10-Q - FRST - Equibles

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 June 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 July 31, 2020, there were 24,368,853 shares of common stock, $0.01 par value, outstanding.

Table of Contents SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

June 30, 2020

INDEX	****	PAGE
PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements
Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019		<br><br>2
Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2020 and 2019		3
Consolidated Statement of Changes in Stockholders’ Equity for the three and six months ended June 30, 2020 and 2019		4
Consolidated Statements of Cash Flows for the six months ended June 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		33

Item 3 – Quantitative and Qualitative Disclosures about Market Risk		45

Item 4 – Controls and Procedures		47

PART II - OTHER INFORMATION

Item 1 – Legal Proceedings		47

Item 1A – Risk Factors		48

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		49

Item 3 – Defaults Upon Senior Securities		49

Item 4 – Mine Safety Disclosures		49

Item 5 – Other Information		49

Item 6 - Exhibits		50

Signatures		52

Table of Contents SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC. CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share amounts)


	****	June 30,		****	December 31,
		2020			2019
		(unaudited)			*
ASSETS
Cash and cash equivalents:
Cash and due from financial institutions		$	8,212		$	7,909
Interest-bearing deposits in other financial institutions			74,374			24,019
Total cash and cash equivalents			82,586			31,928

Securities available for sale, at fair value			160,979			164,820

Securities held to maturity, at amortized cost (fair value of $55,352 and $72,666, respectively)			53,958			72,448

Total loans			2,511,504			2,186,047
Less allowance for loan losses			(23,627)			(10,261)
Net loans			2,487,877			2,175,786
Stock in Federal Reserve Bank and Federal Home Loan Bank			16,927			17,832
Equity investment in mortgage affiliate			9,412			5,020
Preferred investment in mortgage affiliate			3,305			3,305
Bank premises and equipment, net			31,087			31,184
Operating lease right-of-use assets			7,111			8,013
Goodwill			101,954			101,954
Core deposit intangibles, net			6,509			7,191
Bank-owned life insurance			64,622			63,850
Other real estate owned			6,006			6,224
Deferred tax assets, net			11,087			11,788
Other assets			28,751			20,827
Total assets		$	3,072,171		$	2,722,170

LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits		$	447,605		$	339,153
Interest-bearing deposits:
NOW accounts			424,096			391,172
Money market accounts			488,229			466,867
Savings accounts			171,681			144,486
Time deposits			619,918			783,040
Total interest-bearing deposits			1,703,924			1,785,565
Total deposits			2,151,529			2,124,718

Securities sold under agreements to repurchase - short term			16,412			12,883
Paycheck Protection Program Liquidity Facility (PPPLF) borrowings			333,574			—
Federal Home Loan Bank (FHLB) advances			100,000			121,640
Junior subordinated debt - long term			9,657			9,632
Senior subordinated notes - long term			47,032			47,051
Operating lease liabilities			7,896			8,469
Other liabilities			24,402			20,536
Total liabilities			2,690,502			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; 24,361,603 and 24,181,534 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively			243			241
Additional paid in capital			308,672			306,755
Retained earnings			69,335			69,462
Accumulated other comprehensive income			3,419			783
Total stockholders' equity			381,669			377,241
Total liabilities and stockholders' equity		$	3,072,171		$	2,722,170

* Derived from audited consolidated financial statements

See accompanying notes to unaudited consolidated financial statements.

Table of Contents 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 Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Interest and dividend income:
Interest and fees on loans	$	27,044	$	28,378	$	53,785	$	56,352
Interest and dividends on taxable securities		1,132		1,475		2,376		2,900
Interest and dividends on tax exempt securities		115		152		232		308
Interest and dividends on other earning assets		381		388		760		1,136
Total interest and dividend income		28,672		30,393		57,153		60,696
Interest expense:
Interest on deposits		5,146		7,654		11,649		15,116
Interest on federal reserve board borrowings		21		—		21		—
Interest on repurchase agreements		22		22		41		45
Interest on junior subordinated debt		121		150		260		300
Interest on senior subordinated notes		712		712		1,424		1,424
Interest on other borrowings		177		891		770		1,895
Total interest expense		6,199		9,429		14,165		18,780
Net interest income		22,473		20,964		42,988		41,916
Provision for loan losses		10,899		—		14,349		200
Net interest income after provision for loan losses		11,574		20,964		28,639		41,716

Noninterest income:
Account maintenance and deposit service fees		1,489		1,788		3,187		3,475
Income from bank-owned life insurance		385		385		771		908
Equity gain from mortgage affiliate		4,161		558		4,392		576
Recoveries related to acquired charged-off loans and investment securities		2,235		324		2,419		915
Other		123		136		444		379
Total noninterest income		8,393		3,191		11,213		6,253

Noninterest expenses:
Salaries and benefits		7,338		7,144		19,647		12,956
Occupancy expenses		1,405		1,801		3,344		3,604
Furniture and equipment expenses		639		738		1,258		1,448
Amortization of core deposit intangible		341		362		682		725
Virginia franchise tax expense		659		563		1,229		1,126
Data processing expense		956		571		1,663		1,083
Telephone and communication expense		369		406		737		781
Net (gain) loss on other real estate owned		—		(36)		71		(38)
Professional fees		873		1,381		2,066		1,902
Other operating expenses		1,490		962		3,225		6,595
Total noninterest expenses		14,070		13,892		33,922		30,182
Income before income taxes		5,897		10,263		5,930		17,787
Income tax expense		1,188		944		1,194		2,448
Net income	$	4,709	$	9,319	$	4,736	$	15,339
Other comprehensive income:
Unrealized gain on available for sale securities	$	316	$	2,844	$	3,330	$	3,928
Accretion of amounts previously recorded upon transfer to held to maturity from available for sale		3		3		7		6
Net unrealized gain		319		2,847		3,337		3,934
Tax effect		67		597		701		826
Other comprehensive income		252		2,250		2,636		3,108
Comprehensive income	$	4,961	$	11,569	$	7,372	$	18,447
Earnings per share, basic	$	0.19	$	0.39	$	0.20	$	0.64
Earnings per share, diluted	$	0.19	$	0.38	$	0.19	$	0.63

See accompanying notes to unaudited consolidated financial statements.

Table of Contents SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

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


		For the Three Months Ended June 30, 2020
											Accumulated
					Additional						Other
		Common			Paid in			Retained			Comprehensive
	****	Stock		****	Capital		****	Earnings		****	Income		****	Total
Balance - March 31, 2020		$	242		$	308,352		$	67,061		$	3,167		$	378,822
Net income			—			—			4,709			—			4,709
Changes in other comprehensive income on investment securities (net of tax $67)			—			—			—			252			252
Dividends on common stock ($0.10 per share)			—			—			(2,435)			—			(2,435)
Issuance of common stock under Stock Incentive Plan (41,400 shares)			1			331			—			—			332
Stock-based compensation expense			—			(11)			—			—			(11)
Balance - June 30, 2020		$	243		$	308,672		$	69,335		$	3,419		$	381,669

		For the Three Months Ended June 30, 2019
											Accumulated
					Additional						Other
		Common			Paid in			Retained			Comprehensive
	****	Stock		****	Capital		****	Earnings		****	Income (Loss)		****	Total
Balance - March 31, 2019		$	241		$	305,879		$	48,300		$	(1,731)		$	352,689
Net income			—			—			9,319			—			9,319
Changes in other comprehensive income on investment securities (net of tax $597)			—			—			—			2,250			2,250
Dividends on common stock ($0.09 per share)			—			—			(2,171)			—			(2,171)
Issuance of common stock under Stock Incentive Plan (2,200 shares)			—			7			—			—			7
Impact of adoption of ASU 2016-02			—			—			535			—			535
Stock-based compensation expense			—			163			—			—			163
Balance - June 30, 2019		$	241		$	306,049		$	55,983		$	519		$	362,792

