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

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


	For the Three Months Ended September 30, 2020
							Accumulated
			Additional				Other
	Common		Paid in		Retained		Comprehensive
	Stock		Capital		Earnings		Income		Total
Balance - June 30, 2020	$	243	$	308,672	$	69,335	$	3,419	$	381,669
Net income		0		0		9,588		0		9,588
Changes in other comprehensive income on investment securities (net of tax $5)		0		0		0		21		21
Dividends on common stock ($0.10 per share)		0		0		(2,437)		0		(2,437)
Issuance of common stock under Stock Incentive Plan (7,250 shares)		0		50		0		0		50
Stock-based compensation expense		0		92		0		0		92
Balance - September 30, 2020	$	243	$	308,814	$	76,486	$	3,440	$	388,983

	For the Three Months Ended September 30, 2019
							Accumulated
			Additional				Other
	Common		Paid in		Retained		Comprehensive
	Stock		Capital		Earnings		Income		Total
Balance - June 30, 2019	$	241	$	306,049	$	55,983	$	519	$	362,792
Net income		0		0		8,864		0		8,864
Changes in other comprehensive income on investment securities (net of tax $157)		0		0		0		587		587
Dividends on common stock ($0.09 per share)		0		0		(2,173)		0		(2,173)
Issuance of common stock under Stock Incentive Plan (54,450 shares)		0		475		0		0		475
Stock-based compensation expense		0		85		0		0		85
Balance - September 30, 2019	$	241	$	306,609	$	62,674	$	1,106	$	370,630

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 consolidated financial statements.~~

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

CONSOLIDATED ~~STATEMENTS~~STATEMENT OF ~~INCOME~~CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE AND ~~COMPREHENSIVE INCOME~~NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

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

For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2017 2016 2017 2016

Interest and dividend income:
Interest and fees on loans $ 26,726 $ 11,792 $ 51,819 $ 33,790
Interest and dividends on taxable securities 1,464 581 2,620 2,059
Interest and dividends on tax exempt securities 159 84 333 252
Interest and dividends on other earning assets 458 162 829 482
Interest on federal funds sold 4 - 4 -
Total interest and dividend income 28,811 12,619 55,605 36,583
Interest expense:
Interest on deposits 3,391 2,128 7,809 5,918
Interest on repurchase agreements 12 - 13 18
Interest on junior subordinated debt 120 - 129 -
Interest on senior subordinated notes 712 - 1,483 -
Interest on other borrowings 726 118 1,225 388
Total interest expense 4,961 2,246 10,659 6,324

Net interest income 23,850 10,373 44,946 30,259

Provision for loan losses 5,250 2,050 6,850 4,062
Net interest income after provision for loan losses 18,600 8,323 38,096 26,197

Noninterest income:
Account maintenance and deposit service fees 1,518 225 2,098 675
Income from bank-owned life insurance 305 175 631 524
Equity (loss) income from mortgage affiliate (83 ) 749 (450 ) 1,381
(Loss) gain on sales of investment securities (2 ) - 255 -
Other 561 26 580 88
Total noninterest income 2,299 1,175 3,114 2,668

Noninterest expenses:
Salaries and benefits 7,746 2,699 13,750 8,753
Occupancy expenses 1,703 783 3,338 2,377
Furniture and equipment expenses 907 283 1,401 720
Amortization of core deposit intangible 360 44 483 168
Virginia franchise tax expense 364 96 605 290
FDIC assessment 186 165 391 478
Data processing expense 440 184 858 533
Telephone and communication expense 567 201 912 586
Amortization of FDIC indemnification asset 173 187 540 606
Net (gain) loss on other real estate owned (106 ) (9 ) 213 74
Merger expenses 168 - 9,094 -
Other operating expenses 1,928 725 3,745 2,403
Total noninterest expenses 14,436 5,358 35,330 16,988
Income before income taxes 6,463 4,140 5,880 11,877
Income tax expense 2,089 1,375 2,294 3,757
Net income $ 4,374 $ 2,765 $ 3,586 $ 8,120

Other comprehensive income (loss):
Unrealized gain (loss) on available for sale securities $ 242 $ 188 $ 323 $ (296 )
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
Net unrealized gain (loss) 247 191 77 (286 )
Tax effect (84 ) (64 ) (26 ) 98
Other comprehensive income (loss) 163 127 51 (188 )
Comprehensive income $ 4,537 $ 2,892 $ 3,637 $ 7,932
Earnings per share, basic $ 0.18 $ 0.23 $ 0.22 $ 0.66
Earnings per share, diluted $ 0.18 $ 0.22 $ 0.21 $ 0.65


	For the Nine Months Ended September 30, 2020
							Accumulated
			Additional				Other
	Common		Paid in		Retained		Comprehensive
	Stock		Capital		Earnings		Income		Total
Balance - December 31, 2019	$	241	$	306,755	$	69,462	$	783	$	377,241
Net income		0		0		14,324		0		14,324
Changes in other comprehensive income on investment securities (net of tax $706)		0		0		0		2,657		2,657
Dividends on common stock ($0.30 per share)		0		0		(7,300)		0		(7,300)
Issuance of common stock under Stock Incentive Plan (93,250 shares)		2		574		0		0		576
Stock-based compensation expense		0		1,485		0		0		1,485
Balance - September 30, 2020	$	243	$	308,814	$	76,486	$	3,440	$	388,983

	For the Nine Months Ended September 30, 2019
							Accumulated
			Additional				Other
	Common		Paid in		Retained		Comprehensive
	Stock		Capital		Earnings		Income (Loss)		Total
Balance - December 31, 2018	$	240	$	305,654	$	44,985	$	(2,589)	$	348,290
Net income		0		0		24,203		0		24,203
Changes in other comprehensive income on investment securities (net of tax $983)		0		0		0		3,695		3,695
Dividends on common stock ($0.27 per share)		0		0		(6,514)		0		(6,514)
Issuance of common stock under Stock Incentive Plan (73,900 shares)		1		603		0		0		604
Stock-based compensation expense		0		352		0		0		352
Balance - September 30, 2019	$	241	$	306,609	$	62,674	$	1,106	$	370,630

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

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

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

CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ~~2017~~2020 AND 2019


	For the Nine Months Ended September 30,
	2020		2019
Operating activities:
Net income	$	14,324	$	24,203
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation and amortization		3,946		4,526
Amortization of operating lease right-of-use assets		2,255		1,901
Accretion of loan discount		(3,596)		(2,689)
Amortization of FDIC indemnification asset		0		531
Provision for loan losses		16,349		350
Earnings on bank-owned life insurance		(1,165)		(1,300)
Equity gain on mortgage affiliate		(8,218)		(1,175)
Stock-based compensation expense		1,485		352
(Gain) loss on other real estate owned		55		(38)
Provision for deferred income taxes		(3,395)		(1,197)
Net increase in other assets and accrued interest receivable		(15,141)		(3,642)
Net increase in other liabilities		3,370		5,710
Net cash and cash equivalents provided by operating activities		10,269		27,532
Investing activities:
Purchases of held to maturity investment securities		(15,197)		(10,233)
Purchases of available for sale investment securities		(29,284)		(35,082)
Proceeds from paydowns, maturities and calls of available for sale investment securities		38,451		18,151
Proceeds from paydowns, maturities and calls of held to maturity investment securities		37,998		23,685
Net decrease of FRB and FHLB stock		905		4,920
Net (increase) decrease in loans		(335,156)		37,883
Proceeds from bank-owned life insurance death benefit		0		343
Sales of other real estate owned, net of improvements		1,041		93
Purchases of bank premises and equipment		(965)		(504)
Net cash and cash equivalents provided by (used in) investing activities		(302,207)		39,256
Financing activities:
Net increase in deposits		91,756		81,149
Cash dividends paid on common stock		(7,300)		(6,514)
Issuance of common stock under Stock Incentive Plan		576		604
Issuance of subordinated notes, net of cost		58,686		0
Net increase in PPPLF borrowings		283,906		0
Net decrease in short-term borrowings		(18,342)		(122,066)
Net cash and cash equivalents provided by (used in) financing activities		409,282		(46,827)
Increase in cash and cash equivalents		117,344		19,961
Cash and cash equivalents at beginning of period		31,928		28,611
Cash and cash equivalents at end of period	$	149,272	$	48,572
Supplemental disclosure of cash flow information
Cash payments for:
Interest	$	21,704	$	27,097
Income taxes		4,187		3,467
Non-cash investing and financing activities:
Initial recognition of operating lease right-of-use assets	$	0	$	8,615
Initial recognition of operating lease liabilities		0		9,099

~~(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 unaudited consolidated financial ~~statements.~~statements.

