SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM ~~10-Q~~10‑Q

~~September~~June 30, ~~2017~~2019

INDEX		PAGE

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements
Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018		2
Consolidated Statements of Income and Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018		3
Consolidated Statement of Changes in Stockholders’ Equity for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~2019 and 2018		4
Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018		5 6
Notes to Unaudited Consolidated Financial Statements		~~6-33~~ 7

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		~~34-47~~ 31

Item 3 – Quantitative and Qualitative Disclosures about Market Risk		~~47-49~~ 42

Item 4 – Controls and Procedures		49 44

PART II - OTHER INFORMATION

Item 1 – Legal Proceedings		50 45

Item 1A – Risk Factors		50 45

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		51 45

Item 3 – Defaults Upon Senior Securities		51 45

Item 4 – Mine Safety Disclosures		51 45

Item 5 – Other Information		51 45

Item 6 - Exhibits		51 46

Signatures		52 49

~~Certifications~~

Table of Contents

~~PART I - FINANCIAL INFORMATION~~

~~ITEM 1 - FINANCIAL STATEMENTS~~

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share amounts)


	June 30,		December 31,
	2019		2018
	(unaudited)		*
ASSETS
Cash and cash equivalents:
Cash and due from financial institutions	$	6,898	$	6,939
Interest-bearing deposits in other financial institutions		26,190		20,877
Federal funds sold		—		795
Total cash and cash equivalents		33,088		28,611

Securities available for sale, at fair value		163,860		143,377

Securities held to maturity, at amortized cost (fair value of $86,681 and $89,109, respectively)		86,815		92,462

Total loans		2,172,845		2,178,824
Less allowance for loan losses		(11,613)		(12,283)
Net loans		2,161,232		2,166,541
Stock in Federal Reserve Bank and Federal Home Loan Bank		17,364		19,522
Equity investment in mortgage affiliate		4,405		3,829
Preferred investment in mortgage affiliate		3,305		3,305
Bank premises and equipment, net		30,767		32,352
Operating lease right-of-use assets		7,924		—
Goodwill		101,954		101,954
Core deposit intangibles, net		7,884		8,609
Bank-owned life insurance		63,060		62,495
Other real estate owned		5,041		5,077
Deferred tax assets, net		14,475		14,104
Other assets		23,129		19,057
Total assets	$	2,724,303	$	2,701,295

LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits	$	335,024	$	320,043
Interest-bearing deposits:
NOW accounts		361,787		345,597
Money market accounts		444,299		355,469
Savings accounts		143,328		151,050
Time deposits		865,988		925,441
Total interest-bearing deposits		1,815,402		1,777,557
Total deposits		2,150,426		2,097,600

Securities sold under agreements to repurchase - short term		14,319		18,721
Federal Home Loan Bank (FHLB) advances - short term		110,640		163,340
Junior subordinated debt - long term		9,608		9,584
Senior subordinated notes - long term		47,070		47,089
Operating lease liabilities		8,385		—
Other liabilities		21,063		16,671
Total liabilities		2,361,511		2,353,005
Commitments and contingencies (See Note 6)

Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 5,000,000 shares; no shares issued and outstanding		—		—
Common stock, $0.01 par value. Authorized 45,000,000 shares; 24,117,326 and 24,052,253 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively		241		240
Additional paid in capital		306,049		305,654
Retained earnings		55,983		44,985
Accumulated other comprehensive income (loss)		519		(2,589)
Total stockholders' equity		362,792		348,290
Total liabilities and stockholders' equity	$	2,724,303	$	2,701,295

* Derived from audited consolidated financial statements

September 30, December 31,
2017 2016
(unaudited) (audited)
ASSETS
Cash and cash equivalents:
Cash and due from financial institutions $ 7,500 $ 4,656
Interest-bearing deposits in other financial institutions 15,820 42,736
Total cash and cash equivalents 23,320 47,392

Federal funds sold 623 -

Securities available for sale, at fair value 164,237 3,918

Securities held to maturity, at amortized cost
(fair value of $99,122 and $83,344, respectively) 100,333 85,300

Covered loans 23,979 28,180
Non-covered loans 2,011,202 902,235
Total loans 2,035,181 930,415
Less allowance for loan losses (9,254 ) (8,610 )
Net loans 2,025,927 921,805

Stock in Federal Reserve Bank and Federal Home Loan Bank 24,076 7,929
Equity investment in mortgage affiliate 4,617 4,629
Preferred investment in mortgage affiliate 3,305 2,555
Bank premises and equipment, net 36,289 8,227
Goodwill 96,990 10,514
Core deposit intangibles, net 10,416 874
FDIC indemnification asset 1,525 2,111
Bank-owned life insurance 50,491 23,826
Other real estate owned 8,053 8,617
Deferred tax assets, net 24,921 6,780
Other assets 21,449 7,966

Total assets $ 2,596,572 $ 1,142,443

LIABILITIES AND STOCKHOLDERS' EQUITY

Noninterest-bearing demand deposits $ 323,722 $ 88,783
Interest-bearing deposits:
NOW accounts 326,064 26,338
Cash management accounts - 9,658
Money market accounts 364,420 129,835
Savings accounts 166,030 52,755
Time deposits 723,373 605,613
Total interest-bearing deposits 1,579,887 824,199
Total deposits 1,903,609 912,982

Securities sold under agreements to repurchase 16,416 -
Federal Home Loan Bank (FHLB) advances - short term 272,115 95,000
Junior subordinated debt 9,522 -
Senior subordinated notes 47,138 -
Other liabilities 21,762 8,117
Total liabilities 2,270,562 1,016,099

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; issued and outstanding, 23,916,453 shares at September 30, 2017 and 12,263,643 at December 31, 2016 239 123
Additional paid in capital 304,682 104,884
Retained earnings 21,827 22,126
Accumulated other comprehensive loss (738 ) (789 )
Total stockholders' equity 326,010 126,344

Total liabilities and stockholders' equity $ 2,596,572 $ 1,142,443

See accompanying notes to unaudited consolidated financial ~~statements.~~statements.

2

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 Nine Months Ended
	September 30,						September 30,						For the Three Months Ended				For the Six Months Ended
	2017			2016			2017			2016			June 30,				June 30,
													2019		2018		2019		2018
Interest and dividend income:
Interest and fees on loans	$	26,726		$	11,792		$	51,819		$	33,790		$	28,378	$	27,697	$	56,352	$	53,602
Interest and dividends on taxable securities		1,464			581			2,620			2,059			1,475		1,400		2,900		2,882
Interest and dividends on tax exempt securities		159			84			333			252			152		160		308		319
Interest and dividends on other earning assets		458			162			829			482			388		412		1,134		879
Interest on federal funds sold		4			-			4			-			—		14		2		21
Total interest and dividend income		28,811			12,619			55,605			36,583			30,393		29,683		60,696		57,703
Interest expense:
Interest on deposits		3,391			2,128			7,809			5,918			7,654		3,810		15,116		7,080
Interest on repurchase agreements		12			-			13			18			22		24		45		46
Interest on junior subordinated debt		120			-			129			-			150		147		300		275
Interest on senior subordinated notes		712			-			1,483			-			712		712		1,424		1,423
Interest on other borrowings		726			118			1,225			388			891		1,816		1,895		3,205
Total interest expense		4,961			2,246			10,659			6,324			9,429		6,509		18,780		12,029

Net interest income		23,850			10,373			44,946			30,259			20,964		23,174		41,916		45,674

Provision for loan losses		5,250			2,050			6,850			4,062			—		1,050		200		2,650
Net interest income after provision for loan losses		18,600			8,323			38,096			26,197			20,964		22,124		41,716		43,024

Noninterest income:
Account maintenance and deposit service fees		1,518			225			2,098			675			1,788		1,375		3,475		2,783
Income from bank-owned life insurance		305			175			631			524			385		563		908		870
Equity (loss) income from mortgage affiliate		(83	)		749			(450	)		1,381
(Loss) gain on sales of investment securities		(2	)		-			255			-
Equity gain (loss) from mortgage affiliate														558		191		576		(126)
Gain on sales of investment securities														—		—		—		—
Recoveries related to acquired charged-off loans and investment securities														324		250		915		1,733
Other		561			26			580			88			136		174		379		372
Total noninterest income		2,299			1,175			3,114			2,668			3,191		2,553		6,253		5,632

Noninterest expenses:
Salaries and benefits		7,746			2,699			13,750			8,753			7,144		7,007		12,956		13,779
Occupancy expenses		1,703			783			3,338			2,377			1,801		1,656		3,604		3,306
Furniture and equipment expenses		907			283			1,401			720			738		712		1,448		1,509
Amortization of core deposit intangible		360			44			483			168			362		361		725		723
Virginia franchise tax expense		364			96			605			290			563		492		1,126		856
FDIC assessment		186			165			391			478
Data processing expense		440			184			858			533			571		464		1,083		930
Telephone and communication expense		567			201			912			586			406		501		781		1,095
Amortization of FDIC indemnification asset		173			187			540			606
Net (gain) loss on other real estate owned		(106	)		(9	)		213			74			(36)		(40)		(38)		160
Merger expenses		168			-			9,094			-
Professional fees														1,381		839		2,985		1,788
Other operating expenses		1,928			725			3,745			2,403			962		1,625		5,512		3,090
Total noninterest expenses		14,436			5,358			35,330			16,988			13,892		13,617		30,182		27,236
Income before income taxes		6,463			4,140			5,880			11,877			10,263		11,060		17,787		21,420
Income tax expense		2,089			1,375			2,294			3,757			944		2,193		2,448		4,294
Net income	$	4,374		$	2,765		$	3,586		$	8,120		$	9,319	$	8,867	$	15,339	$	17,126

Other comprehensive income (loss):
Unrealized gain (loss) on available for sale securities	$	242		$	188		$	323		$	(296	)	$	2,844	$	(837)	$	3,928	$	(2,713)
Realized amounts on securities sold, net		2			-			(255	)		-
Accretion of amounts previously recorded upon transfer to held-to-maturity from available-for-sale		3			3			9			10
Accretion of amounts previously recorded upon transfer to held to maturity from available for sale														3		2		6		6
Net unrealized gain (loss)		247			191			77			(286	)		2,847		(835)		3,934		(2,707)
Tax effect		(84	)		(64	)		(26	)		98			597		(175)		826		(569)
Other comprehensive income (loss)		163			127			51			(188	)		2,250		(660)		3,108		(2,138)
Comprehensive income	$	4,537		$	2,892		$	3,637		$	7,932		$	11,569	$	8,207		18,447		14,988
Earnings per share, basic	$	0.18		$	0.23		$	0.22		$	0.66		$	0.39	$	0.37	$	0.64	$	0.71
Earnings per share, diluted	$	0.18		$	0.22		$	0.21		$	0.65		$	0.38	$	0.37	$	0.63	$	0.71

See accompanying notes to unauditedconsolidated financial statements.

3

Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED STATEMENT OF CHANGES IN ~~STOCKHOLDERS'~~STOCKHOLDERS’ EQUITY

FOR THE ~~NINE~~THREE AND SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2019 AND 2018

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

Accumulated
Additional Other
Common Paid in Retained Comphrensive
Stock Capital Earnings Loss Total
Balance - December 31, 2016 $ 123 $ 104,884 $ 22,126 $ (789 ) $ 126,344
Comprehensive income:
Net income - - 3,586 - 3,586
Change in unrealized loss on securities available for sale (net of tax expense, $23) - - - 45 45
Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $3 and accretion, $9 and amounts recorded into other comprehensive income at transfer) - - - 6 6
Dividends on common stock ($0.24 per share) - - (3,885 ) - (3,885 )
Issuance of common stock for warrants exercised (49,500 shares) - 449 - - 449
Issuance of common stock under Stock Incentive Plan (45,550 shares) - 371 - - 371
Issuance of common stock in connection with Eastern Virginia Bankshares, Inc. merger (11,557,760 shares) 116 198,793 - - 198,909
Stock-based compensation expense - 185 - - 185
Balance - September 30, 2017 $ 239 $ 304,682 $ 21,827 $ (738 ) $ 326,010

~~See accompanying notes to consolidated financial statements.~~

4


	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, and accretion of $3)		—		—		—		2,250		2,250
Dividends on common stock ($0.18 per share)		—		—		(2,171)		—		(2,171)
Issuance of common stock under Stock Incentive Plan (2,200 shares, net)		—		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

	For the Three Months Ended June 30, 2018
							Accumulated
			Additional				Other
	Common		Paid in		Retained		Comprehensive
	Stock		Capital		Earnings		Loss		Total
Balance - March 31, 2018	$	240	$	305,360	$	25,324	$	(2,859)	$	328,065
Net income		—		—		8,867		—		8,867
Changes in other comprehensive income on investment securities (net of tax, $826, and accretion of $6)		—		—		—		(660)		(660)
Dividends on common stock ($0.18 per share)		—		—		(1,922)		—		(1,922)
Issuance of common stock under Stock Incentive Plan (19,450 shares, net)		—		6		—		—		6
Stock-based compensation expense		—		94		—		—		94
Balance - June 30, 2018	$	240	$	305,460	$	32,269	$	(3,519)	$	334,450

4

Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED ~~STATEMENTS~~STATEMENT OF ~~CASH FLOWS~~

CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE ~~NINE~~THREE AND SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2019 AND ~~2016~~2018

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

2017 2016

Operating activities:
Net income $ 3,586 $ 8,120
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation 1,282 613
Amortization of core deposit intangible 483 168
Other amortization, net 633 (61 )
Accretion of loan discount (2,321 ) (1,465 )
Amortization of FDIC indemnification asset 540 606
Provision for loan losses 6,850 4,062
Earnings on bank-owned life insurance (631 ) (524 )
Equity loss (income) on mortgage affiliate 450 (1,381 )
Stock-based compensation expense 185 198
Net gain on sales of investment securities (255 ) -
Net loss on other real estate owned 213 74
Net decrease (increase) in other assets 2,237 (1,694 )
Net (decrease) increase in other liabilities (851 ) 3,324
Net cash and cash equivalents provided by operating activities 12,401 12,040
Investing activities:
Purchase of federal funds sold (623 ) -
Proceeds from sales of investment securities 4,767 -
Purchases of held to maturity investment securities (9,950 ) (46,055 )
Purchases of available for sale investment securities (1,747 ) -
Proceeds from paydowns, maturities and calls of available for sale investment securities 3,950 -
Proceeds from paydowns, maturities and calls of held to maturity investment securities 9,752 55,976
Loan originations and payments, net (51,059 ) (90,875 )
Distribution from mortgage affiliate 48 628
Net increase in stock in Federal Reserve Bank and Federal Home Loan Bank (9,413 ) (575 )
Payments received on FDIC indemnification asset - 10
Proceeds from sales of other real estate owned 1,006 1,166
Purchases of bank premises and equipment (750 ) (120 )
Acquisition of Eastern Virginia Bankshares, Inc. (10 ) -
Cash acquired in acquisition of Eastern Virginia Bankshares, Inc. 24,025 -
Net cash and cash equivalents used in investing activities (30,004 ) (79,845 )
Financing activities:
Net (decrease) increase in deposits (149,119 ) 79,596
Cash dividends paid - common stock (3,885 ) (2,940 )
Issuance of common stock for warrants exercised 449 101
Issuance of common stock under Stock Incentive Plan 371 118
Issuance of subordinated notes, net of cost 26,075 -
Net increase in short-term borrowings 119,640 16,000
Net decrease in long-term borrowings - (5,000 )
Net cash and cash equivalents (used in) provided by financing activities (6,469 ) 87,875
(Decrease) increase in cash and cash equivalents (24,072 ) 20,070
Cash and cash equivalents at beginning of period 47,392 30,336
Cash and cash equivalents at end of period $ 23,320 $ 50,406

Supplemental disclosure of cash flow information
Cash payments for:
Interest $ 9,231 $ 6,190
Income taxes 2,390 3,483
Supplemental schedule of noncash investing and financing activities
Transfer from long-term FHLB advances to short-term FHLB advances $ - $ 5,000
Transfer from covered loans to other real estate owned - 144
Transfer from securities sold under agreement to repurchase to deposits - 10,381
Assets acquired, excluding cash and cash equivalents of $24,025 1,346,573 -
Liabilities assumed 1,258,164 -


	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, and accretion of $6)		—		—		—		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, net)		1		128		—		—		129
Stock-based compensation expense		—		267		—		—		267
Balance - June 30, 2019	$	241	$	306,049	$	55,983	$	519	$	362,792

	For the Six Months Ended June 30, 2018
							Accumulated
			Additional				Other
	Common		Paid in		Retained		Comprehensive
	Stock		Capital		Earnings		Loss		Total
Balance - December 31, 2017	$	239	$	304,932	$	18,753	$	(1,152)	$	322,772
Net income		—		—		17,126		—		17,126
Changes in other comprehensive loss on investment securities (net of tax, $394, and accretion of $3)		—		—		—		(2,138)		(2,138)
Dividends on common stock ($0.08 per share)		—		—		(3,839)		—		(3,839)
Issuance of common stock under Stock Incentive Plan (51,200 shares, net)		1		359		—		—		360
Reclassification from accumulated other comprehensive loss to retained earnings due to adoption of ASU 2018-02		—		—		229		(229)		—
Stock-based compensation expense		—		169		—		—		169
Balance - June 30, 2018	$	240	$	305,460	$	32,269	$	(3,519)	$	334,450

See accompanying notes to unaudited consolidated financial ~~statements.~~statements.

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018

(dollars in thousands) (Unaudited)


	2019		2018
Operating activities:
Net income	$	15,339	$	17,126
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation and amortization		3,411		3,732
Amortization of operating lease right-of-use assets		1,275		—
Accretion of loan discount		(1,788)		(2,453)
Amortization of FDIC indemnification asset		354		350
Provision for loan losses		200		2,650
Earnings on bank-owned life insurance		(908)		(706)
Equity (gain) loss on mortgage affiliate		(576)		126
Stock-based compensation expense		267		169
Gain on bank-owned life insurance death benefit		—		(164)
(Gain) loss on other real estate owned		(38)		160
Provision for deferred income taxes		(1,197)		—
Net (increase) decrease in other assets		(4,210)		1,230
Net increase (decrease) in other liabilities		3,362		(2,169)
Net cash and cash equivalents provided by operating activities		15,491		20,051
Investing activities:
Purchases of available for sale investment securities		(25,110)		—
Proceeds from paydowns, maturities and calls of available for sale investment securities		7,711		7,363
Proceeds from paydowns, maturities and calls of held to maturity investment securities		5,463		2,498
Sales of FRB and FHLB stock		2,158		756
Net (increase) decrease in loans		6,896		(91,728)
Purchase of bank-owned life insurance		—		(12,000)
Proceeds from bank-owned life insurance death benefit		343		477
Proceeds from sales of other real estate owned, net of improvements		74		1,857
Proceeds from sales of bank premise and equipment and assets held for sale		—		2,136
Purchases of bank premises and equipment		(73)		(1,805)
Net cash and cash equivalents used in investing activities		(2,538)		(90,446)
Financing activities:
Net increase in deposits		52,837		115,153
Cash dividends paid on common stock		(4,341)		(3,839)
Issuance of common stock under Stock Incentive Plan		129		360
Net decrease in short-term borrowings		(57,101)		(14,579)
Net cash and cash equivalents provided by (used in) financing activities		(8,476)		97,095
Increase in cash and cash equivalents		4,477		26,700
Cash and cash equivalents at beginning of period		28,611		25,463
Cash and cash equivalents at end of period	$	33,088	$	52,163
Supplemental disclosure of cash flow information
Cash payments for:
Interest	$	18,643	$	11,663
Income taxes		2,937		4,516
Non-cash investing and financing activities:
Initial recognition of operating lease right-of-use assets		8,615		—
Initial recognition of operating lease liabilities		9,099		—

See accompanying notes to unaudited consolidated financial statements.

6

Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Unaudited Consolidated Financial Statements ~~(Unaudited)~~

~~September~~June 30, ~~2017~~2019

1.

~~ACCOUNTING POLICIES~~

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. As of the close of business on June 23, 2017, SNBV completed its ~~previously announced~~ merger ofwith Eastern Virginia Bankshares, Inc. (“EVBS”) ~~with~~ and ~~into SNBV and the completion of~~ the merger of EVBS’s wholly-owned subsidiary, EVB, with and into SNBV’s wholly-owned subsidiary, Sonabank (see Note 2 - Business Combinations). This combination has brought together two banking companies with complementary business lines, creating one of the premier banking institutions headquartered in the Commonwealth of Virginia. EVBS was the holding company for EVB, a Virginia state-chartered bank which traced its beginnings to 1910.Sonabank. Sonabank provides a range of financial services to individuals and small and medium sized businesses. At ~~September~~June 30, ~~2017,~~2019, Sonabank had ~~thirty-seven~~thirty-eight full-service retail branches in Virginia, located in the counties of Chesterfield (2), Essex (2), Fairfax (Reston, McLean and Fairfax), Gloucester (2), Hanover (3), King William, Lancaster, Middlesex (3), New Kent, Northumberland (3), Southampton, Surry, Sussex, and in Charlottesville, Clifton Forge, Colonial Heights, Front Royal, Hampton, Haymarket, Leesburg, Middleburg, New Market, Newport News, Richmond, South Riding, Warrenton, and Williamsburg, and seven full-service retail branches in Maryland, in Rockville, Shady Grove, Bethesda, Upper Marlboro, Brandywine, Owings and Huntingtown.

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~~10‑Q and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in Southern National’s Form ~~10-K~~10‑K for the year ended December 31, ~~2016.~~2018.

Revenue from Contracts with Customers

Southern National records revenue from contracts with customers in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606). Under Topic 606, we must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) we satisfy a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

Our primary sources of revenue are derived from financial instruments, namely loans, investment securities, and other financial instruments that are not within the scope of Topic 606. We have evaluated the nature of the Company’s contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income and Comprehensive Income was not necessary. Southern National generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little

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judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

Operating Leases

The Company leases certain properties and equipment under operating leases. For leases in effect upon adoption of FASB Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) at January 1, 2019 and for any leases commencing thereafter, the Company recognizes a liability to make lease payments, the operating lease liability, and an asset representing the right to use the underlying asset during the lease term, the right-of-use asset. The operating lease liability is measured at the present value of the remaining lease payments, discounted at the Company’s incremental borrowing rate at inception. The right-of-use asset is measured at the amount of the operating lease liability adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term, any unamortized initial direct costs, and any impairment of the right-of-use-asset. Lease expense consists of a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis, variable lease payments not included in the operating lease liability, and any impairment of the right-of-use asset.

Certain of the Company’s leases contain options to renew the lease; however, these renewal options are not included in the calculation of the operating lease liabilities as they are not reasonably certain to be exercised. The Company’s leases do not contain residual value guarantees or material variable lease payments. The Company does not have any material restrictions or covenants imposed by leases that would impact the Company’s ability to pay dividends or cause the Company to incur additional financial obligations.

The Company has made an accounting policy election to not apply the recognition requirements in Topic 842 to short-term leases. The Company has also elected to use the practical expedient to make an accounting policy election for property leases to use the discount rates in effect on January 2, 2019 for the remaining life of the leases.

Use of Estimates

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

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assets.

Recent Accounting Pronouncements

~~In January 2016, the Financial~~Adoption of New Accounting ~~Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-1,~~~~Financial Instruments Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities~~. The amendments in ASU 2016-1: (a) require equity investments (except for those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplify the impairment assessment of equity securities without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminate the requirement for public business entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (d) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (e) require an entity to present separately in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (f) require separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the notes to the financial statements; and (g) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2016-01 is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.

Standards:

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which updates narrow aspects of the guidance issued in ASU 2016-02. The amendments in this ASU ~~are~~were effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early ~~application~~adoption of this ASU iswas permitted for all entities. ~~Management currently anticipates recognizing a right-of-use asset and a lease liability associated with its long-term operating leases and is~~The Company adopted ASU 2016-02 in the ~~process~~first quarter of ~~inventorying~~2019 and ~~categorizing~~inventoried and categorized its lease agreements. Upon adoption, the Company recognized right-of-use assets and associated operating lease liabilities of $8.6 million and $9.1 million, respectively. Right-of-use assets and operating lease liabilities are reflected on our consolidated balance sheets. The company currently does not have any finance leases. See Note 5 – Leases for additional disclosures related to leases.