Table of Contents

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

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


		For the Six Months Ended June 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			—			—			4,736			—			4,736
Changes in other comprehensive income on investment securities (net of tax $701)			—			—			—			2,636			2,636
Dividends on common stock ($0.20 per share)			—			—			(4,863)			—			(4,863)
Issuance of common stock under Stock Incentive Plan (86,000 shares)			2			524			—			—			526
Stock-based compensation expense			—			1,393			—			—			1,393
Balance - June 30, 2020		$	243		$	308,672		$	69,335		$	3,419		$	381,669

		For the Six Months Ended June 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			—			—			15,339			—			15,339
Changes in other comprehensive income on investment securities (net of tax $826)			—			—			—			3,108			3,108
Dividends on common stock ($0.18 per share)			—			—			(4,341)			—			(4,341)
Issuance of common stock under Stock Incentive Plan (19,450 shares)			1			128			—			—			129
Stock-based compensation expense			—			267			—			—			267
Balance - June 30, 2019		$	241		$	306,049		$	55,983		$	519		$	362,792

See accompanying notes to unaudited consolidated financial statements.

Table of Contents SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019


		For the Years Ended June 30,
	****	2020		****	2019
Operating activities:
Net income		$	4,736		$	15,339
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation and amortization			2,609			3,411
Amortization of operating lease right-of-use assets			1,648			1,275
Accretion of loan discount			(2,505)			(1,788)
Amortization of FDIC indemnification asset			—			354
Provision for loan losses			14,349			200
Earnings on bank-owned life insurance			(771)			(908)
Equity gain on mortgage affiliate			(4,392)			(576)
Stock-based compensation expense			1,393			267
(Gain) loss on other real estate owned			71			(38)
Net increase in other assets			(7,924)			(5,407)
Net increase in other liabilities			2,545			3,362
Net cash and cash equivalents provided by operating activities			11,759			15,491
Investing activities:
Purchases of held to maturity investment securities			(15,197)			—
Purchases of available for sale investment securities			(14,980)			(25,110)
Proceeds from paydowns, maturities and calls of available for sale investment securities			21,440			7,711
Proceeds from paydowns, maturities and calls of held to maturity investment securities			33,451			5,463
Net decrease of FRB and FHLB stock			905			2,158
Net (increase) decrease in loans			(324,138)			6,896
Proceeds from bank-owned life insurance death benefit			—			343
Sales of other real estate owned, net of improvements			350			74
Purchases of bank premises and equipment			(869)			(73)
Net cash and cash equivalents used in investing activities			(299,038)			(2,538)
Financing activities:
Net increase in deposits			26,811			52,837
Cash dividends paid on common stock			(4,863)			(4,341)
Issuance of common stock under Stock Incentive Plan			526			129
Net increase in PPPLF borrowings			333,574			—
Net decrease in short-term borrowings			(18,111)			(57,101)
Net cash and cash equivalents provided by (used in) financing activities			337,937			(8,476)
Increase in cash and cash equivalents			50,658			4,477
Cash and cash equivalents at beginning of period			31,928			28,611
Cash and cash equivalents at end of period		$	82,586		$	33,088
Supplemental disclosure of cash flow information
Cash payments for:
Interest		$	15,680		$	18,643
Income taxes			857			2,937
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.

Table of Contents SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Unaudited Consolidated Financial Statements

June 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 June 30, 2020, Sonabank had forty-two full-service branches. 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.

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 could impair their ability to fulfill their financial obligations to the 7

Table of Contents 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 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 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. 8

Table of Contents 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. Considering the effects of COVID-19, management determined there to be an event in the first quarter of 2020 warranting an interim assessment. For the first and second quarter 2020 assessments, we performed a qualitative assessment to determine if it was more likely than not that 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 that it was not necessary to perform the quantitative impairment test pursuant to ASC 350-20. Our qualitative assessment considered many factors including, but not limited to, our actual and projected operating performance and profitability, as well as consideration of recent bank merger and acquisition transaction metrics. No impairment losses were considered necessary based on management’s assessment. We will continue to monitor and assess the impacts of COVID-19 in the third and fourth quarters.

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 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 July 31, 2020, total modified loans or loans with requests for modifications were $713.0 million and the Company anticipates minimal additional deferrals in the third quarter of 2020. 9

Table of Contents 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 July 31, 2020, the Company had originated 4,203 PPP loans representing $346.0 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.

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 June 30, 2020, the Company had $333.6 million borrowings outstanding through this facility. The facility is available through September 30, 2020.

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 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 $9.3 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 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 plan to elect the 10

Table of Contents 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.

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 six months ended June 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
Exercised		(86,000)			7.65
Options outstanding, end of period		469,750		$	10.45		4.2		$	(288)

Exercisable at end of period		351,330		$	9.58		3.5		$	(59)

Stock-based compensation expense associated with stock options was $7 thousand and $22 thousand for the three months ended June 30, 2020 and 2019, respectively and $102 thousand and $43 thousand for the six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, unrecognized compensation expense associated with stock options was $16 thousand, which is expected to be recognized over a weighted average period of twelve months. 11

Table of Contents A summary of the activity in the restricted stock plan during the six months ended June 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		4.3

Restricted stock compensation expense totaled $(18) thousand and $141 thousand for the three months ended June 30, 2020 and 2019, respectively and $1.3 million and $224 thousand for the six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, unrecognized compensation expense associated with restricted stock was $1.3 million, which is expected to be recognized over a weighted average period of 4.3 years.

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
June 30, 2020
Residential government-sponsored mortgage-backed securities		$	44,608		$	1,689		$	—		$	46,297
Obligations of states and political subdivisions			16,192			842			—			17,034
Corporate securities			7,001			65			—			7,066
Trust preferred securities			2,530			165			(410)			2,285
Residential government-sponsored collateralized mortgage obligations			31,899			972			(2)			32,869
Government-sponsored agency securities			14,447			150			—			14,597
Agency commercial mortgage-backed securities			27,332			1,141			—			28,473
SBA pool securities			12,447			90			(179)			12,358
Total		$	156,456		$	5,114		$	(591)		$	160,979


		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

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


		Amortized			Gross Unrecognized						Fair
	****	Cost		****	Gains		****	Losses		****	Value
June 30, 2020
Residential government-sponsored mortgage-backed securities		$	33,973		$	949		$	(1)		$	34,921
Obligations of states and political subdivisions			11,276			217			—			11,493
Trust preferred securities			1,778			—			(22)			1,756
Residential government-sponsored collateralized mortgage obligations			1,931			48			—			1,979
Government-sponsored agency securities			5,000			203			—			5,203
Total		$	53,958		$	1,417		$	(23)		$	55,352


		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 six months ended June 30, 2020, $5.0 million and $15.0 million, respectively, of available for sale investment securities were purchased. During the six months ended June 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 June 30, 2020. No investment securities were sold during the three and six months ended June 30, 2020 and 2019.

The fair value and carrying amount, if different, of debt investment securities as of June 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		$	2,564	$	2,674		$	3,414		$	3,538
Due in five to ten years			13,402		13,710			2,186			2,242
Due after ten years			24,204		24,598			12,454			12,672
Residential government-sponsored mortgage-backed securities			44,608		46,297			33,973			34,921
Residential government-sponsored collateralized mortgage obligations			31,899		32,869			1,931			1,979
Agency commercial mortgage-backed securities			27,332		28,473			—			—
SBA pool securities			12,447		12,358			—			—
Total		$	156,456	$	160,979		$	53,958		$	55,352

Investment securities with a carrying amount of approximately $113.2 million and $120.5 million at June 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 June 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 $12.9 million in the portfolio with the carrying value exceeding the estimated fair value that were considered temporarily impaired at June 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 13

Table of Contents before their anticipated recovery, management does not consider these investment securities to be other than temporarily impaired as of June 30, 2020.