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016~~

~~(dollars in thousands) (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 -

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

~~SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.~~

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

September 30, ~~2017~~2020

1. ACCOUNTING POLICIES

Southern National Bancorp of Virginia, Inc. (“Southern National” or “SNBV” or the “Company”) is a corporation that was formed on July 28, 2004 under the laws of the Commonwealth of Virginia and is the holding company for Sonabank (“Sonabank” or the “Bank”), a Virginia state-chartered bank which commenced operations on April 14, 2005. ~~As of the close of business on~~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 30, ~~2017,~~2020, Sonabank had ~~thirty-seven~~NaN full-service branches in Virginia and Maryland and through certain internet and mobile applications. NaN full-service retail branches are in Virginia, located in the counties of Chesterfield, Essex (2), Fairfax (Reston, McLean and Fairfax), Gloucester (2), Hanover (3), King William, Lancaster, Middlesex (3), New Kent, Northumberland (3), Southampton, Surry, Sussex, and inAshland, Burgess, Callao, Central Garage, Charlottesville, Chester, Clifton Forge, Colonial Heights, Courtland, Deltaville, Fairfax, Front Royal, Gloucester, Gloucester Point, Hampton, ~~Haymarket,~~Hartfield, Heathsville, Kilmarnock, Leesburg, McLean, Mechanicsville (2), Middleburg, Midlothian, New Market, Newport News, Quinton, Reston, Richmond, South Riding, Surry, Tappahannock (2), Urbanna, Warrenton, Waverly, and Williamsburg, and ~~seven~~5 full-service retail branches in Maryland, located in ~~Rockville, Shady Grove,~~ Bethesda, ~~Upper Marlboro,~~ Brandywine, Owings, Rockville, and ~~Huntingtown.~~

Upper Marlboro. We have administrative offices in Warrenton and Glen Allen, Virginia, and in Georgetown, Washington, D.C.

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

In addition, Southern National owns the Trust which is an unconsolidated subsidiary. The junior subordinated debt owed to the Trust is reported as a liability of Southern National.

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

2019.

Use of Estimates

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

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Risks and ~~fair value measurements related to assets acquired and liabilities assumed from business combinations.~~Uncertainties

~~Recent Accounting Pronouncements~~

~~In January 2016, the Financial 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~~outbreak of the ~~investee)~~novel corona virus disease 2019 (“COVID-19”) has adversely impacted a broad range of industries in which the Company’s customers operate and has impaired and could continue to impair their ability to fulfill their financial obligations to the Company. In March 2020, the World Health Organization declared COVID-19 to be ~~measured at fair value with changes~~a global pandemic. The spread of COVID-19 has caused significant uncertainty, volatility and disruption in ~~fair value recognized~~the U.S. and global economy and has disrupted banking and other financial activity in ~~net income; (b) simplify~~ the ~~impairment assessment~~areas in which the Company operates. Given the ongoing and dynamic nature COVID-19, it is not possible to accurately predict the extent, severity or duration of ~~equity securities without readily determinable fair values~~these conditions or when normal economic and operating conditions will resume. For this reason, the extent to which the COVID-19 pandemic affects our business, operations and financial condition, as well as our regulatory capital and liquidity ratios and credit ratings, is highly uncertain and unpredictable and depends on, among other things, new information that may emerge concerning the scope, duration and severity of the COVID-19 pandemic and actions taken by ~~requiring a qualitative assessment~~governmental authorities and other parties in response to ~~identify impairment; (c) eliminate~~ the ~~requirement for public business entities to disclose~~pandemic. If the ~~method and significant assumptions used to estimate~~pandemic is prolonged, the ~~fair value that is required to be disclosed for financial instruments measured at amortized cost~~adverse impact on the ~~balance sheet; (d) require public~~markets in which we operate and on our business, ~~entities~~operations and financial condition could deepen.

Congress, the President, and the Federal Reserve have taken several actions designed to ~~use~~minimize the ~~exit price notion when measuring~~economic impact of COVID-19. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the ~~fair value~~end of ~~financial instruments for disclosure purposes; (e) require an entity to present separately in other comprehensive income, the portion~~March 2020 as a $2 trillion legislative package. The goal of the ~~total change in the fair value of~~CARES Act is to prevent a ~~liability resulting from a change in the instrument-specific credit risk when the entity has elected~~severe economic downturn through various measures, including direct financial aid to ~~measure the liability at fair value in accordance with the fair value option~~American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for ~~financial instruments; (f) require separate presentation of financial assets~~hospitals and ~~financial liabilities by measurement category and form of financial assets on the balance sheet or the notes~~healthcare providers. In addition to the ~~financial statements;~~general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and ~~(g) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related~~regulatory relief efforts have had and are expected 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 expectedcontinue to have a material impact on the ~~Company's consolidated~~Company’s operations. The CARES Act includes provisions that temporarily delay the required implementation date of Financial Accounting Standards Board (“FASB”) ASC Topic 326, Financial Instruments—Credit Losses, and suspend the requirements related to accounting for a troubled debt restructuring (“TDR”), for certain entities.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial ~~position, results of operations~~transactions. If the global response to contain COVID-19 escalates further or ~~cash flows.~~

~~In February 2016,~~is unsuccessful, 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~~Company could experience a material adverse effect 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. The amendments in this ASU are effective for publicits business, entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of this ASU is 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 in the process of inventorying and categorizing its lease agreements.

~~In March 2016, the FASB issued ASU 2016-07~~~~, Investments – Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting~~. The amendments eliminate 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,financial condition, results of operations and ~~retained earnings retroactively~~cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.

Financial position and results of operations

The Company’s fee income has decreased due to COVID-19. In accordance with regulatory guidelines, the Company is actively working with COVID-19-affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees and account maintenance fees. These reductions in fees are thought, at this time, to be temporary in conjunction with the duration of COVID-19 and the related economic impact. At this time, the Company is unable to project the materiality of the impact, but believes that the economic impact of COVID-19 is likely to impact its fee income in future periods.

The Company’s interest income has decreased due to COVID-19. In accordance with regulatory guidelines, the Company is actively working with COVID-19-affected borrowers to defer their payments, interest, and fees. While interest and fees will continue to accrue to income through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed, which would negatively impact interest income. At this time, the Company is unable to project the materiality of the impact, but believes that the economic impact of COVID-19 may affect its borrowers’ ability to repay in future periods.

Capital and liquidity

While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses. The Company relies on cash on hand as well as dividends from its subsidiary bank to service its debt. If the Company’s capital deteriorates

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such that its subsidiary bank is unable to pay dividends to it for an extended period of time, the Company may not be able to service its debt.

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

Asset valuation

Goodwill is evaluated for impairment on an annual basis or more frequently if events or circumstances warrant. Our annual assessment occurs during the third calendar quarter. In response to the effects of COVID-19, management determined there to be a triggering event in the third quarter of 2020 warranting a goodwill assessment. For the third quarter 2020 assessment, we performed a step one quantitative assessment to determine if the fair value of our single reporting unit was less than its carrying amount. We concluded that the fair value of our single reporting unit exceeded its carrying amount and 0 impairment was present based on management’s assessment. We will continue to monitor and assess the impacts of COVID-19 on the Company’s goodwill in the fourth quarter.