In March ~~2016,~~2017, the FASB issued ASU ~~2016-07~~2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), ~~Investments – Equity Method and Joint Ventures (Topic 323), Simplifying~~Premium Amortization on Purchased Callable Debt Securities, which shortens the ~~Transition~~amortization period for certain

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callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the ~~Equity Method of Accounting~~.earliest call date. The amendments ~~eliminate~~do not require an accounting change for securities held at a discount; the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investeediscount continues to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments require that an entity that has an available for sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments arebe amortized to maturity. ASU 2017-08 became effective for ~~all~~public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2016.~~2018. The ~~amendments should be applied prospectively upon their effective date to increase the level of ownership interest or degree of influence that result~~company adopted ASU 2017-08 in the ~~adoption~~first quarter of ~~the equity method. The adoption of the amendments~~2019 and it did not have ~~an effect on our consolidated financial statements.~~

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~~In May 2014, the FASB issued ASU No. 2014-09,~~~~Revenue From Contracts With Customers (Topic 606).~~ These amendments affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g. insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The ASU allows for either full retrospective or modified retrospective adoption. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017. Our revenue is balanced between net interest income on financial assets and liabilities, which is explicitly excluded from the scope of the new standard, and noninterest income. The Company is nearing its overall assessment of revenue streams and reviewing contracts potentially affected by the ASU including deposit related fees, gains/losses on the sale of OREO, and interchange fees, to determine the potentialmaterial impact ~~the new guidance is expected to have~~ on the Company’s consolidated financial statements; however, the Company’s revenue recognition pattern for these revenue streams is not expected to change significantly from current practice. The Company is currently planning to adopt ASU No. 2014-09 on January 1,statements.

In July 2018, ~~utilizing the modified retrospective approach.~~

~~In March 2016,~~ the FASB issued ASU ~~2016-09,~~~~Compensation – Stock Compensation (Topic 718):~~2018-09, Codification Improvements. This ASU makes changes to ~~Employee Share-Based Payment~~a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting ~~(“ASU 2016-09”), which is intended to simplify several aspects~~ Standards Codification. The majority of the ~~accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.~~amendments in ASU ~~2016-09 is~~2018-09 were effective for ~~annual periods~~the Company for fiscal years beginning after December 15, ~~2016, and interim periods within those annual periods. Early application is permitted.~~2018. The Company adopted ~~this guidance during~~ASU 2018-09 in the first quarter of ~~2017 with an immaterial effect.~~2019 and it did not have a material impact on the Company’s consolidated financial statements.

New Accounting Standards Not Yet Adopted:

In June 2016,the FASB issued ASU 2016-13,Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~("ASU 2016-13")~~, which sets forth a “current expected credit loss” ("CECL") model requiring the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. For public business entities that are U.S. Securities and Exchange Commission filers, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Southern National ~~is currently assessing the impact of the adoption of this ASU on its consolidated financial statements and is collecting~~has engaged a third-party to collect data that will be needed to produce historical inputs into any models created as a result of adopting this ~~ASU~~.

~~In August 2016,~~ASU. We are currently evaluating the ~~FASB issued new guidance related to~~impact of the~~Statement of Cash Flows~~in ASU 2016-15. The new guidance clarifies the classification within the statement of cash flows for certain transactions, including debt extinguishment costs, zero-coupon debt, contingent consideration related to business combinations, insurance proceeds, equity method distributions and beneficial interests in securitizations. The guidance also clarifies that cash flows with aspects of multiple classes of cash flows or that cannot be separated by source or use should be classified based on the activity that is likely to be the predominant source or use of cash flows for the item. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The adoption of this ~~guidance is not expected to be material to the~~ASU on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,~~("ASU 2017-04")~~, which eliminates the second step of the previous FASB guidance for testing goodwill for impairment and is intended to reduce cost and complexity of goodwill impairment testing. The amendments in this ASU modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. After determining if the carrying amount of a reporting unit exceeds its fair value, the entity should take an impairment charge of the same amount to the goodwill for that reporting unit, not to exceed the total goodwill amount for that reporting unit. ASU 2017-04 is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Southern National is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.

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In ~~January 2017, the~~August 2018, FASB issued ASU ~~2017-01,~~~~Business Combinations~~2018-13, Fair Value measurement (Topic ~~805): Clarifying the Definition of a Business,~~ which is intended to provide guidance in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses in order to provide stakeholders with more detailed reporting and less cost to analyze transactions.820). This ASU ~~provides a screen to determine when a set of assets is not a business. It requires that when substantially all~~adds, eliminates and modifies certain disclosure requirements for fair value ~~of gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set of assets is not a business. If the screen is not met, the~~measurements. The amendments in ~~this update provide a framework to assist entities in evaluating whether both an input and a substantive process~~ASU 2018-13 are ~~present for the set to be a business. ASU 2017-01 is~~ effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. No disclosures are required at transition and early adoption is permitted. We are currently evaluating the impact of adopting the new guidance on our consolidated financial statements.

~~In January 2017, the FASB issued ASU 2017-03,~~~~Accounting Changes and Error Corrections~~ ~~(Topic 250) and~~ ~~Investments – Equity Method and Joint Ventures~~ ~~(Topic 323)~~ ~~– Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings.~~ASU 2017-03 provides amendments that add paragraph 250-10-S99-6 which includes the text of "SEC Staff Announcement: Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of a Registrant When Such Standards Are Adopted in a Future Period” (in accordance with Staff Accounting Bulletin (“SAB”) Topic 11.M). Registrants are required to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. In cases where a registrant cannot reasonably estimate the impact of the adoption, then additional qualitative disclosures should be considered to assist the reader in assessing the significance of the standard's impact on its financial statements. Southern National has enhanced its disclosures regarding the expected impact of recently issued accounting standards adopted in a future period will have on its accounting and disclosures.

~~In March 2017, the FASB issued ASU 2017-08,~~~~Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities,~~which shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2018.~~2019. Early adoption is permitted. The disclosures are effective using the prospective method for certain disclosures and retrospective for majority of the disclosures. Southern National is currently ~~reviewing its portfolio~~in the process of ~~debt securities to determine~~evaluating the impact ~~that this ASU will have~~of adopting the new guidance on its consolidated financial ~~statements.~~

~~In May 2017, the FASB issued ASU 2017-09,~~~~Compensation - Stock Compensation (Topic 718)~~,~~Scope of Modification Accounting~~~~. These amendments provide guidance on determining which changes to the terms~~statements and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. Southern National is currently evaluating the impact of the amendments in the ASU on its consolidated financial statements.

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2.

~~BUSINESS COMBINATIONS~~

On June 23, 2017, SNBV completed its acquisition of EVBS and its subsidiaries, the Trust and EVB. Pursuant to the Agreement and Plan of Merger, dated December 13, 2016, as amended, holders of EVBS common stock received 0.6313 shares of SNBV common stock for each outstanding share of EVBS common stock held immediately prior to the effective time of the Merger and holders of Non-Voting Mandatorily Convertible Non-Cumulative Preferred Stock, Series B of EVBS (“EVBS Series B Preferred Stock”) received 0.6313 shares of SNBV common stock for each share of EVBS Series B Preferred Stock held immediately prior to the effective time of the Merger, which totaled approximately $198.9 million based on SNBV’s closing common stock price on June 23, 2017 of $17.21 per share. EVBS was a bank holding company organized and chartered under the laws of the Commonwealth of Virginia on September 5, 1997, commenced operations on December 29, 1997 and was headquartered in Glen Allen, Virginia. EVBS operated twenty-four retail branches, which served diverse markets that primarily are in the counties of Essex, Gloucester, Hanover, Henrico, King and Queen, King William, Lancaster, Middlesex, New Kent, Northumberland, Southampton, Surry, Sussex and the cities of Colonial Heights, Hampton, Newport News, Richmond and Williamsburg.

~~SNBV accounted for the acquisition using the acquisition method of accounting in accordance with FASB Accounting Standards Codification (“ASC”) 805,~~~~“Business Combinations.”~~ Under the acquisition method of accounting, the assets and liabilities of EVBS were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate the estimated fair values. The fair values are preliminary and subject to refinement for up to one year after the acquisition date as additional information relative to the acquisition date fair values becomes available. SNBV recognized goodwill of $86.5 million in connection with the acquisition, none of which is deductible for income tax purposes.

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The following table details the total consideration paid by SNBV on June 23, 2017 in connection with the acquisition of EVBS, the fair values of the assets acquired and liabilities assumed, and the resulting goodwill.

As Recorded Fair Value As Recorded
(dollars in thousands) (unaudited) by EVBS Adjustments by the Company
Consideration paid:
Cash $ 10
SNBV common stock 198,909
Total consideration paid $ 198,919

Identifiable assets acquired:
Cash and due from banks $ 4,350 $ - $ 4,350
Interest bearing deposits with banks 18,993 - 18,993
Federal funds sold 682 - 682
Securities available for sale, at fair value 163,029 (150 ) 162,879
Securities held to maturity, at carrying value 19,036 508 19,544
Restricted securities, at cost 6,734 - 6,734
Loans 1,045,600 (7,722 ) 1,037,878
Loans held for sale 19,689 - 19,689
Deferred income taxes 15,735 2,844 18,579
Bank premises and equipment 24,242 4,352 28,594
Assets held for sale 2,970 (1,285 ) 1,685
Accrued interest receivable 4,272 - 4,272
Other real estate owned 563 92 655
Core deposit intangible 435 9,590 10,025
Bank owned life insurance 26,035 - 26,035
Other assets 10,004 - 10,004
Total identifiable assets acquired 1,362,369 8,229 1,370,598

Identifiable liabilities assumed:
Noninterest-bearing demand accounts 226,637 - 226,637
Interest-bearing deposits 920,743 1,182 921,925
Federal funds purchased and repurchase agreements 7,598 - 7,598
Federal Home Loan Bank advances 57,475 - 57,475
Junior subordinated debt 10,310 (801 ) 9,509
Senior subordinated notes 19,175 1,876 21,051
Accrued interest payable 902 - 902
Other liabilities 13,067 - 13,067
Total identifiable liabilities assumed 1,255,907 2,257 1,258,164

Net identifiable assets acquired $ 106,462 $ 5,972 $ 112,434

Goodwill resulting from acquisition $ 86,485

The net effect of the amortization and accretion of premiums and discounts associated with the Company’s acquisition accounting adjustments to assets acquired and liabilities assumed from EVBS had the following impact on the consolidated statements of income during the three and nine months ended September 30, 2017:

For the Three Months For the Nine Months
(dollars in thousands) Ended September 30, 2017 Ended September 30, 2017
Loans (1) $ 1,127 $ 1,218
Time deposits (2) 213 217
Junior and senior subordinated debt (3) 21 23
Core deposit intangible (4) (312 ) (338 )
Net impact to income before income taxes $ 1,049 $ 1,120

disclosures.

~~(1)~~

~~Loan discount accretion is included in the “Interest and fees on loans” section of “Interest and dividend income” in the Consolidated Statements of Income.~~

~~(2)~~

~~Time deposit premium amortization is included in the "Interest on deposits" section of "Interest expense" in the Consolidated Statements of Income.~~

~~(3)~~

The junior subordinated debt discount accretion and senior subordinated notes premium amortization are included in the “Interest on junior subordinated debt” and “Interest on senior subordinated notes” section of “Interest expense”, respectively, in the Consolidated Statements of Income.

~~(4)~~

~~Core deposit intangible premium amortization is included in the "Other operating expenses" section of "Noninterest expenses" in the Consolidated Statements of Income.~~

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~~Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:~~

~~Loans~~: The acquired loans were recorded at fair value at the acquisition date of $1.04 billion without carryover of EVBS’s allowance for loan losses. The unpaid principal balance and discount at the merger date were $1.05 billion and $15.4 million, respectively. Where loans exhibited characteristics of performance, fair value was determined based on a discounted cash flow analysis which included default estimates; loans without such characteristics, fair value was determined based on the estimated values of the underlying collateral. While estimating the amount and timing of both principal and interest cash flows expected to be collected, a market-based discount rate was applied. In this regard, the acquired loans were segregated into pools based on loan type and credit risk. Loan type was determined based on collateral type and purpose, industry segment and loan structure. Credit risk characteristics included risk rating groups pass, special mention and substandard and lien position. For valuation purposes, these pools were further disaggregated by maturity and pricing characteristics (e.g., fixed-rate, adjustable-rate, balloon maturities)2.

~~Loans Held for Sale~~: The $19.7 million of acquired loans held for sale were recorded at fair value at the acquisition date. Acquired loans held for sale represent the potentially credit-impaired loans that were moved out of the held for investment portfolio and marked to fair value by EVBS just prior to the closing of the merger. Fair value was determined using quoted prices from an independent, third party buyer. Subsequent to the acquisition date, acquired loans held for sale were sold to an independent third party.

~~Premises and Equipment and Assets Held for Sale~~: The fair value of EVBS’s premises, including land, buildings and improvements, was determined based upon appraisal by licensed appraisers. These appraisals were based upon the best and highest use of the property with final values determined based upon an analysis of the cost, sales comparison and income capitalization approaches for each property appraised. The fair value of bank-owned real estate resulted in a net premium of $3.1 million. Land is not depreciated.

~~Core Deposit Intangible~~: The fair value of the core deposit intangible (��CDI”) was determined based on a combined discounted economic benefit and market approach. The economic benefit was calculated as the cost savings between maintaining the core deposit base and using an alternate funding source, such as FHLB advances. The life of the deposit base and projected deposit attrition rates was determined using EVBS's historical deposit data. The CDI was estimated at $10.0 million or 0.9% of total deposits. The CDI is being amortized over a weighted average life of 96 months using the straight-line method.

~~Time Deposits~~: The fair value of time deposits was determined based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The resulting estimated fair value adjustment of time deposits is a $1.2 million premium and is being amortized over the weighted average remaining life of approximately 18 months using the straight-line method.

~~FHLB Advances~~~~: The fair value of FHLB advances was considered to be equivalent to EVBS’s recorded book balance as the advances mature in 90 days or less.~~

~~Junior Subordinated Debt and Senior Subordinated Notes:~~The fair value of the junior subordinated debt and senior subordinated notes were based on discounted cash flows using rates for securities with similar terms. The resulting estimated fair value adjustment of junior subordinated debt is a $801 thousand discount and is being accreted over the remaining life of approximately 195 months using the straight-line method. The resulting estimated fair value adjustment of senior subordinated notes is a $1.1 million premium and is being amortized over the remaining life of approximately 95 months using the straight-line method.

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~~Deferred Income Taxes~~: Certain deferred tax assets and liabilities were carried over to SNBV from EVBS based on the Company’s ability to utilize them in the future. Additionally, deferred tax assets and liabilities were established for acquisition accounting fair value adjustments as the future amortization/accretion of these adjustments represent temporary differences between book income and taxable income.

The table below illustrates the unaudited pro forma revenue and net income of the combined entities had the acquisition taken place on January 1, 2016. The unaudited combined pro forma revenue and net income combines the historical results of EVBS with the Company's consolidated statements of income for the periods listed below and, while certain adjustments were made for the estimated effect of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition actually taken place on January 1, 2016. Acquisition-related expenses of $168 thousand and $9.1 million were included in the Company's reported consolidated statements of income for the three and nine months ended September 30, 2017, respectively, but were excluded from the unaudited pro forma information listed below. While the majority of the acquisition-related expenses have been recognized in the first nine months of 2017, the Company believes that additional legal and other transition expenses related to this acquisition will be likely throughout the remainder of 2017. Additionally, the Company expects to achieve further operational cost savings and other efficiencies as a result of the acquisition which are not reflected in the unaudited pro forma amounts below:

Unaudited Unaudited Unaudited Unaudited
Pro Forma Pro Forma Pro Forma Pro Forma
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
(dollars in thousands) 2017 2016 2017 2016
Net interest income $ 23,850 $ 21,139 $ 67,271 $ 63,467
Net income 4,648 5,742 17,774 17,385

3.

~~STOCK-BASED COMPENSATION~~

STOCK-BASED COMPENSATION

In 2004, the Company’s Board of Directors adopted a stock option plan that authorized the reservation of up to 302,500 shares of common stock and provided for the granting of stock options to certain directors, officers and employees. The 2010 Stock Awards and Incentive Plan (the “2010 Plan”) was approved by the Company’s Board of Directors in January 2010 and approved by the stockholders at the Annual Stockholder Meeting in April 2010. The 2010 Plan

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authorized the reservation of an additional 700,000 shares of common stock for the granting of stock awards. The options granted to officers and employees are incentive stock options and the options granted to non-employee directors are non-qualified stock options. The purpose of the plan is to afford key employees an incentive to remain in the ~~employ~~employment of Southern National and to assist in ~~the~~ attracting and retaining of non-employee directors by affording them an opportunity to share in Southern National’s anticipated future success. Under the plan, the option’s price cannot be less than the fair market value of the stock on the grant date. The maximum term of the options is ten years and options granted may be subject to a graded vesting schedule.

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 ~~replaces~~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 incentive to employees, non-employee directors, consultants and advisors to associate their personal interests with the long-term financial success of the Company, including its subsidiaries, and with growth in stockholder value, consistent with the Company’s risk management practices. Because the 2017 Plan was approved, shares under the 2004 stock-option plan or 2010 Plan will no longer be awarded.

A summary of the activity in the stock option plan during the six months ended June 30, 2019 follows:

13


				Weighted
		Weighted		Average	Aggregate
		Average		Remaining	Intrinsic
		Exercise		Contractual	Value
	Shares	Price		Term	(in thousands)
Options outstanding, beginning of period	642,350	$	9.77	5.0	$	2,219
Forfeited	(2,700)		10.52
Exercised	(19,450)		6.77
Options outstanding, end of period	620,200	$	9.86	4.6	$	3,383

Exercisable at end of period	478,050	$	9.04	3.9	$	2,856

Southern National granted no regular options during the first nine months of 2017, but did issue 22,559 options under the 2017 Plan in connection with the merger with EVBS which options were previously outstanding under the EVBS 2003 Stock Incentive Plan. Immediately prior to the effective time of the merger, each option to purchase shares of EVBS common stock granted under an EVBS stock plan vested and was converted into and became an option to purchase shares of common stock of SNBV (each, an “Assumed Option”), which was adjusted (i) by multiplying the number of shares of common stock that could be purchased under the Assumed Option by the 0.6313 exchange ratio and rounding down to the nearest share and (ii) by dividing the per share exercise price of the option by the 0.6313 exchange ratio and rounding up to the nearest cent. SNBV assumed each Assumed Option in accordance with the terms of the EVBS stock plan and award agreement by which it is evidenced.

~~For the three and nine months ended September 30, 2017, stock-based~~Stock-based compensation expense associated with stock options was ~~$84~~$22 thousand and ~~$185 thousand, respectively, compared to $62 thousand and $198~~$39 thousand for the ~~same periods last year,~~three months ended June 30, 2019 and 2018, respectively and $43 thousand and $78 thousand for the six months ended June 30, 2019 and 2018, respectively. As of ~~September~~June 30, ~~2017,~~2019, unrecognized compensation expense associated with ~~the~~ stock options was ~~$272~~$50 thousand, which is expected to be recognized over a weighted average period of ~~2.0~~1.5 years.

As of June 30, 2019, 48,500 shares of restricted stock were granted at a weighted average exercise price of $14.15 to certain officers of Southern National under the 2017 Plan and are subject to vesting in five years. These shares are included in the total shares outstanding at June 30, 2019. As of June 30, 2019, 2,700 shares of restricted stock granted to certain officers of Southern National under the 2017 Plan were forfeited. Restricted stock compensation expense totaled $141 thousand and $55 thousand for the three months ended June 30, 2019 and 2018, respectively and $224 thousand and $61 thousand for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, unrecognized compensation expense associated with restricted stock was $1.3 million, which is expected to be recognized over a weighted average period of 4.2 years.

~~A summary~~

10

Table of ~~the activity in the stock option plan during the nine months ended September 30, 2017 follows (dollars in thousands):~~Contents

Weighted
Weighted Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Shares Price Term (in thousands)
Options outstanding, beginning of period 782,200 $ 9.56
Granted - -
Options issued in connection with EVBS merger 22,559 24.54
Forfeited (12,400 ) 11.53
Exercised (42,750 ) 8.67
Options outstanding, end of period 749,609 $ 10.03 5.7 $ 5,391

Exercisable at end of period 409,759 $ 7.72 4.1 $ 3,164

4.

~~INVESTMENT SECURITIES~~

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, 2019
Residential government-sponsored mortgage-backed securities	$	45,594	$	331	$	(76)	$	45,849
Obligations of states and political subdivisions		18,166		427		—		18,593
Corporate securities		2,006		13		—		2,019
Trust preferred securities		2,589		316		(314)		2,591
Residential government-sponsored collateralized mortgage obligations		40,814		214		(48)		40,980
Government-sponsored agency securities		8,597		37		—		8,634
Agency commercial mortgage-backed securities		27,839		154		(14)		27,979
SBA pool securities		17,401		21		(207)		17,215
Total	$	163,006	$	1,513	$	(659)	$	163,860

Amortized Gross Unrealized Fair
September 30, 2017 Cost Gains Losses Value
Agency residential mortgage-backed securities (fixed and variable rate) $ 32,237 $ 3 $ (135 ) $ 32,105
Obligations of states and political subdivisions 18,650 32 (73 ) 18,609
Corporate securities 2,014 1 - 2,015
Trust preferred securities 2,589 14 (237 ) 2,366
Residential government-sponsored collateralized mortgage obligations 53,643 5 (278 ) 53,370
Government-sponsored agency securities 1,747 - (14 ) 1,733
Agency commercial mortgage-backed securities 28,304 - (223 ) 28,081
SBA pool securities 25,937 46 (25 ) 25,958
$ 165,121 $ 101 $ (985 ) $ 164,237

Amortized Gross Unrealized Fair
December 31, 2016 Cost Gains Losses Value
Obligations of states and political subdivisions $ 2,280 $ 9 $ (30 ) $ 2,259
Trust preferred securities 2,590 - (931 ) 1,659
$ 4,870 $ 9 $ (961 ) $ 3,918

14


	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
December 31, 2018
Residential government-sponsored mortgage-backed securities	$	27,945	$	—	$	(643)	$	27,302
Obligations of states and political subdivisions		18,305		30		(280)		18,055
Corporate securities		2,008		1		(1)		2,008
Trust preferred securities		2,589		356		(304)		2,641
Residential government-sponsored collateralized mortgage obligations		44,095		3		(1,041)		43,057
Government-sponsored agency securities		3,247		—		(122)		3,125
Agency commercial mortgage-backed securities		28,069		—		(765)		27,304
SBA pool securities		20,183		10		(308)		19,885
Total	$	146,441	$	400	$	(3,464)	$	143,377

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

	Amortized		Gross Unrecognized					Fair
September 30, 2017	Cost		Gains		Losses			Value
										Amortized		Gross Unrecognized				Fair
										Cost		Gains		Losses		Value
June 30, 2019
Residential government-sponsored mortgage-backed securities	$	12,015	$	45	$	(48	)	$	12,012	$	8,957	$	19	$	(33)	$	8,943
Obligations of states and political subdivisions											20,121		176		(10)		20,287
Trust preferred securities											2,471		124		(2)		2,593
Residential government-sponsored collateralized mortgage obligations		9,494		-		(51	)		9,443		4,607		10		(16)		4,601
Government-sponsored agency securities		52,648		48		(1,334	)		51,362		50,659		100		(502)		50,257
Obligations of states and political subdivisions		22,917		170		(76	)		23,011
Trust preferred securities		3,259		58		(23	)		3,294
	$	100,333	$	321	$	(1,532	)	$	99,122
Total										$	86,815	$	429	$	(563)	$	86,681

Amortized Gross Unrecognized Fair
December 31, 2016 Cost Gains Losses Value
Residential government-sponsored mortgage-backed securities $ 18,594 $ 308 $ (118 ) $ 18,784
Residential government-sponsored collateralized mortgage obligations 2,371 - (54 ) 2,317
Government-sponsored agency securities 47,975 28 (1,865 ) 46,138
Obligations of states and political subdivisions 12,706 53 (162 ) 12,597
Trust preferred securities 3,654 - (146 ) 3,508
$ 85,300 $ 389 $ (2,345 ) $ 83,344

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	Amortized		Gross Unrecognized				Fair
	Cost		Gains		Losses		Value
December 31, 2018
Residential government-sponsored mortgage-backed securities	$	9,699	$	4	$	(230)	$	9,473
Obligations of states and political subdivisions		21,496		85		(147)		21,434
Trust preferred securities		2,610		150		(1)		2,759
Residential government-sponsored collateralized mortgage obligations		6,001		—		(91)		5,910
Government-sponsored agency securities		52,656		—		(3,123)		49,533
Total	$	92,462	$	239	$	(3,592)	$	89,109

The amortized cost amounts are net of recognized other than temporary ~~impairment.~~impairment on trust preferred securities.