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


June 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
Trust preferred securities		$	—		$	—		$	630		$	(410)		$	630		$	(410)
Residential government-sponsored collateralized mortgage obligations			769			(2)			—			—			769			(2)
SBA pool securities			1,599			(3)			7,986			(176)			9,585			(179)
Total		$	2,368		$	(5)		$	8,616		$	(586)		$	10,984		$	(591)


June 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		$	—		$	—		$	147		$	(1)		$	147		$	(1)
Trust preferred securities			1,765			(20)			28			(2)			1,793			(22)
Total		$	1,765		$	(20)		$	175		$	(3)		$	1,940		$	(23)


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)

Table of Contents As of June 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		$	1,910		$	1,785		$	1,765		18	%	$	219
MMCF III B		Senior Sub		A3		A-		Ba1		WD			31			(7)			(9)		48	%		4
												$	1,941		$	1,778		$	1,756				$	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		$	630		32	%	$	400
ALESCO V C1		Mezzanine		A2		A		Caa1		C			2,150			1,490			1,655		15	%		660
												$	3,650		$	2,530		$	2,285				$	1,060

Total												$	5,591		$	4,308		$	4,041
(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 June 30, 2020.

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

Table of Contents Changes in accumulated other comprehensive income (loss) by component for the three and six months ended June 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 June 30, 2020	****	Available for Sale		****	Securities		****	Total
Beginning balance		$	3,325		$	(158)		$	3,167
Current period other comprehensive income			248			4			252
Ending balance		$	3,573		$	(154)		$	3,419


	Unrealized Holding
	Losses on		Held to Maturity
For the three months ended June 30, 2019	Available for Sale		Securities		Total
Beginning balance	$	(1,563)	$	(168)	$	(1,731)
Current period other comprehensive income		2,247		3		2,250
Ending balance	$	684	$	(165)	$	519


	Unrealized Holding
	Losses on		Held to Maturity
For the six months ended June 30, 2020	Available for Sale		Securities		Total
Beginning balance	$	943	$	(160)	$	783
Current period other comprehensive income		2,630		6		2,636
Ending balance	$	3,573	$	(154)	$	3,419


	Unrealized Holding
	Losses on		Held to Maturity
For the six months ended June 30, 2019	Available for Sale		Securities		Total
Beginning balance	$	(2,419)	$	(170)	$	(2,589)
Current period other comprehensive income		3,103		5		3,108
Ending balance	$	684	$	(165)	$	519

Table of Contents 4. LOANS AND ALLOWANCE FOR LOAN LOSSES

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


		June 30, 2020		****	December 31, 2019
Loans secured by real estate:
Commercial real estate - owner occupied		$	412,916		$	414,479
Commercial real estate - non-owner occupied			591,229			559,195
Secured by farmland			16,845			17,622
Construction and land loans			122,086			150,750
Residential 1-4 family (1)			612,247			604,777
Multi- family residential			100,685			82,055
Home equity lines of credit (1)			101,218			109,006
Total real estate loans			1,957,226			1,937,884

Commercial loans			204,160			221,447
Paycheck Protection Program Loans			335,612			—
Consumer loans			24,733			26,304
Subtotal			2,521,731			2,185,635
Plus (less) deferred costs (fees) on loans			(10,227)			412
Total loans		$	2,511,504		$	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 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 $8.6 million and $11.2 million at June 30, 2020 and December 31, 2019, respectively. Accretion associated with the acquired loans held for investment of $1.9 million and $972 thousand was recognized during the three months ended June 30, 2020 and 2019, respectively, and $2.5 million and $1.8 million was recognized during the six months ended June 30, 2020 and 2019, respectively. 17

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


		Total Loans
	****			****	Unpaid		****
		Recorded			Principal			Related
June 30, 2020		Investment (1)			Balance			Allowance
With no related allowance recorded
Commercial real estate - owner occupied		$	10,412		$	11,122		$	—
Commercial real estate - non-owner occupied (2)			7,797			7,805			—
Construction and land development			119			128			—
Commercial loans			5,610			6,737			—
Paycheck Protection Program Loans			—			—			—
Residential 1-4 family (3)			6,079			6,746			—
Other consumer loans			6			6			—
Total		$	30,023		$	32,544		$	—

With an allowance recorded
Commercial real estate - owner occupied		$	369		$	370		$	16
Commercial real estate - non-owner occupied (2)			—			—			—
Construction and land development			1,691			1,691			24
Commercial loans			2,053			2,144			1,068
Paycheck Protection Program Loans			—			—			—
Residential 1-4 family (3)			562			551			36
Other consumer loans			5			4			5
Total		$	4,680		$	4,760		$	1,149
Grand total		$	34,703		$	37,304		$	1,149


		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			—
Paycheck Protection Program Loans			—			—			—
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
Paycheck Protection Program Loans			—			—			—
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 $2.0 million and $1.5 million as of June 30, 2020 and December 31, 2019, respectively. These loans also have aggregate SBA guarantees of $4.0 million and $4.4 million as of June 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.
---	---

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


	Total Loans
	Average			Interest
	Recorded		****	Income (loss)
Three Months Ended June 30, 2020	Investment			Recognized
With no related allowance recorded
Commercial real estate - owner occupied	$	11,667		$	145
Commercial real estate - non-owner occupied (1)		7,800			51
Construction and land development		124			(10)
Commercial loans		7,844			50
Paycheck Protection Program Loans		—			—
Residential 1-4 family (2)		7,059			23
Other consumer loans		6			—
Total	$	34,500		$	259
With an allowance recorded
Commercial real estate - owner occupied	$	369		$	13
Commercial real estate - non-owner occupied (1)		—			—
Construction and land development		1,696			52
Commercial loans		2,224			26
Paycheck Protection Program Loans		—			—
Residential 1-4 family (2)		562			(18)
Other consumer loans		5			—
Total	$	4,856		$	73
Grand total	$	39,356		$	332


	Total Loans
	Average			Interest
	Recorded		****	Income
Three Months Ended June 30, 2019	Investment			Recognized
With no related allowance recorded
Commercial real estate - owner occupied	$	5,433		$	92
Commercial real estate - non-owner occupied (1)		4,901			100
Construction and land development		357			14
Commercial loans		5,524			98
Paycheck Protection Program Loans		—			—
Residential 1-4 family (2)		1,691			48
Other consumer loans		—			—
Total	$	17,906		$	352
With an allowance recorded
Commercial real estate - owner occupied	$	—		$	—
Commercial real estate - non-owner occupied (1)		—			—
Construction and land development		—			—
Commercial loans		2,787			49
Paycheck Protection Program Loans		—			—
Residential 1-4 family (2)		1,256			20
Other consumer loans		—			—
Total	$	4,043		$	69
Grand total	$	21,949		$	421

________________________________________

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

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 six months ended June 30, 2020 and 2019 (in thousands):


		Total Loans
		Average			Interest
		Recorded			Income (loss)
Six Months Ended June 30, 2020		Investment		****	Recognized
With no related allowance recorded	****
Commercial real estate - owner occupied		$	11,709		$	236
Commercial real estate - non-owner occupied (1)			7,808			97
Construction and land development			125			4
Commercial loans			7,864			96
Paycheck Protection Program Loans			—			—
Residential 1-4 family (2)			7,066			60
Other consumer loans			6			—
Total		$	34,578		$	493
With an allowance recorded
Commercial real estate - owner occupied		$	369		$	13
Commercial real estate - non-owner occupied (1)			—			—
Construction and land development			1,700			52
Commercial loans			2,245			75
Paycheck Protection Program Loans			—			—
Residential 1-4 family (2)			563			(18)
Other consumer loans			5			—
Total		$	4,882		$	122
Grand total		$	39,460		$	615


