savings accounts

 

179,756

 

144,486

Time deposits

 

561,685

 

783,040

Total interest-bearing deposits

 

1,748,893

 

1,785,565

Total deposits

 

2,216,474

 

2,124,718

Securities sold under agreements to repurchase - short term

 

16,181

 

12,883

Paycheck Protection Program Liquidity Facility (PPPLF) borrowings

283,906

Federal Home Loan Bank (FHLB) advances

 

100,000

 

121,640

Junior subordinated debt - long term

 

9,669

 

9,632

Senior subordinated notes - long term

 

105,709

 

47,051

Operating lease liabilities

7,800

8,469

Other liabilities

 

25,851

 

20,536

Total liabilities

 

2,765,590

 

2,344,929

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; 24,368,853 and 24,181,534 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

 

243

 

241

Additional paid in capital

 

308,814

 

306,755

Retained earnings

 

76,486

 

69,462

Accumulated other comprehensive income

 

3,440

 

783

Total stockholders' equity

 

388,983

 

377,241

Total liabilities and stockholders' equity

$

3,154,573

 

$

2,722,170

* Derived from audited consolidated financial statements

See accompanying notes to unaudited consolidated financial statements.

2

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

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

For the Three Months Ended

For the Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

Interest and dividend income:

 

  

 

  

 

  

 

  

Interest and fees on loans

$

27,266

$

28,340

$

81,051

$

84,692

Interest and dividends on taxable securities

 

1,006

 

1,375

 

3,382

 

4,275

Interest and dividends on tax exempt securities

 

123

 

145

 

355

 

453

Interest and dividends on other earning assets

 

312

 

614

 

1,072

 

1,750

Total interest and dividend income

 

28,707

 

30,474

 

85,860

 

91,170

Interest expense:

 

  

 

  

 

  

 

  

Interest on deposits

 

4,357

 

8,001

 

16,006

 

23,117

Interest on federal reserve board borrowings

180

201

Interest on repurchase agreements

 

24

 

20

 

65

 

65

Interest on junior subordinated debt

 

89

 

158

 

349

 

458

Interest on senior subordinated notes

 

968

 

711

 

2,392

 

2,135

Interest on other borrowings

 

91

 

569

 

861

 

2,464

Total interest expense

 

5,709

 

9,459

 

19,874

 

28,239

Net interest income

 

22,998

 

21,015

 

65,986

 

62,931

Provision for loan losses

 

2,000

 

150

 

16,349

 

350

Net interest income after provision for loan losses

 

20,998

 

20,865

 

49,637

 

62,581

Noninterest income:

 

  

 

  

 

  

 

  

Account maintenance and deposit service fees

 

1,633

 

1,837

 

4,820

 

5,312

Income from bank-owned life insurance

 

394

 

392

 

1,165

 

1,300

Equity gain from mortgage affiliate

 

3,826

 

599

 

8,218

 

1,175

Recoveries related to acquired charged-off loans and investment securities

288

145

2,707

1,060

Other

 

130

 

1

 

574

 

380

Total noninterest income

 

6,271

 

2,974

 

17,484

 

9,227

Noninterest expenses:

 

  

 

  

 

  

 

  

Salaries and benefits

 

7,817

 

6,567

 

27,464

 

19,523

Occupancy expenses

 

1,432

 

968

 

4,776

 

4,572

Furniture and equipment expenses

 

719

 

514

 

1,977

 

1,962

Amortization of core deposit intangible

 

341

 

352

 

1,023

 

1,077

Virginia franchise tax expense

 

615

 

563

 

1,844

 

1,689

Data processing expense

 

701

 

622

 

2,364

 

1,704

Telephone and communication expense

 

382

 

477

 

1,119

 

1,258

Net (gain) loss on other real estate owned

 

(16)

 

 

55

 

(38)

Professional fees

 

1,494

 

673

 

3,560

 

2,576

Other operating expenses

 

1,779

 

1,878

 

5,004

 

8,473

Total noninterest expenses

 

15,264

 

12,614

 

49,186

 

42,796

Income before income taxes

 

12,005

 

11,225

 

17,935

 

29,012

Income tax expense

 

2,417

 

2,361

 

3,611

 

4,809

Net income

$

9,588

$

8,864

$

14,324

$

24,203

Other comprehensive income:

 

  

 

  

 

  

 

  

Unrealized gain on available for sale securities

$

23

$

740

$

3,353

$

4,668

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

 

3

 

4

 

10

 

10

Net unrealized gain

 

26

 

744

 

3,363

 

4,678

Tax effect

 

5

 

157

 

706

 

983

Other comprehensive income

 

21

 

587

 

2,657

 

3,695

Comprehensive income

$

9,609

$

9,451

$

16,981

$

27,898

Earnings per share, basic

$

0.40

$

0.37

$

0.59

$

1.01

Earnings per share, diluted

$

0.39

$

0.36

$

0.59

$

0.99

See accompanying notes to unaudited consolidated financial statements.

3

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

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

For the Three Months Ended September 30, 2020

Accumulated

Additional

Other

Common

Paid in

Retained

Comprehensive

    

Stock

    

Capital

    

Earnings

    

Income

    

Total

Balance - June 30, 2020

$

243

$

308,672

$

69,335

$

3,419

$

381,669

Net income

 

 

 

9,588

 

 

9,588

Changes in other comprehensive income on investment securities (net of tax $5)

21

21

Dividends on common stock ($0.10 per share)

 

 

 

(2,437)

 

 

(2,437)

Issuance of common stock under Stock Incentive Plan (7,250 shares)

 

 

50

 

 

 

50

Stock-based compensation expense

 

 

92

 

 

 

92

Balance - September 30, 2020

$

243

$

308,814

$

76,486

$

3,440

$

388,983

For the Three Months Ended September 30, 2019

Accumulated

Additional

Other

Common

Paid in

Retained

Comprehensive

    

Stock

    

Capital

    

Earnings

    

Income

    

Total

Balance - June 30, 2019

$

241

$

306,049

$

55,983

$

519

$

362,792

Net income

 

 

 

8,864

 

 

8,864

Changes in other comprehensive income on investment securities (net of tax $157)

587

587

Dividends on common stock ($0.09 per share)

 

 

 

(2,173)

 

 

(2,173)

Issuance of common stock under Stock Incentive Plan (54,450 shares)

 

 

475

 

 

 

475

Stock-based compensation expense

 

 

85

 

 

 

85

Balance - September 30, 2019

$

241

$

306,609

$

62,674

$

1,106

$

370,630

4

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

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

For the Nine Months Ended September 30, 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

 

 

 

14,324

 

 

14,324

Changes in other comprehensive income on investment securities (net of tax $706)

2,657

2,657

Dividends on common stock ($0.30 per share)

 

 

 

(7,300)

 

 

(7,300)

Issuance of common stock under Stock Incentive Plan (93,250 shares)

 

2

 

574

 

 

 

576

Stock-based compensation expense

 

 

1,485

 

 

 

1,485

Balance - September 30, 2020

$

243

$

308,814

$

76,486

$

3,440

$

388,983

For the Nine Months Ended September 30, 2019

Accumulated

Additional

Other

Common

Paid in

Retained

Comprehensive

    

Stock

    

Capital

    

Earnings

    

Income (Loss)

    

Total

Balance - December 31, 2018

$

240

$

305,654

$

44,985

$

(2,589)

$

348,290

Net income

 

 

 

24,203

 

 

24,203

Changes in other comprehensive income on investment securities (net of tax $983)

3,695

3,695

Dividends on common stock ($0.27 per share)

 

 

 

(6,514)

 

 

(6,514)

Issuance of common stock under Stock Incentive Plan (73,900 shares)

 

1

 

603

 

 

 

604

Stock-based compensation expense

 

 

352

 

 

 

352

Balance - September 30, 2019

$

241

$

306,609

$

62,674

$

1,106

$

370,630

See accompanying notes to unaudited consolidated financial statements.

5

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

For the Nine Months Ended September 30, 

    

2020

    

2019

Operating activities:

 

  

 

  

Net income

$

14,324

$

24,203

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

 

  

 

  

Depreciation and amortization

 

3,946

 

4,526

Amortization of operating lease right-of-use assets

2,255

1,901

Accretion of loan discount

 

(3,596)

 

(2,689)

Amortization of FDIC indemnification asset

 

 

531

Provision for loan losses

 

16,349

 

350

Earnings on bank-owned life insurance

 

(1,165)

 

(1,300)

Equity gain on mortgage affiliate

 

(8,218)

 

(1,175)

Stock-based compensation expense

 

1,485

 

352

(Gain) loss on other real estate owned

 

55

 

(38)

Provision for deferred income taxes

 

(3,395)

 

(1,197)

Net increase in other assets and accrued interest receivable

 

(15,141)

 

(3,642)

Net increase in other liabilities

 

3,370

 

5,710

Net cash and cash equivalents provided by operating activities

 

10,269

 

27,532

Investing activities:

 

  

 

  

Purchases of held to maturity investment securities

 

(15,197)

 

(10,233)

Purchases of available for sale investment securities

 

(29,284)

 

(35,082)

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

 

38,451

 

18,151

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

 

37,998

 

23,685

Net decrease of FRB and FHLB stock

905

4,920

Net (increase) decrease in loans

 

(335,156)

 

37,883

Proceeds from bank-owned life insurance death benefit

343

Sales of other real estate owned, net of improvements

1,041

93

Purchases of bank premises and equipment

 

(965)

 

(504)

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

 

(302,207)

 

39,256

Financing activities:

 

  

 

  

Net increase in deposits

 

91,756

 

81,149

Cash dividends paid on common stock

 

(7,300)

 

(6,514)

Issuance of common stock under Stock Incentive Plan

 

576

 

604

Issuance of subordinated notes, net of cost

 

58,686

 

Net increase in PPPLF borrowings

283,906

Net decrease in short-term borrowings

 

(18,342)

 

(122,066)

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

 

409,282

 

(46,827)

Increase in cash and cash equivalents

 

117,344

 

19,961

Cash and cash equivalents at beginning of period

 

31,928

 

28,611

Cash and cash equivalents at end of period

$

149,272

$

48,572

Supplemental disclosure of cash flow information

 

  

 

  

Cash payments for:

 

  

 

  

Interest

$

21,704

$

27,097

Income taxes

 

4,187

 

3,467

Non-cash investing and financing activities:

Initial recognition of operating lease right-of-use assets

$

$

8,615

Initial recognition of operating lease liabilities

9,099

See accompanying notes to unaudited consolidated financial statements.

6

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Unaudited Consolidated Financial Statements

September 30, 2020

1.      ACCOUNTING POLICIES

Southern National Bancorp of Virginia, Inc. (“Southern National” or “SNBV” or the “Company”) 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 (“Sonabank” or the “Bank”), a Virginia state-chartered bank which commenced operations on April 14, 2005. On June 23, 2017, SNBV completed its merger with Eastern Virginia Bankshares, Inc. (“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.