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

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

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

Processes, controls and business continuity plan

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

Lending operations and accommodations to borrowers

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

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With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company is actively assisting its customers with loan applications through the program. PPP loans have a two or five year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of September 30, 2020, the Company had originated 4,343 PPP loans representing $348.0 million to its customers. Loans funded through the PPP program are guaranteed by the SBA and loans that meet certain regulatory criteria are subject to forgiveness. In the event that the PPP loans are not fully guaranteed by the SBA, the Company could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings. We expect forgiveness of the PPP loans to begin in the fourth quarter of 2020 and continue into 2021.

Federal Reserve Paycheck Protection Program Liquidity Facility

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

Credit

The Company is working with customers directly affected by COVID-19 and is offering short-term assistance in accordance with regulatory guidelines. As a result of the economic environment caused by the COVID-19 virus, the Company is engaging in more frequent communication with borrowers to better understand their financial situation and the challenges they face, allowing it to respond proactively as needs and issues arise. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the ~~equity method had been in effect during all previous periods that the investment had been held.~~effects of COVID-19 are prolonged.

Recent Accounting Pronouncements

Adoption of New Accounting Standards:

In August 2018, FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). This ASU adds, eliminates and modifies certain disclosure requirements for fair value measurements. The amendments ~~require that the equity method investor add the cost of acquiring the additional interest~~ in the investee 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 areASU 2018-13 were effective ~~for all entities~~ for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2016.~~2019. Early adoption was permitted. The ~~amendments should be applied prospectively upon their effective date to increase~~disclosures were adopted using the ~~level~~prospective method for certain disclosures and retrospective for a majority of ~~ownership interest or degree of influence that result~~the disclosures. The Company adopted ASU 2018-13 in the ~~adoption~~first quarter of ~~the equity method. The adoption of the amendments~~2020 and it did not have ~~an effect on our consolidated financial statements.~~

~~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, 2018 utilizing the modified retrospective approach.statements.

~~In March 2016, the FASB issued ASU 2016-09,~~~~Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment~~New Accounting (“ASU 2016-09”), which is intended to simplify several aspects 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. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted. The Company adopted this guidance during the first quarter of 2017 with an immaterial effect.

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 along with several other subsequent codification updates related to accounting for credit losses, sets forth a “current expected credit loss” ("CECL") model requiring the Company to measure all expected credit losses for financial instruments recorded at amortized cost held at the reporting ~~date~~date. The estimate is to be based on historical experience, current conditions and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. ~~For public business entities that are U.S. Securities and Exchange Commission filers, the~~The amendments ~~in this update are~~were effective for ~~fiscal years~~the Company beginning ~~after December 15, 2019, including interim periods within those fiscal years. Southern National is currently assessing~~January 1, 2020. The Company estimates that the ~~impact of the~~initial adoption of this ASU will result in an increase of approximately $9.0 million in our allowance for loan losses, including transfers of non-accretable discount on ~~its consolidated financial statements and~~purchased credit-impaired loans. The increase is ~~collecting data that will be needed to produce historical inputs into any models created as~~ a result of ~~adopting this ASU~~.

~~In August 2016, the FASB issued new guidance related to the~~ ~~Statement of Cash Flows~~~~in ASU 2016-15. The new guidance clarifies the classification~~changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the ~~statement~~portfolio, to an “expected loss” model, which encompasses allowances for losses

Table 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 likelyContents

expected to be incurred over the ~~predominant source or use~~life 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.~~portfolio. The adoption of this ~~guidance is~~ASU requires that we establish an allowance for expected credit losses for certain debt securities and other financial assets which are not ~~expected~~material. We do not plan to ~~be material~~elect the federal banking agencies’ rule providing for an optional three-year phase-in period for the day-one adverse regulatory capital effects upon adopting the standard. The Company elected to defer adoption of CECL until the ~~consolidated financial statements.~~

earlier of the termination date of the current national emergency, declared by the President on March 31, 2020, under the National Emergencies Act in connection with the COVID-19 outbreak, or December 31, 2020.

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

statements and disclosures.

In ~~January 2017, the~~March 2020, FASB issued ASU ~~2017-01,~~2020-04, ~~Business Combinations~~Reference Rate Reform (Topic ~~805): Clarifying~~848) - Facilitation of the ~~Definition~~Effects of ~~a Business,~~Reference Rate Reform on Financial Reporting ~~which~~. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. The ASU is intended to ~~provide~~help stakeholders during the global market-wide reference rate transition period. ASU 2020-04 is effective upon issuance and can be applied through December 31, 2022. Southern National is currently in the process of evaluating the impact of adopting the new guidance ~~in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses in order~~on its consolidated financial statements and disclosures.

In October 2020, FASB issued ASU 2020-08, Codification Improvements to ~~provide stakeholders with more detailed reporting~~Subtopic 310-20, Receivables - Nonrefundable Fees and ~~less cost to analyze transactions.~~Other Costs. This ASU provides a screen to determine when a set of assets is not a business. It requires that when substantially all fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets,clarifies the set of assets is not a business. If the screen is not met, the amendments in this update provide a framework to assist entities in evaluating whether both an input and a substantive process are presentaccounting for the ~~set to be a business.~~amortization of purchase premiums for callable debt securities with multiple call dates. ASU ~~2017-01~~2020-08 is effective for annual periods beginning after December 15, ~~2017,~~2020, including interim periods within those annual periods. ~~No disclosures are required at transition and early~~Early adoption is not permitted. ~~We are~~Southern National is currently in the process of 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. Southern National is currently reviewing its portfolio of debt securities to determine the impact that this ASU will have on its consolidated financial ~~statements.~~statements and disclosures.

~~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 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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~~BUSINESS COMBINATIONS~~
2. STOCK-BASED COMPENSATION

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.

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

~~(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.~~

~~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).

~~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.

~~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

~~STOCK-BASED COMPENSATION~~

In 2004, the 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 Board of Directors in January 2010 and approved by the stockholders at the Annual Meeting in April 2010. The 2010 Plan 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 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 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~~incentives to employees, non-employee directors, consultants and advisors to associate their personal interests with the long-term financial success of the Company, including its subsidiaries, and with growth in stockholder value, consistent with the Company’s risk management practices. Because the 2017 Plan was approved, shares under the 2004 stock-option plan orand 2010 Plan ~~will~~are no longer be awarded.

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 compensation expense was $84 thousand and $185 thousand, respectively, compared to $62 thousand and $198 thousand for the same periods last year, respectively. As of September 30, 2017, unrecognized compensation expense associated with the stock options was $272 thousand, which is expected to be recognized over a weighted average period of 2.0 years.

A summary of the activity in the stock option plan during the nine months ended September 30, ~~2017 follows (dollars~~2020 follows:


				Weighted
		Weighted		Average	Aggregate
		Average		Remaining	Intrinsic
		Exercise		Contractual	Value
	Shares	Price		Term	(in thousands)
Options outstanding, beginning of period	555,750	$	10.02	4.3	$	3,518
Forfeited	(11,700)		10.91
Exercised	(93,250)		7.60
Options outstanding, end of period	450,800	$	10.50	4.0	$	0

Exercisable at end of period	336,540	$	9.63	3.4	$	0

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

A summary of the activity in ~~thousands):~~the restricted stock plan during the nine months ended September 30, 2020 follows:


				Weighted
		Weighted		Average
		Average		Remaining
		Exercise		Contractual
	Shares	Price		Term
Unvested restricted stock outstanding, beginning of period	86,500	$	14.85	3.8
Granted	102,500		14.56
Vested	(91,800)		12.09
Unvested restricted stock outstanding, end of period	97,200	$	14.20	4.1

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

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

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3. INVESTMENT SECURITIES

The amortized cost and fair value of available for sale investment securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows (in thousands):


	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
September 30, 2020
Residential government-sponsored mortgage-backed securities	$	40,341	$	1,723	$	0	$	42,064
Obligations of states and political subdivisions		22,332		917		(116)		23,133
Corporate securities		10,000		88		0		10,088
Trust preferred securities		2,530		176		(290)		2,416
Residential government-sponsored collateralized mortgage obligations		33,145		891		(1)		34,035
Government-sponsored agency securities		5,984		96		0		6,080
Agency commercial mortgage-backed securities		27,253		1,140		0		28,393
SBA pool securities		11,766		84		(163)		11,687
Total	$	153,351	$	5,115	$	(570)	$	157,896