		Total Loans
		Average			Interest
		Recorded			Income
Six Months Ended June 30, 2019		Investment		****	Recognized
With no related allowance recorded	****
Commercial real estate - owner occupied		$	5,459		$	158
Commercial real estate - non-owner occupied (1)			4,933			137
Construction and land development			362			28
Commercial loans			5,547			109
Paycheck Protection Program Loans			—			—
Residential 1-4 family (2)			1,703			107
Other consumer loans			—			—
Total		$	18,004		$	539
With an allowance recorded
Commercial real estate - owner occupied		$	—		$	—
Commercial real estate - non-owner occupied (1)			—			—
Construction and land development			—			—
Commercial loans			2,819			99
Paycheck Protection Program Loans			—			—
Residential 1-4 family (2)			1,257			38
Other consumer loans			—			—
Total		$	4,076		$	137
Grand total		$	22,080		$	676

________________________________________

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

(2) Includes home equity lines of credit. 20

Table of Contents

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


		30 - 59		****	60 - 89		****	90		****			****			****			****
		Days			Days			Days			Total			Nonaccrual			Loans Not			Total
June 30, 2020		Past Due			Past Due			or More			Past Due			Loans (3)			Past Due			Loans (4)
Total loans:	****
Commercial real estate - owner occupied		$	1,568		$	206		$	—		$	1,774		$	2,788		$	408,354		$	412,916
Commercial real estate - non-owner occupied (1)			—			—			—			—			1,152			707,607			708,759
Construction and land development			40			—			—			40			—			122,046			122,086
Commercial loans			271			413			—			684			6,707			196,769			204,160
Paycheck Protection Program Loans			—			—			—			—			—			335,612			335,612
Residential 1-4 family (2)			2,474			1,103			—			3,577			4,248			705,640			713,465
Other consumer loans			24			100			—			124			35			24,574			24,733
Total		$	4,377		$	1,822		$	—		$	6,199		$	14,930		$	2,500,602		$	2,521,731


	****	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
Paycheck Protection Program Loans			—			—			—			—			—			—			—
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 $3.5 million and $4.1 million at June 30, 2020 and December 31, 2019, respectively.
---	---
(4)	Includes $713.0 million of loans that were subject to deferrals at July 31, 2020.
---	---

Table of Contents Activity in the allowance for loan and lease losses by class of loan for the three months ended June 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 June 30, 2020	****	Occupied		****	Occupied (1)		****	Development		****	Loans		****	Residential (2)		****	Loans		****	Unallocated		****	Total
Allowance for loan losses:	****
Beginning balance		$	1,068		$	2,693		$	376		$	5,833		$	2,439		$	239		$	74		$	12,722
Provision (recovery) for non-purchased loans			2,490			5,682			341			(157)			1,410			686			653			11,105
Recovery for purchase credit impaired loans			—			—			—			(206)			—			—			—			(206)
Total provision (recovery)			2,490			5,682			341			(363)			1,410			686			653			10,899
Charge offs			—			—			—			—			—			(33)			—			(33)
Recoveries			—			3			—			20			5			11			—			39
Ending balance		$	3,558		$	8,378		$	717		$	5,490		$	3,854		$	903		$	727		$	23,627

Three Months Ended June 30, 2019
Allowance for loan losses:
Beginning balance		$	816		$	1,831		$	920		$	6,106		$	1,170		$	253		$	778		$	11,874
Provision (recovery)			599			56			(118)			(481)			(237)			105			76			—
Charge offs			(782)			—			—			—			(90)			(96)			—			(968)
Recoveries			200			3			—			209			284			11			—			707
Ending balance		$	833		$	1,890		$	802		$	5,834		$	1,127		$	273		$	854		$	11,613

Activity in the allowance for loan and lease losses by class of loan for the six months ended June 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
Six Months Ended June 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 (recovery) for non-purchased loans			2,743			6,653			34			665			2,797			760			553			14,205
Provision for purchase credit impaired loans			—			—			—			144			—			—			—			144
Total provision (recovery)			2,743			6,653			34			809			2,797			760			553			14,349
Charge offs			—			—			—			(822)			(245)			(65)			—			(1,132)
Recoveries			5			5			—			85			36			18			—			149
Ending balance		$	3,558		$	8,378		$	717		$	5,490		$	3,854		$	903		$	727		$	23,627

Six Months Ended June 30, 2019		****	****		****	****		****	****		****	****		****	****		****	****		****	****		****	****
Allowance for loan losses:
Beginning balance		$	802		$	1,669		$	821		$	7,097		$	1,106		$	224		$	564		$	12,283
Provision (recovery)			610			680			(19)			(1,368)			(181)			188			290			200
Charge offs			(782)			(462)			—			(167)			(90)			(156)			—			(1,657)
Recoveries			203			3			—			272			292			17			—			787
Ending balance		$	833		$	1,890		$	802		$	5,834		$	1,127		$	273		$	854		$	11,613
(1)	Includes loans secured by farmland and multi-family residential loans.
---	---
(2)	Includes home equity lines of credit.
---	---

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

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 June 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						****
June 30, 2020		Occupied			Occupied (1)			Development			Loans			Program			Residential (2)			Loans			Unallocated			Total
Ending allowance balance attributable to loans:	****
Individually evaluated for impairment		$	16		$	—		$	24		$	1,068		$	—		$	36		$	5		$	—		$	1,149
Collectively evaluated for impairment			3,542			8,378			693			4,422			—			3,818			898			727			22,478
Total ending allowance		$	3,558		$	8,378		$	717		$	5,490		$	—		$	3,854		$	903		$	727		$	23,627

Loans:
Individually evaluated for impairment		$	10,412		$	7,797		$	119		$	5,610		$	—		$	6,079		$	6		$	—		$	30,023
Collectively evaluated for impairment			402,504			700,962			121,967			198,550			335,612			707,386			24,727			—			2,491,708
Total ending loan balances		$	412,916		$	708,759		$	122,086		$	204,160		$	335,612		$	713,465		$	24,733		$	—		$	2,521,731

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. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty and whether a 23

Table of Contents 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 five TDRs during the three months ended June 30, 2020 and 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 June 30, 2020 or December 31, 2019.

As of June 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		****					****
June 30, 2020		Mention			Substandard (3)		Pass			Total
Commercial real estate - owner occupied		$	7,721		$	6,970	$	398,225		$	412,916
Commercial real estate - non-owner occupied (1)			3,515			4,653		700,591			708,759
Construction and land development			—			1,691		120,395			122,086
Commercial loans			1,999			4,429		197,732			204,160
Paycheck Protection Program Loans			—			—		335,612			335,612
Residential 1-4 family (2)			656			1,854		710,955			713,465
Other consumer loans			115					24,618			24,733
Total		$	14,006		$	19,597	$	2,488,128		$	2,521,731

Table of Contents


		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
Paycheck Protection Program Loans			—			—		—			—
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 $1.5 million and $4.1 million as of June 30, 2020 and December 31, 2019, respectively.
---	---

The amount of foreclosed residential real estate property held at June 30, 2020 and December 31, 2019 was $1.4 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 $2.0 million and $1.9 million at June 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 June 30, 2020, the Company had operating lease liabilities totaling $7.9 million and right-of-use assets totaling $7.1 million related to these leases. Operating lease liabilities and right-of-use assets are reflected in our consolidated balance sheets. We do not currently have any financing leases. For the three months ended June 30, 2020 and 2019, our net operating lease cost was $609 thousand and $693 thousand, respectively, and for the six months ended June 30, 2020 and 2019, our net operating lease cost was $1.6 million and $1.3 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 Six Months Ended
(in thousands except for percent and period data)	June 30, 2020			June 30, 2019
Supplemental cash flow information:
Cash paid for amounts included in the measurement of lease liabilities	$	2,523		$	2,483
Right-of-use assets obtained in exchange for new operating lease liabilities	$	—		$	—