At September 30, 2020, Sonabank had forty-two full-service branches in Virginia and Maryland and through certain internet and mobile applications. Thirty-seven full-service retail branches are in Virginia, located in Ashland, Burgess, Callao, Central Garage, Charlottesville, Chester, Clifton Forge, Colonial Heights, Courtland, Deltaville, Fairfax, Front Royal, Gloucester, Gloucester Point, Hampton, Hartfield, 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 five full-service retail branches in Maryland, located in Bethesda, Brandywine, Owings, Rockville, and Upper Marlboro. We have administrative offices in Warrenton and Glen Allen, Virginia, and in Georgetown, Washington, D.C.

The consolidated financial statements include the accounts of Southern National and its subsidiaries, Sonabank and EVB Statutory Trust I (the “Trust”). Significant inter-company accounts and transactions have been eliminated in consolidation. Southern National consolidates subsidiaries in which it holds, directly or indirectly, more than 50 percent of the voting rights or where it exercises control. Entities where Southern National holds 20 to 50 percent of the voting rights, or has the ability to exercise significant influence, or both, are accounted for under the equity method. Southern National has an interest in one affiliate, Southern Trust Mortgage, LLC (“STM”), which it accounts for as an equity method investment. In addition, Southern National owns the Trust which is an unconsolidated subsidiary. The junior subordinated debt owed to the Trust is reported as a liability of Southern National.

The unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and instructions for Form 10-Q and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in Southern National’s Annual Report on Form 10-K for the year ended December 31, 2019.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change in the near term include: the determination of the allowance for loan losses, the fair value of investment securities, other than temporary impairment of investment securities, the valuation of goodwill and intangible assets, other real estate owned (“OREO”) and deferred taxes.

7

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Risks and Uncertainties

The outbreak of the novel corona virus disease 2019 (“COVID-19”) has adversely impacted a broad range of industries in which the Company’s customers operate and has impaired and could continue to impair their ability to fulfill their financial obligations to 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 minimize the economic impact of COVID-19. 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 healthcare 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 have had and are expected to continue 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 has decreased due to COVID-19. In accordance with regulatory guidelines, 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 and account maintenance fees. These reductions in fees are thought, at this time, to be temporary in conjunction with the duration of COVID-19 and the related economic impact. At this time, the Company is unable to project the materiality of the impact, but believes that the economic impact of COVID-19 is likely to impact its fee income in future periods.

The Company’s interest income has decreased due to COVID-19. In accordance with regulatory guidelines, the Company is actively working with COVID-19-affected borrowers to defer their payments, interest, and fees. While interest and fees will continue to 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, which would negatively impact interest income. At this time, the Company is unable to project the materiality of the impact, but believes that the economic impact of COVID-19 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

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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.

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 causes a 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 occurs during the third calendar quarter. In response to the effects of COVID-19, management determined there to be a triggering event in the third quarter of 2020 warranting a goodwill assessment. For the third quarter 2020 assessment, we performed a step one quantitative assessment to determine if the fair value of our single reporting unit was less than its carrying amount. We concluded that the fair value of our single reporting unit exceeded its carrying amount and no impairment was present based on management’s assessment. We will continue to monitor and assess the impacts of COVID-19 on the Company’s goodwill in the fourth quarter.

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 the 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 an 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 an 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 a result of COVID-19, businesses in the Company’s markets have experienced significant operational disruptions. In accordance with regulatory guidelines to work with borrowers during this unprecedented environment, the Company provided certain modifications, including interest only or principal and interest deferments. As of October 30, 2020, total modified loans or loans with requests for modifications were $80.7 million and the Company anticipates minimal additional deferrals in the fourth quarter of 2020.

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With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company is actively assisting its customers with loan applications through the program. PPP loans have a two or five 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 September 30, 2020, the Company had originated 4,343 PPP loans representing $348.0 million to its customers. Loans funded through the PPP program are guaranteed by the SBA and loans that meet certain regulatory criteria are subject to forgiveness. In the event that the PPP loans are not fully guaranteed by the SBA, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings. We expect forgiveness of the PPP loans to begin in the fourth quarter of 2020 and continue into 2021.

Federal Reserve Paycheck Protection Program Liquidity Facility

On April 9, 2020, the Board of Governors of the Federal Reserve issued guidance for banks that wish to participate in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”). Under the PPPLF, the Federal Reserve Banks will extend funding, on a non-recourse basis, to banks participating in the PPP administered by the SBA, taking PPP loans originated under the PPP as collateral. The Company has also established additional borrowing capacity through the Federal Reserve Bank’s PPPLF, where it can pledge PPP loans to borrow an equal amount of funds. As of September 30, 2020, the Company had $283.9 million borrowings outstanding through this facility. This facility is available until the PPP loans are paid off/forgiven by the SBA or until the maturity of the PPP loan. In October 2020, we paid off all of the PPPLF advances but we can re-pledge the loans if needed.

Credit

The Company is working with customers directly affected by COVID-19 and is offering short-term assistance in accordance with regulatory guidelines. As a result of the economic environment caused by the COVID-19 virus, the Company is engaging in more frequent communication with borrowers to better understand their financial situation and the challenges they face, 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 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 were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption was permitted. The disclosures were adopted 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.

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. 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. The amendments were effective for the Company beginning January 1, 2020. The Company estimates that the initial adoption of this ASU will result in an increase of approximately $9.0 million in our allowance for loan losses, including transfers of non-accretable discount on 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

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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 assets which are not material. We do not 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 earlier of the termination date of the current national emergency, declared by the President on March 31, 2020, under the National Emergencies Act in connection with the COVID-19 outbreak, or December 31, 2020. 

In December 2019, FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This ASU simplifies the 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 accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods. Early adoption is permitted. Southern National is currently in the process of evaluating the impact of adopting the new guidance on its consolidated financial statements and disclosures.

In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the 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 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 process of evaluating the impact of adopting the new guidance on its consolidated financial statements and disclosures.

In October 2020, FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs. This ASU clarifies the accounting for the amortization of purchase premiums for callable debt securities with multiple call dates. ASU 2020-08 is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods. Early adoption is not permitted. Southern National is currently in the process of evaluating the impact of adopting the new guidance on its consolidated financial statements and disclosures.

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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 is to promote the success of the Company by providing greater incentives 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 and 2010 Plan are no longer awarded.

A summary of the activity in the stock option plan during the nine months ended September 30, 2020 follows:

    

    

    

Weighted

    

 

Weighted

Average 

Aggregate

Average

Remaining

Intrinsic

Exercise

Contractual

Value

Shares

Price

Term

(in thousands)

Options outstanding, beginning of period

 

555,750

$

10.02

 

4.3

$

3,518

Forfeited

 

(11,700)

10.91

 

  

 

  

Exercised

 

(93,250)

7.60

 

 

  

Options outstanding, end of period

 

450,800

$

10.50

 

4.0

$

Exercisable at end of period

 

336,540

$

9.63

 

3.4

$

Stock-based compensation expense associated with stock options was $16 thousand and $12 thousand for the three months ended September 30, 2020 and 2019, respectively and $118 thousand and $55 thousand for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, unrecognized compensation expense associated with stock options was $12 thousand, which is expected to be recognized over a weighted average period of nine months.

A summary of the activity in the restricted stock plan during the nine months ended September 30, 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

 

102,500

 

14.56

 

  

 

Vested

 

(91,800)

 

12.09

 

  

 

Unvested restricted stock outstanding, end of period

 

97,200

$

14.20

 

4.1

Restricted stock compensation expense totaled $76 thousand and $73 thousand for the three months ended September 30, 2020 and 2019, respectively and $1.4 million and $297 thousand for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, unrecognized compensation expense associated with restricted stock was $1.2 million, which is expected to be recognized over a weighted average period of 4.1 years.

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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

September 30, 2020

Residential government-sponsored mortgage-backed securities

$

40,341

$

1,723

$

$

42,064

Obligations of states and political subdivisions

 

22,332

 

917

 

(116)

 

23,133

Corporate securities

 

10,000

 

88

 

 

10,088

Trust preferred securities

 

2,530

 

176

 

(290)

 

2,416

Residential government-sponsored collateralized mortgage obligations

 

33,145

 

891

 

(1)

 

34,035

Government-sponsored agency securities

 

5,984

 

96

 

 

6,080

Agency commercial mortgage-backed securities

 

27,253

 

1,140

 

 

28,393

SBA pool securities

 

11,766

 

84

 

(163)

 

11,687

Total

$

153,351

$

5,115

$

(570)

$

157,896

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

$

1,754

$

(562)

$

164,820

The amortized cost, gross 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

September 30, 2020

Residential government-sponsored mortgage-backed securities

$

29,831

$

807

$

(2)

$

30,636

Obligations of states and political subdivisions

 

11,256

 

207

 

 

11,463

Trust preferred securities

 

1,784

 

 

(12)

 

1,772

Residential government-sponsored collateralized mortgage obligations

 

1,452

 

45

 

 

1,497

Government-sponsored agency securities

 

5,000

 

183

 

 

5,183

Total

$

49,323

$

1,242

$

(14)

$

50,551

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Amortized

Gross Unrecognized

Fair

    

Cost

    

Gains

    

Losses

Value

December 31, 2019

Residential government-sponsored mortgage-backed securities

$

22,925

$

62

$

(52)

$

22,935

Obligations of states and political subdivisions

 

15,071

 

165

 

(1)

 

15,235

Trust preferred securities

 

1,938

 

99

 

(2)

 

2,035

Residential government-sponsored collateralized mortgage obligations

 

3,128

 

10

 

(9)

 

3,129

Government-sponsored agency securities

 

29,386

 

108

 

(162)

 

29,332

Total

$

72,448

$

444

$

(226)

$

72,666

During the three and nine months ended September 30, 2020, $14.3 million and $29.3 million, respectively, of available for sale investment securities were purchased. During the nine months ended September 30, 2020, $15.2 million of held to maturity investment securities were purchased. No held to maturity investment securities were purchased during the three months ended September 30, 2020. During the three and nine months ended September 30, 2019, $10.0 million and $35.1 million, respectively, of available for sale investment securities were purchased. Held to maturity investment securities of $10.2 million were purchased during the three and nine months ended September 30, 2019. No investment securities were sold during the three and nine months ended September 30, 2020 and 2019.

The fair value and carrying amount, if different, of debt investment securities as of September 30, 2020, by contractual maturity were as follows (in thousands). Investment securities not due at a single maturity date are shown separately.