During the three and six months ended June 30, 2019, $9.8 million and $25.1 million, respectively of available for sale investment securities were purchased.

The fair value and carrying amount, if different, of debt investment securities as of ~~September~~June 30, ~~2017,~~2019, by contractual maturity were as follows (in thousands). Investment securities not due at a single maturity date are shown separately.


	Held to Maturity				Available for Sale				Available for Sale				Held to Maturity
	Amortized				Amortized				Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value		Cost		Fair Value		Cost		Fair Value
Due in one to five years	$	1,456	$	1,477	$	1,946	$	1,943	$	3,343	$	3,366	$	4,963	$	4,987
Due in five to ten years		23,496		23,178		5,397		5,393		11,923		12,061		18,933		18,917
Due after ten years		53,872		53,012		17,657		17,387		16,092		16,410		49,355		49,233
Agency residential mortgage-backed securities (fixed and variable rate)		12,015		12,012		32,237		32,105
Residential government-sponsored mortgage-backed securities										45,594		45,849		8,957		8,943
Residential government-sponsored collateralized mortgage obligations		9,494		9,443		53,643		53,370		40,814		40,980		4,607		4,601
Agency commercial mortgage-backed securities		-		-		28,304		28,081		27,839		27,979		—		—
SBA pool securities		-		-		25,937		25,958		17,401		17,215		—		—
Total	$	100,333	$	99,122	$	165,121	$	164,237	$	163,006	$	163,860	$	86,815	$	86,681

Investment securities with a carrying amount of approximately ~~$134.2~~$152.6 million and ~~$73.9~~$165.7 million at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, 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, ~~(“FHLB”),~~ and repurchase agreements.

Southern National monitors the portfolio for indicators of other than temporary impairment. At ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, certain investment securities’ fair values were below cost. As outlined in the table below, there were investment securities with fair values totaling approximately ~~$202.7~~$97.1 million in the portfolio with the carrying value exceeding the estimated fair value that are considered temporarily impaired at ~~September~~June 30, ~~2017.~~2019. Because the decline in fair value is attributable to changes in interest rates and market illiquidity, and not credit quality, and because we do not have the intent to sell these investment securities and it is likely that we will not be required to sell the investment securities before their anticipated recovery, management does not consider these investment securities to be other than temporarily impaired as of ~~September~~June 30, ~~2017.~~2019.

15

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The following tables present information regarding investment securities available for sale and held to maturity in a continuous unrealized loss position as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016 (in thousands)~~2018 by duration of time in a loss ~~position:~~position (in thousands):


June 30, 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	$	4,373	$	(10)	$	14,238	$	(66)	$	18,611	$	(76)
Obligations of states and political subdivisions		—		—		1,006		—		1,006		—
Corporate securities		—		—		—		—		—		—
Trust preferred securities		—		—		795		(314)		795		(314)
Residential government-sponsored collateralized mortgage obligations		475		(7)		8,973		(41)		9,448		(48)
Government-sponsored agency securities		—		—		—		—		—		—
Agency commercial mortgage-backed securities		—		—		6,190		(14)		6,190		(14)
SBA pool securities		—		—		11,575		(207)		11,575		(207)
Total	$	4,848	$	(17)	$	42,777	$	(642)	$	47,625	$	(659)

September 30, 2017 Less than 12 months 12 Months or More Total
Available for Sale Fair value Unrealized
Losses Fair value Unrealized
Losses Fair value Unrealized
Losses
Agency residential mortgage-backed securities (fixed and variable rate) $ 33,288 $ (135 ) $ - $ - $ 33,288 $ (135 )
Obligations of states and political subdivisions 14,509 (73 ) - - 14,509 (73 )
Trust preferred securities - - 863 (237 ) 863 (237 )
Residential government-sponsored collateralized mortgage obligations 52,134 (278 ) - - 52,134 (278 )
Government-sponsored agency securities 1,733 (14 ) - - 1,733 (14 )
Agency commercial mortgage-backed securities 28,081 (223 ) - - 28,081 (223 )
SBA pool securities 11,468 (25 ) - - 11,468 (25 )
$ 141,213 $ (748 ) $ 863 $ (237 ) $ 142,076 $ (985 )


June 30, 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	$	—	$	—	$	3,865	$	(33)	$	3,865	$	(33)
Obligations of states and political subdivisions		—		—		3,731		(10)		3,731		(10)
Trust preferred securities		—		—		56		(2)		56		(2)
Residential government-sponsored collateralized mortgage obligations		—		—		3,365		(16)		3,365		(16)
Government-sponsored agency securities		—		—		38,478		(502)		38,478		(502)
Total	$	—	$	—	$	49,495	$	(563)	$	49,495	$	(563)

	Less than 12 months					12 Months or More					Total
Held to Maturity	Fair value		Unrecognized Losses			Fair value		Unrecognized Losses			Fair value		Unrecognized Losses
December 31, 2018																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	$	3,403	$	(40	)	$	419	$	(8	)	$	3,822	$	(48	)	$	393	$	(5)	$	26,910	$	(638)	$	27,303	$	(643)
Obligations of states and political subdivisions																	2,220		(78)		13,385		(202)		15,605		(280)
Corporate securities																	1,008		(1)		—		—		1,008		(1)
Trust preferred securities																	—		—		795		(304)		795		(304)
Residential government-sponsored collateralized mortgage obligations		7,820		(15	)		1,623		(36	)		9,443		(51	)		—		—		42,598		(1,041)		42,598		(1,041)
Government-sponsored agency securities		12,724		(264	)		24,917		(1,070	)		37,641		(1,334	)		—		—		3,125		(122)		3,125		(122)
Obligations of states and political subdivisions		7,441		(48	)		2,030		(28	)		9,471		(76	)
Trust preferred securities		-		-			239		(23	)		239		(23	)
	$	31,388	$	(367	)	$	29,228	$	(1,165	)	$	60,616	$	(1,532	)
Agency commercial mortgage-backed securities																	—		—		27,304		(765)		27,304		(765)
SBA pool securities																	6,009		(70)		10,546		(238)		16,555		(308)
Total																$	9,630	$	(154)	$	124,663	$	(3,310)	$	134,293	$	(3,464)

December 31, 2016
Less than 12 months 12 Months or More Total
Available for Sale Fair value Unrealized
Losses Fair value Unrealized
Losses Fair value Unrealized
Losses
Obligations of states and political subdivisions $ 1,706 $ (30 ) $ - $ - $ 1,706 $ (30 )
Trust preferred securities - - 1,658 (931 ) 1,658 (931 )
$ 1,706 $ (30 ) $ 1,658 $ (931 ) $ 3,364 $ (961 )

Less than 12 months 12 Months or More Total
Held to Maturity Fair value Unrecognized
Losses Fair value Unrecognized
Losses Fair value Unrecognized
Losses
Residential government-sponsored mortgage-backed securities $ 10,238 $ (110 ) $ 457 $ (8 ) $ 10,695 $ (118 )
Residential government-sponsored collateralized mortgage obligations 1,346 (27 ) 971 (27 ) 2,317 (54 )
Government-sponsored agency securities 41,110 (1,865 ) - - 41,110 (1,865 )
Obligations of states and political subdivisions 3,578 (98 ) 1,065 (64 ) 4,643 (162 )
Trust preferred securities - - 3,508 (146 ) 3,508 (146 )
$ 56,272 $ (2,100 ) $ 6,001 $ (245 ) $ 62,273 $ (2,345 )

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December 31, 2018	Less than 12 months				12 Months or More				Total
	Fair		Unrecognized		Fair		Unrecognized		Fair		Unrecognized
Held to Maturity	value		Losses		value		Losses		value		Losses
Residential government-sponsored mortgage-backed securities	$	—	$	—	$	8,935	$	(230)	$	8,935	$	(230)
Obligations of states and political subdivisions		3,273		(10)		7,187		(137)		10,460		(147)
Trust preferred securities		—		—		60		(1)		60		(1)
Residential government-sponsored collateralized mortgage obligations		—		—		5,910		(91)		5,910		(91)
Government-sponsored agency securities		—		—		49,532		(3,123)		49,532		(3,123)
Total	$	3,273	$	(10)	$	71,624	$	(3,582)	$	74,897	$	(3,592)

As of ~~September~~June 30, ~~2017,~~2019, we owned pooled trust preferred securities as follows:

Previously
% of Current Recognized
Defaults and Cumulative
Ratings Estimated Deferrals to Other
Tranche When Purchased Current Ratings Fair Total Comprehensive
Security Level Moody's Fitch Moody's Fitch Par Value Book Value Value Collateral Loss (1)
(in thousands)
Held to Maturity
ALESCO VII A1B Senior Aaa AAA Aa2 A $ 3,250 $ 2,998 $ 3,055 17 % $ 228
MMCF III B Senior Sub A3 A- Ba1 BBB 265 261 239 32 % 4
3,515 3,259 3,294 $ 232

Cumulative OTTI
Related to
Credit Loss (2)
Available for Sale
Other Than Temporarily Impaired:
TPREF FUNDING II Mezzanine A1 A- Caa3 C 1,500 1,099 862 28 % $ 400
ALESCO V C1 Mezzanine A2 A Caa2 C 2,150 1,490 1,504 13 % 660
3,650 2,589 2,366 $ 1,060

Total $ 7,165 $ 5,848 $ 5,660

~~(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~~


												% 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	AA	Aa1	AA	$	2,596	$	2,413	$	2,537	17	%	$	219
MMCF III B	Senior Sub	A3	WD	Ba1	BBB		59		58		56	45	%		4
							2,655		2,471		2,593			$	223

														Cumulative OTTI
Available for Sale														Related to
Other Than Temporarily Impaired:														Credit Loss (2)
TPREF FUNDING II	Mezzanine	A1	D	Caa3	D		1,500		1,099		785	31	%	$	400
ALESCO V C1	Mezzanine	A2	C	Caa1	C		2,150		1,490		1,806	14	%		660
							3,650		2,589		2,591			$	1,060

Total						$	6,305	$	5,060	$	5,184

16

(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. The cash flow analyses performed included the following assumptions:

·

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

·

Recoveries of 9% with a two year lag on all defaults and deferrals.

·

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

·

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

We recognized no other than temporary impairment charges during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively.

~~The following table presents a roll forward~~

14

Table of the credit losses on our investment securities previously classified as held to maturity and now classified as available for sale recognized in earnings for the nine months ended September 30, 2017 and 2016 (in thousands):Contents

2017 2016

Amount of cumulative other than temporary impairment related to credit loss prior to January 1 $ 1,060 $ 1,060
Amounts related to credit loss for which an other than temporary impairment was not previously recognized - -
Amounts related to credit loss for which an other than temporary impairment was previously recognized - -
Reductions due to realized losses - -
Amount of cumulative other than temporary impairment related to credit loss as of September 30 $ 1,060 $ 1,060

17

Changes in accumulated other comprehensive ~~(loss)~~loss by component for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 are shown in the ~~table~~tables below. All amounts are net of tax (in thousands).


	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 three months ended June 30, 2018	Available for Sale		Securities		Total
Beginning balance	$	(2,680)	$	(179)	$	(2,859)
Current period other comprehensive (loss) income		(662)		2		(660)
Ending balance	$	(3,342)	$	(177)	$	(3,519)


	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


	Unrealized Holding
	Losses on		Held to Maturity
For the six months ended June 30, 2018	Available for Sale		Securities		Total
Beginning balance	$	(999)	$	(153)	$	(1,152)
Amounts reclassified from accumulated other comprehensive loss due to the adoption of ASU 2018-02		(199)		(30)		(229)
Subtotal		(1,198)		(183)		(1,381)
Current period other comprehensive (loss) income		(2,144)		6		(2,138)
Ending balance	$	(3,342)	$	(177)	$	(3,519)

Unrealized Holding
(Losses) on Held to Maturity
For the three months ended September 30, 2017 Available for Sale Securities Securities Total
Beginning balance $ (743 ) $ (158 ) $ (901 )
Other comprehensive income before reclassifications 161 2 163
Net current-period other comprehensive income 161 2 163
Ending balance $ (582 ) $ (156 ) $ (738 )

Unrealized Holding
(Losses) on Held to Maturity
For the nine months ended September 30, 2017 Available for Sale Securities Securities Total
Beginning balance $ (627 ) $ (162 ) $ (789 )
Other comprehensive income before reclassifications 45 6 51
Net current-period other comprehensive income 45 6 51
Ending balance $ (582 ) $ (156 ) $ (738 )

Unrealized Holding
(Losses) on Held to Maturity
For the three months ended September 30, 2016 Available for Sale Securities Securities Total
Beginning balance $ (760 ) $ (165 ) $ (925 )
Other comprehensive income before reclassifications 125 2 127
Net current-period other comprehensive income 125 2 127
Ending balance $ (635 ) $ (163 ) $ (798 )

Unrealized Holding
(Losses) on Held to Maturity
For the nine months ended September 30, 2016 Available for Sale Securities Securities Total
Beginning balance $ (440 ) $ (170 ) $ (610 )
Other comprehensive (loss) income before reclassifications (195 ) 7 (188 )
Net current-period other comprehensive (loss) income (195 ) 7 (188 )
Ending balance $ (635 ) $ (163 ) $ (798 )

5.

~~LOANS AND ALLOWANCE FOR LOAN LOSSES~~

15

Table of Contents

4. LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table summarizes the composition of our loan portfolio as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016:~~2018 (in thousands):

	Covered		Non-covered			Total			Covered		Non-covered			Total
	Loans (1)		Loans			Loans			Loans (1)		Loans			Loans
	September 30, 2017								December 31, 2016								June 30, 2019		December 31, 2018
Loans secured by real estate:
Commercial real estate - owner-occupied	$	-	$	399,799		$	399,799		$	-	$	154,807		$	154,807
Commercial real estate - non-owner-occupied		-		452,797			452,797			-		279,634			279,634
Commercial real estate - owner occupied																	$	410,832	$	407,031
Commercial real estate - non-owner occupied																		561,732		540,698
Secured by farmland		-		13,270			13,270			-		541			541			18,629		20,966
Construction and land loans		-		198,328			198,328			-		91,067			91,067			158,956		146,654
Residential 1-4 family		9,356		462,545			471,901			10,519		220,291			230,810
Residential 1-4 family(1)																		572,715		565,083
Multi- family residential		-		73,547			73,547			-		30,021			30,021			82,593		82,516
Home equity lines of credit		14,623		137,681			152,304			17,661		11,542			29,203
Home equity lines of credit(1)																		117,298		128,225
Total real estate loans		23,979		1,737,967			1,761,946			28,180		787,903			816,083			1,922,755		1,891,173

Commercial loans		-		235,171			235,171			-		115,365			115,365			220,566		255,441
Consumer loans		-		39,460			39,460			-		856			856			29,310		32,347
Gross loans		23,979		2,012,598			2,036,577			28,180		904,124			932,304

Less deferred fees on loans		-		(1,396	)		(1,396	)		-		(1,889	)		(1,889	)
Subtotal																		2,172,631		2,178,961
Plus (less) deferred costs (fees) on loans																		214		(137)
Loans, net of deferred fees	$	23,979	$	2,011,202		$	2,035,181		$	28,180	$	902,235		$	930,415		$	2,172,845	$	2,178,824

(1)

Includes $15.8 million and $18.3 million of loans as of June 30, 2019 and December 31, 2018, respectively, acquired in the Greater Atlantic Bank (“GAB”) transaction covered under an FDIC loss-share agreement. The agreement covering single family loans expires in December 2019.

~~(1) Covered Loans~~In the first quarter of 2019, $33.9 million of commercial loans were ~~acquired in the Greater Atlantic transaction~~reclassified into loans secured by real estate, upon review and ~~are covered under an FDIC loss-share agreement. The agreement covering single family loans expires in December 2019.~~

validation of collateral and Call Report codes.

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

18

On June 23, 2017, in connection with the merger with EVBS, SNBV acquired loans held for sale with a fair value of $19.7 million and loans held for investment with an unpaid principal balance of $1.05 billion and an estimated fair value of $1.04 billion, which created an accretable discount of $15.4 million at acquisition. Accretion of $1.1 million and $1.2 million associated with these acquired loans held for investment was recognized in the three and nine months ended September 30, 2017, respectively.

As part of the ~~Greater Atlantic Bank~~GAB acquisition, the Bank and the FDIC entered into loss sharing agreements on approximately $143.4 million (contractual basis) of ~~Greater Atlantic Bank’s~~GAB’s assets. There were two agreements with the FDIC: one for single family loans which is a ~~10-year~~10‑year agreement expiring in December 2019, and one for non-single family (commercial) assets which was a ~~5-year~~5‑year agreement which expired in December 2014. The Bank will continue to share in the losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharing ~~agreements;~~agreement related to single family loans; we refer to these assets collectively as “covered assets.” Loans that are not covered in the loss sharing agreement are referred to as “non-covered ~~loans”. As of September~~loans.” Covered loans totaled $15.8 million and $18.3 million at June 30, ~~2017, non-covered loans included $22.6 million of loans acquired in the HarVest acquisition, $37.3 million acquired in the Prince Georges Federal Savings Bank (“PGFSB”) acquisition~~2019 and ~~$990.4 million acquired in the EVBS acquisition.~~

December 31, 2018, respectively.

Accretable discount on the acquired EVBS, ~~Greater Atlantic~~GAB, Prince George’s Federal Savings Bank ~~PGFSB,~~(“PGFSB”), and the HarVest Bank (“HarVest”) loans totaled ~~$19.6~~$13.3 million and ~~$6.5~~$15.1 million at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

Accretion associated with the acquired loans held for investment of $972 thousand and $1.1 million was recognized in the three months ended June 30, 2019 and 2018, respectively, and $1.8 million and $2.2 million was recognized in the six months ended June 30, 2019 and 2018, respectively.

For the three acquisitions subsequent to the ~~Greater Atlantic Bank~~GAB acquisition noted above, management sold the majority of the purchased credit impaired loans immediately after closing of the acquisition.

19

16

Table of Contents

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

Covered Loans Non-covered Loans Total Loans
Unpaid Unpaid Unpaid
Recorded Principal Related Recorded Principal Related Recorded Principal Related
September 30, 2017 Investment Balance Allowance Investment (1) Balance Allowance Investment Balance Allowance
With no related allowance recorded
Commercial real estate - owner occupied $ - $ - $ - $ 1,218 $ 1,324 $ - $ 1,218 $ 1,324 $ -
Commercial real estate - non-owner occupied (2) - - - - - - - - -
Construction and land development - - - 9,984 9,984 - 9,984 9,984 -
Commercial loans - - - 4,128 9,126 - 4,128 9,126 -
Residential 1-4 family (3) 1,285 1,495 - 376 517 - 1,661 2,012 -
Other consumer loans - - - - - - - - -

Total $ 1,285 $ 1,495 $ - $ 15,706 $ 20,951 $ - $ 16,991 $ 22,446 $ -

With an allowance recorded
Commercial real estate - owner occupied $ - $ - $ - $ - $ - $ - $ - $ - $ -
Commercial real estate - non-owner occupied (2) - - - - - - - - -
Construction and land development - - - - - - - - -
Commercial loans - - - - - - - - -
Residential 1-4 family (3) - - - - - - - - -
Other consumer loans - - - - - - - - -

Total $ - $ - $ - $ - $ - $ - $ - $ - $ -
Grand total $ 1,285 $ 1,495 $ - $ 15,706 $ 20,951 $ - $ 16,991 $ 22,446 $ -

~~(1) Recorded investment is after cumulative prior charge offs of $5.2 million. These loans also have aggregate SBA guarantees of $1.7 million.~~

~~(2) Includes loans secured by farmland and multi-family residential loans.~~

~~(3) Includes home equity lines of credit.~~

Covered Loans Non-covered Loans Total Loans
Unpaid Unpaid Unpaid
Recorded Principal Related Recorded Principal Related Recorded Principal Related
December 31, 2016 Investment Balance Allowance Investment (1) Balance Allowance Investment Balance Allowance
With no related allowance recorded
Commercial real estate - owner occupied $ - $ - $ - $ 5,583 $ 5,592 $ - $ 5,583 $ 5,592 $ -
Commercial real estate - non-owner occupied (2) - - - - - - - - -
Construction and land development - - - - - - - - -
Commercial loans - - - 3,002 3,603 - 3,002 3,603 -
Residential 1-4 family (3) 963 1,113 - - - - 963 1,113 -
Other consumer loans - - - - - - - - -

Total $ 963 $ 1,113 $ - $ 8,585 $ 9,195 $ - $ 9,548 $ 10,308 $ -

With an allowance recorded
Commercial real estate - owner occupied $ - $ - $ - $ 688 $ 688 $ 150 $ 688 $ 688 $ 150
Commercial real estate - non-owner occupied (2) - - - - - - - - -
Construction and land development - - - - - - - - -
Commercial loans - - - 3,378 5,798 750 3,378 5,798 750
Residential 1-4 family (3) - - - - - - - - -
Other consumer loans - - - - - - - - -

Total $ - $ - $ - $ 4,066 $ 6,486 $ 900 $ 4,066 $ 6,486 $ 900
Grand total $ 963 $ 1,113 $ - $ 12,651 $ 15,681 $ 900 $ 13,614 $ 16,794 $ 900

~~(1) Recorded investment is after cumulative prior charge offs of $3.0 million. These loans also have aggregate SBA guarantees of $2.2 million.~~

~~(2) Includes loans secured by farmland and multi-family residential loans.~~

~~(3) Includes home equity lines of credit.~~


	Total Loans
			Unpaid
	Recorded		Principal		Related
June 30, 2019	Investment (1)		Balance		Allowance
With no related allowance recorded
Commercial real estate - owner occupied	$	5,279	$	7,019	$	—
Commercial real estate - non-owner occupied (2)		4,868		5,011		—
Construction and land development		338		749		—
Commercial loans		5,442		9,052		—
Residential 1-4 family (3)		1,635		4,127		—
Other consumer loans		—		20		—
Total	$	17,562	$	25,978	$	—

With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—	$	—
Commercial real estate - non-owner occupied (2)		—		—		—
Construction and land development		—		—		—
Commercial loans		2,771		2,771		600
Residential 1-4 family (3)		1,179		1,463		5
Other consumer loans		—		—		—
Total	$	3,950	$	4,234	$	605
Grand total	$	21,512	$	30,212	$	605

20

(1)

Recorded investment is after cumulative prior charge offs of $1.3 million. These loans also have aggregate SBA guarantees of $3.2 million.

(2)

Includes loans secured by farmland and multi-family loans.

(3)

Includes home equity lines of credit.