Other information:
Weighted-average remaining lease term - operating leases, in years		5.6			6.0
Weighted-average discount rate - operating leases		2.8	%		3.0	%

Table of Contents The following table summarizes the maturity of remaining lease liabilities:



	As of
(dollars in thousands)	June 30, 2020
Lease payments due:
Less than one year	$	2,098
One to three years		3,250
Three to five years		1,722
More than five years		1,518
Total lease payments		8,588
Less: imputed interest		(692)
Lease liabilities	$	7,896

As of June 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. 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 $15.2 million and $17.7 million as of June 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 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 June 30, 2020 and December 31, 2019, we had unfunded lines of credit and undisbursed construction loan funds totaling $324.4 million and $324.8 million, respectively. Virtually all of our unfunded lines of credit and undisbursed construction loan funds are variable rate. 26

Table of Contents 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 June 30, 2020	****
Basic EPS		$	4,709	24,246		$	0.19
Effect of dilutive stock options and unvested restricted stock			—	107			—
Diluted EPS		$	4,709	24,353		$	0.19

For the three months ended June 30, 2019
Basic EPS		$	9,319	24,025		$	0.39
Effect of dilutive stock options and unvested restricted stock			—	298			(0.01)
Diluted EPS		$	9,319	24,323		$	0.38

For the six months ended June 30, 2020
Basic EPS		$	4,736	24,207		$	0.20
Effect of dilutive stock options and unvested restricted stock			—	142			(0.01)
Diluted EPS		$	4,736	24,349		$	0.19

For the six months ended June 30, 2019
Basic EPS		$	15,339	24,017		$	0.64
Effect of dilutive stock options and unvested restricted stock			—	298			(0.01)
Diluted EPS		$	15,339	24,315		$	0.63

The Company did not have any anti-dilutive options in 2020 and 2019.

Table of Contents 8. FAIR VALUE

ASC 820 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability

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.

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


					Fair Value Measurements Using
								Significant			****
					Quoted Prices in			Other			Significant
					Active Markets for			Observable			Unobservable
		Total at			Identical Assets			Inputs			Inputs
(dollars in thousands)	****	June 30, 2020		****	(Level 1)		****	(Level 2)		****	(Level 3)
Available for sale securities
Residential government-sponsored mortgage-backed securities		$	46,297		$	—		$	46,297		$	—
Obligations of states and political subdivisions			17,034			—			17,034			—
Corporate securities			7,066			—			6,066			1,000
Trust preferred securities			2,285			—			2,285			—
Residential government-sponsored collateralized mortgage obligations			32,869			—			32,869			—
Government-sponsored agency securities			14,597			—			14,597			—
Agency commercial mortgage-backed securities			28,473			—			28,473			—
SBA pool securities			12,358			—			12,358			—
Total		$	160,979		$	—		$	159,979		$	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 six months ended June 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 June 30, 2020 and December 31, 2019. Fair value is classified as Level 3 in the fair value hierarchy. Loans identified as impaired totaled $34.7 million (including SBA guarantees of $4.0 million) as of June 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. 29

Table of Contents 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 June 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 June 30, 2020 and December 31, 2019, the total amount of OREO was $6.0 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)	****	June 30, 2020		****	(Level 1)		****	(Level 2)		****	(Level 3)
Impaired loans:
Commercial real estate - owner occupied		$	10,781		$	—		$	—		$	10,781
Commercial real estate - non-owner occupied (1)			7,797			—			—			7,797
Construction and land development			1,810			—			—			1,810
Commercial loans			7,663			—			—			7,663
Residential 1-4 family (2)			6,641			—			—			6,641
Consumer			11			—			—			11
Other real estate owned:
Commercial real estate - owner occupied (1)			1,984			—			—			1,984
Construction and land development			2,593			—			—			2,593
Residential 1-4 family (2)			1,429			—			—			1,429


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

Table of Contents Fair Value of Financial Instruments

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


				June 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		$	82,586		$	82,586		$	31,928		$	31,928
Securities available for sale		Level 2 & Level 3			160,979			160,979			164,820			164,820
Securities held to maturity		Level 2			53,958			55,352			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			9,412			9,412			5,020			5,020
Preferred investment in mortgage affiliate		Level 3			3,305			3,305			3,305			3,305
Net loans		Level 3			2,487,877			2,517,892			2,175,786			2,180,487
Accrued interest receivable		Level 2 & Level 3			15,074			15,074			8,210			8,210
Financial liabilities:	****
Demand deposits and NOW accounts		Level 2		$	871,701		$	871,701		$	730,325		$	730,325
Money market and savings accounts		Level 2			659,910			659,910			611,353			611,353
Time deposits		Level 3			619,918			628,076			783,040			786,420
Securities sold under agreements to repurchase		Level 1			16,412			16,412			12,883			12,883
PPPLF borrowings		Level 1			333,574			333,574			—			—
FHLB short term advances		Level 1			100,000			100,000			121,640			121,640
Junior subordinated debt		Level 2			9,657			7,936			9,632			9,206
Senior subordinated notes		Level 2			47,032			46,452			47,051			48,156
Accrued interest payable		Level 1 & Level 3			3,392			3,392			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 six months ended June 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.

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 31

Table of Contents one year, which are secured transactions with customers. The balance in repo accounts at June 30, 2020 and December 31, 2019 was $16.4 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 June 30, 2020 and December 31, 2019, we had

$9.6

million 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 June 30, 2020 and December 31, 2019, the interest rate was 3.25% 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 June 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 June 30, 2020, all of the SNBV Senior Subordinated Notes qualified as Tier 2 capital. At June 30, 2020, the remaining unamortized debt issuance costs related to the SNBV Senior Subordinated Notes totaled $619 thousand.

Also in connection with our merger with EVBS, the Company assumed the Senior Subordinated Note Purchase Agreement previously entered into by EVBS on April 22, 2015 with certain institutional accredited investors pursuant to which EVBS sold $20.0 million (fair value adjustment of $1.9 million) in aggregate principal amount of its 6.50% Fixed-to-Floating Rate Subordinated Notes due 2025 (the “EVBS Senior Subordinated Notes”) to the investors at a price equal to 100% of the aggregate principal amount of the EVBS Senior Subordinated Notes. At June 30, 2020 all of the EVBS Senior Subordinated Notes qualified as Tier 2 capital.

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

Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of SNBV. This discussion and analysis should be read with the consolidated financial statements, the footnotes thereto, and the other financial data included in this report and in our annual report on Form 10-K for the year ended December 31, 2019. Results of operations for the three and six months ended June 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 Report on Form 10-Q for the quarter ended March 31, 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;
---	---

Table of Contents

●	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. 34

Table of Contents 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.

RESULTS OF OPERATIONS

Net Income

Three-Month Comparison. Net income for the three months ended June 30, 2020 was $4.7 million, or $0.19 basic and diluted earnings per share, compared to net income of $9.3 million, or $0.39 basic and $0.38 diluted earnings per share for the three months ended June 30, 2019.

Net income declined $4.6 million, or 49.5%, during the three months ended June 30, 2020 compared to the three months ended June 30, 2019. The decline in net income was primarily driven by higher provision for loan losses in the current year as the Company made certain adjustments to its qualitative factors in response to the impact of COVID-19 that increased the provision by $10.9 million. The decrease was partially offset by an increase in equity gain from 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 an increase in recoveries related to acquired charged-off loans and investment securities in the current year.

Six-Month Comparison. Net income for the six months ended June 30, 2020 was $4.7 million, or $0.20 basic and $0.19 diluted earnings per share, compared to net income of $15.3 million, or $0.64 basic and $0.63 diluted earnings per share, for the six months ended June 30, 2019.