Available for Sale

Held to Maturity

    

Amortized

    

    

Amortized

    

Cost

Fair Value

Cost

Fair Value

Due in one to five years

$

2,559

$

2,666

$

3,410

$

3,527

Due in five to ten years

 

16,095

 

16,616

 

2,685

 

2,738

Due after ten years

 

22,192

 

22,435

 

11,945

 

12,153

Residential government-sponsored mortgage-backed securities

 

40,341

 

42,064

 

29,831

 

30,636

Residential government-sponsored collateralized mortgage obligations

 

33,145

 

34,035

 

1,452

 

1,497

Agency commercial mortgage-backed securities

 

27,253

 

28,393

 

 

SBA pool securities

 

11,766

 

11,687

 

 

Total

$

153,351

$

157,896

$

49,323

$

50,551

Investment securities with a carrying amount of approximately $101.3 million and $120.5 million at September 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits, certain other deposits, a line of credit for advances from the Federal Home Loan Bank (“FHLB”) of Atlanta, and repurchase agreements.

Southern National monitors its securities portfolio for indicators of other than temporary impairment. At September 30, 2020 and December 31, 2019, certain investment securities’ fair values were below cost. As outlined in the tables below, there were investment securities with fair values totaling approximately $17.7 million in the portfolio with the carrying value exceeding the estimated fair value that were considered temporarily impaired at September 30, 2020. Because the decline in fair value is attributable to changes in interest rates and market illiquidity, and not credit quality, and because we do not have the intent to sell these investment securities and it is likely that we will not be required to sell the investment securities before their anticipated recovery, management does not consider these investment securities to be other than temporarily impaired as of September 30, 2020.

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The following tables present information regarding investment securities available for sale and held to maturity in a continuous unrealized loss position as of September 30, 2020 and December 31, 2019 by duration of time in a loss position (in thousands):

September 30, 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

Obligations of states and political subdivisions

$

6,076

$

(116)

$

$

$

6,076

$

(116)

Trust preferred securities

750

(290)

750

(290)

Residential government-sponsored collateralized mortgage obligations

310

(1)

310

(1)

SBA pool securities

 

 

 

8,357

 

(163)

 

8,357

 

(163)

Total

$

6,386

$

(117)

$

9,107

$

(453)

$

15,493

$

(570)

September 30, 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

Residential government-sponsored mortgage-backed securities

$

336

$

(1)

$

146

$

(1)

$

482

$

(2)

Trust preferred securities

 

1,743

 

(10)

 

29

 

(2)

 

1,772

 

(12)

Total

$

2,079

$

(11)

$

175

$

(3)

$

2,254

$

(14)

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

Residential government-sponsored mortgage-backed securities

$

2,686

$

(7)

$

1,758

$

(9)

$

4,444

$

(16)

Trust preferred securities

 

 

 

795

 

(245)

 

795

 

(245)

Residential government-sponsored collateralized mortgage obligations

4,253

 

(25)

 

3,133

 

(14)

 

7,386

 

(39)

Government-sponsored agency securities

4,924

 

(48)

 

 

 

4,924

 

(48)

Agency commercial mortgage-backed securities

2,833

 

(6)

 

3,126

 

(12)

 

5,959

 

(18)

SBA pool securities

1,148

 

(2)

 

9,420

 

(194)

 

10,568

 

(196)

Total

$

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)

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As of September 30, 2020, we owned pooled trust preferred investment securities as 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

$

1,874

$

1,754

$

1,743

 

17

%  

$

219

MMCF III B

Senior Sub

 

A3

 

A-

 

Ba1

 

WD

31

30

29

48

%  

4

 

  

 

  

 

  

 

  

 

  

$

1,905

$

1,784

$

1,772

 

  

$

223

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

$

750

 

32

%  

$

400

ALESCO V C1

 

Mezzanine

 

A2

 

A

 

Caa1

 

C

 

2,150

1,490

1,666

 

15

%  

 

660

 

  

 

  

 

  

 

  

 

  

$

3,650

$

2,530

$

2,416

 

  

$

1,060

Total

 

  

 

  

 

  

 

  

 

  

$

5,555

$

4,314

$

4,188

 

  

 

  

(1)Pre-tax, and represents unrealized losses at date of transfer from available-for-sale to held-to-maturity, net of accretion.
(2)Pre-tax.

Each of these 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. There have been no changes to our cash flow analyses and assumptions as of September 30, 2020.

There were no other than temporary impairment charges related to credit losses or sales of these securities during the three and nine months ended September 30, 2020 and 2019.

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Changes in accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2020 and 2019 are shown in the tables below. All amounts are net of tax (in thousands).

Unrealized Holding

Gains on

Held to Maturity

For the three months ended September 30, 2020

    

Available for Sale

    

Securities

    

Total

Beginning balance

$

3,573

$

(154)

$

3,419

Current period other comprehensive income

 

19

 

2

 

21

Ending balance

$

3,592

$

(152)

$

3,440

Unrealized Holding

Gains on

Held to Maturity

For the three months ended September 30, 2019

Available for Sale

Securities

Total

Beginning balance

$

684

$

(165)

$

519

Current period other comprehensive income

 

585

 

2

 

587

Ending balance

$

1,269

$

(163)

$

1,106

Unrealized Holding

Gains on

Held to Maturity

For the nine months ended September 30, 2020

Available for Sale

Securities

Total

Beginning balance

$

943

$

(160)

$

783

Current period other comprehensive income

 

2,649

 

8

 

2,657

Ending balance

$

3,592

$

(152)

$

3,440

Unrealized Holding

Gains (Losses) on

Held to Maturity

For the nine months ended September 30, 2019

Available for Sale

Securities

Total

Beginning balance

$

(2,419)

$

(170)

$

(2,589)

Current period other comprehensive income

 

3,688

 

7

 

3,695

Ending balance

$

1,269

$

(163)

$

1,106

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4.      LOANS AND ALLOWANCE FOR LOAN LOSSES

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

    

September 30, 2020

    

December 31, 2019

Loans secured by real estate:

 

  

Commercial real estate - owner occupied

$

416,717

$

414,479

Commercial real estate - non-owner occupied

 

605,053

 

559,195

Secured by farmland

 

16,608

 

17,622

Construction and land loans

 

120,066

 

150,750

Residential 1-4 family (1)

 

581,237

 

604,777

Multi- family residential

 

107,672

 

82,055

Home equity lines of credit (1)

 

97,727

 

109,006

Total real estate loans

 

1,945,080

 

1,937,884

Commercial loans

 

216,711

 

221,447

Paycheck Protection Program Loans

348,022

Consumer loans

 

23,078

 

26,304

Subtotal

 

2,532,891

 

2,185,635

Plus (less) deferred costs (fees) on loans

 

(9,182)

 

412

Total loans

$

2,523,709

$

2,186,047

(1)Included $13.5 million of loans as of December 31, 2019, acquired in the Greater Atlantic Bank (“GAB”) transaction covered under an FDIC loss-share agreement. The loss-share agreement covering single family loans expired on December 31, 2019.

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.

Accretable discount on the acquired loans totaled $8.5 million and $11.2 million at September 30, 2020 and December 31, 2019, respectively. Accretion associated with the acquired loans held for investment of $1.1 million and $901 thousand was recognized during the three months ended September 30, 2020 and 2019, respectively, and $3.6 million and $2.7 million was recognized during the nine months ended September 30, 2020 and 2019, respectively.

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Table of Contents

Impaired loans for the portfolio were as follows (in thousands):

Total Loans

    

    

Unpaid 

    

Recorded

Principal

Related 

September 30, 2020

Investment (1)

Balance

Allowance

With no related allowance recorded

 

  

 

  

 

  

Commercial real estate - owner occupied

$

10,192

$

11,632

$

Commercial real estate - non-owner occupied (2)

 

7,009

 

7,103

 

Construction and land development

 

1,749

 

1,818

 

Commercial loans

 

5,006

 

6,264

 

Paycheck Protection Program Loans

Residential 1-4 family (3)

 

5,929

 

6,958

 

Other consumer loans

 

18

 

18

 

Total

$

29,903

$

33,793

$

With an allowance recorded

 

  

 

  

 

  

Commercial real estate - owner occupied

$

$

$

Commercial real estate - non-owner occupied (2)

 

 

 

Construction and land development

 

 

 

Commercial loans

 

2,292

2,304

1,080

Paycheck Protection Program Loans

Residential 1-4 family (3)

 

Other consumer loans

 

Total

$

2,292

$

2,304

$

1,080

Grand total

$

32,195

$

36,097

$

1,080

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

(1)Recorded investment is after cumulative prior charge offs of $1.8 million and $1.5 million as of September 30, 2020 and December 31, 2019, respectively. These loans also have aggregate SBA guarantees of $0.2 million and $4.4 million as of September 30, 2020 and December 31, 2019, respectively.
(2)Includes loans secured by farmland and multi-family residential loans.
(3)Includes home equity lines of credit.

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Table of Contents

The following tables present the average recorded investment and interest income (loss) recognized for impaired loans recognized by class of loans for the three months ended September 30, 2020 and 2019 (in thousands):

Total Loans

Average

Interest

    

Recorded

    

Income

Three Months Ended September 30, 2020

Investment

Recognized

With no related allowance recorded

Commercial real estate - owner occupied

$

11,441

 

$

109

Commercial real estate - non-owner occupied (1)

 

7,011

 

 

16

Construction and land development

 

1,754

 

 

42

Commercial loans

 

7,303

 

 

30

Paycheck Protection Program Loans

Residential 1-4 family (2)

 

6,554

 

 

55

Other consumer loans

 

19

 

 

Total

$

34,082

 

$

252

With an allowance recorded

Commercial real estate - owner occupied

$

 

$

Commercial real estate - non-owner occupied (1)

 

 

 

Construction and land development

 

 

 

Commercial loans

 

2,394

 

 

Paycheck Protection Program Loans

Residential 1-4 family (2)

 

 

 

Other consumer loans

 

 

 

Total

$

2,394

 

$

Grand total

$

36,476

 

$

252

Total Loans

Average

Interest

    

Recorded

    

Income (loss)

Three Months Ended September 30, 2019

Investment

Recognized

With no related allowance recorded

Commercial real estate - owner occupied

$

4,562

 

$

69

Commercial real estate - non-owner occupied (1)

 

4,718

 

 

69

Construction and land development

 

379

 

 

15

Commercial loans

 

5,552

 

 

54

Residential 1-4 family (2)

 

1,645

 

 

41

Other consumer loans

 

 

 

Total

$

16,856

 

$

248

With an allowance recorded

Commercial real estate - owner occupied

$

 

$

Commercial real estate - non-owner occupied (1)

 

 

 

Construction and land development

 

 

 

Commercial loans

 

2,760

 

 

48

Residential 1-4 family (2)

 

345

 

 

(13)

Other consumer loans

 

 

 

Total

$

3,105

 

$

35

Grand total

$

19,961

 

$

283

________________________________________

(1)Includes loans secured by farmland and multi-family residential loans.
(2)Includes home equity lines of credit.