	Total Loans
			Unpaid
	Recorded		Principal		Related
December 31, 2018	Investment (1)		Balance		Allowance
With no related allowance recorded
Commercial real estate - owner occupied	$	2,795	$	4,777	$	—
Commercial real estate - non-owner occupied (2)		171		333		—
Construction and land development		—		336		—
Commercial loans		3,450		6,013		—
Residential 1-4 family (3)		1,591		5,911		—
Other consumer loans		—		—		—
Total	$	8,007	$	17,370	$	—

With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—	$	—
Commercial real estate - non-owner occupied (2)		—		—		—
Construction and land development		—		—		—
Commercial loans		2,626		3,276		612
Residential 1-4 family (3)		1,429		1,476		6
Other consumer loans		—		—		—
Total	$	4,055	$	4,752	$	618
Grand total	$	12,062	$	22,122	$	618

(1)

Recorded investment is after cumulative prior charge offs of $1.5 million. These loans also have aggregate SBA guarantees of $3.4 million.

(2)

Includes loans secured by farmland and multi-family loans.

(3)

Includes home equity lines of credit.

17

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 and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 (in thousands):


	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
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
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 loans.

(2)

Covered Loans Non-covered Loans Total Loans
Average Interest Average Interest Average Interest
Recorded Income Recorded Income Recorded Income
Three months ended September 30, 2017 Investment Recognized Investment Recognized Investment Recognized
With no related allowance recorded
Commercial real estate - owner occupied $ - $ - $ 1,325 $ 8 $ 1,325 $ 8
Commercial real estate - non-owner occupied (1) - - - - - -
Construction and land development - - 9,984 153 9,984 153
Commercial loans - - 8,286 111 8,286 111
Residential 1-4 family (2) 1,290 12 517 - 1,807 12
Other consumer loans - - - - - -

Total $ 1,290 $ 12 $ 20,112 $ 272 $ 21,402 $ 284

With an allowance recorded
Commercial real estate - owner occupied $ - $ - $ - $ - $ - $ -
Commercial real estate - non-owner occupied (1) - - - - - -
Construction and land development - - - - - -
Commercial loans - - - - - -
Residential 1-4 family (2) - - - - - -
Other consumer loans - - - - - -

Total $ - $ - $ - $ - $ - $ -
Grand total $ 1,290 $ 12 $ 20,112 $ 272 $ 21,402 $ 284

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

~~(2) Includes home equity lines of credit.~~

Covered Loans Non-covered Loans Total Loans
Average Interest Average Interest Average Interest
Recorded Income Recorded Income Recorded Income
Three months ended September 30, 2016 Investment Recognized Investment Recognized Investment Recognized
With no related allowance recorded
Commercial real estate - owner occupied $ - $ - $ 7,984 $ 73 $ 7,984 $ 73
Commercial real estate - non-owner occupied (1) - - 132 3 132 3
Construction and land development - - - - - -
Commercial loans - - 2,600 13 2,600 13
Residential 1-4 family (2) 959 7 - - 959 7
Other consumer loans - - - - - -

Total $ 959 $ 7 $ 10,716 $ 89 $ 11,675 $ 96

With an allowance recorded
Commercial real estate - owner occupied $ - $ - $ 693 $ 8 $ 693 $ 8
Commercial real estate - non-owner occupied (1) - - - - - -
Construction and land development - - - - - -
Commercial loans - - 4,140 39 4,140 39
Residential 1-4 family (2) - - - - - -
Other consumer loans - - - - - -
��
Total $ - $ - $ 4,833 $ 47 $ 4,833 $ 47
Grand total $ 959 $ 7 $ 15,549 $ 136 $ 16,508 $ 143

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

~~(2)~~ Includes home equity lines of credit.


	Total Loans
	Average		Interest
	Recorded		Income
Three Months Ended June 30, 2018	Investment		Recognized
With no related allowance recorded
Commercial real estate - owner occupied	$	668	$	9
Commercial real estate - non-owner occupied (1)		193		5
Construction and land development		—		—
Commercial loans		5,109		10
Residential 1-4 family (2)		2,894		14
Other consumer loans		21		—
Total	$	8,885	$	38

With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—
Commercial real estate - non-owner occupied (1)		—		—
Construction and land development		—		—
Commercial loans		—		—
Residential 1-4 family (2)		—		—
Other consumer loans		—		—
Total	$	—	$	—
Grand total	$	8,885	$	38

(1)

Includes loans secured by farmland and multi-family loans.

(2)

Includes home equity lines of credit.

18

Table of Contents


	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
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
Residential 1-4 family (2)		1,257		38
Other consumer loans		—		—
Total	$	4,076	$	137
Grand total	$	22,080	$	676

21

(1)

Includes loans secured by farmland and multi-family loans.

(2)

Includes home equity lines of credit.

Covered Loans Non-covered Loans Total Loans
Average Interest Average Interest Average Interest
Recorded Income Recorded Income Recorded Income
Nine months ended September 30, 2017 Investment Recognized Investment Recognized Investment Recognized
With no related allowance recorded
Commercial real estate - owner occupied $ - $ - $ 1,328 $ 27 $ 1,328 $ 27
Commercial real estate - non-owner occupied (1) - - - - - -
Construction and land development - - 9,934 158 9,934 158
Commercial loans - - 8,206 323 8,206 323
Residential 1-4 family (2) 1,292 45 517 - 1,809 45
Other consumer loans - - - - - -

Total $ 1,292 $ 45 $ 19,985 $ 508 $ 21,277 $ 553

With an allowance recorded
Commercial real estate - owner occupied $ - $ - $ - $ - $ - $ -
Commercial real estate - non-owner occupied (1) - - - - - -
Construction and land development - - - - - -
Commercial loans - - - - - -
Residential 1-4 family (2) - - - - - -
Other consumer loans - - - - - -

Total $ - $ - $ - $ - $ - $ -
Grand total $ 1,292 $ 45 $ 19,985 $ 508 $ 21,277 $ 553

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

~~(2) Includes home equity lines of credit.~~

Covered Loans Non-covered Loans Total Loans
Average Interest Average Interest Average Interest
Recorded Income Recorded Income Recorded Income
Nine months ended September 30, 2016 Investment Recognized Investment Recognized Investment Recognized
With no related allowance recorded
Commercial real estate - owner occupied $ - $ - $ 6,711 $ 220 $ 6,711 $ 220
Commercial real estate - non-owner occupied (1) - - 134 8 134 8
Construction and land development - - - - - -
Commercial loans - - 2,852 - 2,852 -
Residential 1-4 family (2) 996 24 - - 996 24
Other consumer loans - - - - - -

Total $ 996 $ 24 $ 9,697 $ 228 $ 10,693 $ 252

With an allowance recorded
Commercial real estate - owner occupied $ - $ - $ 696 $ 24 $ 696 $ 24
Commercial real estate - non-owner occupied (1) - - - - - -
Construction and land development - - - - - -
Commercial loans - - 3,301 117 3,301 117
Residential 1-4 family (2) - - - - - -
Other consumer loans - - - - - -

Total $ - $ - $ 3,997 $ 141 $ 3,997 $ 141
Grand total $ 996 $ 24 $ 13,694 $ 369 $ 14,690 $ 393

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

~~(2) Includes home equity lines of credit.~~


	Total Loans
	Average		Interest
	Recorded		Income
Six Months Ended June 30, 2018	Investment		Recognized
With no related allowance recorded
Commercial real estate - owner occupied	$	670	$	17
Commercial real estate - non-owner occupied (1)		194		10
Construction and land development		—		—
Commercial loans		5,032		25
Residential 1-4 family (2)		2,733		49
Other consumer loans		21		—
Total	$	8,650	$	101

With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—
Commercial real estate - non-owner occupied (1)		—		—
Construction and land development		—		—
Commercial loans		—		—
Residential 1-4 family (2)		—		—
Other consumer loans		—		—
Total	$	—	$	—
Grand total	$	8,650	$	101

22

(1)

Includes loans secured by farmland and multi-family loans.

(2)

Includes home equity lines of credit.

19

Table of Contents

The following tables present the aging of the recorded investment in past due loans by class of loans as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 (in thousands):


	30 - 59		60 - 89
	Days		Days		90 Days		Total		Nonaccrual		Loans Not		Total
June 30, 2019	Past Due		Past Due		or More		Past Due		Loans		Past Due		Loans
Total loans:
Commercial real estate - owner occupied	$	265	$	—	$	—	$	265	$	813	$	409,754	$	410,832
Commercial real estate - non-owner occupied (1)		915		—		—		915		—		662,039		662,954
Construction and land development		237		—		—		237		—		158,719		158,956
Commercial loans		3,052		157		—		3,209		3,207		214,150		220,566
Residential 1-4 family (2)		2,827		2,170		—		4,997		1,180		683,836		690,013
Other consumer loans		135		14		—		149		—		29,161		29,310
Total	$	7,431	$	2,341	$	—	$	9,772	$	5,200	$	2,157,659	$	2,172,631

(1)

Includes loans secured by farmland and multi-family loans.

(2)

Includes home equity lines of credit.


	30 - 59		60 - 89
	Days		Days		90 Days		Total		Nonaccrual		Loans Not		Total
December 31, 2018	Past Due		Past Due		or More		Past Due		Loans		Past Due		Loans
Total loans:
Commercial real estate - owner occupied	$	577	$	344	$	—	$	921	$	1,284	$	404,826	$	407,031
Commercial real estate - non-owner occupied (1)		581		617		—		1,198		—		642,982		644,180
Construction and land development		851		—		—		851		—		145,803		146,654
Commercial loans		319		168		—		487		3,391		251,563		255,441
Residential 1-4 family (2)		5,523		197		—		5,720		2,055		685,533		693,308
Other consumer loans		142		18		—		160		—		32,187		32,347
Total	$	7,993	$	1,344	$	—	$	9,337	$	6,730	$	2,162,894	$	2,178,961

(1)

Includes loans secured by farmland and multi-family loans.

(2)

Includes home equity lines of credit.

30 - 59 60 - 89
Days Days 90 Days Total Nonaccrual Loans Not Total
September 30, 2017 Past Due Past Due or More Past Due Loans Past Due Loans
Covered loans:
Commercial real estate - owner occupied $ - $ - $ - $ - $ - $ - $ -
Commercial real estate - non-owner occupied (1) - - - - - - -
Construction and land development - - - - - - -
Commercial loans - - - - - - -
Residential 1-4 family (2) 23 193 - 216 1,109 22,654 23,979
Other consumer loans - - - - - - -

Total $ 23 $ 193 $ - $ 216 $ 1,109 $ 22,654 $ 23,979

Non-covered loans:
Commercial real estate - owner occupied $ 4,491 $ 40 $ - $ 4,531 $ 636 $ 394,632 $ 399,799
Commercial real estate - non-owner occupied (1) 1,934 39 - 1,973 - 537,641 539,614
Construction and land development 1,604 - - 1,604 9,984 186,740 198,328
Commercial loans 5,994 250 - 6,244 1,732 227,195 235,171
Residential 1-4 family (2) 3,565 1,119 - 4,684 639 594,903 600,226
Other consumer loans 37 8 - 45 - 39,415 39,460

Total $ 17,625 $ 1,456 $ - $ 19,081 $ 12,991 $ 1,980,526 $ 2,012,598

Total loans:
Commercial real estate - owner occupied $ 4,491 $ 40 $ - $ 4,531 $ 636 $ 394,632 $ 399,799
Commercial real estate - non-owner occupied (1) 1,934 39 - 1,973 - 537,641 539,614
Construction and land development 1,604 - - 1,604 9,984 186,740 198,328
Commercial loans 5,994 250 - 6,244 1,732 227,195 235,171
Residential 1-4 family (2) 3,588 1,312 - 4,900 1,748 617,557 624,205
Other consumer loans 37 8 - 45 - 39,415 39,460

Total $ 17,648 $ 1,649 $ - $ 19,297 $ 14,100 $ 2,003,180 $ 2,036,577

30 - 59 60 - 89
Days Days 90 Days Total Nonaccrual Loans Not Total
December 31, 2016 Past Due Past Due or More Past Due Loans Past Due Loans
Covered loans:
Commercial real estate - owner occupied $ - $ - $ - $ - $ - $ - $ -
Commercial real estate - non-owner occupied (1) - - - - - - -
Construction and land development - - - - - - -
Commercial loans - - - - - - -
Residential 1-4 family (2) 221 95 - 316 850 27,014 28,180
Other consumer loans - - - - - - -

Total $ 221 $ 95 $ - $ 316 $ 850 $ 27,014 $ 28,180

Non-covered loans:
Commercial real estate - owner occupied $ - $ - $ - $ - $ 637 $ 154,170 $ 154,807
Commercial real estate - non-owner occupied (1) - - - - - 310,196 310,196
Construction and land development - - - - - 91,067 91,067
Commercial loans 1,349 - - 1,349 3,158 110,858 115,365
Residential 1-4 family (2) 1,011 - - 1,011 - 230,822 231,833
Other consumer loans - - - - - 856 856

Total $ 2,360 $ - $ - $ 2,360 $ 3,795 $ 897,969 $ 904,124

Total loans:
Commercial real estate - owner occupied $ - $ - $ - $ - $ 637 $ 154,170 $ 154,807
Commercial real estate - non-owner occupied (1) - - - - - 310,196 310,196
Construction and land development - - - - - 91,067 91,067
Commercial loans 1,349 - - 1,349 3,158 110,858 115,365
Residential 1-4 family (2) 1,232 95 - 1,327 850 257,836 260,013
Other consumer loans - - - - - 856 856

Total $ 2,581 $ 95 $ - $ 2,676 $ 4,645 $ 924,983 $ 932,304

20

Table of Contents

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

~~(2) Includes home equity lines of credit.~~

~~Non-covered nonaccrual~~Nonaccrual loans include SBA guaranteed amounts totaling ~~$1.7~~$3.2 million and ~~$2.2~~$3.4 million at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

23

Activity in the allowance for non-covered loan and lease losses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 is summarized below (in thousands):

Commercial Commercial
Real Estate Real Estate Construction Other
Owner Non-owner and Land Commercial 1-4 Family Consumer
Occupied Occupied (1) Development Loans Residential (2) Loans Unallocated Total
Non-covered loans:
Three months ended September 30, 2017
Allowance for loan losses:
Beginning balance $ 938 $ 1,790 $ 1,096 $ 2,691 $ 1,423 $ 84 $ 1,175 $ 9,197
Charge offs - - - (5,316 ) - (57 ) - (5,373 )
Recoveries 7 - - 170 2 1 - 180
Provision (129 ) (260 ) (293 ) 6,629 15 297 (1,009 ) 5,250
Ending balance $ 816 $ 1,530 $ 803 $ 4,174 $ 1,440 $ 325 $ 166 $ 9,254

Three months ended September 30, 2016
Allowance for loan losses:
Beginning balance $ 721 $ 1,403 $ 855 $ 3,345 $ 1,262 $ 122 $ 713 $ 8,421
Charge offs (798 ) - - (1,363 ) - - - (2,161 )
Recoveries - - 120 33 4 2 - 159
Provision 916 196 (328 ) 1,257 95 (41 ) (45 ) 2,050
Ending balance $ 839 $ 1,599 $ 647 $ 3,272 $ 1,361 $ 83 $ 668 $ 8,469

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

~~(2) Includes home equity lines of credit.~~

Commercial Commercial
Real Estate Real Estate Construction Other
Owner Non-owner and Land Commercial 1-4 Family Consumer
Occupied Occupied (1) Development Loans Residential (2) Loans Unallocated Total
Non-covered loans:
Nine months ended September 30, 2017
Allowance for loan losses:
Beginning balance $ 905 $ 1,484 $ 752 $ 3,366 $ 1,279 $ 78 $ 746 $ 8,610
Charge offs - (100 ) - (6,283 ) (319 ) (63 ) - (6,765 )
Recoveries 28 299 - 221 6 5 - 559
Provision (117 ) (153 ) 51 6,870 474 305 (580 ) 6,850
Ending balance $ 816 $ 1,530 $ 803 $ 4,174 $ 1,440 $ 325 $ 166 $ 9,254

Nine months ended September 30, 2016
Allowance for loan losses:
Beginning balance $ 1,185 $ 1,222 $ 865 $ 3,041 $ 1,408 $ 48 $ 652 $ 8,421
Charge offs (798 ) - (450 ) (2,633 ) (22 ) (322 ) - (4,225 )
Recoveries - 1 120 78 8 4 - 211
Provision 452 376 112 2,786 (33 ) 353 16 4,062
Ending balance $ 839 $ 1,599 $ 647 $ 3,272 $ 1,361 $ 83 $ 668 $ 8,469

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

~~(2) Includes home equity lines of credit.~~

~~No activity in the allowance for covered loan and lease losses was recorded during the three and nine months ended September 30, 2017 and 2016.~~


	Commercial		Commercial
	Real Estate		Real Estate		Construction						Other
	Owner		Non-owner		and Land		Commercial		1-4 Family		Consumer
Three Months Ended June 30, 2019	Occupied		Occupied (1)		Development		Loans		Residential (2)		Loans		Unallocated		Total
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

Three Months Ended June 30, 2018
Allowance for loan losses:
Beginning balance	$	859	$	1,550	$	804	$	5,272	$	1,450	$	820	$	—	$	10,755
Provision (recovery)		(113)		(257)		69		1,709		199		(557)		—		1,050
Charge offs		—		—		—		(707)		(95)		(91)		—		(893)
Recoveries		4		—		—		32		25		27		—		88
Ending balance	$	750	$	1,293	$	873	$	6,306	$	1,579	$	199	$	—	$	11,000

24

(1)

Includes loans secured by farmland and multi-family loans.

(2)

Includes home equity lines of credit.


	Commercial		Commercial
	Real Estate		Real Estate		Construction						Other
	Owner		Non-owner		and Land		Commercial		1-4 Family		Consumer
Six Months Ended June 30, 2019	Occupied		Occupied (1)		Development		Loans		Residential (2)		Loans		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	802	$	1,669	$	821	$	7,097	$	1,106	$	224	$	564	$	12,283
Provision (recovery)		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

Six Months Ended June 30, 2018
Allowance for loan losses:
Beginning balance	$	690	$	1,321	$	692	$	4,496	$	1,586	$	612	$	—	$	9,397
Provision (recovery)		53		(28)		181		2,540		165		(261)		—		2,650
Charge offs		—		—		—		(937)		(261)		(182)		—		(1,380)
Recoveries		7		—		—		207		89		30		—		333
Ending balance	$	750	$	1,293	$	873	$	6,306	$	1,579	$	199	$	—	$	11,000

(1)

Includes loans secured by farmland and multi-family loans.

(2)

Includes home equity lines of credit.

21

Table of Contents

The following tables present the balance in the allowance for loan losses and the recorded investment in non-covered loans by portfolio segment and based on impairment method as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 (in thousands):

Commercial Commercial
Real Estate Real Estate Construction Other
Owner Non-owner and Land Commercial 1-4 Family Consumer
Occupied Occupied (1) Development Loans Residential (2) Loans Unallocated Total
Non-covered loans:
September 30, 2017
Ending allowance balance attributable to loans:
Individually evaluated for impairment $ - $ - $ - $ - $ - $ - $ - $ -
Collectively evaluated for impairment 816 1,530 803 4,174 1,440 325 166 9,254
Total ending allowance $ 816 $ 1,530 $ 803 $ 4,174 $ 1,440 $ 325 $ 166 $ 9,254

Loans:
Individually evaluated for impairment $ 1,218 $ - $ 9,984 $ 4,128 $ 376 $ - $ - $ 15,706
Collectively evaluated for impairment 398,581 539,614 188,344 231,043 599,850 39,460 - 1,996,892
Total ending loan balances $ 399,799 $ 539,614 $ 198,328 $ 235,171 $ 600,226 $ 39,460 $ - $ 2,012,598

December 31, 2016
Ending allowance balance attributable to loans:
Individually evaluated for impairment $ 150 $ - $ - $ 750 $ - $ - $ - $ 900
Collectively evaluated for impairment 755 1,484 752 2,616 1,279 78 746 7,710
Total ending allowance $ 905 $ 1,484 $ 752 $ 3,366 $ 1,279 $ 78 $ 746 $ 8,610

Loans:
Individually evaluated for impairment $ 6,271 $ - $ - $ 6,380 $ - $ - $ - $ 12,651
Collectively evaluated for impairment 148,536 310,196 91,067 108,985 231,833 856 - 891,473
Total ending loan balances $ 154,807 $ 310,196 $ 91,067 $ 115,365 $ 231,833 $ 856 $ - $ 904,124

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

~~(2) Includes home equity lines of credit.~~

The following tables present the balance in the allowance for covered loan losses and the recorded investment in covered loans by portfolio segment and based on impairment method as of September 30, 2017 and December 31, 2016 (in thousands):

Commercial Commercial
Real Estate Real Estate Construction Other
Owner Non-owner and Land Commercial 1-4 Family Consumer
Occupied Occupied (1) Development Loans Residential (2) Loans Unallocated Total
Covered loans:
September 30, 2017
Ending allowance balance attributable to loans:
Individually evaluated for impairment $ - $ - $ - $ - $ - $ - $ - $ -
Collectively evaluated for impairment - - - - - - - -
Total ending allowance $ - $ - $ - $ - $ - $ - $ - $ -

Loans:
Individually evaluated for impairment $ - $ - $ - $ - $ 1,285 $ - $ - $ 1,285
Collectively evaluated for impairment - - - - 22,694 - - 22,694
Total ending loan balances $ - $ - $ - $ - $ 23,979 $ - $ - $ 23,979

December 31, 2016
Ending allowance balance attributable to loans:
Individually evaluated for impairment $ - $ - $ - $ - $ - $ - $ - $ -
Collectively evaluated for impairment - - - - - - - -
Total ending allowance $ - $ - $ - $ - $ - $ - $ - $ -

Loans:
Individually evaluated for impairment $ - $ - $ - $ - $ 963 $ - $ - $ 963
Collectively evaluated for impairment - - - - 27,217 - - 27,217
Total ending loan balances $ - $ - $ - $ - $ 28,180 $ - $ - $ 28,180

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

~~(2) Includes home equity lines of credit.~~


	Commercial		Commercial
	Real Estate		Real Estate		Construction						Other
	Owner		Non-owner		and Land		Commercial		1-4 Family		Consumer
June 30, 2019	Occupied		Occupied (1)		Development		Loans		Residential (2)		Loans		Unallocated		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	600	$	—	$	—	$	—	$	600
Collectively evaluated for impairment		833		1,890		802		5,234		1,127		273		854		11,013
Total ending allowance	$	833	$	1,890	$	802	$	5,834	$	1,127	$	273	$	854	$	11,613

Loans:
Individually evaluated for impairment	$	5,279	$	4,868	$	338	$	5,442	$	1,635	$	—	$	—	$	17,562
Collectively evaluated for impairment		405,553		658,086		158,618		215,124		688,378		29,310		—		2,155,069
Total ending loan balances	$	410,832	$	662,954	$	158,956	$	220,566	$	690,013	$	29,310	$	—	$	2,172,631

December 31, 2018
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	600	$	—	$	—	$	—	$	600
Collectively evaluated for impairment		802		1,669		821		6,497		1,106		224		564		11,683
Total ending allowance	$	802	$	1,669	$	821	$	7,097	$	1,106	$	224	$	564	$	12,283

Loans:
Individually evaluated for impairment	$	2,795	$	171	$	—	$	3,450	$	1,591	$	—	$	—	$	8,007
Collectively evaluated for impairment		404,236		644,009		146,654		251,991		691,717		32,347		—		2,170,954
Total ending loan balances	$	407,031	$	644,180	$	146,654	$	255,441	$	693,308	$	32,347	$	—	$	2,178,961

25

(1)

Includes loans secured by farmland and multi-family loans.

(2)

Includes home equity lines of credit.

Troubled Debt Restructurings

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

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

22

Table of Contents

~~During the three and nine months ending September~~As of June 30, ~~2017, there were no~~2019, we had two loans in TDRs. One loan was modified in ~~TDRs.~~TDRs during the year ending December 31, 2018. One TDR which had been modified in 2013 defaulted ~~during the second quarter of~~in 2015. This loan, in the amount of ~~$677~~$655 thousand, was current as of ~~September~~June 30, ~~2017.~~

During the three and nine months ending September 30, 2016, there were no loans modified in TDRs. One TDR which had been modified in 2013 defaulted during the second quarter of 2015. This loan, in the amount of $692 thousand, was current as of September 30, 2016.