	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

										Amortized		Gross Unrealized				Fair
										Cost		Gains		Losses		Value
December 31, 2019
Residential government-sponsored mortgage-backed securities										$	48,540	$	455	$	(16)	$	48,979
Obligations of states and political subdivisions		18,650		32		(73	)		18,609		17,041		541		0		17,582
Corporate securities		2,014		1		-			2,015		2,004		8		0		2,012
Trust preferred securities		2,589		14		(237	)		2,366		2,530		283		(245)		2,568
Residential government-sponsored collateralized mortgage obligations		53,643		5		(278	)		53,370		36,511		217		(39)		36,689
Government-sponsored agency securities		1,747		-		(14	)		1,733		14,823		47		(48)		14,822
Agency commercial mortgage-backed securities		28,304		-		(223	)		28,081		27,557		192		(18)		27,731
SBA pool securities		25,937		46		(25	)		25,958		14,622		11		(196)		14,437
	$	165,121	$	101	$	(985	)	$	164,237
Total										$	163,628	$	1,754	$	(562)	$	164,820

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

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

	Amortized		Gross Unrecognized					Fair
September 30, 2017	Cost		Gains		Losses			Value

										Amortized		Gross Unrecognized				Fair
										Cost		Gains		Losses		Value
September 30, 2020
Residential government-sponsored mortgage-backed securities	$	12,015	$	45	$	(48	)	$	12,012	$	29,831	$	807	$	(2)	$	30,636
Obligations of states and political subdivisions											11,256		207		0		11,463
Trust preferred securities											1,784		0		(12)		1,772
Residential government-sponsored collateralized mortgage obligations		9,494		-		(51	)		9,443		1,452		45		0		1,497
Government-sponsored agency securities		52,648		48		(1,334	)		51,362		5,000		183		0		5,183
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										$	49,323	$	1,242	$	(14)	$	50,551

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, 2019
Residential government-sponsored mortgage-backed securities	$	22,925	$	62	$	(52)	$	22,935
Obligations of states and political subdivisions		15,071		165		(1)		15,235
Trust preferred securities		1,938		99		(2)		2,035
Residential government-sponsored collateralized mortgage obligations		3,128		10		(9)		3,129
Government-sponsored agency securities		29,386		108		(162)		29,332
Total	$	72,448	$	444	$	(226)	$	72,666

~~The amortized cost amounts are net~~During the three and nine months ended September 30, 2020, $14.3 million and $29.3 million, respectively, of ~~recognized other than temporary impairment.~~

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

The fair value and carrying amount, if different, of debt investment securities as of September 30, ~~2017,~~2020, by contractual maturity were as follows (in thousands). Investment securities not due at a single maturity date are shown separately.


	Available for Sale				Held to Maturity
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
Due in one to five years	$	2,559	$	2,666	$	3,410	$	3,527
Due in five to ten years		16,095		16,616		2,685		2,738
Due after ten years		22,192		22,435		11,945		12,153
Residential government-sponsored mortgage-backed securities		40,341		42,064		29,831		30,636
Residential government-sponsored collateralized mortgage obligations		33,145		34,035		1,452		1,497
Agency commercial mortgage-backed securities		27,253		28,393		0		0
SBA pool securities		11,766		11,687		0		0
Total	$	153,351	$	157,896	$	49,323	$	50,551

Held to Maturity Available for Sale
Amortized Amortized
Cost Fair Value Cost Fair Value
Due in one to five years $ 1,456 $ 1,477 $ 1,946 $ 1,943
Due in five to ten years 23,496 23,178 5,397 5,393
Due after ten years 53,872 53,012 17,657 17,387
Agency residential mortgage-backed securities (fixed and variable rate) 12,015 12,012 32,237 32,105
Residential government-sponsored collateralized mortgage obligations 9,494 9,443 53,643 53,370
Agency commercial mortgage-backed securities - - 28,304 28,081
SBA pool securities - - 25,937 25,958
Total $ 100,333 $ 99,122 $ 165,121 $ 164,237

Investment securities with a carrying amount of approximately ~~$134.2~~$101.3 million and ~~$73.9~~$120.5 million at September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively, were pledged to secure public deposits, certain other deposits, a line of credit for advances from the Federal Home Loan Bank (“FHLB”) of Atlanta, ~~(“FHLB”),~~ and repurchase agreements.

Southern National monitors ~~the~~its securities portfolio for indicators of other than temporary impairment. At September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, certain investment securities’ fair values were below cost. As outlined in the ~~table~~tables below, there were investment securities with fair values totaling approximately ~~$202.7~~$17.7 million in the portfolio with the carrying value exceeding the estimated fair value that ~~are~~were considered temporarily impaired at September 30, ~~2017.~~2020. Because the decline in fair value is attributable to changes in interest rates and market illiquidity, and not credit quality, and because we do not have the intent to sell these investment securities and it is likely that we will not be required to sell the investment securities before their anticipated recovery, management does not consider these investment securities to be other than temporarily impaired as of September 30, ~~2017.~~2020.

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The following tables present information regarding investment securities available for sale and held to maturity in a continuous unrealized loss position as of September 30, ~~2017~~2020 and December 31, ~~2016 (in thousands)~~2019 by duration of time in a loss ~~position:~~position (in thousands):


September 30, 2020	Less than 12 months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Available for Sale	value		Losses		value		Losses		value		Losses
Obligations of states and political subdivisions	$	6,076	$	(116)	$	0	$	0	$	6,076	$	(116)
Trust preferred securities		0		0		750		(290)		750		(290)
Residential government-sponsored collateralized mortgage obligations		310		(1)		0		0		310		(1)
SBA pool securities		0		0		8,357		(163)		8,357		(163)
Total	$	6,386	$	(117)	$	9,107	$	(453)	$	15,493	$	(570)

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 )


September 30, 2020	Less than 12 months				12 Months or More				Total
	Fair		Unrecognized		Fair		Unrecognized		Fair		Unrecognized
Held to Maturity	value		Losses		value		Losses		value		Losses
Residential government-sponsored mortgage-backed securities	$	336	$	(1)	$	146	$	(1)	$	482	$	(2)
Trust preferred securities		1,743		(10)		29		(2)		1,772		(12)
Total	$	2,079	$	(11)	$	175	$	(3)	$	2,254	$	(14)

	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, 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	$	3,403	$	(40	)	$	419	$	(8	)	$	3,822	$	(48	)	$	2,686	$	(7)	$	1,758		$	(9)	$	4,444	$	(16)
Trust preferred securities																	0		0		795			(245)		795		(245)
Residential government-sponsored collateralized mortgage obligations		7,820		(15	)		1,623		(36	)		9,443		(51	)		4,253		(25)		3,133			(14)		7,386		(39)
Government-sponsored agency securities		12,724		(264	)		24,917		(1,070	)		37,641		(1,334	)		4,924		(48)		0			0		4,924		(48)
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																	2,833		(6)		3,126			(12)		5,959		(18)
SBA pool securities																	1,148		(2)		9,420	��		(194)		10,568		(196)
Total																$	15,844	$	(88)	$	18,232		$	(474)	$	34,076	$	(562)

December 31, 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

December 31, 2019																Less than 12 months				12 Months or More				Total
																Fair		Unrecognized		Fair		Unrecognized		Fair		Unrecognized
Held to Maturity																value		Losses		value		Losses		value		Losses
Residential government-sponsored mortgage-backed securities																$	14,978	$	(41)	$	1,402	$	(11)	$	16,380	$	(52)
Obligations of states and political subdivisions	$	1,706	$	(30	)	$	-	$	-		$	1,706	$	(30	)		2,011		(1)		0		0		2,011		(1)
Trust preferred securities		-		-			1,658		(931	)		1,658		(931	)		0		0		53		(2)		53		(2)
	$	1,706	$	(30	)	$	1,658	$	(931	)	$	3,364	$	(961	)
Residential government-sponsored collateralized mortgage obligations																	1,162		(3)		571		(6)		1,733		(9)
Government-sponsored agency securities																	0		0		20,833		(162)		20,833		(162)
Total																$	18,151	$	(45)	$	22,859	$	(181)	$	41,010	$	(226)