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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 nine months ended September 30, 2020 and 2019 (in thousands):

Total Loans

Average

Interest

Recorded

Income

Nine Months Ended September 30, 2020

    

Investment

    

Recognized

With no related allowance recorded

 

  

 

  

Commercial real estate - owner occupied

$

11,757

$

345

Commercial real estate - non-owner occupied (1)

 

7,111

 

113

Construction and land development

 

1,826

 

46

Commercial loans

 

6,406

 

126

Paycheck Protection Program Loans

Residential 1-4 family (2)

 

6,983

 

115

Other consumer loans

 

19

 

Total

$

34,102

$

745

With an allowance recorded

 

  

 

  

Commercial real estate - owner occupied

$

$

Commercial real estate - non-owner occupied (1)

 

 

Construction and land development

 

 

Commercial loans

 

2,456

1

Paycheck Protection Program Loans

Residential 1-4 family (2)

 

Other consumer loans

 

 

Total

$

2,456

$

1

Grand total

$

36,558

$

746

Total Loans

Average

Interest

Recorded

Income

Nine Months Ended September 30, 2019

    

Investment

    

Recognized

With no related allowance recorded

 

  

 

  

Commercial real estate - owner occupied

$

4,612

$

227

Commercial real estate - non-owner occupied (1)

 

4,774

 

206

Construction and land development

 

396

 

43

Commercial loans

 

5,604

 

163

Residential 1-4 family (2)

 

1,665

 

148

Other consumer loans

 

 

Total

$

17,051

$

787

With an allowance recorded

 

  

 

  

Commercial real estate - owner occupied

$

$

Commercial real estate - non-owner occupied (1)

 

 

Construction and land development

 

 

Commercial loans

 

2,799

 

147

Residential 1-4 family (2)

 

345

 

25

Other consumer loans

 

 

Total

$

3,144

$

172

Grand total

$

20,195

$

959

________________________________________

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

(2) Includes home equity lines of credit.

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Table of Contents

The following tables present the aging of the recorded investment in past due loans by class of loans as of September 30, 2020 and December 31, 2019 (in thousands):

    

30 - 59

    

60 - 89

    

90 

    

    

    

    

Days

Days

Days 

Total

Nonaccrual

Loans Not

Total

September 30, 2020

Past Due

Past Due

or More

Past Due

Loans (3)

Past Due

Loans (4)

Total loans:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate - owner occupied

$

370

$

$

$

370

$

2,788

$

413,559

$

416,717

Commercial real estate - non-owner occupied (1)

 

443

 

 

 

443

 

1,537

 

727,353

 

729,333

Construction and land development

 

40

 

 

 

40

 

1,690

 

118,336

 

120,066

Commercial loans

 

73

 

3

 

 

76

 

5,416

 

211,219

 

216,711

Paycheck Protection Program Loans

348,022

348,022

Residential 1-4 family (2)

 

1,211

 

372

 

 

1,583

 

3,839

 

673,542

 

678,964

Other consumer loans

 

108

 

1

 

 

109

 

 

22,969

 

23,078

Total

$

2,245

$

376

$

$

2,621

$

15,270

$

2,515,000

$

2,532,891

    

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

(1)Includes loans secured by farmland and multi-family residential loans.
(2)Includes home equity lines of credit.
(3)Nonaccrual loans include SBA guaranteed amounts totaling $4.1 million at September 30, 2020 and December 31, 2019.
(4)Includes $80.7 million of loans that were subject to deferrals at October 30, 2020.

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Table of Contents

Activity in the allowance for loan and lease losses by class of loan for the three months ended September 30, 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 September 30, 2020

 

Occupied

 

Occupied (1)

 

Development

 

Loans

 

Residential (2)

 

Loans

 

Unallocated

 

Total

Allowance for loan losses:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Beginning balance

$

3,558

$

8,378

$

717

$

5,490

$

3,854

$

903

$

727

$

23,627

Provision (recovery)

1,480

330

7

909

(589)

(59)

(78)

2,000

Charge offs

 

 

 

 

(12)

 

(47)

 

(27)

 

 

(86)

Recoveries

 

 

4

 

 

 

225

 

9

 

 

238

Ending balance

$

5,038

$

8,712

$

724

$

6,387

$

3,443

$

826

$

649

$

25,779

Three Months Ended September 30, 2019

Allowance for loan losses:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Beginning balance

$

833

$

1,890

$

802

$

5,834

$

1,127

$

273

$

854

$

11,613

Provision (recovery)

 

(113)

 

(281)

 

16

 

133

 

347

 

11

 

37

 

150

Charge offs

 

 

(1)

 

 

(266)

 

(315)

 

(65)

 

 

(647)

Recoveries

 

(1)

 

4

 

 

65

 

8

 

9

 

 

85

Ending balance

$

719

$

1,612

$

818

$

5,766

$

1,167

$

228

$

891

$

11,201

Activity in the allowance for loan and lease losses by class of loan for the nine months ended September 30, 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

Nine Months Ended September 30, 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 for non-purchased loans

 

4,223

 

6,983

 

41

 

1,574

 

2,208

 

701

 

475

 

16,205

Provision for purchase credit impaired loans

144

144

Provision

4,223

6,983

41

1,718

2,208

701

475

16,349

Charge offs

 

 

 

 

(834)

 

(292)

 

(92)

 

 

(1,218)

Recoveries

 

5

 

9

 

 

85

 

261

 

27

 

 

387

Ending balance

$

5,038

$

8,712

$

724

$

6,387

$

3,443

$

826

$

649

$

25,779

Nine Months Ended September 30, 2019

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Allowance for loan losses:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Beginning balance

$

802

$

1,669

$

821

$

7,097

$

1,106

$

224

$

564

$

12,283

Provision (recovery)

497

399

(3)

(1,235)

166

199

327

350

Charge offs

 

(782)

 

(463)

 

 

(433)

 

(405)

 

(221)

 

 

(2,304)

Recoveries

 

202

 

7

 

 

337

 

300

 

26

 

 

872

Ending balance

$

719

$

1,612

$

818

$

5,766

$

1,167

$

228

$

891

$

11,201

(1)Includes loans secured by farmland and multi-family residential loans.
(2)Includes home equity lines of credit.

No allowance for credit losses has been recognized for PPP loans as these loans are fully guaranteed by the SBA.

23

Table of Contents

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of September 30, 2020 and the balance in the allowance for loan losses and the recorded investment in non-covered loans by portfolio segment and based on the impairment method as of December 31, 2019 (in thousands):

    

Commercial

    

Commercial

    

    

    

    

    

    

    

Real Estate

Real Estate

Construction

Paycheck

Other

 

Owner

Non-owner

and Land

Commercial

Protection

1-4 Family

Consumer

 

September 30, 2020

Occupied

Occupied (1)

Development

Loans

Program

Residential (2)

Loans

Unallocated

Total

Ending allowance balance attributable to loans:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Individually evaluated for impairment

$

$

$

$

1,080

$

$

$

$

$

1,080

Collectively evaluated for impairment

 

5,038

 

8,712

 

724

 

5,307

 

 

3,443

 

826

 

649

 

24,699

Total ending allowance

$

5,038

$

8,712

$

724

$

6,387

$

$

3,443

$

826

$

649

$

25,779

Loans:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Individually evaluated for impairment

$

10,192

$

7,009

$

1,749

$

7,298

$

$

5,929

$

18

$

$

32,195

Collectively evaluated for impairment

 

406,525

 

722,324

 

118,317

 

209,413

 

348,022

 

673,035

 

23,060

 

 

2,500,696

Total ending loan balances

$

416,717

$

729,333

$

120,066

$

216,711

$

348,022

$

678,964

$

23,078

$

$

2,532,891

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

(1)Includes loans secured by farmland and multi-family residential loans.
(2)Includes home equity lines of credit.

Troubled Debt Restructurings

A modification is classified as a 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 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.

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Table of Contents

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.

For the CARES Act provisions regarding TDR accounting suspension, refer to note 1 in our consolidated financial statements.

There were eight TDRs in the amount of $1.6 million as of September 30, 2020 primarily due to the economic impact of COVID-19. There have been no defaults of 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, 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 no loans classified Doubtful at September 30, 2020 or December 31, 2019.

As of September 30, 2020 and December 31, 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

    

    

    

 

September 30, 2020

Mention

Substandard (3)

Pass

Total

Commercial real estate - owner occupied

$

7,665

$

6,962

$

402,090

$

416,717

Commercial real estate - non-owner occupied (1)

 

3,470

 

4,651

 

721,212

 

729,333

Construction and land development

 

 

1,690

 

118,376

 

120,066

Commercial loans

 

2,338

 

4,182

 

210,191

 

216,711

Paycheck Protection Program Loans

348,022

348,022

Residential 1-4 family (2)

 

580

 

1,818

 

676,566

 

678,964

Other consumer loans

 

115

 

 

22,963

 

23,078

Total

$

14,168

$

19,303

$

2,499,420

$

2,532,891

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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

(1)Includes loans secured by farmland and multi-family residential loans.
(2)Includes home equity lines of credit.
(3)Includes SBA guarantees of $0.2 million and $4.1 million as of September 30, 2020 and December 31, 2019, respectively.

The amount of foreclosed residential real estate property held at September 30, 2020 and December 31, 2019 was $1.3 million and $1.4 million, respectively. The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was $1.7 million and $1.9 million at September 30, 2020 and December 31, 2019, respectively.

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 September 30, 2020 and December 31, 2019, the Company had operating lease liabilities totaling $7.8 million and $8.5 million, respectively, and right-of-use assets totaling $7.0 million and $8.0 million, respectively, 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 September 30, 2020 and 2019, our net operating lease cost was $609 thousand and $625 thousand, respectively, and for the nine months ended September 30, 2020 and 2019, our net operating lease cost was $2.3 million and $1.9 million, respectively, and were reflected in occupancy expenses on our income statements.

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

For the Nine Months Ended

(in thousands except for percent and period data)

September 30, 2020

September 30, 2019

Supplemental cash flow information:

Cash paid for amounts included in the measurement of lease liabilities

$

3,724

$

3,682

Other information:

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

5.3

5.9

Weighted-average discount rate - operating leases

 

2.6

%

 

2.8

%

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The following table summarizes the maturity of remaining lease liabilities:

As of

(dollars in thousands)

September 30, 2020

Lease payments due:

Less than one year

$

2,125

One to three years

3,456

Three to five years

1,411

More than five years

 

1,449

Total lease payments

8,441

Less: imputed interest

(641)

Lease liabilities

$

7,800

As of September 30, 2020, the Company did not have any operating leases that have not yet commenced that will create additional lease liabilities and right-of-use assets for the Company.

6.     COMMITMENTS AND CONTINGENCIES

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 $13.7 million and $17.7 million as of September 30, 2020 and December 31, 2019, respectively.

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

Commitments

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

At September 30, 2020 and December 31, 2019, we had unfunded lines of credit and undisbursed construction loan funds totaling $348.5 million and $324.8 million, respectively. Virtually all of our unfunded lines of credit and undisbursed construction loan funds are variable rate.