2019.

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. ~~Southern National had no loans classified Doubtful at September 30, 2017 or December 31, 2016.~~

Special Mention loans are loans that have a potential weakness that ~~deserves~~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.

26

Southern National had no loans classified Doubtful at June 30, 2019 or December 31, 2018.

As of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, 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, 2019	Mention		Substandard (3)		Pass		Total
Commercial real estate - owner occupied	$	3,939	$	5,058	$	401,835	$	410,832
Commercial real estate - non-owner occupied (1)		4,311		181		658,462		662,954
Construction and land development		731		—		158,225		158,956
Commercial loans		3,439		7,173		209,954		220,566
Residential 1-4 family (2)		471		2,583		686,959		690,013
Other consumer loans		132		—		29,178		29,310
Total	$	13,023	$	14,995	$	2,144,613	$	2,172,631


	Total Loans
	Special
December 31, 2018	Mention		Substandard (3)		Pass		Total
Commercial real estate - owner occupied	$	6,611	$	2,810	$	397,610	$	407,031
Commercial real estate - non-owner occupied (1)		4,382		189		639,609		644,180
Construction and land development		—		—		146,654		146,654
Commercial loans		2,373		2,689		250,379		255,441
Residential 1-4 family (2)		395		1,982		690,931		693,308
Other consumer loans		142		—		32,205		32,347
Total	$	13,903	$	7,670	$	2,157,388	$	2,178,961

(1)

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

(2)

Includes home equity lines of credit.

(3)

Includes SBA guarantees of $3.2 million and $3.4 million as of June 30, 2019 and December 31, 2018, respectively.

Covered Loans Non-covered Loans Total Loans
Classified/ Special Classified/
September 30, 2017 Criticized (1) Pass Total Mention Substandard (3) Pass Total Criticized Pass Total
Commercial real estate - owner occupied $ - $ - $ - $ - $ 1,218 $ 398,581 $ 399,799 $ 1,218 $ 398,581 $ 399,799
Commercial real estate - non-owner occupied (2) - - - - 9,984 529,630 539,614 9,984 529,630 539,614
Construction and land development - - - - - 198,328 198,328 - 198,328 198,328
Commercial loans - - - 3,258 4,128 227,785 235,171 7,386 227,785 235,171
Residential 1-4 family (4) 1,285 22,694 23,979 - 376 599,850 600,226 1,661 622,544 624,205
Other consumer loans - - - - - 39,460 39,460 - 39,460 39,460

Total $ 1,285 $ 22,694 $ 23,979 $ 3,258 $ 15,706 $ 1,993,634 $ 2,012,598 $ 20,249 $ 2,016,328 $ 2,036,577

Covered Loans Non-covered Loans Total Loans
Classified/ Special Classified/
December 31, 2016 Criticized (1) Pass Total Mention Substandard (3) Pass Total Criticized Pass Total
Commercial real estate - owner occupied $ - $ - $ - $ - $ 6,271 $ 148,536 $ 154,807 $ 6,271 $ 148,536 $ 154,807
Commercial real estate - non-owner occupied (2) - - - - - 310,196 310,196 - 310,196 310,196
Construction and land development - - - - - 91,067 91,067 - 91,067 91,067
Commercial loans - - - 28 6,380 108,957 115,365 6,408 108,957 115,365
Residential 1-4 family (4) 963 27,217 28,180 - - 231,833 231,833 963 259,050 260,013
Other consumer loans - - - - - 856 856 - 856 856

Total $ 963 $ 27,217 $ 28,180 $ 28 $ 12,651 $ 891,445 $ 904,124 $ 13,642 $ 918,662 $ 932,304

23

~~(1) Credit quality is enhanced by a loss sharing agreement with the FDIC in the covered portfolio. The same credit quality indicators used in the non-covered portfolio are combined.~~

~~(2) Includes loans secured by farmland and multi-family residential loans.~~

~~(3) Includes SBA guarantees~~Table of ~~$1.7 million and $2.2 million as of September 30, 2017 and December 31, 2016.~~Contents

~~(4) Includes home equity lines of credit.~~

The amount of foreclosed residential real estate property held at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 was ~~$2.0 million and $3.4 million, respectively.~~$ $1.2 million. The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was ~~$1.4~~$0.5 million and ~~$1.8~~$1.5 million at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

5.LEASES

6.

~~FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK~~

The Company leases certain premises and equipment under operating leases. At June 30, 2019, the Company had operating lease liabilities totaling $8.4 million and right-of-use assets totaling $7.9 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 and six months ended June 30, 2019, our net operating lease cost was $693 thousand and $1.3 million, respectively, and was reflected in occupancy expenses on our income statement.

The following table presents other information related to our operating leases:



	For the Six Months Ended
(in thousands except for percent and period data)	June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities	$	2,483
Right-of-use assets obtained in exchange for new operating lease liabilities	$	—
Weighted-average remaining lease term - operating leases, in years		6.0
Weighted-average discount rate - operating leases		3.0	%

The following table summarizes the maturity of remaining lease liabilities:



	As of
	June 30,
(dollars in thousands)	2019
Lease payments due:
Less than one year	$	1,199
One to three years		3,445
Three to five years		2,384
More than five years		2,199
Total lease payments		9,227
Less: lease expense		(842)
Lease liabilities	$	8,385

As of June 30, 2019, the Company does not have or expect any operating leases that have not yet commenced or 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 sold by EVBS premerger.~~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 ~~$14.3~~$19.6 million and ~~$6.4~~$19.2 million as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

24

Table of Contents

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

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~~customer’s creditworthiness on a case-by-case basis.

At ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, we had unfunded lines of credit and undisbursed construction loan funds totaling ~~$399.8~~$342.0 million and ~~$135.8~~$339.2 million, respectively. Virtually all of our unfunded lines of credit and undisbursed construction loan funds are variable rate.

27

Premerger, EVBS sold its credit card portfolio. With that sale, EVBS guaranteed the credit card accounts of certain customers to the bank that issues the cards. In connection with the merger with EVBS, Southern National now is the guarantor. The fair value of guarantees of credit card accounts previously sold is based on the estimated cost to settle the obligations with the counterparty and are not considered significant as of September 30, 2017.

7.~~Earnings Per Share~~EARNINGS PER SHARE

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

			Weighted
			Average						Weighted
	Income		Shares		Per Share				Average
	(Numerator)		(Denominator)		Amount		Income		Shares	Per Share
For the three months ended September 30, 2017
							(Numerator)		(Denominator)	Amount
For the three months ended June 30, 2019
Basic EPS	$	4,374		23,913	$	0.18	$	9,319	24,025	$	0.39
Effect of dilutive stock options and warrants		-		305		-
Effect of dilutive stock options								—	298		(0.01)
Diluted EPS	$	4,374		24,218	$	0.18	$	9,319	24,323	$	0.38

For the three months ended September 30, 2016
For the three months ended June 30, 2018
Basic EPS	$	2,765		12,258	$	0.23	$	8,867	24,038	$	0.37
Effect of dilutive stock options and warrants		-		171		-
Effect of dilutive stock options								—	292		—
Diluted EPS	$	2,765		12,429	$	0.22	$	8,867	24,330	$	0.37

For the nine months ended September 30, 2017
For the six months ended June 30, 2019
Basic EPS	$	3,586		16,526	$	0.22	$	15,339	24,017	$	0.64
Effect of dilutive stock options and warrants		-		295		-
Effect of dilutive stock options								—	298		(0.01)
Diluted EPS	$	3,586		16,821	$	0.21	$	15,339	24,315	$	0.63

For the nine months ended September 30, 2016
For the six months ended June 30, 2018
Basic EPS	$	8,120		12,248	$	0.66	$	17,126	24,000	$	0.71
Effect of dilutive stock options and warrants		-		154		-
Effect of dilutive stock options								—	282		—
Diluted EPS	$	8,120		12,402	$	0.65	$	17,126	24,282	$	0.71

~~There were 480,729 and 467,977~~The Company did not have any anti-dilutive options ~~outstanding for the three~~in 2019 and ~~nine months ended September 30, 2017, respectively. There were 684,604 and 702,027 anti-dilutive options and warrants outstanding for the three and nine months ended September 30, 2016, respectively.~~2018.

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8.FAIR VALUE

ASC ~~820-10~~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

28

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 ~~would~~ include highly liquid government bonds and mortgage ~~products and exchange traded equities.~~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 ~~would~~ 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, ~~all~~a majority of Southern National’s available for sale debt investment securities are considered to be Level 2 investment securities, except for a few corporate securities that are classified as Level 3 investment securities.

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


			Fair Value Measurements Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Total at		Identical Assets		Inputs		Inputs
(dollars in thousands)	June 30, 2019		(Level 1)		(Level 2)		(Level 3)
Available for sale securities
Residential government-sponsored mortgage-backed securities	$	45,849	$	—	$	45,849	$	—
Obligations of states and political subdivisions		18,593		—		18,593		—
Corporate securities		2,019		—		1,019		1,000
Trust preferred securities		2,591		—		2,591		—
Residential government-sponsored collateralized mortgage obligations		40,980		—		40,980		—
Government-sponsored agency securities		8,634		—		8,634		—
Agency commercial mortgage-backed securities		27,979		—		27,979		—
SBA pool securities		17,215		—		17,215		—
Total	$	163,860	$	—	$	162,860	$	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) September 30, 2017 (Level 1) (Level 2) (Level 3)
Financial assets:
Available for sale securities
Agency residential mortgage-backed securities (fixed and variable rate) $ 32,105 $ - $ 32,105 $ -
Obligations of states and political subdivisions 18,609 - 18,609 -
Corporate securities 2,015 - 2,015 -
Trust preferred securities 2,366 - 2,366 -
Residential government-sponsored collateralized mortgage obligations 53,370 - 53,370 -
Government-sponsored agency securities 1,733 - 1,733 -
Agency commercial mortgage-backed securities 28,081 - 28,081 -
SBA pool securities 25,958 - 25,958 -
$ 164,237 $ - $ 164,237 $ -


			Fair Value Measurements Using								Fair Value Measurements Using
					Significant								Significant
			Quoted Prices in		Other		Significant				Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable				Active Markets for		Observable		Unobservable
	Total at		Identical Assets		Inputs		Inputs		Total at		Identical Assets		Inputs		Inputs
(dollars in thousands)	December 31, 2016		(Level 1)		(Level 2)		(Level 3)		December 31, 2018		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Available for sale securities
Residential government-sponsored mortgage-backed securities									$	27,302	$	—	$	27,302	$	—
Obligations of states and political subdivisions	$	2,259	$	-	$	2,259	$	-		18,055		—		18,055		—
Corporate securities										2,008		—		1,008		1,000
Trust preferred securities		1,659		-		1,659		-		2,641		—		2,641		—
	$	3,918	$	-	$	3,918	$	-
Residential government-sponsored collateralized mortgage obligations										43,057		—		43,057		—
Government-sponsored agency securities										3,125		—		3,125		—
Agency commercial mortgage-backed securities										27,304		—		27,304		—
SBA pool securities										19,885		—		19,885		—
Total									$	143,377	$	—	$	142,377	$	1,000

Assets and Liabilities Measured on a Non-recurring Basis:

Impaired Loans

Generally, we measure the impairment for impaired loans considering the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral is determined by an independent appraisal or evaluation less estimated costs related to selling the collateral. In some cases appraised value is net of costs to sell. Estimated selling costs range from 6% to 10% of collateral valuation at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016.~~2018. Fair value is classified as Level 3 in the fair value hierarchy. ~~Non-covered loans~~Loans identified as impaired totaled ~~$15.7~~$21.5 million (including SBA guarantees of ~~$1.7~~$3.2 million) as of ~~September~~June 30, ~~2017~~2019 with ~~$0 allocated~~$605 thousand allocation made to the allowance for loan losses compared to a carrying amount of ~~$12.7~~$12.1 million (including SBA guarantees of ~~$2.2~~$3.4 million) with ~~an allocated~~$618 thousand allocation made to the allowance for loan losses ~~totaling $900 thousand~~ at December 31, ~~2016.~~2018.

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Assets held for sale

In connection with the merger with EVBS, SNBV acquired four properties that were either former EVBS administrative locations or previously anticipated to be future EVBS administrative locations. Assets held for sale are

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measured at fair value less cost to sell, based on appraisals conducted by an independent, licensed appraiser outside of the Company using observable market data. If the fair value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. Assets held for sale are measured at fair value on a non-recurring ~~basis.~~basis and are included in other assets in the consolidated balance sheets. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the consolidated statements of comprehensive income.

Other Real Estate Owned (“OREO”)

OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or evaluation less cost to sell. In some cases appraised value is net of costs to sell. Selling costs have been in the range from 5.0% to 7.6% of collateral valuation at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016.~~2018. Fair value is classified as Level 3 in the fair value hierarchy. OREO is further evaluated quarterly for any additional impairment. At ~~September~~June 30, ~~2017, the total amount of non-covered OREO was $8.1 million,~~2019 and ~~there was no covered OREO. As of~~ December 31, ~~2016,~~2018, the total amount of OREO was ~~$8.6~~$5.0 million and ~~there was no covered OREO.~~

30

$5.1 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, 2019		(Level 1)		(Level 2)		(Level 3)
Impaired loans:
Commercial real estate - owner occupied	$	5,279	$	—	$	—	$	5,279
Commercial real estate - non-owner occupied (1)		4,868		—		—		4,868
Construction and land development		338		—		—		338
Commercial loans		8,213		—		—		8,213
Residential 1-4 family (2)		2,814		—		—		2,814
Assets held for sale		600		—		—		600
Other real estate owned:
Commercial real estate - owner occupied (1)		908		—		—		908
Construction and land development		2,902		—		—		2,902
Residential 1-4 family (2)		1,231		—		—		1,231


			Fair Value Measurements Using								Fair Value Measurements Using
					Significant								Significant
			Quoted Prices in		Other		Significant				Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable				Active Markets for		Observable		Unobservable
	Total at		Identical Assets		Inputs		Inputs		Total at		Identical Assets		Inputs		Inputs
(dollars in thousands)	September 30, 2017		(Level 1)		(Level 2)		(Level 3)		December 31, 2018		(Level 1)		(Level 2)		(Level 3)
Impaired non-covered loans:
Impaired loans:
Commercial real estate - owner occupied	$	1,218	$	-	$	-	$	1,218	$	2,795	$	—	$	—	$	2,795
Commercial real estate - non-owner occupied (1)										171		—		—		171
Commercial loans										6,076		—		—		6,076
Residential 1-4 family (2)										3,020		—		—		3,020
Assets held for sale										600		—		—		600
Other real estate owned:
Commercial real estate - owner occupied (1)										908		—		—		908
Construction and land development		9,984		-		-		9,984		2,938		—		—		2,938
Commercial loans		4,128		-		-		4,128
Residential 1-4 family		376		-		-		376
Impaired covered loans:
Residential 1-4 family		1,285		-		-		1,285
Assets held for sale		1,685		-		-		1,685
Non-covered other real estate owned:
Commercial real estate - owner occupied		3,092		-		-		3,092
Construction and land development		2,923		-		-		2,923
Residential 1-4 family		2,038		-		-		2,038
Residential 1-4 family (2)										1,231		—		—		1,231

(1)

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, 2016 (Level 1) (Level 2) (Level 3)
Impaired non-covered loans:
Commercial real estate - owner occupied $ 6,121 $ - $ - $ 6,121
Commercial loans 5,630 - - 5,630
Impaired covered loans:
Residential 1-4 family 963 - - 963
Non-covered other real estate owned:
Commercial real estate - owner occupied 1,110 - - 1,110
Commercial real estate - non-owner occupied (1) 237 - - 237
Construction and land development 3,863 - - 3,863
Residential 1-4 family 3,407 - - 3,407

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

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(2)

Includes home equity lines of credit.

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Fair Value of Financial Instruments

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


		June 30, 2019				December 31, 2018
	Fair Value	Carrying		Fair		Carrying		Fair
	Hierarchy Level	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	Level 1	$	33,088	$	33,088	$	28,611	$	28,611
Securities available for sale	Level 2 & Level 3		163,860		163,860		143,377		143,377
Securities held to maturity	Level 2		86,815		86,681		92,462		89,109
Stock in Federal Reserve Bank and Federal Home Loan Bank	Level 2		17,364		17,364		19,522		19,522
Equity investment in mortgage affiliate	Level 3		4,405		4,405		3,829		3,829
Preferred investment in mortgage affiliate	Level 3		3,305		3,305		3,305		3,305
Net loans	Level 3		2,161,232		2,139,365		2,166,541		2,134,021
Accrued interest receivable	Level 2 & Level 3		8,818		8,818		8,745		8,745
Financial liabilities:
Demand deposits	Level 2	$	696,811	$	696,811	$	665,640	$	665,640
Money market and savings accounts	Level 2		587,627		587,627		506,519		506,519
Certificates of deposit	Level 3		865,988		866,127		925,441		919,175
Securities sold under agreements to repurchase	Level 1		14,319		14,319		18,721		18,721
FHLB short term advances	Level 1		110,640		110,640		163,340		163,340
Junior subordinated debt	Level 2		9,608		13,034		9,584		12,065
Senior subordinated notes	Level 2		47,070		58,785		47,089		57,173
Accrued interest payable	Level 1 & Level 3		4,121		4,121		3,985		3,985

September 30, 2017 December 31, 2016
Fair Value Carrying Fair Carrying Fair
Hierarchy Level Amount Value Amount Value

Financial assets:
Cash and cash equivalents(1) Level 1 $ 23,943 $ 23,943 $ 47,392 $ 47,392
Securities available for sale See previous table 164,237 164,237 3,918 3,918
Securities held to maturity Level 2 100,333 99,122 85,300 83,344
Stock in Federal Reserve Bank and Federal Home Loan Bank n/a 24,076 n/a 7,929 n/a
Equity investment in mortgage affiliate Level 3 4,617 4,617 4,629 4,629
Preferred investment in mortgage affiliate Level 3 3,305 3,305 2,555 2,555
Net non-covered loans Level 3 2,001,948 2,005,934 893,625 903,085
Net covered loans Level 3 23,979 24,027 28,180 32,173
Accrued interest receivable Level 2 & Level 3 7,965 7,965 3,202 3,202
FDIC indemnification asset Level 3 1,525 528 2,111 528
Financial liabilities:
Demand deposits Level 1 649,786 649,786 124,779 124,779
Money market and savings accounts Level 1 530,450 530,450 182,590 182,590
Certificates of deposit Level 3 723,373 721,223 605,613 605,394
Securities sold under agreements to repurchase Level 1 16,416 16,416 - -
FHLB short term advances Level 1 272,115 272,115 95,000 95,000
Junior subordinated debt Level 2 9,522 11,524 - -
Senior subordinated notes Level 2 47,138 52,649 - -
Accrued interest payable Level 1 & Level 3 2,619 2,619 1,190 1,190

~~(1)~~

~~Includes Federal Funds Sold~~

Carrying amount is the estimated fair value for cash and cash equivalents (including federal funds sold), equity ~~investment~~investments in our mortgage affiliate, preferred ~~investment~~investments in our mortgage affiliate, accrued interest receivable and payable, demand deposits, savings accounts, money market accounts, securities sold under agreements to repurchase, and short-term debt (FHLB short-term advances and variable rate loans that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates appliedsecurities sold under agreements to the estimated life. A discount for liquidity risk was not considered necessary in estimating the fair value of loans. It was not practicable to determine the fair value of Federal Reserve Bank and Federal Home Loan Bank stock due to restrictions placed on its transferability.repurchase). Fair value of long-term debt is based on current rates for similar financing. ~~The~~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 FDIC indemnification asset was determined by discounting estimated future cash flows using the long-term risk free rate plus a premium and represents the present value of our current expectation for recoveries from the FDIC on covered loans.par value. The fair value of off-balance-sheet items is not considered material. ~~The fair~~Fair value of net loans, ~~is not presented on an exit price basis.~~certificates of deposits, junior subordinated debt, and senior subordinated notes are measured using the exit-price notion in accordance with the adoption of ASU 2016‑01 in 2018.

9.

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

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

Other short-term borrowings can consist of ~~Federal Home Loan Bank (“FHLB”)~~FHLB of Atlanta overnight advances, other FHLB advances maturing within one year, federal funds purchased and securities sold under agreements to repurchase (“repo”) that mature within one year, which are secured transactions with customers.

~~In the second quarter of 2016, the Company discontinued offering repo accounts. However,~~ The balance in repo accounts ~~totaling $7.6~~at June 30, 2019 and December 31, 2018 was $14.3 million ~~were assumed on June 23, 2017 in the merger with EVBS. During the third quarter of 2017 the Company determined that it will continue to offer repo accounts~~ and ~~the balance at September 30, 2017 was $16.4 million.~~$18.7 million, respectively.

32

~~10.~~

~~JUNIOR SUBORDINATED DEBT AND SENIOR SUBORDINATED NOTES~~

10. JUNIOR SUBORDINATED DEBT AND SENIOR SUBORDINATED NOTES

In connection with our merger with EVBS, the Company assumed ~~$10~~$10.3 million (fair value adjustment of $801 thousand) of trust preferred securities that were issued on September 17, 2003 and placed through the Trust in a pooled

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Table of Contents

underwriting totaling approximately $650 million. The trust issuer ~~has~~ 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. The trust preferred securities pay cumulative cash distributions quarterly at a variable rate per annum, reset quarterly, equal to the ~~3-month~~three-month LIBOR plus 2.95%. As of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, the interest rate was ~~4.27%~~5.36% and ~~3.94%~~5.73%, respectively. The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax purposes. The trust preferred securities have a mandatory redemption date of September 17, 2033, and became subject to varying call provisions beginning September 17, 2008. The Company has fully and unconditionally guaranteed the trust preferred securities through the combined operation of the Junior Subordinated Debt and other related documents. The Company’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company.

The trust preferred securities may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. At ~~September~~June 30, ~~2017,~~2019, all of the trust preferred securities qualified as Tier 1 capital.

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

On January 20, 2017, Southern National completed the sale of $27.0 million of its fixed-to-floating rate Subordinated Notes due 2027 (the “SNBV Senior Subordinated Notes”). The SNBV Senior Subordinated Notes will initially bear interest at 5.875% per annum until January 31, 2022; thereafter, the SNBV Senior Subordinated Notes will be payable at an annual floating rate equal to three-month LIBOR plus a spread of 3.95% until maturity or early redemption. At ~~September~~June 30, ~~2017,~~2019, all of the SNBV Senior Subordinated Notes qualified as Tier 2 capital. At ~~September~~June 30, ~~2017,~~2019, the remaining unamortized debt issuance costs related to the SNBV Senior Subordinated Notes totaled ~~$878~~$713 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. The EVBS Senior Subordinated Notes bear interest at an annual rate of 6.50%, payable semi-annually in arrears on May 1 and November 1 of each year ending on May 1, 2020. From and including May 1, 2020 to, but excluding, the maturity date, the EVBS Senior Subordinated Notes will bear interest at an annual rate, reset quarterly, equal to LIBOR determined on the determination date of the applicable interest period plus 502 basis points, payable quarterly in arrears on February 1, May 1, August 1 and November 1 of each year, beginning on August 1, 2020. The Company may, at its option, redeem, in whole or in part, the EVBS Senior Subordinated Notes as early as May 1, 2020, and any partial redemption would be made pro rata among all of the holders. At ~~September~~June 30, ~~2017~~2019 all of the EVBS Senior Subordinated Notes qualified as Tier 2 capital.

33

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

Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of SNBV. This discussion and analysis should be read with the consolidated financial statements, the footnotes thereto, and the other financial data included in this report and in our annual report on Form ~~10-K~~10‑K for the year ended December 31, ~~2016.~~2018. Results of operations for the three and ~~nine month periods~~six months ended ~~September~~June 30, ~~2017~~2019 are not necessarily indicative of results that may be attained for any other period.