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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As of September 30, ~~2017,~~2020, we owned pooled trust preferred investment securities as ~~follows:~~follows (in thousands):

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	AAA	Aa1	AA	$	1,874	$	1,754	$	1,743	17	%	$	219
MMCF III B	Senior Sub	A3	A-	Ba1	WD		31		30		29	48	%		4
						$	1,905	$	1,784	$	1,772			$	223

Available for Sale														Cumulative OTTI
Other Than														Related to
Temporarily Impaired:														Credit Loss⁽²⁾
TPREF FUNDING II	Mezzanine	A1	A-	Caa3	WD	$	1,500	$	1,040	$	750	32	%	$	400
ALESCO V C1	Mezzanine	A2	A	Caa1	C		2,150		1,490		1,666	15	%		660
						$	3,650	$	2,530	$	2,416			$	1,060

Total						$	5,555	$	4,314	$	4,188

(1)

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

(2)

Pre-tax.

Each of these investment securities has been evaluated for other than temporary impairment. In performing a detailed cash flow analysis of each investment security, Sonabank works with independent third parties to estimate expected cash flows and assist with the evaluation of other than temporary impairment. ~~The~~There have been no changes to our cash flow analyses ~~performed included the following assumptions:~~and assumptions as of September 30, 2020.

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

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

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

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

~~We recognized no~~There were 0 other than temporary impairment charges related to credit losses or sales of these securities during the three and nine months ended September 30, ~~2017~~2020 and ~~2016, respectively.~~2019.

The following table presents a roll forward 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):

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

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Changes in accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, ~~2017~~2020 and ~~2016~~2019 are shown in the ~~table~~tables below. All amounts are net of tax (in thousands).


	Unrealized Holding
	Gains on		Held to Maturity
For the three months ended September 30, 2020	Available for Sale		Securities		Total
Beginning balance	$	3,573	$	(154)	$	3,419
Current period other comprehensive income		19		2		21
Ending balance	$	3,592	$	(152)	$	3,440


	Unrealized Holding
	Gains on		Held to Maturity
For the three months ended September 30, 2019	Available for Sale		Securities		Total
Beginning balance	$	684	$	(165)	$	519
Current period other comprehensive income		585		2		587
Ending balance	$	1,269	$	(163)	$	1,106


	Unrealized Holding
	Gains on		Held to Maturity
For the nine months ended September 30, 2020	Available for Sale		Securities		Total
Beginning balance	$	943	$	(160)	$	783
Current period other comprehensive income		2,649		8		2,657
Ending balance	$	3,592	$	(152)	$	3,440


	Unrealized Holding
	Gains (Losses) on		Held to Maturity
For the nine months ended September 30, 2019	Available for Sale		Securities		Total
Beginning balance	$	(2,419)	$	(170)	$	(2,589)
Current period other comprehensive income		3,688		7		3,695
Ending balance	$	1,269	$	(163)	$	1,106

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 )

Table of Contents

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 )

4. LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table summarizes the composition of our loan portfolio as of September 30, ~~2017~~2020 and December 31, ~~2016:~~2019 (in thousands):


	September 30, 2020		December 31, 2019
Loans secured by real estate:
Commercial real estate - owner occupied	$	416,717	$	414,479
Commercial real estate - non-owner occupied		605,053		559,195
Secured by farmland		16,608		17,622
Construction and land loans		120,066		150,750
Residential 1-4 family ⁽¹⁾		581,237		604,777
Multi- family residential		107,672		82,055
Home equity lines of credit ⁽¹⁾		97,727		109,006
Total real estate loans		1,945,080		1,937,884

Commercial loans		216,711		221,447
Paycheck Protection Program Loans		348,022		—
Consumer loans		23,078		26,304
Subtotal		2,532,891		2,185,635
Plus (less) deferred costs (fees) on loans		(9,182)		412
Total loans	$	2,523,709	$	2,186,047

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

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.~~

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

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 acquisition, the Bank and the FDIC entered into loss sharing agreements on approximately $143.4 million (contractual basis) of Greater Atlantic Bank’s assets. There were two agreements with the FDIC: one for single family loans which is a 10-year agreement expiring in December 2019, and one for non-single family (commercial) assets which was a 5-year agreement which expired in December 2014. The Bank will share in the losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharing agreements; 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 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 and $990.4 million acquired in the EVBS acquisition.

Accretable discount on the acquired ~~EVBS, Greater Atlantic Bank, PGFSB, and the HarVest~~ loans totaled ~~$19.6~~$8.5 million and ~~$6.5~~$11.2 million at September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively.

~~For~~ Accretion associated with the acquired loans held for investment of $1.1 million and $901 thousand was recognized during the three ~~acquisitions subsequent to~~months ended September 30, 2020 and 2019, respectively, and $3.6 million and $2.7 million was recognized during the ~~Greater Atlantic Bank acquisition noted above, management sold the majority~~nine months ended September 30, 2020 and 2019, respectively.

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

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


	Total Loans
			Unpaid
	Recorded		Principal		Related
September 30, 2020	Investment ⁽¹⁾		Balance		Allowance
With no related allowance recorded
Commercial real estate - owner occupied	$	10,192	$	11,632	$	—
Commercial real estate - non-owner occupied ⁽²⁾		7,009		7,103		—
Construction and land development		1,749		1,818		—
Commercial loans		5,006		6,264		—
Paycheck Protection Program Loans		—		—		—
Residential 1-4 family ⁽³⁾		5,929		6,958		—
Other consumer loans		18		18		—
Total	$	29,903	$	33,793	$	—

With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—	$	—
Commercial real estate - non-owner occupied ⁽²⁾		—		—		—
Construction and land development		—		—		—
Commercial loans		2,292		2,304		1,080
Paycheck Protection Program Loans		—		—		—
Residential 1-4 family ⁽³⁾		—		—		—
Other consumer loans		—		—		—
Total	$	2,292	$	2,304	$	1,080
Grand total	$	32,195	$	36,097	$	1,080

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)~~

Total Loans




Unpaid


Recorded

Principal

Related
December 31, 2019

Investment ⁽¹⁾

Balance

Allowance
With no related allowance recorded






Commercial real estate - owner occupied

$
6,890

$
8,530

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

3,120

3,363

—
Construction and land development

345

747

—
Commercial loans

5,049

8,490

—
Residential 1-4 family ⁽³⁾

1,021

2,719

—
Other consumer loans

—

—

—
Total

$
16,425

$
23,849

$
—

With an allowance recorded






Commercial real estate - owner occupied

$
—

$
—

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

176

281

1
Construction and land development

—

—

—
Commercial loans

2,498

2,533

957
Residential 1-4 family ⁽³⁾

2,841

3,243

92
Other consumer loans

39

39

1
Total

$
5,554

$
6,096

$
1,051
Grand total

$
21,979

$
29,945

$
1,051

(1)	Recorded investment is after cumulative prior charge offs of $1.8 million and $1.5 million as of September 30, 2020 and December 31, 2019, respectively. These loans also have aggregate SBA guarantees of $0.2 million and $4.4 million as of September 30, 2020 and December 31, 2019, respectively.

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

(3)	Includes home equity lines of credit.