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7.      EARNINGS PER SHARE

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

    

    

Weighted

    

 

Average

 

Income 

Shares

Per Share

(Numerator)

(Denominator)

Amount

For the three months ended September 30, 2020

 

  

 

  

 

  

Basic EPS

$

9,588

 

24,270

$

0.40

Effect of dilutive stock options and unvested restricted stock

 

 

105

 

(0.01)

Diluted EPS

$

9,588

 

24,375

$

0.39

For the three months ended September 30, 2019

 

  

 

  

 

  

Basic EPS

$

8,864

 

24,072

$

0.37

Effect of dilutive stock options and unvested restricted stock

 

 

302

 

(0.01)

Diluted EPS

$

8,864

 

24,374

$

0.36

 

  

 

  

 

  

For the nine months ended September 30, 2020

 

  

 

  

 

  

Basic EPS

$

14,324

 

24,229

$

0.59

Effect of dilutive stock options and unvested restricted stock

 

 

121

 

Diluted EPS

$

14,324

 

24,350

$

0.59

For the nine months ended September 30, 2019

 

  

 

  

 

  

Basic EPS

$

24,203

 

24,036

$

1.01

Effect of dilutive stock options and unvested restricted stock

 

 

299

 

(0.02)

Diluted EPS

$

24,203

 

24,335

$

0.99

The Company did not have any anti-dilutive options as of September 30, 2020 and 2019.

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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

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.

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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

(dollars in thousands)

    

September 30, 2020

    

(Level 1)

    

(Level 2)

    

(Level 3)

Available for sale securities

 

  

 

  

 

  

 

  

Residential government-sponsored mortgage-backed securities

$

42,064

$

$

42,064

$

Obligations of states and political subdivisions

 

23,133

 

 

23,133

 

Corporate securities

 

10,088

 

 

9,088

 

1,000

Trust preferred securities

 

2,416

 

 

2,416

 

Residential government-sponsored collateralized mortgage obligations

 

34,035

 

 

34,035

 

Government-sponsored agency securities

 

6,080

 

 

6,080

 

Agency commercial mortgage-backed securities

 

28,393

 

 

28,393

 

SBA pool securities

 

11,687

 

 

11,687

 

Total

$

157,896

$

$

156,896

$

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

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 and nine months ended September 30, 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 5% to 10% of collateral valuation at September 30, 2020 and December 31, 2019. Fair value is classified as Level 3 in the fair value hierarchy. Loans identified as impaired totaled $32.2 million (including SBA guarantees of $0.2 million) as of September 30, 2020, with $1.1 million allocation made to the allowance for loan losses compared to a carrying amount of $22.0 million (including SBA guarantees of $4.4 million) with $1.1 million allocation made to the allowance for loan losses at December 31, 2019.

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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% to 10% of collateral valuation at September 30, 2020 and December 31, 2019. Fair value is classified as Level 3 in the fair value hierarchy. OREO is further evaluated quarterly for any additional impairment. At September 30, 2020 and December 31, 2019, the total amount of OREO was $5.4 million and $6.2 million, respectively.

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

(dollars in thousands)

    

September 30, 2020

    

(Level 1)

    

(Level 2)

    

(Level 3)

Impaired loans:

Commercial real estate - owner occupied

$

10,192

$

$

 

$

10,192

Commercial real estate - non-owner occupied (1)

 

7,009

 

 

 

7,009

Construction and land development

 

1,749

 

 

 

1,749

Commercial loans

 

7,298

 

 

 

7,298

Residential 1-4 family (2)

 

5,929

 

 

 

5,929

Consumer

 

18

 

 

 

18

Other real estate owned:

 

 

 

  

 

Commercial real estate - non-owner occupied (1)

 

1,678

 

 

 

1,678

Construction and land development

 

2,427

 

 

 

2,427

Residential 1-4 family (2)

 

1,283

 

 

 

1,283

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 - non-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)Includes loans secured by farmland and multi-family residential loans.
(2)Includes home equity lines of credit.

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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:

September 30, 2020

December 31, 2019

    

Fair Value

    

Carrying

    

Fair 

    

Carrying

    

Fair 

Hierarchy Level

Amount

Value

Amount

Value

Financial assets:

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

 

Level 1

$

149,272

$

149,272

$

31,928

$

31,928

Securities available for sale

 

Level 2 & Level 3

 

157,896

 

157,896

 

164,820

 

164,820

Securities held to maturity

 

Level 2

 

49,323

 

50,551

 

72,448

 

72,666

Stock in Federal Reserve Bank and Federal Home Loan Bank

 

Level 2

 

16,927

 

16,927

 

17,832

 

17,832

Equity investment in mortgage affiliate

 

Level 3

 

13,238

 

13,238

 

5,020

 

5,020

Preferred investment in mortgage affiliate

 

Level 3

 

3,305

 

3,305

 

3,305

 

3,305

Net loans

 

Level 3

 

2,497,930

 

2,536,849

 

2,175,786

 

2,180,487

Accrued interest receivable

 

Level 2 & Level 3

 

21,076

 

21,076

 

8,210

 

8,210

Financial liabilities:

 

  

 

 

 

 

Demand deposits and NOW accounts

 

Level 2

$

940,134

$

940,134

$

730,325

$

730,325

Money market and savings accounts

 

Level 2

 

714,655

 

714,655

 

611,353

 

611,353

Time deposits

 

Level 3

 

561,685

 

568,258

 

783,040

 

786,420

Securities sold under agreements to repurchase

 

Level 1

 

16,181

 

16,181

 

12,883

 

12,883

PPPLF borrowings

Level 1

283,906

283,906

FHLB short term advances

 

Level 1

 

100,000

 

100,000

 

121,640

 

121,640

Junior subordinated debt

 

Level 2

 

9,669

 

8,451

 

9,632

 

9,206

Senior subordinated notes

 

Level 2

 

105,709

 

110,610

 

47,051

 

48,156

Accrued interest payable

 

Level 1 & Level 3

 

3,077

 

3,077

 

4,907

 

4,907

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

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 is adjusted 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. No impairment was recorded for the three and nine months ended September 30, 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, time deposits, junior subordinated debt, and senior subordinated notes are measured using the exit-price notion.

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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 September 30, 2020 and December 31, 2019 was $16.2 million and $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 of trust preferred securities that were issued on September 17, 2003 and placed through a trust in a pooled underwriting totaling approximately $650 million. The trust issuer invested the total proceeds from the sale of the trust preferred securities in Floating Rate Junior Subordinated Deferrable Interest Debentures (“Junior Subordinated Debt”) issued by EVBS. At September 30, 2020 and December 31, 2019, we had $9.7 million and $9.6 million, respectively, of Junior Subordinated Debt outstanding. 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 September 30, 2020 and December 31, 2019, the interest rate was 3.20% and 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 may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. At September 30, 2020, all of the trust preferred securities qualified as Tier 1 capital.

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 September 30, 2020, all of the SNBV Senior Subordinated Notes qualified as Tier 2 capital.

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 which EVBS sold $20.0 million (fair value adjustment of $1.1 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. At September 30, 2020, 80% of the EVBS Senior Subordinated Notes qualified as Tier 2 capital.

On August 25, 2020, Southern National completed the sale of $60.0 million of its fixed-to-floating rate Subordinated Notes due 2030 (the “SNBV Subordinated Notes”). The SNBV Subordinated Notes will bear interest at an initial rate of 5.40% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2021. From and including September 1, 2025 to, but excluding the maturity date or the date of earlier redemption (the “floating rate period”), the interest rate will reset quarterly to an annual interest rate equal to the Benchmark rate, which is expected to be three-month Term SOFR plus 531 basis points, for each quarterly interest period during the floating rate period, payable quarterly in arrears on March 1, June 1, September 1, and December 1 of each year, commencing on December 1, 2025. Notwithstanding the foregoing, in the event that the Benchmark rate is less than zero, the Benchmark rate shall be deemed to be zero. At September 30, 2020, all of the SNBV Subordinated Notes qualified as Tier 2 capital.

At September 30, 2020, the remaining unamortized debt issuance costs related to the Subordinated Notes totaled $1.9 million.

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

Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of SNBV. This discussion and analysis should be read with the consolidated financial statements, the footnotes thereto, and the other financial data included in this report and in our annual report on Form 10-K for the year ended December 31, 2019. Results of operations for the three and nine months ended September 30, 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 beyond our control, particularly with regard to developments related to the 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 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, as well as the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, 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;
adverse results from current or future litigation, regulatory examinations or other legal and/or regulatory actions, including as a result of our participation in and execution of government programs related to the COVID-19 pandemic;
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;

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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;
failure to prevent a breach to our Internet-based system and online commerce security, including as a result of increased remote working by our employees;
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 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 Bureau, the capital ratios of Basel III as adopted by the federal banking authorities, the Tax Cuts and Jobs Act of 2017 and the CARES Act;
uncertainty related to the transition away from or new 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 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 (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.

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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. 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.

At September 30, 2020, Sonabank had forty-two full-service branches in Virginia and Maryland and through certain internet and mobile applications. Thirty-seven full-service retail branches are in Virginia, located in Ashland, Burgess, Callao, Central Garage, Charlottesville, Chester, Clifton Forge, Colonial Heights, Courtland, Deltaville, Fairfax, Front Royal, Gloucester, Gloucester Point, Hampton, Hartfield, 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 five full-service retail branches in Maryland, located in Bethesda, Brandywine, Owings, Rockville, and Upper Marlboro. We have administrative offices in Warrenton and Glen Allen, Virginia, and in Georgetown, Washington, D.C.

RESULTS OF OPERATIONS

Net Income

Three-Month Comparison. Net income for the three months ended September 30, 2020 was $9.6 million, or $0.40 basic and $0.39 diluted earnings per share, compared to net income of $8.9 million, or $0.37 basic and $0.36 diluted earnings per share for the three months ended September 30, 2019.  

Net income increased $0.7 million, or 8.2%, during the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The increase in net income was driven by a decline in cost of deposits and by an increase in equity gain from the Company’s mortgage affiliate driven by higher margins on closed loans and materially higher volumes from refinance activity as well as production from new hires and teams that were on-boarded in the last half of 2019. The increase was partially offset by higher provision for loan losses in 2020 as the Company made certain adjustments to its qualitative factors in response to the economic impact of COVID-19 that increased the provision by $2.0 million. The increase in net income was also offset by an increase in employee compensation and benefits expense due to increased staffing in the commercial lending and Panacea Financial divisions along with the modified incentive and bonus plans.

Nine-Month Comparison. Net income for the nine months ended September 30, 2020 was $14.3 million, or $0.59 basic and diluted earnings per share, compared to net income of $24.2 million, or $1.01 basic and $0.99 diluted earnings per share, for the nine months ended September 30, 2019.  