FORWARD-LOOKING STATEMENTS

Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. ~~These forward-looking~~Forward-looking statements are based on our beliefs, assumptions and ~~involve a number~~expectations of ~~risks~~our future financial and ~~uncertainties, many~~operating performance and growth plans, taking into account the information currently available to us. These statements are not statements of ~~which are beyond our control.~~historical fact. The words “believe,” “may,” “forecast,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “continue,” “would,” “could,” “hope,” “might,” “assume,” “objective,” “seek,” “plan,” “strive” ~~and~~or similar words, or the negatives of these words, ~~are intended to~~ identify forward-looking statements.

~~Many possible events or factors could affect our future financial results~~Forward-looking statements involve risks and ~~performance and could~~uncertainties that may cause our actual results to differ materially from the expectations of future results we express or imply in any forward-looking statements. In addition to the Risk Factor contained in this Quarterly Report on Form ~~10-Q,~~10‑Q, as well as the Risk Factors previously disclosed in our Annual Report on Form ~~10-K~~10‑K for the year ended December 31, ~~2016,~~2018, factors that could contribute to those differences include, but are not limited to:

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

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

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

~~a deterioration or downgrade in the credit quality and credit agency ratings of the 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 an acquisition and possible adverse short-term effects on our results of operations;~~

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

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

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

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

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

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

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

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

~~the continued service of key management personnel;~~

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

~~potential environmental liability risk associated with lending activities;~~

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

34

·

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

·

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

·

changes in the availability of funds resulting in increased costs or reduced liquidity, as well as the adequacy of our cash flow from operations and borrowings to meet our short-term liquidity needs;

·

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

·

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

·

the incurrence and possible impairment of goodwill associated with current or future acquisitions and possible adverse short-term effects on our results of operations;

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

31

~~risks~~Table of ~~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;~~Contents

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

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

~~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;~~

·

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

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

·

the continued service of key management personnel;

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

·

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

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;

·

potential environmental liability risk associated with properties that we assume upon foreclosure;

factors that adversely affect our business initiatives, including SNBV’s merger and integration of EVBS, and other factors that could impact the business of the combined organization, including, without limitation, changes in the economic or business conditions in SNBV’s markets;

·

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

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

·

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 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.~~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 ~~keep in mind~~refer to the risk factors and other cautionary statements in this Quarterly Report on Form ~~10-Q.~~10‑Q and in our periodic and current reports filed with the SEC for specific factors that could cause our actual results to be different from those expressed or implied by our forward-looking statements. These statements speak only as of the date of this Quarterly Report on Form ~~10-Q.~~10‑Q (or an earlier date to the extent applicable). Except as required by applicable law, we undertake no obligation to update publicly these statements in light of new information or future events.

OVERVIEW

SNBV is a corporation that was formed on July 28, 2004 under the laws of the Commonwealth of Virginia and is the holding company for Sonabank a Virginia state-chartered bank which commenced operations on April 14, 2005. As of the close of business on June 23, 2017, SNBV completed its ~~previously announced~~ merger ofwith EVBS ~~with~~ and ~~into SNBV and the completion of~~ the merger of EVBS’s wholly-owned subsidiary, EVB, with and into SNBV’s wholly-owned subsidiary, Sonabank. This combination has brought together two banking companies with complementary business lines, creating one of the premier banking institutions headquartered in the Commonwealth of Virginia. EVBS was the holding company for EVB, a Virginia state-chartered bank which traced its beginnings to 1910. Sonabank provides a range of financial services to individuals and small and medium sized businesses. At ~~September~~June 30, ~~2017,~~2019, Sonabank had ~~thirty-seven~~thirty-eight full-service retail branches in Virginia, located in the counties of Chesterfield (2), Essex (2), Fairfax (Reston, McLean and Fairfax), Gloucester (2), Hanover (3), King William, Lancaster, Middlesex (3), New Kent, Northumberland (3), Southampton, Surry, Sussex, and in Charlottesville, Clifton Forge, Colonial Heights, Front Royal, Hampton, Haymarket, Leesburg, Middleburg, New Market, Newport News, Richmond, South Riding, Warrenton, and Williamsburg, and seven full-service retail branches in Maryland, in Rockville, Shady Grove, Bethesda, Upper Marlboro, Brandywine, Owings and Huntingtown.

35

We have administrative offices in Warrenton and Glen Allen, Virginia, and executive offices in Georgetown, Washington, D.C. and Glen Allen, Virginia where senior management is located. ~~In September 2017, Southern National and Sonabank successfully completed the core data processing system conversion related to its merger~~

32

Table of EVBS and EVB. We are very excited to have combined two great organizations and remain highly optimistic about the future prospects and synergies of the combined entity. With the core data processing system conversion complete, during the fourth quarter of 2017 and forward, we plan to continue to focus our efforts on realizing cost savings, maximizing revenue enhancement opportunities from the merger of EVBS, while conservatively and prudently growing the balance sheet. Contents

RESULTS OF OPERATIONS

Net Income

Three-Month Comparison.Net income for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017~~2019 was ~~$4.4~~$9.3 million, or $0.39 basic and ~~$3.6 million, respectively. That compares~~$0.38 diluted earnings per share, compared to net income of ~~$2.8~~$8.9 million, or $0.37 basic and ~~$8.1 million~~diluted earnings per share, for the three months ended June 30, 2018.

The increase in the net income during the three ~~and nine~~ months ended ~~September~~June 30, ~~2016, respectively. SNBV’s results~~2019 compared to the three months ended June 30, 2018 was primarily driven by an income tax benefit of $1.2 million in the second quarter of 2019 due to the formal assessment and rebooking of the $5.5 million net operating loss carryforward that was written off in the fourth quarter of 2018. The increase was partially offset by a decrease in net interest income as a result of a rising interest rate environment during 2018.

During the three months ended June 30, 2018, net income was impacted positively by the $1.2 million of accretion income from the acquired loan discounts, $732 thousand of interest income recognized on the payout of a $9.9 million nonaccrual loan, and $250 thousand of income from recoveries of legacy investment securities and loans charged off by EVBS before it merged into Southern National in June of 2017.

Six-Month Comparison.Net income for the ~~three and nine~~six months ended ~~September~~June 30, ~~2017 were directly~~2019 was $15.3 million, or $0.64 basic and $0.63 diluted earnings per share, compared to net income of $17.1 million, or $0.71 basic and diluted earnings per share, for the six months ended June 30, 2018.

The decrease in the net income during the six months ended June 30, 2019 compared to the six months ended June 30, 2018 was primarily driven by a nonrecurring other loss of $3.2 million and related legal expense of $502 thousand. The decrease was partially offset by an income tax benefit of $1.2 million in the second quarter of 2019 due to the formal assessment and rebooking of the $5.5 million net operating loss carryforward that was written off in the fourth quarter of 2018.

During the six months ended June 30, 2018, the net income was impacted positively by the ~~merger with~~$2.5 million of accretion income from the acquired loan discounts, $1.7 million of income from recoveries of legacy investment securities and loans charged off by EVBS ~~including expenses related~~before it merged into Southern National in June of 2017, and the reduced federal income tax rate of 21% from 34% due to the merger of $168 thousand and $9.1 million, respectively, compared to no merger expenses during the same periods last year. Also affecting SNBV’s results was a provision for loan losses of $5.3 million that was recorded during the third quarter of 2017. The primary driverenactment of the ~~elevated provision for loan losses was the $5.3 million in charge-offs taken~~Tax Cuts and Jobs Act of 2017, which became effective on two loans that were related to the deteriorating financial condition of one long-time borrower of Sonabank, a government contractor, who is experiencing cash flow problems. Management is closely monitoring this situation.

January 1, 2018.

Net Interest Income

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

Three-Month Comparison.Net interest income was ~~$23.9~~$21.0 million infor the ~~quarter~~three months ended ~~September~~June 30, ~~2017~~2019 compared to ~~$10.4~~$23.2 million ~~during~~for the ~~same period last year. Average loans during~~three months ended June 30, 2018, which was a direct result of the ~~third quarter~~rising costs of ~~2017 were $2.04 billion compared to $907.3 million during the same period last year.~~funds including deposits and borrowings. Southern National’s net interest margin for the three months ended June 30, 2019 was ~~4.02% in the third quarter of 2017~~3.40% compared to ~~4.04% during~~3.79% for the ~~third quarter of 2016.~~three months ended June 30, 2018. Total income on interest-earning assets was $30.3 million and $30.0 million for the three months ended June 30, 2019 and 2018, respectively. The yield on average interest-earning assets ~~decreased five basis points to~~was 4.93% and 4.86% ~~during~~for the ~~third~~second quarter of ~~2017 when comparing to~~2019 and 2018, respectively. Interest and fees on loans totaled $28.4 million and $27.7 million for the ~~4.91% yield on average interest-earning assets during the third~~second quarter of ~~2016. Cost of funds improved five basis points to 0.88% for the third quarter of 2017 when compared to the 0.93% cost of funds during the third quarter of 2016.~~2019 and 2018, respectively. The accretion of the discount on loans acquired in the acquisitions of EVBS, Greater Atlantic Bank, HarVest and ~~PGFSB increased due to the EVBS acquisition and~~Prince Georges Federal Savings Bank contributed ~~$1.5 million~~$156 thousand to net interest income during the three months ended ~~September~~June 30, ~~2017~~2019 compared to ~~$536 thousand during the third quarter of 2016.~~

~~Net interest income was $44.9~~$1.2 million during the ~~nine~~three months ended ~~September~~June 30, ~~2017, compared~~2018. The decrease in accretion was due to ~~$30.3 million during~~ the ~~comparable period~~slowdown in ~~the prior year.~~acquired loan prepayments and payoffs. Average loans during the ~~nine months ended September 30, 2017~~second quarter of 2019 were ~~$1.4~~$2.16 billion compared to ~~$879.6 million~~$2.14 billion during the ~~same period last year. Southern National’s net~~second quarter of 2018.

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Total interest ~~margin~~expense was ~~3.88% during~~$9.4 million and $6.5 million for the ~~nine~~three months ended ~~September~~June 30, ~~2017 compared~~2019 and 2018, respectively. Interest on deposits was $7.7 million and $3.8 million for the three months ended June 30, 2019 and 2018, respectively. Total average interest-bearing deposits for the second quarter of 2019 and 2018 were $1.78 billion and $1.56 billion, respectively. The yield on total average interest-bearing deposits was 1.72% and 0.98% for the quarter ended June 30, 2019 and 2018, respectively. Interest expense on total average borrowings, which include securities sold under agreements to ~~4.05% during~~repurchase, FHLB advances, junior subordinated debt, and senior subordinated notes, was $1.8 million and $2.7 million for the ~~same period in 2016. The loan discount accretions on~~three months ended June 30, 2019 and 2018, respectively. Total average borrowings were $223.0 million and $451.9 million for the ~~four aforementioned acquisitions were $2.4 million in the first nine~~three months ~~of 2017 compared to $1.6 million in the same period last year.~~

36

ended June 30, 2019 and 2018, respectively.

The following ~~tables detail~~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, 2019						June 30, 2018
			Interest						Interest
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate
	(Dollar amounts in thousands)
Assets
Interest-earning assets:
Loans, net of deferred fees (1) (2)	$	2,161,505	$	28,378	5.27	%	$	2,141,966	$	27,697	5.19	%
Investment securities		248,276		1,627	2.63	%		250,573		1,560	2.50	%
Other earning assets		55,824		326	2.34	%		58,517		426	2.91	%
Total earning assets		2,465,605		30,331	4.93	%		2,451,056		29,683	4.86	%
Allowance for loan losses		(12,488)						(11,172)
Total non-earning assets		266,606						262,974
Total assets	$	2,719,723					$	2,702,858

Liabilities and stockholders' equity
Interest-bearing liabilities:
NOW and other demand accounts	$	357,850	$	773	0.87	%	$	327,459	$	336	0.41	%
Money market accounts		432,927		2,058	1.91	%		330,214		619	0.75	%
Savings accounts		146,073		115	0.32	%		164,421		132	0.32	%
Time deposits		848,806		4,709	2.23	%		739,673		2,723	1.48	%
Total interest-bearing deposits		1,785,656		7,655	1.72	%		1,561,767		3,810	0.98	%
Borrowings		223,053		1,774	3.19	%		451,919		2,699	2.40	%
Total interest-bearing liabilities		2,008,709		9,429	1.88	%		2,013,686		6,509	1.30	%
Noninterest-bearing liabilities:
Demand deposits		331,481						336,849
Other liabilities		22,123						19,248
Total liabilities		2,362,313						2,369,783
Stockholders' equity		357,410						333,075
Total liabilities and stockholders' equity	$	2,719,723					$	2,702,858
Net interest income			$	20,902					$	23,172
Interest rate spread					3.05	%					3.56	%
Net interest margin					3.40	%					3.79	%

(1)

Average Balance Sheets and Net Interest
Analysis For the Three Months Ended
September 30, 2017 September 30, 2016
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) $ 2,038,574 $ 26,726 5.20 % $ 907,330 $ 11,792 5.17 %
Investment securities 267,315 1,623 2.41 % 93,563 665 2.84 %
Other earning assets 47,143 462 3.89 % 21,296 162 3.01 %
Total earning assets 2,353,032 28,811 4.86 % 1,022,189 12,619 4.91 %
Allowance for loan losses (12,069 ) (8,427 )
Total non-earning assets 255,760 81,147
Total assets $ 2,596,723 $ 1,094,909

Liabilities and stockholders' equity
Interest-bearing liabilities:
NOW and other demand accounts $ 328,602 323 0.39 % $ 41,735 18 0.17 %
Money market accounts 381,942 690 0.72 % 127,939 116 0.36 %
Savings accounts 167,630 139 0.33 % 52,093 82 0.63 %
Time deposits 765,725 2,239 1.16 % 596,160 1,912 1.28 %
Total interest-bearing deposits 1,643,899 3,391 0.82 % 817,927 2,128 1.04 %
Borrowings 271,336 1,570 2.30 % 53,777 118 0.87 %
Total interest-bearing liabilities 1,915,235 4,961 1.03 % 871,704 2,246 1.03 %
Noninterest-bearing liabilities:
Demand deposits 330,145 91,575
Other liabilities 25,913 7,794
Total liabilities 2,271,293 971,073
Stockholders' equity 325,430 123,836
Total liabilities and stockholders' equity $ 2,596,723 $ 1,094,909
Net interest income $ 23,850 $ 10,373
Interest rate spread 3.83 % 3.88 %
Net interest margin 4.02 % 4.04 %

~~(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 $41.9 million for the six months ended June 30, 2019 compared to $45.7 million for the six months ended June 30, 2018, which was a direct result of the rising costs of funds including deposits and borrowings. Southern National’s net interest margin for the six months ended June 30, 2019 was 3.41% compared to 3.80% for the six months ended June 30, 2018. Total income on interest-earning assets was $60.6 million and $57.7 million for the six months ended June 30, 2019 and 2018, respectively. The yield on average interest-earning assets was 4.94% and 4.81% for the six months ended June 30, 2019 and 2018, respectively. Interest and fees on loans totaled $56.4 million and $53.6 million for the six months ended June 30, 2019 and 2018, respectively. The accretion of the

34

Table of Contents

discount on loans acquired in the acquisitions of EVBS, Greater Atlantic Bank, HarVest and Prince Georges Federal Savings Bank contributed $972 thousand to net interest income during the six months ended June 30, 2019 compared to $2.5 million during the six months ended June 30, 2018. The decrease in accretion was due to the slowdown in acquired loan prepayments and payoffs. Average loans during the six months ended June 30, 2019 were $2.16 billion compared to $2.11 billion during the six months ended June 30, 2018.

Total interest expense was $18.8 million and $12.0 million for the six months ended June 30, 2019 and 2018, respectively. Interest on deposits was $15.1 million and $7.1 million for the six months ended June 30, 2019 and 2018, respectively. Total average interest-bearing deposits for the six months ended June 30, 2019 and 2018 were $1.80 billion and $1.55 billion, respectively. The yield on total average interest-bearing deposits was 1.69% and 0.92% for the six months ended June 30, 2019 and 2018, respectively. Interest expense on total average borrowings, which include securities sold under agreements to repurchase, FHLB advances, junior subordinated debt, and senior subordinated notes, was $3.7 million and $4.9 million for the six months ended June 30, 2019 and 2018, respectively. Total average borrowings were $218.5 million and $439.0 million for the six months ended June 30, 2019 and 2018, 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,
	2019						2018
			Interest						Interest
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate
	(Dollar amounts in thousands)
Assets
Interest-earning assets:
Loans, net of deferred fees (1) (2)	$	2,158,395	$	56,352	5.26	%	$	2,109,109	$	53,603	5.14	%
Investment securities		242,878		3,207	2.66	%		254,083		3,201	2.54	%
Other earning assets		73,001		1,011	2.79	%		58,401		899	3.10	%
Total earning assets		2,474,275		60,570	4.94	%		2,421,593		57,703	4.81	%
Allowance for loan losses		(12,393)						(10,781)
Total non-earning assets		261,938						259,039
Total assets	$	2,723,820					$	2,669,851

Liabilities and stockholders' equity
Interest-bearing liabilities:
NOW and other demand accounts	$	351,925	$	1,415	0.81	%	$	327,427	$	652	0.40	%
Money market accounts		417,358		3,886	1.88	%		336,425		1,179	0.71	%
Savings accounts		146,827		230	0.32	%		163,786		260	0.32	%
Time deposits		887,258		9,585	2.18	%		719,453		4,989	1.40	%
Total interest-bearing deposits		1,803,368		15,116	1.69	%		1,547,091		7,080	0.92	%
Borrowings		218,516		3,663	3.38	%		439,022		4,949	2.27	%
Total interest-bearing liabilities		2,021,884		18,779	1.87	%		1,986,113		12,029	1.22	%
Noninterest-bearing liabilities:
Demand deposits		325,921						333,095
Other liabilities		20,818						18,861
Total liabilities		2,368,623						2,338,069
Stockholders' equity		355,197						331,782
Total liabilities and stockholders' equity	$	2,723,820					$	2,669,851
Net interest income			$	41,791					$	45,674
Interest rate spread					3.06	%					3.58	%
Net interest margin					3.41	%					3.80	%

(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.~~

37

(2)

Calculations include non-accruing loans in average loan amounts outstanding.

Average Balance Sheets and Net Interest
Analysis For the Nine Months Ended
September 30, 2017 September 30, 2016
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) $ 1,353,054 $ 51,819 5.12 % $ 879,628 $ 33,790 5.13 %
Investment securities 155,506 2,953 2.54 % 99,028 2,311 3.11 %
Other earning assets 38,822 833 2.87 % 19,417 482 3.33 %
Total earning assets 1,547,382 55,605 4.80 % 998,073 36,583 4.90 %
Allowance for loan losses (10,030 ) (8,633 )
Total non-earning assets 152,257 81,380
Total assets $ 1,689,609 $ 1,070,820

Liabilities and stockholders' equity
Interest-bearing liabilities:
NOW and other demand accounts $ 137,295 384 0.37 % $ 35,348 40 0.15 %
Money market accounts 221,749 1,005 0.61 % 127,115 332 0.35 %
Savings accounts 95,604 308 0.43 % 51,556 252 0.65 %
Time deposits 652,322 6,112 1.25 % 571,143 5,294 1.24 %
Total interest-bearing deposits 1,106,970 7,809 0.94 % 785,162 5,918 1.01 %
Borrowings 170,466 2,850 2.24 % 69,526 406 0.78 %
Total interest-bearing liabilities 1,277,436 10,659 1.12 % 854,688 6,324 0.99 %
Noninterest-bearing liabilities:
Demand deposits 181,064 86,294
Other liabilities 23,780 7,647
Total liabilities 1,482,280 948,629
Stockholders' equity 207,329 122,191
Total liabilities and stockholders' equity $ 1,689,609 $ 1,070,820
Net interest income $ 44,946 $ 30,259
Interest rate spread 3.68 % 3.91 %
Net interest margin 3.88 % 4.05 %

35

~~(1) Includes loan fees in both interest income and the calculation~~Table of ~~the yield on loans.~~Contents

~~(2) Calculations include non-accruing loans in average loan amounts outstanding.~~

Provision for Loan Losses

The provision for loan losses is a current charge to earnings made in order to increase the allowance for loan losses to a level 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 loan loss allowance is calculated by segmenting the loan portfolio by loan type and applying risk factors to each segment. The risk factors are determined by considering historical loss data, peer data, as well as applying management’s judgment.

~~The loan loss~~For the three months ended June 30, 2019 and 2018, the provision for ~~the quarter ended September 30, 2017~~loan losses was ~~$5.3~~zero and $1.1 million, ~~compared to $2.1 million~~respectively. The provision for loan losses for the ~~same period last year. For the nine~~six months ended ~~September~~June 30, ~~2017, the loan loss provision~~2019 and 2018 was ~~$6.9 million compared to $4.1 million for the same period last year. Net charge offs for the three~~$200 thousand and ~~nine months ended September 30, 2017 were $5.2 million and $6.2~~$2.7 million, respectively. Net charge offs for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016 were $2.0~~2019 and 2018 was $261 thousand and $870 thousand, respectively, compared to $804 thousand and $1.0 million, ~~and $4.0 million, respectively. The primary driver of the elevated provision~~respectively for ~~loan losses during~~ the three and ~~nine~~six months ended ~~September~~June 30, 2017, as compared to the same periods in 2016, was the $5.3 million in charge-offs taken during the third quarter of 2017 on two loans that were related to the deteriorating financial condition of one long-time borrower of Sonabank, a government contractor, who is experiencing cash flow problems. Management is closely monitoring this situation.

38

2018.

Noninterest Income

The following ~~tables present~~table presents the major categories of noninterest income for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017~~2019 and ~~2016:~~2018:

For the Three Months Ended
September 30,
2017 2016 Change
(dollars in thousands)
Account maintenance and deposit service fees $ 1,518 $ 225 $ 1,293
Income from bank-owned life insurance 305 175 130
Equity (loss) income from mortgage affiliate (83 ) 749 (832 )
(Loss) on sales of investment securities (2 ) - (2 )
Other 561 26 535
Total noninterest income $ 2,299 $ 1,175 $ 1,124

	For the Nine Months Ended
	September 30,								For the Three Months Ended
	2017			2016		Change			June 30,
	(dollars in thousands)
(dollars in thousands)									2019		2018		Change
Account maintenance and deposit service fees	$	2,098		$	675	$	1,423		$	1,788	$	1,375	$	413
Income from bank-owned life insurance		631			524		107			385		563		(178)
Equity (loss) income from mortgage affiliate		(450	)		1,381		(1,831	)
Gain on sales of investment securities		255			-		255
Equity income from mortgage affiliate										558		191		367
Recoveries related to acquired charged-off loans and investment securities										324		250		74
Other		580			88		492			136		174		(38)
Total noninterest income	$	3,114		$	2,668	$	446		$	3,191	$	2,553	$	638

~~During the third quarter of 2017,~~ Southern National had noninterest income of ~~$2.3~~$3.2 million ~~compared to noninterest income of $1.2~~and $2.6 million during the ~~third~~second quarter of 2016. A loss was recorded from the investment in STM, Southern National’s mortgage affiliate, in the amount of $83 thousand compared to income of $749 thousand during the same quarter last year. This loss was primarily driven by an overall decrease in STM’s revenue due to a lower volume of mortgage loan closings.2019 and 2018, respectively. Account maintenance and deposit service fees, which totaled $1.8 million for the second quarter of 2019, increased ~~$1.3 million as~~$413 thousand compared to ~~the same quarter last year, primarily driven by the increased retail deposits acquired in the merger with EVBS.~~prior year. Income from bank-owned life insurance, which totaled $385 thousand for the second quarter of 2019, decreased $178 thousand compared to $563 thousand of income in the second quarter of 2018. The second quarter decrease was driven by death benefits paid in 2018. Income from the investment in STM totaled $558 thousand during the second quarter of 2019 compared to $191 thousand during the second quarter of 2018. The increase was driven by strengthened management and operational improvements within STM. Other noninterest income, which totaled $324 thousand for the second quarter of 2019, increased ~~$130~~$74 thousand when compared to the ~~third~~second quarter of ~~2016, primarily driven by additional income earned from~~ the ~~increase in bank-owned life insurance policies acquired in~~prior year. For the ~~merger with EVBS. Other~~three months ended June 30, 2019, other noninterest income ~~increased $535~~has benefited, from $324 thousand asof recoveries of legacy investment securities and loans charged off by EVBS premerger compared to $243 thousand for the ~~same quarter last year. This~~three months ended June 30, 2018.