The 69.1% decrease in the net income during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily driven by higher provision for loan losses in the current year as the Company made certain adjustments to its qualitative factors in response to the impact of COVID-19 that increased the provision by $14.0 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. These decreases were partially offset by an increase in equity gain from 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 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 $22.5 million for the three months ended June 30, 2020 compared to $21.0 million for the three months ended June 30, 2019. Southern National’s net interest margin for the three months 35

Table of Contents ended June 30, 2020 was 3.33% compared to 3.40% for the three months ended June 30, 2019. Net interest margin was impacted heavily by the origination of Paycheck Protection Program (PPP) loans in the second quarter of 2020. Excluding the effects of PPP loans, the Company’s net interest margin for the three months ended June 30, 2020 would have increased to 3.50% compared to 3.40% for the three months ended June 30, 2019. Total income on interest-earning assets was $28.7 million and $30.4 million for the three months ended June 30, 2020 and 2019, respectively. The yield on average interest-earning assets decreased 68 basis points to 4.25% during the three months ended June 30, 2020 compared to the 4.93% yield on average interest-earning assets during the three months ended June 30, 2019, primarily driven by market conditions. The cost of average interest-bearing liabilities decreased 71 basis points to 1.17% during the three months ended June 30, 2020 when comparing to the 1.88% cost on average interest-bearing liabilities during the three months ended June 30, 2019. Interest and fees on loans totaled $27.0 million and $28.4 million for the second 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 $1.9 million to net interest income during the three months ended June 30, 2020 compared to $972 thousand during the three months ended June 30, 2019. The increase in accretion was due to increased acquired loan paydowns and payoffs. Average loans during the second quarter of 2020 were $2.40 billion compared to $2.16 billion during the second quarter of 2019.

Total interest expense was $6.2 million and $9.4 million for the three months ended June 30, 2020 and 2019, respectively. Interest on deposits was $5.1 million and $7.7 million for the three months ended June 30, 2020 and 2019, respectively. Total average interest-bearing deposits for the first quarter of 2020 and 2019 were $1.77 billion and $1.78 billion, respectively. The yield on total average interest-bearing deposits was 1.17% and 1.72% for the quarter ended June 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 $1.1 million and $1.8 million for the three months ended June 30, 2020 and 2019, respectively. Total average borrowings were $371.8 million and $223.1 million for the three months ended June 30, 2020 and 2019, respectively.

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


		Average Balance Sheets and Net Interest
		Analysis For the Three Months Ended
		June 30, 2020						June 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)		$	2,401,620	$	27,044	4.53	%	$	2,161,505	$	28,378	5.27	%
Investment securities			222,124		1,247	2.26	%		248,276		1,627	2.63	%
Other earning assets			91,230		381	1.68	%		55,824		388	2.34	%
Total earning assets			2,714,975		28,672	4.25	%		2,465,605		30,393	4.93	%
Allowance for loan losses			(16,364)						(12,488)
Total non-earning assets			267,261						266,606
Total assets		$	2,965,872					$	2,719,723

Liabilities and stockholders' equity
Interest-bearing liabilities:
NOW and other demand accounts		$	404,700	$	745	0.74	%	$	357,850	$	773	0.87	%
Money market accounts			488,648		830	0.68	%		432,927		2,058	1.91	%
Savings accounts			163,574		107	0.26	%		146,073		115	0.32	%
Time deposits			710,483		3,465	1.96	%		848,806		4,709	2.23	%
Total interest-bearing deposits			1,767,405		5,146	1.17	%		1,785,656		7,655	1.72	%
Borrowings			371,836		1,053	1.14	%		223,053		1,774	3.19	%
Total interest-bearing liabilities			2,139,241		6,199	1.17	%		2,008,709		9,429	1.88	%
Noninterest-bearing liabilities:
Demand deposits			418,382						331,481
Other liabilities			24,495						22,123
Total liabilities			2,582,118						2,362,313
Stockholders' equity			383,753						357,410
Total liabilities and stockholders' equity		$	2,965,872					$	2,719,723
Net interest income				$	22,473					$	20,964
Interest rate spread						3.08	%					3.05	%
Net interest margin						3.33	%					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.
---	---

Six-Month Comparison. Net interest income was $43.0 million for the six months ended June 30, 2020 compared to $41.9 million for the six months ended June 30, 2019, which was a result of lower costs of funds including deposits and borrowings in the first half of 2020. Southern National’s net interest margin for the six months ended June 30, 2020 was 3.32% compared to 3.41% for the six months ended June 30, 2019. Net interest margin was impacted heavily by the origination of PPP loans in the first half of 2020. Total income on interest-earning assets was $57.2 million and $60.6 million for the six months ended June 30, 2020 and 2019, respectively. The yield on average interest-earning assets was 4.42% and 4.94% for the six months ended June 30, 2020 and 2019, respectively. The decrease was primarily driven by market conditions. Interest and fees on loans totaled $53.8 million and $56.4 million for the six months ended June 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 $2.5 million to net interest income during the six months ended June 30, 2020 compared to $1.8 million during the six months ended June 30, 2019. The increase in accretion was due to increased acquired loan paydowns and payoffs. Average loans during the six months ended June 30, 2020 were $2.30 billion compared to $2.16 billion during the six months ended June 30, 2019.

Total interest expense was $14.2 million and $18.8 million for the six months ended June 30, 2020 and 2019, respectively. Interest on deposits was $11.6 million and $15.1 million for the six months ended June 30, 2020 and 2019, 37

Table of Contents respectively. Total average interest-bearing deposits for the six months ended June 30, 2020 and 2019 were $1.76 billion and $1.80 billion, respectively. The yield on total average interest-bearing deposits was 1.33% and 1.69% for the six months ended June 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 $2.5 million and $3.7 million for the six months ended June 30, 2020 and 2019, respectively. Total average borrowings were $311.8 million and $218.5 million for the six months ended June 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 Six Months Ended
		June 30, 2020						June 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)		$	2,301,273	$	53,785	4.70	%	$	2,158,395	$	56,352	5.26	%
Investment securities			226,959		2,608	2.31	%		242,878		3,208	2.66	%
Other earning assets			73,015		760	2.09	%		73,001		1,136	2.79	%
Total earning assets			2,601,248		57,153	4.42	%		2,474,275		60,696	4.94	%
Allowance for loan losses			(13,646)						(12,393)
Total non-earning assets			265,444						261,938
Total assets		$	2,853,046					$	2,723,820

Liabilities and stockholders' equity
Interest-bearing liabilities:
NOW and other demand accounts		$	392,115	$	1,531	0.79	%	$	351,925	$	1,415	0.81	%
Money market accounts			479,150		2,404	1.01	%		417,358		3,886	1.88	%
Savings accounts			155,635		223	0.29	%		146,827		230	0.32	%
Time deposits			733,269		7,491	2.05	%		887,258		9,585	2.18	%
Total interest-bearing deposits			1,760,169		11,649	1.33	%		1,803,368		15,116	1.69	%
Borrowings			311,833		2,516	1.62	%		218,516		3,664	3.38	%
Total interest-bearing liabilities			2,072,002		14,165	1.37	%		2,021,884		18,780	1.87	%
Noninterest-bearing liabilities:
Demand deposits			375,895						325,921
Other liabilities			23,138						20,818
Total liabilities			2,471,036						2,368,623
Stockholders' equity			382,010						355,197
Total liabilities and stockholders' equity		$	2,853,046					$	2,723,820
Net interest income				$	42,988					$	41,916
Interest rate spread						3.04	%					3.06	%
Net interest margin						3.32	%					3.41	%
(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 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. 38

Table of Contents 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 six months ended June 30, 2020, the Company made certain adjustments to its qualitative factors in response to the impact of COVID-19 that increased the provision for loan losses by $10.9 million and $14.0 million, respectively. For the three months ended June 30, 2020 and 2019, the provision for loan losses was $10.9 million and zero, respectively. The provision for loan losses for the six months ended June 30, 2020 and 2019 was $14.3 million and $200 thousand, respectively. Net recoveries for the three months ended June 30, 2020 was $6 thousand and net charge offs for the six months ended June 30, 2020 was $983 thousand, compared to net charge offs of $261 thousand and $870 thousand, respectively for the three and six months ended June 30, 2019.