The 40.8% decrease in the net income during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily driven by higher provision for loan losses in 2020 as the Company made certain adjustments to its qualitative factors in response to the economic impact of COVID-19 that increased the provision by $16.0 million. The decline in net income was also 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 in the first half of 2020 and increased staffing in the commercial lending and Panacea Financial divisions along with the modified incentive and bonus plans in the third quarter of 2020. These decreases were partially offset by an increase in equity gain from the Company’s mortgage affiliate driven by higher margins on closed loans and materially higher volumes from refinance activity as well as production from new hires and teams that were on-boarded in the last half of 2019. The decline in net income was also offset by a decline in

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cost of deposits and an increase in recoveries related to acquired charged-off loans and investment securities in the current year.

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 $23.0 million for the three months ended September 30, 2020, compared to $21.0 million for the three months ended September 30, 2019. Southern National’s net interest margin for the three months ended September 30, 2020 was 3.18%, compared to 3.37% for the three months ended September 30, 2019. Net interest margin was impacted heavily by the origination of Paycheck Protection Program (PPP) loans in the third quarter of 2020. Excluding the effects of PPP loans, the Company’s net interest margin for the three months ended September 30, 2020 would have been 3.25%, compared to 3.37% for the three months ended September 30, 2019. Total income on interest-earning assets was $28.7 million and $30.5 million for the three months ended September 30, 2020 and 2019, respectively. The yield on average interest-earning assets decreased 92 basis points to 3.97% during the three months ended September 30, 2020, compared to the 4.89% yield on average interest-earning assets during the three months ended September 30, 2019, primarily driven by market conditions. The cost of average interest-bearing liabilities decreased 87 basis points to 1.00% during the three months ended September 30, 2020 compared to 1.87% cost on average interest-bearing liabilities during the three months ended September 30, 2019. Interest and fees on loans totaled $27.3 million and $28.3 million for the third quarters of 2020 and 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 $1.1 million to net interest income during the three months ended September 30, 2020, compared to $901 thousand during the three months ended September 30, 2019. The increase in accretion was due to increased acquired loan paydowns and payoffs. Average loans during the third quarter of 2020 were $2.5 billion, compared to $2.17 billion during the third quarter of 2019.

Total interest expense was $5.7 million and $9.5 million for the three months ended September 30, 2020 and 2019, respectively. Interest on deposits was $4.4 million and $8.0 million for the three months ended September 30, 2020 and 2019, respectively. Total average interest-bearing deposits for the first quarter of 2020 and 2019 were $1.72 billion and $1.83 billion, respectively. The yield on total average interest-bearing deposits was 1.01% and 1.73% for the quarter ended September 30, 2020 and 2019, respectively. Interest expense on total average borrowings, which include securities sold under agreements to repurchase, FHLB advances, junior subordinated debt, senior subordinated notes and Paycheck Protection Program Liquidity Facility (PPPLF) borrowings, was $1.4 million and $1.5 million for the three months ended September 30, 2020 and 2019, respectively. Total average borrowings were $547.2 million and $173.9 million for the three months ended September 30, 2020 and 2019, respectively.

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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

September 30, 2020

September 30, 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)

$

2,501,614

$

27,266

4.34

%  

$

2,165,717

$

28,340

5.19

%  

Investment securities

213,039

1,129

2.11

%  

242,916

1,520

2.48

%  

Other earning assets

163,159

312

0.76

%  

65,707

614

3.71

%  

Total earning assets

2,877,812

28,707

3.97

%  

2,474,340

30,474

4.89

%  

Allowance for loan losses

(23,640)

(11,570)

Total non-earning assets

279,924

266,120

Total assets

$

3,134,096

$

2,728,890

Liabilities and stockholders' equity

  

  

  

  

Interest-bearing liabilities:

  

  

  

  

NOW and other demand accounts

$

451,583

$

807

0.71

%  

$

362,564

$

783

0.86

%  

Money market accounts

504,887

800

0.63

%  

456,492

2,080

1.81

%  

Savings accounts

176,305

130

0.29

%  

144,266

115

0.32

%  

Time deposits

590,263

2,620

1.77

%  

867,533

5,023

2.30

%  

Total interest-bearing deposits

1,723,038

4,357

1.01

%  

1,830,855

8,001

1.73

%  

Borrowings

547,182

1,352

0.98

%  

173,867

1,458

3.33

%  

Total interest-bearing liabilities

2,270,220

5,709

1.00

%  

2,004,722

9,459

1.87

%  

Noninterest-bearing liabilities:

  

  

  

  

  

Demand deposits

452,500

334,435

  

Other liabilities

25,869

22,384

  

Total liabilities

2,748,589

2,361,541

  

Stockholders' equity

385,507

367,349

  

Total liabilities and stockholders' equity

$

3,134,096

$

2,728,890

  

Net interest income

$

22,998

  

$

21,015

Interest rate spread

2.97

%  

  

  

3.01

%  

Net interest margin

3.18

%  

  

  

3.37

%  

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

Nine-Month Comparison. Net interest income was $66.0 million for the nine months ended September 30, 2020, compared to $62.9 million for the nine months ended September 30, 2019, which was a result of lower costs of funds including deposits and borrowings in 2020. Southern National’s net interest margin for the nine months ended September 30, 2020 was 3.27%, compared to 3.40% for the nine months ended September 30, 2019. Net interest margin was impacted heavily by the origination of PPP loans in 2020. Total income on interest-earning assets was $85.9 million and $91.2 million for the nine months ended September 30, 2020 and 2019, respectively. The yield on average interest-earning assets was 4.26% and 4.93% for the nine months ended September 30, 2020 and 2019, respectively. The decrease was primarily driven by market conditions. Interest and fees on loans totaled $81.1 million and $84.7 million for the nine months ended September 30, 2020 and 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 $3.6 million to net interest income during the nine months ended September 30, 2020, compared to $2.7 million during the nine months ended September 30, 2019. The increase in accretion was due to increased acquired loan paydowns and payoffs. Average loans during the nine months ended September 30, 2020 were $2.4 billion compared to $2.16 billion during the nine months ended September 30, 2019.

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Total interest expense was $19.9 million and $28.2 million for the nine months ended September 30, 2020 and 2019, respectively. Interest on deposits was $16.0 million and $23.1 million for the nine months ended September 30, 2020 and 2019, respectively. Total average interest-bearing deposits for the nine months ended September 30, 2020 and 2019 were $1.75 billion and $1.81 billion, respectively. The yield on total average interest-bearing deposits was 1.22% and 1.71% for the nine months ended September 30, 2020 and 2019, respectively. Interest expense on total average borrowings, which include securities sold under agreements to repurchase, FHLB advances, junior subordinated debt, senior subordinated notes and PPPLF borrowings, was $3.9 million and $5.1 million for the nine months ended September 30, 2020 and 2019, respectively. Total average borrowings were $390.9 million and $203.5 million for the nine months ended September 30, 2020 and 2019, respectively.

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 Nine Months Ended

September 30, 2020

September 30, 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)

$

2,368,541

$

81,051

4.57

%  

$

2,160,863

$

84,692

5.24

%  

Investment securities

222,285

3,737

2.25

%  

242,891

4,728

2.60

%  

Other earning assets

103,283

1,072

1.39

%  

70,543

1,750

3.32

%  

Total earning assets

2,694,109

85,860

4.26

%  

2,474,297

91,170

4.93

%  

Allowance for loan losses

(17,002)

(12,115)

Total non-earning assets

270,306

263,347

Total assets

$

2,947,413

$

2,725,529

Liabilities and stockholders' equity

  

  

  

  

Interest-bearing liabilities:

  

  

  

  

NOW and other demand accounts

$

412,083

$

2,338

0.76

%  

$

355,511

$

2,198

0.83

%  

Money market accounts

487,791

3,204

0.88

%  

430,546

5,966

1.85

%  

Savings accounts

162,575

353

0.29

%  

145,964

345

0.32

%  

Time deposits

685,253

10,111

1.97

%  

880,610

14,608

2.22

%  

Total interest-bearing deposits

1,747,702

16,006

1.22

%  

1,812,631

23,117

1.71

%  

Borrowings

390,856

3,868

1.32

%  

203,469

5,122

3.37

%  

Total interest-bearing liabilities

2,138,558

19,874

1.24

%  

2,016,100

28,239

1.87

%  

Noninterest-bearing liabilities:

  

  

  

  

  

Demand deposits

401,616

328,790

  

Other liabilities

24,055

21,347

  

Total liabilities

2,564,229

2,366,237

  

Stockholders' equity

383,184

359,292

  

Total liabilities and stockholders' equity

$

2,947,413

$

2,725,529

  

Net interest income

$

65,986

  

$

62,931

Interest rate spread

3.02

%  

  

  

3.05

%  

Net interest margin

3.27

%  

  

  

3.40

%  

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

Provision for Loan Losses

The provision for loan losses is a current charge to earnings made in order to adjust the allowance for loan losses to an 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 losses is calculated by segmenting the loan

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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 and nine months ended September 30, 2020, the Company made certain adjustments to its qualitative factors in response to the economic impact of COVID-19 that increased the provision for loan losses by $2.0 million and $16.0 million, respectively. For the three months ended September 30, 2020 and 2019, the provision for loan losses was $2.0 million and $150 thousand, respectively. The provision for loan losses for the nine months ended September 30, 2020 and 2019 was $16.3 million and $350 thousand, respectively. Net recoveries for the three months ended September 30, 2020 was $152 thousand and net charge offs for the nine months ended September 30, 2020 was $831 thousand, compared to net charge offs of $562 thousand and $1.4 million, respectively for the three and nine months ended September 30, 2019.

Noninterest Income

The following table presents the major categories of noninterest income for the three months ended September 30, 2020 and 2019:

For the Three Months Ended

September 30, 

(dollars in thousands)

    

2020

    

2019

     

Change

Account maintenance and deposit service fees

$

1,633

$

1,837

 

$

(204)

Income from bank-owned life insurance

 

394

 

392

 

2

Equity gain from mortgage affiliate

 

3,826

 

599

 

3,227

Recoveries related to acquired charged-off loans and investment securities

288

145

143

Other

 

130

 

1

 

129

Total noninterest income

$

6,271

$

2,974

$

3,297

Noninterest income increased 111% to $6.3 million for the three months ended September 30, 2020 compared to $3.0 million for the three months ended September 30, 2019. The $3.3 million increase was primarily driven by a $3.2 million increase in equity gain from the Company’s mortgage affiliate and a $143 thousand increase in recoveries related to acquired charged-off loans and investment securities. Equity gain from the Company’s  mortgage affiliate increased to $3.8 million driven by higher margins on closed loans and materially higher volumes from refinance activity as well as production from new hires and teams that were on-boarded in the last half of 2019. These increases were partially offset by a decrease of $204 thousand in account maintenance and deposit service fees primarily in account service charges and non-sufficient funds fee.