The following table presents the major categories of noninterest income for the six months ended June 30, 2019 and 2018:


	For the Six Months Ended
	June 30,
(dollars in thousands)	2019		2018		Change
Account maintenance and deposit service fees	$	3,475	$	2,783	$	692
Income from bank-owned life insurance		908		870		38
Equity income (loss) from mortgage affiliate		576		(126)		702
Recoveries related to acquired charged-off loans and investment securities		915		1,733		(818)
Other		379		372		7
Total noninterest income	$	6,253	$	5,632	$	621

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Table of Contents

Southern National had noninterest income of $6.3 million and $5.6 million during the six months ended June 30, 2019 and 2018, respectively. The $621 thousand increase was primarily driven by ~~$300~~an increase of $692 thousand and $137 thousand in recoveries of acquired loan and investment security balances from the EVBS acquisition, respectively. These loan and investment security balances were fully charged off by EVBS prior to its acquisition by Southern National.

~~Noninterest income increased to $3.1 million in the first nine months of 2017 from $2.7 million in the first nine months of 2016. The increase was primarily due to the $1.4 million~~ increase in account maintenance and deposit ~~service~~ fees ~~as discussed~~and $702 thousand increase in equity income from mortgage affiliate, partially offset by $818 thousand decrease in recoveries related to acquired charged-off loans and investment securities. Income improved on account maintenance and deposit services fee in the previous paragraph. Southern National also recognized increases of $255 thousand and $492 thousand on gains on sales of investment securities and in other noninterest income, respectively. Partially offsetting these increases was a $1.8 million decline in incomecurrent year compared to the prior year. Income from the investment in STM ~~which resulted in a~~totaled $576 thousand during the six months ended June 30, 2019 compared to the loss of ~~$450~~$126 thousand during the six months ended June 30, 2018. The increase was driven by strengthened management and operational improvements within STM. For the six months ended June 30, 2019, other noninterest income has benefited, from $915 thousand of recoveries of legacy investment securities and loans charged off by EVBS premerger compared to $1.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~ 2018.

39

Noninterest Expense

The following ~~tables present~~table presents the major categories of noninterest expense for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017~~2019 and ~~2016:~~

For the Three Months Ended
September 30,
2017 2016 Change
(dollars in thousands)
Salaries and benefits $ 7,746 $ 2,699 $ 5,047
Occupancy expenses 1,703 783 920
Furniture and equipment expenses 907 283 624
Amortization of core deposit intangible 360 44 316
Virginia franchise tax expense 364 96 268
FDIC assessment 186 165 21
Data processing expense 440 184 256
Telephone and communication expense 567 201 366
Amortization of FDIC indemnification asset 173 187 (14 )
Net (gain) on other real estate owned (106 ) (9 ) (97 )
Merger expenses 168 - 168
Other operating expenses 1,928 725 1,203
Total noninterest expenses $ 14,436 $ 5,358 $ 9,078

For the Nine Months Ended
September 30,
2017 2016 Change
(dollars in thousands)
Salaries and benefits $ 13,750 $ 8,753 $ 4,997
Occupancy expenses 3,338 2,377 961
Furniture and equipment expenses 1,401 720 681
Amortization of core deposit intangible 483 168 315
Virginia franchise tax expense 605 290 315
FDIC assessment 391 478 (87 )
Data processing expense 858 533 325
Telephone and communication expense 912 586 326
Amortization of FDIC indemnification asset 540 606 (66 )
Net loss on other real estate owned 213 74 139
Merger expenses 9,094 - 9,094
Other operating expenses 3,745 2,403 1,342
Total noninterest expenses $ 35,330 $ 16,988 $ 18,342

2018:

40


	For the Three Months Ended
	June 30,
(dollars in thousands)	2019		2018		Change
Salaries and benefits	$	7,144	$	7,007	$	137
Occupancy expenses		1,801		1,656		145
Furniture and equipment expenses		738		712		26
Amortization of core deposit intangible		362		361		1
Virginia franchise tax expense		563		492		71
Data processing expense		571		464		107
Telephone and communication expense		406		501		(95)
Net gain on other real estate owned		(36)		(40)		4
Professional fees		1,381		839		542
Other operating expenses		962		1,625		(663)
Total noninterest expenses	$	13,892	$	13,617	$	275

Noninterest ~~expenses were $14.4~~expense was $13.9 million and ~~$35.3~~$13.6 million during the ~~third quarter~~three months ended June 30, 2019 and ~~the first nine months of 2017, respectively, compared to $5.4~~2018, respectively. Employee compensation and benefits expense totaled $7.1 million and ~~$17.0~~$7.0 million for the three months ended June 30, 2019 and 2018, respectively. The increase was due to $350 thousand of separation expense recognized in 2019, partially offset by savings from the reduction in staff completed during 2018. Occupancy expenses and equipment increased $145 thousand from prior year primarily due to improvements made to our branch offices.

The following table presents the major categories of noninterest expense for the six months ended June 30, 2019 and 2018:


	For the Six Months Ended
	June 30,
(dollars in thousands)	2019		2018		Change
Salaries and benefits	$	12,956	$	13,779	$	(823)
Occupancy expenses		3,604		3,306		298
Furniture and equipment expenses		1,448		1,509		(61)
Amortization of core deposit intangible		725		723		2
Virginia franchise tax expense		1,126		856		270
Data processing expense		1,083		930		153
Telephone and communication expense		781		1,095		(314)
Net (gain) loss on other real estate owned		(38)		160		(198)
Professional fees		2,985		1,788		1,197
Other operating expenses		5,512		3,090		2,422
Total noninterest expenses	$	30,182	$	27,236	$	2,946

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Table of Contents

Noninterest expense was $30.2 million and $27.2 million during the ~~same periods~~six months ended June 30, 2019 and 2018, respectively. The increase in ~~2016, respectively. Salaries~~noninterest expenses was primarily due to a nonrecurring other loss of $3.2 million with related legal expense of $502 thousand during the first quarter of 2019. Employee compensation and benefits expense totaled ~~$7.8~~$13.0 million and $13.8 million for the ~~three and nine~~six months ended ~~September~~June 30, ~~2017,~~2019 and 2018, respectively. ~~Southern National expects salaries and benefits~~The decrease was due to ~~decrease~~a reduction in ~~the fourth quarter of 2017 as the last of the merger-related full-time equivalent employee (“FTE”) reductions are scheduled to take place and then begin to normalize in the first half of 2018.~~staffing. Occupancy expenses ~~rose $920~~and equipment increased $298 thousand infrom prior year primarily due to improvements made to our branch offices. The Company recognized a gain of $38 thousand on the ~~third quarter~~sale of ~~2017, to $1.7 million, when~~other real estate owned (“OREO”) during the six months ended June 30, 2019 compared to a $160 thousand loss for the ~~$783 thousand of occupancy~~six months ended June 30, 2018. Other expenses recorded during the third quarter of 2016. Furniture and equipment expenses rose $624 thousand in the third quarter of 2017, to $907 thousand, when compared to the $283 thousand of furniture and equipment expenses recorded during the third quarter of 2016. The increases in occupancy and furniture and equipment expenses are in line with the added expenses associated with the EVBS merger. Year to date, occupancy expenses were $3.3totaled $8.5 million and ~~furniture~~$4.2 million for six months ended June 30, 2019 and equipment expenses were $1.4 million. Expenses related to the merger with EVBS were $168 thousand and $9.1 million during the third quarter and the first nine months of 2017, respectively, compared to no merger expenses during the same periods last year. Other operating expenses increased $1.2 million, from $725 thousand recorded in the third quarter of 2016 to $1.9 million recorded in the same period in 2017. The increase is in line with the added expenses associated with the EVBS merger. In addition, other operating expenses during the third quarter of 2017 increased due to fraudulent wire transactions in July 2017 that caused losses of approximately $172 thousand. These fraudulent wire transactions were the result of an email phishing scheme that targeted various employees of the Bank and led to an internal email compromise, affording the perpetrators access to personal information of a number of the Bank’s customers. The Bank took immediate action to contain and eradicate the email compromise, including the implementation of control enhancements to prevent a similar situation from occurring again. Southern National believes this is an isolated event and does not believe its technology systems have been compromised.

~~The majority of the merger and merger related expenses have been incurred as the result of the merger with EVBS. The following table shows a breakdown of those merger and merger related expenses:~~

For the Nine Months Ended
September 30, 2017
(dollars in thousands)

Salaries and benefits (1) $ 4,961
Consulting and investment banking fees 2,150
Data processing (2) 600
Legal fees 586
Occupancy expenses 422
Filing fees 164
Appraisals 95
Lodging, travel and meals 25
Training 17
Other 74
Total merger expenses $ 9,094

~~(1) Includes change-in-control contract payouts, severance and pay-to-stay bonuses.~~

~~(2) Fee incurred to cancel core system platform contract.~~

2018, respectively.

FINANCIAL CONDITION

Balance Sheet Overview

Total assets were ~~$2.60~~$2.72 billion and 2.70 billion, respectively as of ~~September~~June 30, ~~2017 compared to $1.14 billion~~2019 and as of December 31, ~~2016. Net~~2018. Total loans ~~receivable increased~~decreased 0.3%, from ~~$921.8 million at the end of 2016 to $2.03~~$2.18 billion at ~~September~~December 31, 2018 to $2.17 billion at June 30, ~~2017,~~2019, primarily due to ~~the loans acquired~~unanticipated large loan payoffs of $50.0 million in the ~~merger with EVBS on~~first quarter of 2019, partially offset by growth of $44.0 million during the six months ended June ~~23, 2017, which totaled $990.4 million at September~~ 30, ~~2017.~~

41

2019. Total deposits were ~~$1.90~~$2.15 billion at ~~September~~June 30, ~~2017~~2019 compared to ~~$913.0 million~~$2.10 billion at December 31, ~~2016. The merger with EVBS contributed $1.15 billion in deposits on~~2018 and total equity was $362.8 million and $348.3 million at June ~~23, 2017.~~

30, 2019 and December 31, 2018, respectively.

Loan Portfolio

~~Net loan~~Loan demand remains strong in the Company’s markets. Loan growth in the ~~third quarter~~six months ended June 30, 2019 of ~~2017 was $2.0 million. Loan growth during the third quarter~~$44.0 million was offset by $40.0 million in five hospitality loans that paid off due to property sales and under-market rates offered by other financial institutions and a $10.0 million construction loan moved to a competitor on a nonrecourse basis. Additionally, in the ~~sale~~first quarter of ~~approximately $29.0~~2019, $33.9 million of ~~EVB’s classified~~commercial loans were reclassified into loans secured by real estate, upon review and ~~residential TDR loans during July~~validation of collateral and ~~August of 2017 as well as net charge-offs of $5.2 million. Total loan purchases of residential portfolio product from STM were $19.9 million during the quarter.~~

Call Report codes.

The ~~following table summarizes the~~ composition of our loan portfolio asconsisted of ~~September~~the following at June 30, ~~2017~~2019 and December 31, ~~2016:~~2018 (in thousands):

Covered Non-covered Total Covered Non-covered Total
Loans (1) Loans Loans Loans (1) Loans Loans
September 30, 2017 December 31, 2016
Loans secured by real estate:
Commercial real estate - owner-occupied $ - $ 399,799 $ 399,799 $ - $ 154,807 $ 154,807
Commercial real estate - non-owner-occupied - 452,797 452,797 - 279,634 279,634
Secured by farmland - 13,270 13,270 - 541 541
Construction and land loans - 198,328 198,328 - 91,067 91,067
Residential 1-4 family 9,356 462,545 471,901 10,519 220,291 230,810
Multi- family residential - 73,547 73,547 - 30,021 30,021
Home equity lines of credit 14,623 137,681 152,304 17,661 11,542 29,203
Total real estate loans 23,979 1,737,967 1,761,946 28,180 787,903 816,083

Commercial loans - 235,171 235,171 - 115,365 115,365
Consumer loans - 39,460 39,460 - 856 856
Gross loans 23,979 2,012,598 2,036,577 28,180 904,124 932,304

Less deferred fees on loans - (1,396 ) (1,396 ) - (1,889 ) (1,889 )
Loans, net of deferred fees $ 23,979 $ 2,011,202 $ 2,035,181 $ 28,180 $ 902,235 $ 930,415

~~(1) Covered Loans were acquired in the Greater Atlantic transaction and are covered under an FDIC loss-share agreement. The agreement covering single family loans expires in December 2019.~~


	June 30, 2019		December 31, 2018
Loans secured by real estate:
Commercial real estate - owner occupied	$	410,832	$	407,031
Commercial real estate - non-owner occupied		561,732		540,698
Secured by farmland		18,629		20,966
Construction and land loans		158,956		146,654
Residential 1-4 family		572,715		565,083
Multi-family residential		82,593		82,516
Home equity lines of credit		117,298		128,225
Total real estate loans		1,922,755		1,891,173

Commercial loans		220,566		255,441
Consumer loans		29,310		32,347
Gross loans		2,172,631		2,178,961
Less deferred fees on loans		214		(137)
Loans, net of deferred fees	$	2,172,845	$	2,178,824

As of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, substantially all of our loans were to customers located in Virginia and Maryland. We are not dependent on any single customer or group of customers whose insolvency would have a material adverse effect on operations.

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Table of Contents

Asset Quality

Asset quality remained high during the first six months of 2019. We will generally place a loan on nonaccrual status when it becomes 90 days past due. Loans will also be placed on nonaccrual status in cases where we are uncertain whether the borrower can satisfy the contractual terms of the loan agreement. Cash payments received while a loan is categorized as nonaccrual will be recorded as a reduction of principal as long as doubt exists as to future collections.

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

Our loss and delinquency experience on our loan portfolio has been limited by a number of factors, including our underwriting standards and the relatively short period of time since the loans were originated. Whether our loss and delinquency experience in the area of our portfolio will increase significantly depends upon the value of the real estate securing loans and economic factors such as the overall economy of the region.

42

~~Non-covered Loans and Assets~~

~~OREO as of September~~Other real estate owned ("OREO") at June 30, ~~2017~~2019 was ~~$8.1~~$5.0 million compared to ~~$8.6~~$5.1 million ~~as of the end of the previous year.~~

at December 31, 2018.

Non-covered nonaccrual loans were ~~$11.3~~$1.2 million (excluding ~~$1.7~~$3.2 million of loans fully covered by SBA guarantees) at ~~September~~June 30, ~~2017~~2019 compared to ~~$1.6~~$2.5 million (excluding ~~$2.2~~$3.4 million of loans fully covered by SBA guarantees) ~~at the end~~as of last year. Included in the $11.3 million of non-covered nonaccrual loans is a $10.0 million loan extended to a commercial construction real estate company which is secured by commercial real estate properties with appraised values of approximately $14 million. The unguaranteed portions of the nonperforming SBA loans have been charged off.December 31, 2018. The ratio of non-covered nonperforming assets (excluding the SBA guaranteed loans) to total non-covered assets decreased from ~~0.92%~~0.28% at ~~the end of 2016~~December 31, 2018 to ~~0.75%~~0.26% at ~~September~~June 30, ~~2017.~~

2019.

Southern National’s allowance for loan losses as a percentage of total non-covered ~~total~~ loans at ~~September~~June 30, ~~2017~~2019 was ~~0.46%~~0.54%, compared to ~~0.95%~~0.57% at ~~the end of 2016.~~December 31, 2018. The ~~main factor driving the 49 basis point decline in the~~ allowance for loan losses as a percentage of non-covered ~~total~~non-acquired loans ~~in the first nine months of 2017~~ was ~~the loans acquired from EVBS, totaling $1.04 billion~~0.78% and 0.85% at June 23, 2017, which were marked to fair value at the merger date. Management believes the allowance is adequate at this time but continues to monitor trends in environmental factors which may potentially affect future losses.

30, 2019 and December 31, 2018, respectively.

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

The following table presents a comparison of non-covered nonperforming assets as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 (in thousands):

September 30, December 31,
2017 2016
Nonaccrual loans $ 12,991 $ 3,795
Loans past due 90 days and accruing interest - -
Total nonperforming loans 12,991 3,795
Other real estate owned 8,053 8,617
Total nonperforming assets $ 21,044 $ 12,412

Troubled debt restructurings $ 677 $ 688

SBA guaranteed amounts included in nonaccrual loans $ 1,732 $ 2,173

Allowance for loan losses to nonperforming loans 71.23 % 226.88 %
Allowance for loan losses to total non-covered loans 0.46 % 0.95 %
Nonperforming assets excluding SBA guaranteed loans to total non-covered assets 0.75 % 0.92 %

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 rate for a new loan with similar risk, extension of the maturity date, reduction of accrued interest or principal forgiveness. When evaluating whether a concession has been granted, the Bank also considers whether the borrower has provided additional collateral or guarantors and whether such additions adequately compensate the Bank for the restructured terms, or if the revised terms are consistent with those currently being offered to new loan customers. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty and whether a concession has been granted is subjective in nature and management’s judgment is required when determining whether a modification is a TDR.

43


	June 30,			December 31,
	2019			2018
Nonaccrual loans	$	5,201		$	6,709
Loans past due 90 days and accruing interest		—			—
Total nonperforming loans		5,201			6,709
Other real estate owned		5,041			5,077
Total non-covered nonperforming assets	$	10,242		$	11,786

Troubled debt restructurings	$	685		$	692
SBA guaranteed amounts included in nonaccrual loans	$	3,207		$	3,391

Allowance for loan losses to nonperforming loans		223.35	%		207.63	%
Allowance for loan losses to total non-covered loans		0.54	%		0.57	%
Nonperforming assets excluding SBA guaranteed loans to total non-covered assets		0.26	%		0.28	%

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.

~~During the three and nine months ending September 30, 2017, there were no loans modified in troubled debt restructurings. One TDR which had been modified in 2013 defaulted during the second quarter~~39

Table of ~~2015. This loan, in the amount of $677 thousand, was current as of September 30, 2017.~~Contents

During the three and nine months ending September 30, 2016, there were no loans modified in troubled debt restructurings. One TDR which had been modified in 2013 defaulted during the second quarter of 2015. This loan, in the amount of $692 thousand, was current as of September 30, 2016.

~~Covered Loans and Assets~~

Covered loans identified as impaired totaled $1.3 million as of September 30, 2017 and $963 thousand as of December 31, 2016. Covered nonaccrual loans were $1.1 million at September 30, 2017 and $850 thousand at December 31, 2016. At September 30, 2017 and December 31, 2016, there were no covered loans past due 90 days or more and accruing interest.

Investment Securities

Investment securities, available for sale and held to maturity, totaled ~~$264.6~~$250.7 million at ~~September~~June 30, ~~2017~~2019 up from ~~$89.2~~$235.8 million at December 31, ~~2016. The merger with EVBS contributed $182.4 million in available for sale and held to maturity investment securities on June 23, 2017.~~

2018.

Investment securities in our portfolio as of ~~September~~June 30, ~~2017~~2019 were as follows:

·

~~residential government-sponsored mortgage-backed securities in the amount of $44.1 million and~~

residential government-sponsored collateralized mortgage obligations in the amount of ~~$62.9~~$45.6 million;

·

agency residential mortgage-backed securities in the amount $54.8 million;

·

corporate bonds in the amount of $2.0 million;

·

commercial mortgage-backed securities in the amount of ~~$28.1~~$28.0 million;

·

SBA loan pool securities in the amount of ~~$26.0~~$17.2 million;

·

callable agency securities in the amount of ~~$54.4~~$58.9 million;

·

trust preferred securities in the amount of ~~$5.6 million, $3.0 million of which is Alesco VII A1B which is rated A1 (Moody’s);~~$5.2 million; and

·

municipal bonds in the amount of ~~$41.5~~$38.9 million ~~(fair value of $41.6 million)~~ with a taxable equivalent yield of ~~3.43%~~3.0% and ratings as of June 30, 2019 as follows:

44


Moody's	Amount		Standard & Poor's	Amount
Rating	(in thousands)		Rating	(in thousands)
Aaa	$	6,370	AAA	$	7,100
Aa1		11,564	AA+		7,631
Aa2		3,197	AA		11,067
Aa3		1,916	AA-		1,811
A1		1,866	A+		1,024
A2		1,531	A		850
Baa1		1,012	BBB+		1,012
NA		11,424	NA		8,385
Total	$	38,880	Total	$	38,880

Moody's Amount Standard & Poor's Amount
Rating (in thousands) Rating (in thousands)
Aaa $ 5,384 AAA $ 6,544
Aa1 12,496 AA+ 7,150
Aa2 4,525 AA 14,626
Aa3 1,899 AA- 1,799
A1 1,941 A+ 1,069
A2 1,577 A 868
Baa1 1,053 BBB+ 1,053
NA 12,745 NA 8,511
$ 41,620 $ 41,620

~~During~~Available for sale investment securities of $25.1 million were purchased during the six months ended June 30, 2019. No investment securities were sold during the first ~~nine~~six months of 2017, we purchased $11.8 million of callable agency securities. Two callable agency securities in the amount $5.3 million were called. Additionally, during the second quarter of 2017, as part of our restricting of our investment securities portfolio, $3.2 million of odd-lot residential government-sponsored mortgage-backed securities and $1.3 million of odd-lot residential government-sponsored collateralized mortgage obligations were sold.

2019.

At ~~September~~June 30, ~~2017,~~2019, 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	AA	Aa1	AA	$	2,596	$	2,413	$	2,537	17	%	$	219
MMCF III B	Senior Sub	A3	WD	Ba1	BBB		59		58		56	45	%		4
							2,655		2,471		2,593			$	223

															Cumulative OTTI
Available for Sale														Related to
Other Than Temporarily Impaired:														Credit Loss (2)
TPREF FUNDING II	Mezzanine	A1	D	Caa3	D		1,500		1,099		785	31	%	$	400
ALESCO V C1	Mezzanine	A2	C	Caa1	C		2,150		1,490		1,806	14	%		660
							3,650		2,589		2,591			$	1,060

Total						$	6,305	$	5,060	$	5,184

(1)

Previously
% of Current Recognized
Defaults and Cumulative
Ratings Estimated Deferrals to Other
Tranche When Purchased Current Ratings Fair Total Comprehensive
Security Level Moody's Fitch Moody's Fitch Par Value Book Value Value Collateral Loss (1)
(in thousands)
Held to Maturity
ALESCO VII A1B Senior Aaa AAA Aa2 A $ 3,250 $ 2,998 $ 3,055 17 % $ 228
MMCF III B Senior Sub A3 A- Ba1 BBB 265 261 239 32 % 4
3,515 3,259 3,294 $ 232

Cumulative OTTI
Related to
Credit Loss (2)
Available for Sale
Other Than Temporarily Impaired:
TPREF FUNDING II Mezzanine A1 A- Caa3 C 1,500 1,099 862 28 % $ 400
ALESCO V C1 Mezzanine A2 A Caa2 C 2,150 1,490 1,504 13 % 660
3,650 2,589 2,366 $ 1,060

Total $ 7,165 $ 5,848 $ 5,660

~~(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.

40

Table of ~~transfer from available-for-sale to held-to-maturity, net of accretion~~Contents

~~(2) Pre-tax~~

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

We recognized no other than temporary impairment charges during the ~~three and nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively.

Liquidity and Funds Management

The objective of our liquidity management is to assure 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.

45

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

We recently purchased liquidity risk software with which we can monitor our liquidity risk at a point in time and prepare cash flow and funds availability projections over a two year period. The projections can be run using a base case and several stress levels.