Table of ~~$5.2 million. These loans also have aggregate SBA guarantees of $1.7 million.~~Contents

~~(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.~~

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


	Total Loans
	Average		Interest
	Recorded		Income
Three Months Ended September 30, 2020	Investment		Recognized
With no related allowance recorded
Commercial real estate - owner occupied	$	11,441	$	109
Commercial real estate - non-owner occupied ⁽¹⁾		7,011		16
Construction and land development		1,754		42
Commercial loans		7,303		30
Paycheck Protection Program Loans		—		—
Residential 1-4 family ⁽²⁾		6,554		55
Other consumer loans		19		—
Total	$	34,082	$	252
With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—
Commercial real estate - non-owner occupied ⁽¹⁾		—		—
Construction and land development		—		—
Commercial loans		2,394		—
Paycheck Protection Program Loans		—		—
Residential 1-4 family ⁽²⁾		—		—
Other consumer loans		—		—
Total	$	2,394	$	—
Grand total	$	36,476	$	252


	Total Loans
	Average		Interest
	Recorded		Income (loss)
Three Months Ended September 30, 2019	Investment		Recognized
With no related allowance recorded
Commercial real estate - owner occupied	$	4,562	$	69
Commercial real estate - non-owner occupied ⁽¹⁾		4,718		69
Construction and land development		379		15
Commercial loans		5,552		54
Residential 1-4 family ⁽²⁾		1,645		41
Other consumer loans		—		—
Total	$	16,856	$	248
With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—
Commercial real estate - non-owner occupied ⁽¹⁾		—		—
Construction and land development		—		—
Commercial loans		2,760		48
Residential 1-4 family ⁽²⁾		345		(13)
Other consumer loans		—		—
Total	$	3,105	$	35
Grand total	$	19,961	$	283

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

(2)	Includes home equity lines of credit.

Table of Contents

The following tables present the average recorded investment and interest income recognized for impaired loans recognized by class of loans for the nine months ended September 30, ~~2017~~2020 and ~~2016~~2019 (in thousands):


	Total Loans
	Average		Interest
	Recorded		Income
Nine Months Ended September 30, 2020	Investment		Recognized
With no related allowance recorded
Commercial real estate - owner occupied	$	11,757	$	345
Commercial real estate - non-owner occupied ⁽¹⁾		7,111		113
Construction and land development		1,826		46
Commercial loans		6,406		126
Paycheck Protection Program Loans		—		—
Residential 1-4 family ⁽²⁾		6,983		115
Other consumer loans		19		—
Total	$	34,102	$	745
With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—
Commercial real estate - non-owner occupied ⁽¹⁾		—		—
Construction and land development		—		—
Commercial loans		2,456		1
Paycheck Protection Program Loans		—		—
Residential 1-4 family ⁽²⁾		—
Other consumer loans		—		—
Total	$	2,456	$	1
Grand total	$	36,558	$	746

	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

													Total Loans
													Average		Interest
													Recorded		Income
Nine Months Ended September 30, 2019													Investment		Recognized
With no related allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	1,325	$	8	$	1,325	$	8	$	4,612	$	227
Commercial real estate - non-owner occupied (1)		-		-		-		-		-		-		4,774		206
Construction and land development		-		-		9,984		153		9,984		153		396		43
Commercial loans		-		-		8,286		111		8,286		111		5,604		163
Residential 1-4 family (2)		1,290		12		517		-		1,807		12		1,665		148
Other consumer loans		-		-		-		-		-		-		—		—

Total	$	1,290	$	12	$	20,112	$	272	$	21,402	$	284	$	17,051	$	787

With an allowance recorded
Commercial real estate - owner occupied	$	-	$	-	$	-	$	-	$	-	$	-	$	—	$	—
Commercial real estate - non-owner occupied (1)		-		-		-		-		-		-		—		—
Construction and land development		-		-		-		-		-		-		—		—
Commercial loans		-		-		-		-		-		-		2,799		147
Residential 1-4 family (2)		-		-		-		-		-		-		345		25
Other consumer loans		-		-		-		-		-		-		—		—

Total	$	-	$	-	$	-	$	-	$	-	$	-	$	3,144	$	172
Grand total	$	1,290	$	12	$	20,112	$	272	$	21,402	$	284	$	20,195	$	959

⁽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~~Table of ~~credit.~~Contents

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.~~

The following tables present the aging of the recorded investment in past due loans by class of loans as of September 30, ~~2017~~2020 and December 31, ~~2016~~2019 (in thousands):


	30 - 59		60 - 89		90
	Days		Days		Days		Total		Nonaccrual		Loans Not		Total
September 30, 2020	Past Due		Past Due		or More		Past Due		Loans ⁽³⁾		Past Due		Loans ⁽⁴⁾
Total loans:
Commercial real estate - owner occupied	$	370	$	—	$	—	$	370	$	2,788	$	413,559	$	416,717
Commercial real estate - non-owner occupied ⁽¹⁾		443		—		—		443		1,537		727,353		729,333
Construction and land development		40		—		—		40		1,690		118,336		120,066
Commercial loans		73		3		—		76		5,416		211,219		216,711
Paycheck Protection Program Loans		—		—		—		—		—		348,022		348,022
Residential 1-4 family ⁽²⁾		1,211		372		—		1,583		3,839		673,542		678,964
Other consumer loans		108		1		—		109		—		22,969		23,078
Total	$	2,245	$	376	$	—	$	2,621	$	15,270	$	2,515,000	$	2,532,891

30 - 59 60 - 89
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

~~(1)~~


30 - 59

60 - 89

90








Days

Days

Days

Total

Nonaccrual

Loans Not

Total
December 31, 2019

Past Due

Past Due

or More

Past Due

Loans ⁽³⁾

Past Due

Loans
Total loans:














Commercial real estate - owner occupied

$
813

$
—

$
—

$
813

$
—

$
413,666

$
414,479
Commercial real estate - non-owner occupied ⁽¹⁾

936

—

—

936

—

657,936

658,872
Construction and land development

746

275

—

1,021

—

149,729

150,750
Commercial loans

234

62

—

296

6,337

214,814

221,447
Residential 1-4 family ⁽²⁾

4,060

—

—

4,060

2,524

707,199

713,783
Other consumer loans

107

—

—

107

39

26,158

26,304
Total

$
6,896

$
337

$
—

$
7,233

$
8,900

$
2,169,502

$
2,185,635

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

(2)	Includes home equity lines of credit.

(3)	Nonaccrual loans include SBA guaranteed amounts totaling $4.1 million at September 30, 2020 and December 31, 2019.

(4)	Includes $80.7 million of loans that were subject to deferrals at October 30, 2020.

Table of Contents

Activity in the allowance for loan and lease losses by ~~farmland and multi-family residential loans.~~

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

~~Non-covered nonaccrual loans include SBA guaranteed amounts totaling $1.7 million and $2.2 million at~~loan for the three months ended September 30, ~~2017~~2020 and ~~December 31, 2016, respectively.~~2019 is summarized below (in thousands):


	Commercial		Commercial
	Real Estate		Real Estate		Construction						Other
	Owner		Non-owner		and Land		Commercial		1-4 Family		Consumer
Three Months Ended September 30, 2020	Occupied		Occupied ⁽¹⁾		Development		Loans		Residential ⁽²⁾		Loans		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	3,558	$	8,378	$	717	$	5,490	$	3,854	$	903	$	727	$	23,627
Provision (recovery)		1,480		330		7		909		(589)		(59)		(78)		2,000
Charge offs		—		—		—		(12)		(47)		(27)		—		(86)
Recoveries		—		4		—		—		225		9		—		238
Ending balance	$	5,038	$	8,712	$	724	$	6,387	$	3,443	$	826	$	649	$	25,779

Three Months Ended September 30, 2019
Allowance for loan losses:
Beginning balance	$	833	$	1,890	$	802	$	5,834	$	1,127	$	273	$	854	$	11,613
Provision (recovery)		(113)		(281)		16		133		347		11		37		150
Charge offs		—		(1)		—		(266)		(315)		(65)		—		(647)
Recoveries		(1)		4		—		65		8		9		—		85
Ending balance	$	719	$	1,612	$	818	$	5,766	$	1,167	$	228	$	891	$	11,201

Activity in the allowance for ~~non-covered~~ loan and lease losses by class of loan for the ~~three and~~ nine months ended September 30, ~~2017~~2020 and ~~2016~~2019 is summarized below (in thousands):