The following table presents the major categories of noninterest income for the nine months ended September 30, 2020 and 2019:

For the Nine Months Ended

September 30, 

(dollars in thousands)

    

2020

    

2019

    

Change

Account maintenance and deposit service fees

$

4,820

$

5,312

 

$

(492)

Income from bank-owned life insurance

 

1,165

 

1,300

 

(135)

Equity gain from mortgage affiliate

 

8,218

 

1,175

 

7,043

Recoveries related to acquired charged-off loans and investment securities

2,707

1,060

1,647

Other

 

574

 

380

 

194

Total noninterest income

$

17,484

$

9,227

 

$

8,257

Noninterest income increased 89% to $17.5 million for the nine months ended September 30, 2020, compared to $9.2 million for the nine months ended September 30, 2019. The $8.3 million increase was primarily driven by a $7.0 million increase in equity gain from the Company’s mortgage affiliate and $1.6 million increase in recoveries related to acquired

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charged-off loans and investment securities. Equity gain from the Company’s mortgage affiliate increased $8.2 million driven by higher margins on closed loans and materially higher volumes from refinance activity as well as production from new hires and teams that were on-boarded in the last half of 2019. The increase was also attributable to a recovery related to a previously charged-off acquired loan of approximately $2.0 million during the second quarter of 2020. These increases were partially offset by a decrease of $492 thousand in account maintenance and deposit service fees primarily in account service charges and non-sufficient funds fee. Income from bank-owned life insurance decreased $135 thousand due to death benefits paid in the first quarter of 2019.

Noninterest Expense

The following table presents the major categories of noninterest expense for the three months ended September 30, 2020 and 2019:

For the Three Months Ended

September 30, 

(dollars in thousands)

    

2020

    

2019

    

Change

Salaries and benefits

$

7,817

$

6,567

$

1,250

Occupancy expenses

 

1,432

968

 

464

Furniture and equipment expenses

 

719

 

514

 

205

Amortization of core deposit intangible

 

341

 

352

 

(11)

Virginia franchise tax expense

 

615

 

563

 

52

Data processing expense

 

701

 

622

 

79

Telephone and communication expense

 

382

 

477

 

(95)

Net (gain) loss on other real estate owned

 

(16)

 

 

(16)

Professional fees

 

1,494

 

673

 

821

Other operating expenses

 

1,779

 

1,878

 

(99)

Total noninterest expenses

$

15,264

$

12,614

$

2,650

Noninterest expenses were $15.3 million during the three months ended September 30, 2020, compared to $12.6 million during the three months ended September 30, 2019. The 21.0% increase in noninterest expenses was primarily due to a $1.3 million increase in employee compensation and benefits expense due to increased staffing in the commercial lending and Panacea Financial divisions along with the modified incentive and bonus plans. Increase in noninterest expenses during the three months ended September 30, 2020 was also attributable to a $821 thousand increase in professional fees driven by higher consulting and legal services which are wholly centered on improving systems integration and technology or fees associated with recruiting additional talent on the commercial banking or risk management division of the business.  Occupancy and furniture and equipment expenses increased $669 thousand during the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

The following table presents the major categories of noninterest expense for the nine months ended September 30, 2020 and 2019:

For the Nine Months Ended

September 30, 

(dollars in thousands)

    

2020

    

2019

    

Change

Salaries and benefits

$

27,464

$

19,523

$

7,941

Occupancy expenses

 

4,776

 

4,572

 

204

Furniture and equipment expenses

 

1,977

 

1,962

 

15

Amortization of core deposit intangible

 

1,023

 

1,077

 

(54)

Virginia franchise tax expense

 

1,844

 

1,689

 

155

Data processing expense

 

2,364

 

1,704

 

660

Telephone and communication expense

 

1,119

 

1,258

 

(139)

Net (gain) loss on other real estate owned

 

55

 

(38)

 

93

Professional fees

 

3,560

 

2,576

 

984

Other operating expenses

 

5,004

 

8,473

 

(3,469)

Total noninterest expenses

$

49,186

$

42,796

$

6,390

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Noninterest expenses were $49.2 million during the nine months ended September 30, 2020, compared to $42.8 million during the nine months ended September 30, 2019. The 14.9% increase in noninterest expenses was primarily due to an increase in employee compensation and benefits expense, higher data processing expense and higher legal and professional fees, partially offset by lower other operating expenses. Employee compensation and benefits expense totaled $27.4 million and $19.5 million for the nine months ended September 30, 2020 and 2019, respectively. The increase was associated with a pre-tax management restructuring expense of $5.6 million in the first half of 2020 and increased staffing in the commercial lending and Panacea Financial divisions along with the modified incentive and bonus plans in the third quarter of 2020. The increase in noninterest expense during the nine months ended September 30, 2020 was also attributable to a $660 thousand increase in data processing expense and a $984 thousand increase in professional fees driven by higher consulting and legal services. The decrease in other operating expenses was driven by a pre-tax nonrecurring loss of $3.2 million with related legal expense of $502 thousand during the first quarter of 2019 that did not recur.

FINANCIAL CONDITION

Balance Sheet Overview

Total assets were $3.15 billion as of September 30, 2020 and $2.72 billion as of December 31, 2019. Total loans increased 15.4%, from $2.19 billion at December 31, 2019 to $2.52 billion at September 30, 2020, with loan growth in 2020 primarily due to PPP loan originations. Excluding PPP loans, loans outstanding decreased $10.4 million, or 0.47%, since December 31, 2019. Total deposits were $2.22 billion at September 30, 2020, compared to $2.12 billion at December 31, 2019 and total equity was $389.0 million and $377.2 million at September 30, 2020 and December 31, 2019, respectively.

Loan Portfolio

Total loans were $2.52 billion and $2.19 billion at September 30, 2020 and December 31, 2019, respectively. Loan growth in 2020 was primarily due to PPP loan originations, which totaled $348.0 million at September 30, 2020. Excluding PPP loans, loans outstanding decreased $10.4 million, or 0.47%, since December 31, 2019.

As of September 30, 2020, the Company had hotel loans of $265.5 million, or 10.5% of total loans. For the year ended December 31, 2019, the portfolio of hotel loans had debt coverage of approximately 147% and weighted average loan to value of approximately 68%. Substantially all of the Company’s hotel loans are to national brands with approximately 93% of the portfolio being to limited service hotels, in non-leisure areas with historically lower operating costs. Hotel demand has been significantly reduced as a result of COVID-19. Expanded monitoring and analysis of loans in the hotel industry had been implemented to address the decline in hotel occupancy and related revenue as needed. However, hotels experienced steady increases in occupancy and room revenues in the third quarter of 2020.

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The composition of our loan portfolio consisted of the following at September 30, 2020 and December 31, 2019 (in thousands):

    

September 30, 2020

    

December 31, 2019

Loans secured by real estate:

 

  

 

Commercial real estate - owner occupied

$

416,717

$

414,479

Commercial real estate - non-owner occupied

 

605,053

 

559,195

Secured by farmland

 

16,608

 

17,622

Construction and land loans

 

120,066

 

150,750

Residential 1-4 family

 

581,237

 

604,777

Multi-family residential

 

107,672

 

82,055

Home equity lines of credit

 

97,727

 

109,006

Total real estate loans

 

1,945,080

 

1,937,884

Commercial loans

 

216,711

 

221,447

Paycheck Protection Program

348,022

Consumer loans

 

23,078

 

26,304

Subtotal

 

2,532,891

 

2,185,635

Plus deferred costs on loans

 

(9,182)

 

412

Total loans

$

2,523,709

$

2,186,047

As of September 30, 2020 and December 31, 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.

Asset Quality

Asset quality remained solid during the third quarter of 2020. The outbreak of COVID-19 and resulting economic instability has had and will likely continue to have an impact on our asset quality, but it is currently unknown to what extent. 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 defer COVID-impacted  loans to the next due date and track delinquency from that new date. During the third quarter of 2020, the Company saw a substantial amount of deferred loans return to traditional loan terms.  

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.

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 losses and delinquencies in our portfolio will increase significantly depends upon the value of the real estate securing the loans and economic factors, such as the overall economy in our market area, including as a result of the impact of COVID-19.

OREO at September 30, 2020 was $5.4 million, compared to $6.2 million at December 31, 2019. The decrease was primarily driven by sale of properties during the year and a write-down on OREO during the first quarter of 2020.

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” loans do not apply to any periods after December 31, 2019. Nonaccrual loans were $11.2 million (excluding $4.1 million of loans fully covered by SBA guarantees) at September 30, 2020, compared to $4.8 million (non-covered and excluding $4.1 million of loans fully covered by SBA guarantees) at

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December 31, 2019, an increase of 133.3%. The ratio of non-covered nonperforming assets (excluding the SBA guaranteed loans) to total non-covered assets was 0.41% at December 31, 2019 and the ratio of nonperforming assets (excluding the SBA guaranteed loans) to total assets was 0.53% at September 30, 2020, an increase of 12 basis points.

Southern National’s allowance for loan losses as a percentage of total loans at September 30, 2020 was 1.04%, compared to 0.47% at December 31, 2019 (based on total non-covered 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.

The following table presents a comparison of nonperforming assets as of September 30, 2020 and December 31, 2019 (in thousands):

    

September 30, 

December 31, 

2020

    

2019 (1)

    

Nonaccrual loans

$

15,270

$

8,900

Loans past due 90 days and accruing interest

 

 

Total nonperforming loans

 

15,270

 

8,900

Other real estate owned

 

5,388

 

6,224

Total nonperforming assets

$

20,658

$

15,124

Troubled debt restructurings

$

1,629

$

697

SBA guaranteed amounts included in nonaccrual loans

$

4,076

$

4,129

Allowance for loan losses to nonperforming loans

 

168.82

%  

 

115.30

%  

Allowance for loan losses to total loans

 

1.04

%  

 

0.47

%  

Nonperforming assets excluding SBA guaranteed loans to total assets

 

0.53

%  

 

0.41

%  

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

Not included in the table above are $436.6 million of loans that were subject to COVID-related deferrals at September 30, 2020. Some of these loans may become potential problem loans in 2021.

We identify potential problem loans based on loan portfolio credit quality. We define our potential problem loans as our non-covered classified/criticized loans less total non-covered nonperforming loans noted above. At September 30, 2020 and December 31, 2019, our potential problem loans totaled $4.0 million and $0.7 million, respectively.

Investment Securities

Investment securities, available for sale and held to maturity, totaled $207.2 million at September 30, 2020 down from $237.3 million at December 31, 2019.