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, we funded our financial obligations with deposits, borrowings from the FHLB of Atlanta and the proceeds from issuance of the SNBV Senior Subordinated Notes in January ~~2017.~~2018. At ~~September~~June 30, ~~2017,~~2019, we had ~~$391.0~~$342.0 million of unfunded ~~lines of credit and undisbursed construction loan funds.~~commitments. Management anticipates that funding requirements for these commitments can be met from the normal sources of funds.

41

Table of Contents

Capital Resources

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

Required for Capital To Be Categorized as
Actual Adequacy Purposes (1) Well Capitalized (2)
Amount Ratio Amount Ratio Amount Ratio
September 30, 2017
Southern National
Common equity tier 1 capital ratio $ 212,038 10.53 % $ 90,632 4.50 % n/a n/a
Tier 1 risk-based capital ratio 219,691 10.91 % 120,843 6.00 % n/a n/a
Total risk-based capital ratio 275,945 13.70 % 161,124 8.00 % n/a n/a
Leverage ratio 219,691 8.86 % 99,187 4.00 % n/a n/a
Sonabank
Common equity tier 1 capital ratio $ 257,369 12.76 % $ 90,783 4.50 % $ 131,131 6.50 %
Tier 1 risk-based capital ratio 257,369 12.76 % 121,044 6.00 % 161,392 8.00 %
Total risk-based capital ratio 266,623 13.22 % 161,392 8.00 % 201,740 10.00 %
Leverage ratio 257,369 10.37 % 99,322 4.00 % 124,152 5.00 %

December 31, 2016
Southern National
Common equity tier 1 capital ratio $ 116,076 12.69 % $ 41,171 4.50 % n/a n/a
Tier 1 risk-based capital ratio 116,076 12.69 % 54,894 6.00 % n/a n/a
Total risk-based capital ratio 124,686 13.63 % 73,193 8.00 % n/a n/a
Leverage ratio 116,076 10.56 % 43,965 4.00 % n/a n/a
Sonabank
Common equity tier 1 capital ratio $ 114,779 12.55 % $ 41,151 4.50 % $ 59,440 6.50 %
Tier 1 risk-based capital ratio 114,779 12.55 % 54,868 6.00 % 73,157 8.00 %
Total risk-based capital ratio 123,389 13.49 % 73,157 8.00 % 91,447 10.00 %
Leverage ratio 114,779 10.45 % 43,947 4.00 % 54,934 5.00 %


					Required for Capital				To Be Categorized as
		Actual			Adequacy Purposes (1)				Well Capitalized (2)
June 30, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio
Southern National
Common equity tier 1 capital ratio	$	250,475	12.00	%	$	93,928	4.50	%		n/a	n/a
Tier 1 risk-based capital ratio		260,475	12.48	%		125,238	6.00	%		n/a	n/a
Total risk-based capital ratio		319,088	15.29	%		166,984	8.00	%		n/a	n/a
Leverage ratio		260,475	9.93	%		104,929	4.00	%		n/a	n/a
Sonabank
Common equity tier 1 capital ratio	$	295,654	14.08	%	$	95,495	4.50	%	$	137,938	6.50	%
Tier 1 risk-based capital ratio		295,654	14.08	%		127,327	6.00	%		169,769	8.00	%
Total risk-based capital ratio		307,267	14.63	%		169,769	8.00	%		212,212	10.00	%
Leverage ratio		295,654	11.27	%		104,359	4.00	%		106,106	5.00	%

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

(1)

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

(2)

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

46

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

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are engaged primarily in the business of investing funds obtained from deposits and borrowings into interest-earning loans and investments. Consequently, our earnings depend to a significant extent on our net interest income, which is the difference between the interest income on loans and other investments and the interest expense on deposits and borrowings. To the extent that our interest-bearing liabilities do not reprice or mature at the same time as our interest-earning assets, we are subject to interest rate risk and corresponding fluctuations in net interest income. We have employed asset/liability management policies that seek to manage our net interest income, without having to incur unacceptable levels of credit or investment risk.

We use simulation modeling to manage our interest rate risk, and we review quarterly interest sensitivity reports prepared for us by FTN Financial using the ~~Sendero~~Fiserv Prologue Risk Manager ALM Analysis System. This approach uses a model which generates estimates of the change in our economic value of equity (“EVE”) over a range of interest rate

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scenarios. EVE is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts using assumptions about estimated loan prepayment rates, reinvestment rates and deposit decay rates.

The following tables are based on an analysis prepared by FTN Financial setting forth an analysis of our interest rate risk as measured by the estimated change in EVE resulting from instantaneous and sustained parallel shifts in the yield curve (plus 400 basis points or minus 200 basis points, measured in 100 basis point increments) as of ~~September~~June 30, ~~2017~~2019 and as of December 31, ~~2016.~~2018. All changes are within our Asset/Liability Risk Management Policy guidelines except for the change resulting from the 100 and 200 basis point decrease in interest rates at ~~September~~June 30, ~~2017~~2019 and ~~the change resulting from the 100 basis point decrease in interest rates at~~ December 31, ~~2016.~~2018.

Sensitivity of Economic Value of Equity
As of September 30, 2017
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 $ 503,532 $ 52,248 11.58 % 19.39 % 154.45 %
Up 300 498,874 47,590 10.55 % 19.21 % 153.02 %
Up 200 490,181 38,897 8.62 % 18.88 % 150.36 %
Up 100 477,193 25,909 5.74 % 18.38 % 146.37 %
Base 451,284 - 0.00 % 17.38 % 138.43 %
Down 100 387,010 (64,274 ) -14.24 % 14.90 % 118.71 %
Down 200 313,519 (137,765 ) -30.53 % 12.07 % 96.17 %


	Sensitivity of Economic Value of Equity
	As of June 30, 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	$	344,880	$	(22,904)	(6.23)	%	12.66	%	95.01	%
Up 300		352,084		(15,700)	(4.27)	%	12.93	%	97.00	%
Up 200		359,580		(8,204)	(2.23)	%	13.20	%	99.06	%
Up 100		365,474		(2,310)	(0.63)	%	13.42	%	100.68	%
Base		367,784		—	—	%	13.50	%	101.32	%
Down 100		333,464		(34,320)	(9.33)	%	12.24	%	91.87	%
Down 200		292,700		(75,084)	(20.42)	%	10.75	%	80.64	%

47


	Sensitivity of Economic Value of Equity
	As of December 31, 2018
							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	$	338,853	$	(33,298)	(8.95)	%	12.54	%	97.03	%
Up 300		347,409		(24,742)	(6.65)	%	12.85	%	99.48	%
Up 200		356,429		(15,722)	(4.22)	%	13.19	%	102.07	%
Up 100		362,312		(9,839)	(2.64)	%	13.40	%	103.75	%
Base		372,151		—	0.00	%	13.77	%	106.57	%
Down 100		341,397		(30,754)	(8.26)	%	12.63	%	97.76	%
Down 200		303,809		(68,342)	(18.36)	%	11.24	%	87.00	%

Sensitivity of Economic Value of Equity
As of December 31, 2016
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 $ 116,120 $ (37,494 ) -24.41 % 10.16 % 91.91 %
Up 300 123,778 (29,836 ) -19.42 % 10.83 % 97.97 %
Up 200 132,243 (21,371 ) -13.91 % 11.58 % 104.67 %
Up 100 141,858 (11,756 ) -7.65 % 12.42 % 112.28 %
Base 153,614 - 0.00 % 13.45 % 121.58 %
Down 100 136,456 (17,158 ) -11.17 % 11.94 % 108.00 %
Down 200 129,485 (24,129 ) -15.71 % 11.33 % 102.49 %

Our interest rate sensitivity is also monitored by management through the use of a model run by FTN Financial that generates estimates of the change in the net interest income (“NII”) over a range of interest rate scenarios. NII depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. In this regard, the model assumes that the composition of our interest sensitive assets and liabilities existing at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 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

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specific assets and liabilities. All changes are within our Asset/Liability Risk Management Policy guidelines at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016.~~2018.


	Sensitivity of Net Interest Income										Sensitivity of Net Interest Income
	As of September 30, 2017										As of June 30, 2019
	Adjusted Net Interest Income				Net Interest Margin						Adjusted Net Interest Income				Net Interest Margin
Change in Interest Rates			$ Change					% Change					$Change				% Change
in Basis Points (Rate Shock)	Amount		From Base		Percent			From Base			Amount		From Base		Percent		From Base
	(dollar amounts in thousands)
											(dollar amounts in thousands)
Up 400	$	94,535	$	9,578		3.99	%		0.38	%	$	97,048	$	8,768	3.88	%	0.31	%
Up 300		92,442		7,485		3.90	%		0.29	%		94,905		6,625	3.80	%	0.23	%
Up 200		90,178		5,221		3.82	%		0.21	%		92,753		4,473	3.73	%	0.16	%
Up 100		87,755		2,798		3.72	%		0.11	%		90,785		2,505	3.66	%	0.09	%
Base		84,957		-		3.61	%		0.00	%		88,280		—	3.57	%	—	%
Down 100		85,228		271		3.63	%		0.02	%		87,816		(464)	3.56	%	(0.01)	%
Down 200		85,574		617		3.64	%		0.03	%		87,641		(639)	3.56	%	(0.01)	%

48


	Sensitivity of Net Interest Income
	As of December 31, 2018
	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	$	101,121	$	9,785	4.05	%	0.35	%
Up 300		97,784		6,448	3.97	%	0.23	%
Up 200		96,305		4,969	3.88	%	0.16	%
Up 100		93,719		2,383	3.78	%	0.07	%
Base		91,336		—	3.70	%	—	%
Down 100		91,719		383	3.72	%	0.04	%
Down 200		91,165		(171)	3.70	%	0.03	%

Sensitivity of Net Interest Income
As of December 31, 2016
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 $ 41,484 $ 3,759 3.87 % 0.43 %
Up 300 41,172 3,447 3.75 % 0.31 %
Up 200 39,898 2,173 3.64 % 0.20 %
Up 100 38,688 963 3.53 % 0.09 %
Base 37,725 - 3.44 % 0.00 %
Down 100 37,961 236 3.46 % 0.02 %
Down 200 37,473 (252 ) 3.42 % -0.02 %

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. In the low interest rate environment that currently exists, limitations on downward adjustments for interest rates, particularly as they apply to deposits, can and do result in anomalies in scenarios that are unlikely to occur due to the current low interest rate environment.

ITEM 4 – CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this quarterly report on Form ~~10-Q,~~10‑Q, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules ~~13a-15(e)~~13a‑15(e) and 15d ~~-15(c)~~-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.~~

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.

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(b) Changes in Internal Control over Financial Reporting. ~~As a result of the acquisition of EVBS, there were~~There have been no changes in our internal control over financial reporting ~~(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934)~~ that ~~occurred during our most recent fiscal quarter that have~~ materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Such changes related to this acquisition included implementing new procedures, including procedures to integrate existing systems, and changes to our accounting and reporting professionals to reflect their new responsibilities with the compliance process. We are continuing to evaluate and augment our existing controls to appropriately manage the risks inherent in an acquisition of this magnitude and complexity.

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PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

Southern National and Sonabank ~~may,~~are from time to time be a party, as both plaintiff and defendant, to various ~~legal~~claims and proceedings arising in the ordinary course of ~~business.~~the Bank’s business, including administrative and/or legal proceedings that may include employment-related claims, as well as claims of lender liability, breach of contract, and other similar lending-related claims. While the ultimate resolution of these matters cannot be determined at this time, the Bank’s management presently believes that such matters, individually and in the aggregate, will not have a material adverse effect on the Bank’s financial condition or results of operations. There are no proceedings pending, or to management’s knowledge, threatened, that represent a significant risk against Southern National or Sonabank as of ~~September~~June 30, ~~2017.~~2019.

ITEM 1A – RISK FACTORS

~~Other than as set forth below, as~~As of ~~September~~June 30, ~~2017~~2019, there have been no material changes to the risk factors faced by Southern National from those previously disclosed on our Annual Report on Form ~~10-K~~10‑K for the year ended December 31, ~~2016.~~

~~We face significant cyber and data security risk that could result in the disclosure of confidential information, adversely affect our business or reputation and expose us to significant liabilities.~~

As a financial institution, we are under threat of loss due to hacking and cyber-attacks. This risk has increased in recent years, and continues to increase, as we continue to expand customer capabilities to utilize internet and other remote channels to transact business. Two of the most significant cyber-attack risks that we face are e-fraud and loss of sensitive customer data. Loss from e-fraud occurs when cybercriminals breach and extract funds directly from customer or our accounts. The attempts to breach sensitive customer data, such as account numbers and social security numbers, are less frequent but would present significant reputational, legal and/or regulatory costs to us if successful. Our risk and exposure to these matters remains heightened because of the evolving nature and complexity of these threats from cybercriminals and hackers, our plans to continue to provide internet banking and mobile banking channels, and our plans to develop additional remote connectivity solutions to serve our customers. In July 2017, we incurred a loss of approximately $172 thousand due to fraudulent wire transactions. These fraudulent wire transactions were the result of an email phishing scheme that targeted various employees of the Bank and led to an internal email compromise, affording the perpetrators access to personal information of a number of the Bank’s customers. We took immediate action to contain and eradicate the email compromise, including the implementation of control enhancements to prevent a similar situation from occurring again. We believe this was an isolated event and do not believe our technology systems have been compromised. While we have not experienced any material losses relating to cyber-attacks or other information security breaches such as the one that occurred in July 2017, we have been the subject of a successful hacking and cyber-attack and there can be no assurance that we will not suffer additional losses in the future related to this event or others.

The occurrence of any cyber-attack or information security breach, such as the one that occurred in July 2017, could result in material adverse consequences to us including damage to our reputation and the loss of customers. We also could face litigation or additional regulatory scrutiny. Litigation or regulatory actions in turn could lead to significant liability or other sanctions, including fines and penalties or reimbursement of customers adversely affected by this security breach. Even if we do not suffer any material adverse consequences as a result of the event that occurred in July 2017 or as a result of other future events, successful attacks or systems failures at the Bank or at other financial institutions could lead to a general loss of customer confidence in financial institutions including the Bank.

Our ability to mitigate the adverse consequences of occurrences (such as the one in July 2017) is in part dependent on the quality of our information security procedures and contracts and our ability to anticipate the timing and nature of any such event that occurs. In recent years, we have incurred significant expense towards improving the reliability of our systems and their security from attack. Nonetheless, there remains the risk that we may be materially harmed by this cyber-attack and information security breach or others in the future. Methods used to attack information systems change frequently (with generally increasing sophistication), often are not recognized until launched against a target, may be supported by foreign governments or other well-financed entities, and may originate from less regulated and remote areas around the world. As a result, we may be unable to address these methods in advance of attacks, including by implementing adequate preventive measures. If such an attack or breach does occur again, we might not be able to fix it timely or adequately. To the extent that such an attack or breach relates to products or services provided by others, we seek to engage in due diligence and monitoring to limit the risk.

50

2018.

~~Item~~ITEM 2 – ~~Unregistered Sales of Equity Securities and Use of Proceeds~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not ~~applicable~~applicable.

~~Item~~ITEM 3 – ~~Defaults Upon Senior Securities~~DEFAULTS UPON SENIOR SECURITIES

Not ~~applicable~~applicable.

~~Item~~ITEM 4 – MINE SAFETY DISCLOSURES

Not ~~applicable~~applicable.

~~Item~~ITEM 5 – ~~Other Information~~OTHER INFORMATION

Not ~~applicable~~applicable.

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ITEM 6 - EXHIBITS

(a) Exhibits.

~~(a) Exhibits.~~

~~Exhibit No.~~		~~Description~~
Exhibit No.		Description
31.1*
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))

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))

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))

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)

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)

10.1+*		Employment Agreement, dated as of February 28, 2019, by and between George C. Sheflett and Southern National Bancorp of Virginia, Inc.

10.2+		Amendment to Employment Agreement, dated as of April 18, 2019, by and between Georgia S. Derrico and Southern National Bancorp of Virginia, Inc. (incorporated herein by reference to Exhibit 10.1 to Southern National’s Current Report on Form 8‑K filed on April 24,2019)

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10.3+		Amendment to Employment Agreement, dated as of April 18, 2019, by and between R. Roderick Porter and Southern National Bancorp of Virginia, Inc. (incorporated herein by reference to Exhibit 10.2 to Southern National’s Current Report on Form 8‑K filed on April 24,2019)

10.4+		Supplemental Executive Retirement Plan, dated as of April 2, 2018, by and between Sonabank and Georgia S. Derrico (incorporated herein by reference to Exhibit 10.3 to Southern National’s Current report on Form 8-K filed April 24, 2019)

10.5+		Supplemental Executive Retirement Plan, dated as of April 2, 2018, by and between Sonabank and R. Roderick Porter (incorporated herein by reference to Exhibit 10.4 to Southern National’s Current report on Form 8-K filed April 24, 2019)

10.6+		Supplemental Executive Retirement Plan, dated as of April 2, 2018, by and between Sonabank and Joe A. Shearin (incorporated herein by reference to Exhibit 10.5 to Southern National’s Current report on Form 8-K filed April 24, 2019)

10.7+		Termination Agreement between Southern National Bancorp of Virginia, Inc., Sonabank and Jeffrey H. Culver, dated as of June 20, 2019 (incorporated herein by reference to Exhibit 10.2 to Southern National’s Current Report on Form 8‑K filed on June 21, 2019)

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

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

32.1**		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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101

The following materials from Southern National Bancorp of Virginia, Inc. Quarterly Report on Form ~~10-Q~~10‑Q for the quarter ended ~~September~~June 30 ~~2017,~~, 2019, formatted in 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).

+ Management contract or compensatory plan or arrangement

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

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

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~~Signatures~~

Signatures

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


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

	(Registrant)
~~November 9, 2017~~

August 8, 2019		/s/ Joe A. Shearin
(Date)		Joe A. Shearin,
		~~President and~~ Chief Executive Officer
		(Principal Executive Officer)

~~November 9, 2017~~		~~/s/ J. Adam Sothen~~
~~(Date)~~ August 8, 2019		~~J. Adam Sothen,~~ /s/ Jeffrey L. Karafa
(Date)		Jeffrey L. Karafa,
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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49

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


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


Large accelerated filer ☐	Accelerated filer ☒	Smaller reporting company ☒

Non-accelerated filer ☐	Emerging growth company ☐

	As Recorded		Fair Value			As Recorded
(dollars in thousands) (unaudited)	by EVBS		Adjustments			by the Company
Consideration paid:
Cash						$	10
SNBV common stock							198,909
Total consideration paid						$	198,919

Identifiable assets acquired:
Cash and due from banks	$	4,350	$	-		$	4,350
Interest bearing deposits with banks		18,993		-			18,993
Federal funds sold		682		-			682
Securities available for sale, at fair value		163,029		(150	)		162,879
Securities held to maturity, at carrying value		19,036		508			19,544
Restricted securities, at cost		6,734		-			6,734
Loans		1,045,600		(7,722	)		1,037,878
Loans held for sale		19,689		-			19,689
Deferred income taxes		15,735		2,844			18,579
Bank premises and equipment		24,242		4,352			28,594
Assets held for sale		2,970		(1,285	)		1,685
Accrued interest receivable		4,272		-			4,272
Other real estate owned		563		92			655
Core deposit intangible		435		9,590			10,025
Bank owned life insurance		26,035		-			26,035
Other assets		10,004		-			10,004
Total identifiable assets acquired		1,362,369		8,229			1,370,598

Identifiable liabilities assumed:
Noninterest-bearing demand accounts		226,637		-			226,637
Interest-bearing deposits		920,743		1,182			921,925
Federal funds purchased and repurchase agreements		7,598		-			7,598
Federal Home Loan Bank advances		57,475		-			57,475
Junior subordinated debt		10,310		(801	)		9,509
Senior subordinated notes		19,175		1,876			21,051
Accrued interest payable		902		-			902
Other liabilities		13,067		-			13,067
Total identifiable liabilities assumed		1,255,907		2,257			1,258,164

Net identifiable assets acquired	$	106,462	$	5,972		$	112,434

Goodwill resulting from acquisition						$	86,485

	For the Three Months			For the Nine Months
(dollars in thousands)	Ended September 30, 2017			Ended September 30, 2017
Loans (1)	$	1,127		$	1,218
Time deposits (2)		213			217
Junior and senior subordinated debt (3)		21			23
Core deposit intangible (4)		(312	)		(338	)
Net impact to income before income taxes	$	1,049		$	1,120

	Unaudited		Unaudited		Unaudited		Unaudited
	Pro Forma		Pro Forma		Pro Forma		Pro Forma
	Three Months Ended		Three Months Ended		Nine Months Ended		Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
(dollars in thousands)	2017		2016		2017		2016
Net interest income	$	23,850	$	21,139	$	67,271	$	63,467
Net income		4,648		5,742		17,774		17,385

															Previously
												% of Current			Recognized
												Defaults and			Cumulative
		Ratings								Estimated		Deferrals to			Other
	Tranche	When Purchased		Current Ratings						Fair		Total			Comprehensive
Security	Level	Moody's	Fitch	Moody's	Fitch	Par Value		Book Value		Value		Collateral			Loss (1)
						(in thousands)
Held to Maturity
ALESCO VII A1B	Senior	Aaa	AAA	Aa2	A	$	3,250	$	2,998	$	3,055		17	%	$	228
MMCF III B	Senior Sub	A3	A-	Ba1	BBB		265		261		239		32	%		4
							3,515		3,259		3,294				$	232

															Cumulative OTTI
															Related to
															Credit Loss (2)
Available for Sale
Other Than Temporarily Impaired:
TPREF FUNDING II	Mezzanine	A1	A-	Caa3	C		1,500		1,099		862		28	%	$	400
ALESCO V C1	Mezzanine	A2	A	Caa2	C		2,150		1,490		1,504		13	%		660
							3,650		2,589		2,366				$	1,060

Total						$	7,165	$	5,848	$	5,660

	2017		2016

Amount of cumulative other than temporary impairment related to credit loss prior to January 1	$	1,060	$	1,060
Amounts related to credit loss for which an other than temporary impairment was not previously recognized		-		-
Amounts related to credit loss for which an other than temporary impairment was previously recognized		-		-
Reductions due to realized losses		-		-
Amount of cumulative other than temporary impairment related to credit loss as of September 30	$	1,060	$	1,060

	Unrealized Holding
	(Losses) on			Held to Maturity
For the three months ended September 30, 2017	Available for Sale Securities			Securities			Total
Beginning balance	$	(743	)	$	(158	)	$	(901	)
Other comprehensive income before reclassifications		161			2			163
Net current-period other comprehensive income		161			2			163
Ending balance	$	(582	)	$	(156	)	$	(738	)

	Covered Loans						Non-covered Loans						Total Loans
			Unpaid						Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related		Recorded		Principal		Related
September 30, 2017	Investment		Balance		Allowance		Investment (1)		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	-	$	1,218	$	1,324	$	-	$	1,218	$	1,324	$	-
Commercial real estate - non-owner occupied (2)		-		-		-		-		-		-		-		-		-
Construction and land development		-		-		-		9,984		9,984		-		9,984		9,984		-
Commercial loans		-		-		-		4,128		9,126		-		4,128		9,126		-
Residential 1-4 family (3)		1,285		1,495		-		376		517		-		1,661		2,012		-
Other consumer loans		-		-		-		-		-		-		-		-		-

Total	$	1,285	$	1,495	$	-	$	15,706	$	20,951	$	-	$	16,991	$	22,446	$	-

With an allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial real estate - non-owner occupied (2)		-		-		-		-		-		-		-		-		-
Construction and land development		-		-		-		-		-		-		-		-		-
Commercial loans		-		-		-		-		-		-		-		-		-
Residential 1-4 family (3)		-		-		-		-		-		-		-		-		-
Other consumer loans		-		-		-		-		-		-		-		-		-

Total	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Grand total	$	1,285	$	1,495	$	-	$	15,706	$	20,951	$	-	$	16,991	$	22,446	$	-