	Commercial		Commercial
	Real Estate		Real Estate		Construction						Other
	Owner		Non-owner		and Land		Commercial		1-4 Family		Consumer
Nine Months Ended September 30, 2020	Occupied		Occupied ⁽¹⁾		Development		Loans		Residential ⁽²⁾		Loans		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	810	$	1,720	$	683	$	5,418	$	1,266	$	190	$	174	$	10,261
Provision for non-purchased loans		4,223		6,983		41		1,574		2,208		701		475		16,205
Provision for purchase credit impaired loans		—		—		—		144		—		—		—		144
Provision		4,223		6,983		41		1,718		2,208		701		475		16,349
Charge offs		—		—		—		(834)		(292)		(92)		—		(1,218)
Recoveries		5		9		—		85		261		27		—		387
Ending balance	$	5,038	$	8,712	$	724	$	6,387	$	3,443	$	826	$	649	$	25,779

Nine Months Ended September 30, 2019
Allowance for loan losses:
Beginning balance	$	802	$	1,669	$	821	$	7,097	$	1,106	$	224	$	564	$	12,283
Provision (recovery)		497		399		(3)		(1,235)		166		199		327		350
Charge offs		(782)		(463)		—		(433)		(405)		(221)		—		(2,304)
Recoveries		202		7		—		337		300		26		—		872
Ending balance	$	719	$	1,612	$	818	$	5,766	$	1,167	$	228	$	891	$	11,201

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

(2)	Includes home equity lines of credit.

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~~allowance for credit losses has been recognized for PPP loans as these loans are fully guaranteed by the SBA.

Table of Contents

The following table presents the balance in the allowance for ~~covered~~ loan losses and ~~lease losses was~~the recorded ~~during~~investment in loans by portfolio segment and based on the ~~three and nine months ended~~impairment method as of September 30, ~~2017~~2020 and ~~2016.~~

~~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 the impairment method as of ~~September 30, 2017 and~~ December 31, ~~2016~~2019 (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					Paycheck			Other
	Owner		Non-owner		and Land		Commercial		Protection		1-4 Family		Consumer
September 30, 2020	Occupied		Occupied ⁽¹⁾		Development		Loans		Program		Residential ⁽²⁾		Loans		Unallocated		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	1,080	$	—	$	—	$	—	$	—	$	1,080
Collectively evaluated for impairment		5,038		8,712		724		5,307		—		3,443		826		649		24,699
Total ending allowance	$	5,038	$	8,712	$	724	$	6,387	$	—	$	3,443	$	826	$	649	$	25,779

Loans:
Individually evaluated for impairment	$	10,192	$	7,009	$	1,749	$	7,298	$	—	$	5,929	$	18	$	—	$	32,195
Collectively evaluated for impairment		406,525		722,324		118,317		209,413		348,022		673,035		23,060		—		2,500,696
Total ending loan balances	$	416,717	$	729,333	$	120,066	$	216,711	$	348,022	$	678,964	$	23,078	$	—	$	2,532,891

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

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

(1)

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

(2)	Includes home equity lines of credit.

Troubled Debt Restructurings

A modification is classified as a 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.

During the three and nine months ending September 30, 2017, 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 $677 thousand, was current as of September 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.

~~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 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.

~~As of September 30, 2017 and December 31, 2016, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):~~

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

~~(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 of $1.7 million and $2.2 million as of September 30, 2017 and December 31, 2016.~~

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

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

~~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. 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 million and $6.4 million as of September 30, 2017 and December 31, 2016, respectively.

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

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

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

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~~

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

Weighted
Average
Income Shares Per Share
(Numerator) (Denominator) Amount
For the three months ended September 30, 2017
Basic EPS $ 4,374 23,913 $ 0.18
Effect of dilutive stock options and warrants - 305 -
Diluted EPS $ 4,374 24,218 $ 0.18

For the three months ended September 30, 2016
Basic EPS $ 2,765 12,258 $ 0.23
Effect of dilutive stock options and warrants - 171 -
Diluted EPS $ 2,765 12,429 $ 0.22

For the nine months ended September 30, 2017
Basic EPS $ 3,586 16,526 $ 0.22
Effect of dilutive stock options and warrants - 295 -
Diluted EPS $ 3,586 16,821 $ 0.21

For the nine months ended September 30, 2016
Basic EPS $ 8,120 12,248 $ 0.66
Effect of dilutive stock options and warrants - 154 -
Diluted EPS $ 8,120 12,402 $ 0.65

There were 480,729 and 467,977 anti-dilutive options outstanding for the three 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.

8.~~FAIR VALUE~~

ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

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

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

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

The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

~~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, mortgage products and exchange traded equities. 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 of Southern National’s available for sale debt investment securities are considered to be Level 2 investment securities.

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

Fair Value Measurements Using
Significant
Quoted Prices in Other Significant
Active Markets for Observable Unobservable
Total at Identical Assets Inputs Inputs
(dollars in thousands) September 30, 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 $ -

~~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 30, 2017 and December 31, 2016. Fair value is classified as Level 3 in the fair value hierarchy. Non-covered loans identified as impaired totaled $15.7 million (including SBA guarantees of $1.7 million) as of September 30, 2017 with $0 allocated allowance for loan losses compared to a carrying amount of $12.7 million (including SBA guarantees of $2.2 million) with an allocated allowance for loan losses totaling $900 thousand at December 31, 2016.

~~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 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. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the consolidated statements of 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 30, 2017 and December 31, 2016. Fair value is classified as Level 3 in the fair value hierarchy. OREO is further evaluated quarterly for any additional impairment. At September 30, 2017, the total amount of non-covered OREO was $8.1 million, and there was no covered OREO. As of December 31, 2016, the total amount of OREO was $8.6 million, and there was no covered OREO.

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

Fair Value Measurements Using
Significant
Quoted Prices in Other Significant
Active Markets for Observable Unobservable
Total at Identical Assets Inputs Inputs
(dollars in thousands) September 30, 2017 (Level 1) (Level 2) (Level 3)
Impaired non-covered loans:
Commercial real estate - owner occupied $ 1,218 $ - $ - $ 1,218
Construction and land development 9,984 - - 9,984
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

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.~~

~~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):~~

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 in mortgage affiliate, preferred investment in mortgage affiliate, accrued interest receivable and payable, demand deposits, savings accounts, money market accounts, securities sold under agreements to repurchase, short-term debt, 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 applied 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. Fair value of long-term debt is based on current rates for similar financing. The fair value 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. The fair value of off-balance-sheet items is not considered material. The fair value of loans is not presented on an exit price basis.

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

Other short-term borrowings can consist of Federal Home Loan Bank (“FHLB”) 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, repo accounts totaling $7.6 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.

~~10.~~

~~JUNIOR SUBORDINATED DEBT AND SENIOR SUBORDINATED NOTES~~

In connection with our merger with EVBS, the Company assumed $10 million of trust preferred securities that were issued on September 17, 2003 and placed through the Trust in a pooled underwriting totaling approximately $650 million. The trust issuer has invested the total proceeds from the sale of the trust preferred 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 LIBOR plus 2.95%. As of September 30, 2017 and December 31, 2016, the interest rate was 4.27% and 3.94%, 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 30, 2017, 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 30, 2017, all of the SNBV Senior Subordinated Notes qualified as Tier 2 capital. At September 30, 2017, the remaining unamortized debt issuance costs related to the SNBV Senior Subordinated Notes totaled $878 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 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 30, 2017 all of the EVBS Senior Subordinated Notes qualified as Tier 2 capital.

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

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

~~FORWARD-LOOKING STATEMENTS~~

Many possible events or factors could affect our future financial results and performance and could cause our actual results to differ materially from the expectations of future results we express or imply in any forward-looking statements. In addition to the Risk Factor contained in this Quarterly Report on Form 10-Q, as well as the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, 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;~~

~~risks 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;~~

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

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

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

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

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

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; and

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

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

~~OVERVIEW~~

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 of 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 30, 2017, Sonabank had thirty-seven full-service retail branches in Virginia, located in the counties of Chesterfield, 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.

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 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.