Investment securities in our portfolio as of September 30, 2020 were as follows:

residential government-sponsored collateralized mortgage obligations in the amount of $35.5 million;
agency residential mortgage-backed securities in the amount of $71.9 million;
corporate bonds in the amount of $10.1 million;
commercial mortgage-backed securities in the amount of $28.4 million;
SBA loan pool securities in the amount of $11.7 million;
callable agency securities in the amount of $11.1 million;
trust preferred securities in the amount of $4.1 million; and

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municipal bonds in the amount of $34.4 million (fair value of $34.6 million) with a taxable equivalent yield of 3.4% and ratings as of September 30, 2020 as follows:

Moody's

Amount

Standard & Poor's

Amount

Rating

    

(in thousands)

    

Rating

    

(in thousands)

Aaa

$

12,169

 

AAA

$

11,700

Aa1

 

6,607

 

AA+

 

6,733

Aa2

 

3,994

 

AA

 

6,890

Aa3

 

697

 

AA-

 

1,831

A1

 

2,334

 

A+

 

1,003

A2

 

1,003

 

A

 

830

Baa1

 

 

BBB+

 

NA

 

7,793

 

NA

 

5,610

Total

$

34,597

 

Total

$

34,597

During the three and nine months ended September 30, 2020, $14.3 million and $29.3 million, respectively, of available for sale investment securities were purchased. During the nine months ended September 30, 2020, $15.2 million of held to maturity investment securities were purchased. No held to maturity investment securities were purchased during the three months ended September 30, 2020. During the three and nine months ended September 30, 2019, $10.0 million and $35.1 million, respectively, of available for sale investment securities were purchased. Held to maturity investment securities of $10.2 million were purchased during the three and nine months ended September 30, 2019. No investment securities were sold during the three and nine months ended September 30, 2020 and 2019.

At September 30, 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

$

1,874

$

1,754

$

1,743

17

%  

$

219

MMCF III B

Senior Sub

 

A3

 

A-

 

Ba1

 

WD

31

30

29

48

%  

4

  

$

1,905

$

1,784

$

1,772

  

$

223

 

  

  

  

  

  

  

  

  

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

$

750

32

%  

$

400

ALESCO V C1

Mezzanine

A2

A

Caa1

C

2,150

1,490

1,666

15

%  

660

  

$

3,650

$

2,530

$

2,416

  

$

1,060

 

Total

  

$

5,555

$

4,314

$

4,188

  

  

(1)Pre-tax, and represents unrealized losses at date of transfer from available-for-sale to held-to-maturity, net of accretion.
(2)Pre-tax.

Each of these 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 and nine months ended September 30, 2020 and 2019, respectively.

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Liquidity and Funds Management

The objective of our liquidity management is to 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 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 on a 30, 60 and 90 day basis along with a one and a 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, the projection incorporates the scheduled loan closings in the Loan Pipeline Report along with other management estimates.

During the nine months ended September 30, 2020, we funded our financial obligations with deposits and borrowings from the FHLB of Atlanta. At September 30, 2020, we had $348.5 million of unfunded lines of credit and undisbursed construction loan funds. The amount of certificate of deposit accounts maturing in less than one year was $434.3 million as of September 30, 2020. Management anticipates that funding requirements for these commitments can be met from the normal sources of funds.

The Company has also established additional borrowing capacity through the Federal Reserve Bank’s PPPLF, where it can pledge PPP loans to borrow an equal amount of funds. As of September 30, 2020, the Company had $283.9 million borrowings outstanding through this facility. This facility is available until the PPP loans are paid off/forgiven by the SBA or until the maturity of the PPP loan. In October 2020, we paid off all of the PPPLF advances but we can re-pledge the loans if needed.

On August 25, 2020, Southern National completed the sale of $60.0 million of its fixed-to-floating rate Subordinated Notes due 2030 (the “SNBV Subordinated Notes”). The SNBV Subordinated Notes will bear interest at an initial rate of 5.40% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2021. From and including September 1, 2025 to, but excluding the maturity date or the date of earlier redemption (the “floating rate period”), the interest rate will reset quarterly to an annual interest rate equal to the Benchmark rate, which is expected to be three-month Term SOFR plus 531 basis points, for each quarterly interest period during the floating rate period, payable quarterly in arrears on March 1, June 1, September 1, and December 1 of each year, commencing on December 1, 2025. Notwithstanding the foregoing, in the event that the Benchmark rate is less than zero, the Benchmark rate shall be deemed to be zero.

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Capital Resources

The following table provides a comparison of the leverage and risk-weighted capital ratios of Sonabank at the periods indicated to the minimum and well-capitalized required regulatory standards:

Minimum

 

Required for

 

Capital

Actual Ratio at

 

Adequacy

To Be Categorized

September 30, 

December 31, 

    

Purposes

    

as Well Capitalized (1)

    

2020

    

2019

 

Sonabank

 

 

 

Common equity tier 1 capital ratio

 

4.50

%  

6.50

%  

15.05

%  

14.81

%

Tier 1 risk-based capital ratio

 

6.00

%  

8.00

%  

15.05

%  

14.81

%

Total risk-based capital ratio

 

8.00

%  

10.00

%  

16.23

%  

15.29

%

Leverage ratio

 

4.00

%  

5.00

%  

12.26

%  

12.07

%

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

Sonabank’s capital position is consistent with being well- capitalized under the regulatory framework for prompt corrective action.

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. Out Asset-Liability Committee (“ALCO”) meets regularly and is responsible for reviewing our interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk. The policies established by the ALCO are reviewed and approved by our Board of Directors. 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 review quarterly interest 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.

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The following tables are based on 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 100 basis points, measured in 100 basis point increments) as of September 30, 2020 and as of December 31, 2019. All changes are within our Asset/Liability Risk Management Policy guidelines except for the change resulting from the 100 basis point decrease in interest rates at September 30, 2020 and December 31, 2019.

Sensitivity of Economic Value of Equity

 

As of September 30, 2020

 

Economic Value of

 

Economic Value of Equity

Equity as a % of

 

Change in Interest Rates

$ Change

% Change

Total

Equity

 

in Basis Points (Rate Shock)

    

Amount

    

From Base

    

From Base

    

Assets

    

Book Value

 

(dollar amounts in thousands)

 

Up 400

$

343,805

$

(809)

 

(0.23)

%  

10.90

%  

88.39

%

Up 300

 

348,284

 

3,670

 

1.06

%  

11.04

%  

89.54

%

Up 200

 

350,895

 

6,281

 

1.82

%  

11.12

%  

90.21

%

Up 100

 

353,269

 

8,655

 

2.51

%  

11.20

%  

90.82

%

Base

 

344,614

 

 

%  

10.92

%  

88.59

%

Down 100

 

306,296

 

(38,318)

 

(11.12)

%  

9.71

%  

78.74

%

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

 

in Basis Points (Rate Shock)

    

Amount

    

From Base

    

From Base

    

Assets

    

Book Value

 

(dollar amounts in thousands)

 

Up 400

$

323,871

$

(45,102)

 

(12.22)

%  

11.90

%  

85.85

%

Up 300

 

336,822

 

(32,151)

 

(8.71)

%  

12.37

%  

89.29

%

Up 200

 

349,192

 

(19,781)

 

(5.36)

%  

12.83

%  

92.56

%

Up 100

 

363,935

 

(5,038)

 

(1.37)

%  

13.37

%  

96.47

%

Base

 

368,973

 

 

0.00

%  

13.55

%  

97.81

%

Down 100

 

353,371

 

(15,602)

 

(4.23)

%  

12.98

%  

93.67

%

Our interest rate sensitivity is also monitored by management through the use of a model 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 September 30, 2020 and December 31, 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 September 30, 2020 and December 31, 2019.

Sensitivity of Net Interest Income

 

As of September 30, 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

$

88,693

$

(4,462)

 

3.36

%  

(0.17)

%

Up 300

 

89,907

 

(3,248)

 

3.41

%  

(0.12)

%

Up 200

 

90,938

 

(2,217)

 

3.44

%  

(0.08)

%

Up 100

 

92,281

 

(874)

 

3.50

%  

(0.03)

%

Base

 

93,155

 

 

3.53

%  

%

Down 100

 

92,980

 

(175)

 

3.52

%  

(0.01)

%

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Sensitivity of Net Interest Income

 

As of December 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

$

74,096

$

(8,158)

 

3.00

%  

(0.33)

%

Up 300

 

76,355

 

(5,899)

 

3.09

%  

(0.24)

%

Up 200

 

78,458

 

(3,796)

 

3.18

%  

(0.15)

%

Up 100

 

80,649

 

(1,605)

 

3.27

%  

(0.07)

%

Base

 

82,254

 

3.33

%  

%

Down 100

 

81,273

 

(981)

 

3.29

%  

(0.04)

%

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, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d -15(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.

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 September 30, 2020.

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ITEM 1A – RISK FACTORS

The Company disclosed risk factors in its Annual Report on Form 10-K for the year ended December 31, 2019 and in its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020. 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 have had and will likely continue to 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 experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, energy, retail and restaurant industries;
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 as a result of our participation 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, any adverse results from current or future litigation related to COVID-19, including as a result of our participation in and execution of government programs related to COVID-19 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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A significant amount of the loan growth we experienced during the second and third quarter was a direct result of PPP loans; this loan growth is likely to end in the near-term. Furthermore, since the inception of the PPP, a number of banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP and claims related to agent fees. We are exposed to similar litigation regarding our procedures used to process applications for the PPP and related matters. If any such litigation is not resolved in a manner favorable to us, it may result in significant financial liability or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation or negative media attention could have a material adverse impact on our business, financial condition and results of operations. The PPP has also attracted interest from federal and state enforcement authorities, oversight agencies, regulators and Congressional committees. State Attorney Generals and other federal and state agencies may assert that they are not subject to the provisions of the CARES Act and the PPP regulations entitling us to rely on borrower certifications, and they may take more aggressive actions against us for alleged violations of the provisions governing our participation in the PPP.  Federal and state regulators can impose or request that we consent to substantial sanctions, restrictions and requirements if they determine there are violations of laws, rules or regulations or weaknesses or failures with respect to general standards of safety and soundness, which could adversely affect our business, reputation, results of operation and financial condition.

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.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 – OTHER INFORMATION

Not applicable.

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ITEM 6 - EXHIBITS

(a) Exhibits.

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 (Registration No. 333-136285) filed August 4, 2006)

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 (Registration No. 333-136285) filed on August 4, 2006)

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 (Registration No. 333-136285) filed on August 4, 2006)

3.4

Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to Southern National’s Current Report on Form 8-K filed on October 22, 2020)

4.1

Subordinated Indenture, dated as of August 25, 2020, between Southern National Bancorp of Virginia, Inc. and Wilmington Trust, National Association (incorporated herein by reference to Exhibit 4.1 to Southern National’s Current Report on Form 8-K filed on August 25, 2020)

4.2

First Supplemental Indenture, dated as of August 25, 2020, between Southern National Bancorp of Virginia, Inc. and Wilmington Trust, National Association (incorporated herein by reference to Exhibit 4.2 to Southern National’s Current Report on Form 8-K filed on August 25, 2020)

4.3

Form of 5.40% Fixed-to-Floating Rate Subordinated Notes due 2030 (included in Exhibit 4.2)

31.1*

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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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 for the quarter ended September 30, 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

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

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Signatures

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

    

Southern National Bancorp of Virginia, Inc.

(Registrant)

November 9, 2020

/s/ Dennis J. Zember

(Date)

Dennis J. Zember,

Chief Executive Officer

(President and Executive Officer)

November 9, 2020

/s/ Jeffrey L. Karafa

(Date)

Jeffrey L. Karafa,

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

54