Noninterest Income

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


	For the Three Months Ended
	June 30,
(dollars in thousands)	2020		****	2019		****	Change
Account maintenance and deposit service fees	$	1,489		$	1,788		$	(299)
Income from bank-owned life insurance		385			385			—
Equity gain from mortgage affiliate		4,161			558			3,603
Recoveries related to acquired charged-off loans and investment securities		2,235			324			1,911
Other		123			136			(13)
Total noninterest income	$	8,393		$	3,191		$	5,202

Noninterest income increased 163% to $8.4 million for the three months ended June 30, 2020 compared to $3.2 million for the three months ended June 30, 2019. The $5.2 million increase was primarily driven by a $3.6 million increase in equity gain from mortgage affiliate and a $1.9 million increase in recoveries related to acquired charged-off loans and investment securities. Equity gain from mortgage affiliate increased to $4.2 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 $299 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 six months ended June 30, 2020 and 2019:


	For the Six Months Ended
	June 30,
(dollars in thousands)	2020		****	2019		****	Change
Account maintenance and deposit service fees	$	3,187		$	3,475		$	(288)
Income from bank-owned life insurance		771			908			(137)
Equity gain from mortgage affiliate		4,392			576			3,816
Recoveries related to acquired charged-off loans and investment securities		2,419			915			1,504
Other		444			379			65
Total noninterest income	$	11,213		$	6,253		$	4,960

Noninterest income increased 79% to $11.2 million for the six months ended June 30, 2020 compared to $6.3 million for the six months ended June 30, 2019. The $4.9 million increase was primarily driven by $3.8 million increase in equity gain from mortgage affiliate and $1.5 million increase in recoveries related to acquired charged-off loans and investment securities. Equity gain from mortgage affiliate increased $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 39

Table of Contents 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 $288 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 $137 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 June 30, 2020 and 2019:


		For the Three Months Ended
		June 30,
(dollars in thousands)	****	2020		****	2019		****	Change
Salaries and benefits		$	7,338		$	7,144		$	194
Occupancy expenses			1,405			1,801			(396)
Furniture and equipment expenses			639			738			(99)
Amortization of core deposit intangible			341			362			(21)
Virginia franchise tax expense			659			563			96
Data processing expense			956			571			385
Telephone and communication expense			369			406			(37)
Net (gain) loss on other real estate owned			—			(36)			36
Professional fees			873			1,381			(508)
Other operating expenses			1,490			962			528
Total noninterest expenses		$	14,070		$	13,892		$	178

Noninterest expenses were $14.1 million during the three months ended June 30, 2020, compared to $13.9 million during the three months ended June 30, 2019. The 1.3% increase in noninterest expenses was primarily due to a $385 thousand increase in data processing expense and a $194 thousand increase in employee compensation and benefits expense, partially offset by a $495 thousand decrease in building and leasehold depreciation.

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


		For the Six Months Ended
		June 30,
(dollars in thousands)	****	2020		****	2019		****	Change
Salaries and benefits		$	19,647		$	12,956		$	6,691
Occupancy expenses			3,344			3,604			(260)
Furniture and equipment expenses			1,258			1,448			(190)
Amortization of core deposit intangible			682			725			(43)
Virginia franchise tax expense			1,229			1,126			103
Data processing expense			1,663			1,083			580
Telephone and communication expense			737			781			(44)
Net (gain) loss on other real estate owned			71			(38)			109
Professional fees			2,066			1,902			164
Other operating expenses			3,225			6,595			(3,370)
Total noninterest expenses		$	33,922		$	30,182		$	3,740

Noninterest expenses were $33.9 million during the six months ended June 30, 2020, compared to $30.2 million during the six months ended June 30, 2019. The 12.4% increase in noninterest expenses was primarily due to an increase in employee compensation and benefits expense and higher data processing expense, partially offset by lower other operating expenses and lower legal and professional services expense. Employee compensation and benefits expense totaled $19.6 million and $13.0 million for the six months ended June 30, 2020 and 2019, respectively. The increase was associated with 40

Table of Contents a pre-tax management restructuring expense of $5.6 million in the first half of 2020. The increase in noninterest expense was also attributable to a $580 thousand increase in data processing expense in the first half of 2020. 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 $3.07 billion as of June 30, 2020 and $2.72 billion as of December 31, 2019. Total loans increased 14.89%, from $2.19 billion at December 31, 2019 to $2.51 billion at June 30, 2020, with loan growth in the second quarter primarily due to PPP loan originations. Excluding PPP loans, loans outstanding decreased $10.2 million, or 0.46%, since December 31, 2019. Total deposits were $2.15 billion at June 30, 2020 compared to $2.12 billion at December 31, 2019 and total equity was $381.7 million and $377.2 million at June 30, 2020 and December 31, 2019, respectively.

Loan Portfolio

Total loans were $2.51 billion and $2.19 billion at June 30, 2020 and December 31, 2019, respectively. Loan growth in the second quarter of 2020 was primarily due to PPP loan originations, which totaled $335.6 million. Excluding PPP loans, loans outstanding decreased $10.2 million since December 31, 2019.

As of June 30, 2020, the Company had hotel loans of $288.4 million, or 11.5% 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 93% of the portfolio being to limited service hotels, in non-leisure areas with historically lower operating costs. Approximately 76% percent of the hotel loans had been granted a COVID-19 deferral as of June 30, 2020. Hotel demand has been significantly reduced as a result of COVID-19. Expanded monitoring and analysis of loans in the hotel industry has been implemented to address the decline in hotel occupancy and related revenue as needed.

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


	June 30, 2020		****	December 31, 2019
Loans secured by real estate:
Commercial real estate - owner occupied	$	412,916		$	414,479
Commercial real estate - non-owner occupied		591,229			559,195
Secured by farmland		16,845			17,622
Construction and land loans		122,086			150,750
Residential 1-4 family		612,247			604,777
Multi-family residential		100,685			82,055
Home equity lines of credit		101,218			109,006
Total real estate loans		1,957,226			1,937,884

Commercial loans		204,160			221,447
Paycheck Protection Program		335,612			—
Consumer loans		24,733			26,304
Subtotal		2,521,731			2,185,635
Plus deferred costs on loans		(10,227)			412
Total loans	$	2,511,504		$	2,186,047

As of June 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.

Table of Contents Asset Quality

Asset quality remained solid during the second quarter of 2020. The outbreak of COVID-19 and resulting economic instability will likely have an impact on our asset quality in future periods, but it is unknown to what extent at this point. We will generally place a loan on nonaccrual status when it becomes 90 days past due. Loans will also be placed on nonaccrual status in cases where we are uncertain whether the borrower can satisfy the contractual terms of the loan agreement. Cash payments received while a loan is categorized as nonaccrual will be recorded as a reduction of principal as long as doubt exists as to future collections. We defer COVID loans to the next due date and track delinquency from that new date.

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 June 30, 2020 was $6.0 million compared to $6.2 million at December 31, 2019. The decrease was driven by 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 $11.4 million (excluding $3.5 million of loans fully covered by SBA guarantees) at June 30, 2020 compared to $4.8 million (non-covered and excluding $4.1 million of loans fully covered by SBA guarantees) at December 31, 2019, an increase of 137.5%. 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 0.57% at June 30, 2020, an increase of 16 basis points.

Southern National’s allowance for loan losses as a percentage of total loans at June 30, 2020 was 0.94%, 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. 42

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


	****	June 30,			December 31,
		2020		****	2019 (1)		****
Nonaccrual loans		$	14,930		$	8,900
Loans past due 90 days and accruing interest			—			—
Total nonperforming loans			14,930			8,900
Other real estate owned			6,006			6,224
Total nonperforming assets		$	20,936		$	15,124

Troubled debt restructurings		$	1,657		$	697
SBA guaranteed amounts included in nonaccrual loans		$	3,513		$	4,129

Allowance for loan losses to nonperforming loans			158.25	%		115.30	%
Allowance for loan losses to total loans			0.94	%		0.47	%
Nonperforming assets excluding SBA guaranteed loans to total assets			0.47	%		0.41	%
(1)	December 31, 2019 included non-covered loans and non-covered assets.
---	---

Not included in the table above are $708.8 million of loans that were subject to COVID deferrals at June 30, 2020.

Investment Securities

Investment securities, available for sale and held to maturity, totaled $214.9 million at June 30, 2020 down from $237.3 million at December 31, 2019.

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

●	residential government-sponsored collateralized mortgage obligations in the amount of $34.8 million;
●	agency residential mortgage-backed securities in the amount $80.3 million;
---	---
●	corporate bonds in the amount of $7.0 million;
---	---
●	commercial mortgage-backed securities in the amount of $28.5 million;
---	---
●	SBA loan pool securities in the amount of $12.4 million;
---	---
●	callable agency securities in the amount of $19.6 million;
---	---
●	trust preferred securities in the amount of $4.0 million; and
---	---
●	municipal bonds in the amount of $28.3 million (fair value of $28.5 million) with a taxable equivalent yield of 3.0% and ratings as of June 30, 2020 as follows:
---	---


Moody's		Amount			Standard & Poor's		Amount
Rating	****	(in thousands)		****	Rating	****	(in thousands)
Aaa		$	6,089		AAA		$	5,637
Aa1			6,624		AA+			6,718
Aa2			3,967		AA			6,872
Aa3			699		AA-			1,835
A1			2,340		A+			1,003
A2			1,003		A			836
Baa1			—		BBB+			—
NA			7,805		NA			5,626
Total		$	28,527		Total		$	28,527

Table of Contents investment securities were purchased. No held to maturity investment securities were purchased during the three months ended June 30, 2020. No investment securities were sold during the three and six months ended June 30, 2020 and 2019.

At June 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		$	1,910		$	1,785		$	1,765		18	%	$	219
MMCF III B		Senior Sub		A3		A-		Ba1		WD			31			(7)			(9)		48	%		4
												$	1,941		$	1,778		$	1,756				$	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		$	630		32	%	$	400
ALESCO V C1		Mezzanine		A2		A		Caa1		C			2,150			1,490			1,655		15	%		660
												$	3,650		$	2,530		$	2,285				$	1,060

Total												$	5,591		$	4,308		$	4,041
(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 six months ended June 30, 2020 and 2019, respectively.

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. 44

Table of Contents During the six months ended June 30, 2020, we funded our financial obligations with deposits and borrowings from the FHLB of Atlanta. At June 30, 2020, we had $342.4 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 $487.8 million as of June 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 June 30, 2020, the Company had $333.6 million borrowings outstanding through this facility. The facility is available through September 30, 2020.

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		June 30,		December 31,
	****	Purposes	****	as Well Capitalized (1)	****	2020	****	2019	****
Sonabank
Common equity tier 1 capital ratio		4.50	%	6.50	%	14.81	%	14.81	%
Tier 1 risk-based capital ratio		6.00	%	8.00	%	14.81	%	14.81	%
Total risk-based capital ratio		8.00	%	10.00	%	15.91	%	15.29	%
Leverage ratio		4.00	%	5.00	%	11.62	%	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.

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 June 30, 2020 and as of December 31, 2019. All changes are within 45

Table of Contents our Asset/Liability Risk Management Policy guidelines except for the change resulting from the 100 basis point decrease in interest rates at June 30, 2020 and December 31, 2019.


		Sensitivity of Economic Value of Equity										****
		As of June 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		$	302,707				(13.19)	%	9.85	%	79.31	%
Up 300			316,726				(9.17)	%	10.31	%	82.98	%
Up 200			329,908				(5.39)	%	10.74	%	86.44	%
Up 100			344,699				(1.15)	%	11.22	%	90.31	%
Base			348,719				—	%	11.35	%	91.37	%
Down 100			315,306				(9.58)	%	10.26	%	82.61	%

All values are in US Dollars.


		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				(12.22)	%	11.90	%	85.85	%
Up 300			336,822				(8.71)	%	12.37	%	89.29	%
Up 200			349,192				(5.36)	%	12.83	%	92.56	%
Up 100			363,935				(1.37)	%	13.37	%	96.47	%
Base			368,973				0.00	%	13.55	%	97.81	%
Down 100			353,371				(4.23)	%	12.98	%	93.67	%

All values are in US Dollars.

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 June 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 June 30, 2020 and December 31, 2019.


		Sensitivity of Net Interest Income								****
		As of June 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		$	81,770				3.22	%	(0.48)	%
Up 300			84,939				3.35	%	(0.36)	%
Up 200			87,937				3.46	%	(0.24)	%
Up 100			91,251				3.60	%	(0.11)	%
Base			93,971				3.70	%	—	%
Down 100			94,251				3.71	%	0.01	%

All values are in US Dollars.

Table of Contents


		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				3.00	%	(0.33)	%
Up 300			76,355				3.09	%	(0.24)	%
Up 200			78,458				3.18	%	(0.15)	%
Up 100			80,649				3.27	%	(0.07)	%
Base			82,254				3.33	%	—	%
Down 100			81,273				3.29	%	(0.04)	%

All values are in US Dollars.

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 June 30, 2020. 47

Table of Contents 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 Report on Form 10-Q for the quarter ended March 31, 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. 48

Table of Contents A significant amount of the loan growth we experienced during the second 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.

Table of Contents 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 3.4 to Southern National’s Annual Report on Form 10-K for the year ended December 31, 2006 filed on March 21, 2007)

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

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

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

31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Table of Contents

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 June 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

Table of Contents Signatures

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


	****	Southern National Bancorp of Virginia, Inc.
		(Registrant)


August 10, 2020		/s/ Dennis J. Zember
(Date)		Dennis J. Zember,
		Chief Executive Officer
		(President and Executive Officer)


August 10, 2020		/s/ Jeffrey L. Karafa
(Date)		Jeffrey L. Karafa,
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

Exhibit 31.1

CERTIFICATIONS

I, Dennis J. Zember, certify that:

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

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

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

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

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

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

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

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

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

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

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


Date: August 10, 2020		/s/ Dennis J. Zember
		Dennis J. Zember,
		President and Chief Executive Officer

Exhibit 31.2

CERTIFICATIONS

I, Jeffrey L. Karafa, certify that:

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

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

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

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

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

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

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


Date: August 10, 2020		/s/ Jeffrey L. Karafa
		Jeffrey L. Karafa,
		Chief Financial Officer

Exhibit 32.1

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

In connection with the Quarterly Report of Southern National Bancorp of Virginia, Inc. (“Southern National”) on Form 10-Q for the period ending June 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned Chief Executive Officer and Chief Financial Officer of Southern National hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that based on their knowledge and belief: 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Southern National as of and for the periods covered in the Report.


/s/ Dennis J. Zember
Dennis J. Zember,
President and Chief Executive Officer


/s/ Jeffrey L. Karafa
Jeffrey L. Karafa,
Chief Financial Officer


August 10, 2020