~~RESULTS OF OPERATIONS~~

~~Net Income~~

Net income for the three and nine months ended September 30, 2017 was $4.4 million and $3.6 million, respectively. That compares to net income of $2.8 million and $8.1 million during the three and nine months ended September 30, 2016, respectively. SNBV’s results for the three and nine months ended September 30, 2017 were directly impacted by the merger with EVBS including expenses related 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 driver of the elevated provision for loan losses was the $5.3 million in charge-offs taken 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.

~~Net Interest Income~~

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

Net interest income was $23.9 million in the quarter ended September 30, 2017 compared to $10.4 million during the same period last year. Average loans during the third quarter of 2017 were $2.04 billion compared to $907.3 million during the same period last year. Southern National’s net interest margin was 4.02% in the third quarter of 2017 compared to 4.04% during the third quarter of 2016. The yield on average interest-earning assets decreased five basis points to 4.86% during the third quarter of 2017 when comparing to the 4.91% yield on average interest-earning assets during the third 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. 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 contributed $1.5 million to net interest income during the three months ended September 30, 2017 compared to $536 thousand during the third quarter of 2016.

Net interest income was $44.9 million during the nine months ended September 30, 2017, compared to $30.3 million during the comparable period in the prior year. Average loans during the nine months ended September 30, 2017 were $1.4 billion compared to $879.6 million during the same period last year. Southern National’s net interest margin was 3.88% during the nine months ended September 30, 2017 compared to 4.05% during the same period in 2016. The loan discount accretions on the four aforementioned acquisitions were $2.4 million in the first nine months of 2017 compared to $1.6 million in the same period last year.

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

Average Balance Sheets and Net Interest
Analysis For the 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.~~

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 %

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

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

~~Provision for Loan Losses~~

The provision for loan losses is a current charge to earnings made in order to increase the allowance for loan losses to a level 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 provision for the quarter ended September 30, 2017 was $5.3 million, compared to $2.1 million for the same period last year. For the nine months ended September 30, 2017, the loan loss provision was $6.9 million compared to $4.1 million for the same period last year. Net charge offs for the three and nine months ended September 30, 2017 were $5.2 million and $6.2 million, respectively. Net charge offs for the three and nine months ended September 30, 2016 were $2.0 million and $4.0 million, respectively. The primary driver of the elevated provision for loan losses during the three and nine months ended September 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.

~~Noninterest Income~~

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

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,
2017 2016 Change
(dollars in thousands)
Account maintenance and deposit service fees $ 2,098 $ 675 $ 1,423
Income from bank-owned life insurance 631 524 107
Equity (loss) income from mortgage affiliate (450 ) 1,381 (1,831 )
Gain on sales of investment securities 255 - 255
Other 580 88 492
Total noninterest income $ 3,114 $ 2,668 $ 446

During the third quarter of 2017, Southern National had noninterest income of $2.3 million compared to noninterest income of $1.2 million during the third 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. Account maintenance and deposit service fees increased $1.3 million as compared to the same quarter last year, primarily driven by the increased retail deposits acquired in the merger with EVBS. Income from bank-owned life insurance increased $130 thousand when compared to the third quarter of 2016, primarily driven by additional income earned from the increase in bank-owned life insurance policies acquired in the merger with EVBS. Other noninterest income increased $535 thousand as compared to the same quarter last year. This increase was primarily driven by $300 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 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 income from the investment in STM, which resulted in a loss of $450 thousand for the nine months ended September 30, 2017.

~~Noninterest Expense~~

~~The following tables present the major categories of noninterest expense for the three and nine months ended September 30, 2017 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

Noninterest expenses were $14.4 million and $35.3 million during the third quarter and the first nine months of 2017, respectively, compared to $5.4 million and $17.0 million during the same periods in 2016, respectively. Salaries and benefits totaled $7.8 million and $13.8 million for the three and nine months ended September 30, 2017, respectively. Southern National expects salaries and benefits to decrease 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. Occupancy expenses rose $920 thousand in the third quarter of 2017, to $1.7 million, when compared to the $783 thousand of occupancy 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 $3.3 million and furniture 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.~~

~~FINANCIAL CONDITION~~

~~Balance Sheet Overview~~

Total assets were $2.60 billion as of September 30, 2017 compared to $1.14 billion as of December 31, 2016. Net loans receivable increased from $921.8 million at the end of 2016 to $2.03 billion at September 30, 2017, primarily due to the loans acquired in the merger with EVBS on June 23, 2017, which totaled $990.4 million at September 30, 2017.

~~Total deposits were $1.90 billion at September 30, 2017 compared to $913.0 million at December 31, 2016. The merger with EVBS contributed $1.15 billion in deposits on June 23, 2017.~~

~~Loan Portfolio~~

Net loan growth in the third quarter of 2017 was $2.0 million. Loan growth during the third quarter was offset by the sale of approximately $29.0 million of EVB’s classified and residential TDR loans during July 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.

~~The following table summarizes the composition of our loan portfolio as of September 30, 2017 and December 31, 2016:~~

~~(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.~~

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

~~Asset Quality~~

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.

~~Non-covered Loans and Assets~~

~~OREO as of September 30, 2017 was $8.1 million compared to $8.6 million as of the end of the previous year.~~

Non-covered nonaccrual loans were $11.3 million (excluding $1.7 million of loans fully covered by SBA guarantees) at September 30, 2017 compared to $1.6 million (excluding $2.2 million of loans fully covered by SBA guarantees) at the end 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. The ratio of non-covered nonperforming assets (excluding the SBA guaranteed loans) to total non-covered assets decreased from 0.92% at the end of 2016 to 0.75% at September 30, 2017.

Southern National’s allowance for loan losses as a percentage of non-covered total loans at September 30, 2017 was 0.46%, compared to 0.95% at the end of 2016. The main factor driving the 49 basis point decline in the allowance for loan losses as a percentage of non-covered total loans in the first nine months of 2017 was the loans acquired from EVBS, totaling $1.04 billion 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.

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 30, 2017 and December 31, 2016 (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~~rates for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, or principal forgiveness. When evaluating whether a concession has been granted, the Bank also considers whether the borrower has provided additional collateral or guarantors and whether such additions adequately compensate the Bank for the restructured terms, or if the revised terms are consistent with those currently being offered to new loan customers.

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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.

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

There were 8 TDRs in the amount of $1.6 million as of September 30, 2020 primarily due to the economic impact of COVID-19. There have been 0 defaults of TDRs modified during the past twelve months.

Credit Quality Indicators

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

Doubtful loans have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Southern National had 0 loans classified Doubtful at September 30, 2020 or December 31, 2019.

As of September 30, 2020 and December 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):


	Total Loans
	Special
September 30, 2020	Mention		Substandard ⁽³⁾		Pass		Total
Commercial real estate - owner occupied	$	7,665	$	6,962	$	402,090	$	416,717
Commercial real estate - non-owner occupied⁽¹⁾		3,470		4,651		721,212		729,333
Construction and land development		—		1,690		118,376		120,066
Commercial loans		2,338		4,182		210,191		216,711
Paycheck Protection Program Loans		—		—		348,022		348,022
Residential 1-4 family ⁽²⁾		580		1,818		676,566		678,964
Other consumer loans		115		—		22,963		23,078
Total	$	14,168	$	19,303	$	2,499,420	$	2,532,891

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

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

(2)	Includes home equity lines of credit.

(3)	Includes SBA guarantees of $0.2 million and $4.1 million as of September 30, 2020 and December 31, 2019, respectively.

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

5.LEASES

The Company leases certain premises and equipment under operating leases. In recognizing lease right-of-use assets and related liabilities, we account for lease and non-lease components (such as taxes, insurance, and common area maintenance costs) separately as such amounts are generally readily determinable under our lease contracts. At September 30, 2020 and December 31, 2019, the Company had operating lease liabilities totaling $7.8 million and $8.5 million, respectively, and right-of-use assets totaling $7.0 million and $8.0 million, respectively, related to these leases. Operating lease liabilities and right-of-use assets are reflected in our consolidated balance sheets. We do not currently have any financing leases. For the three months ended September 30, 2020 and 2019, our net operating lease cost was $609 thousand and $625 thousand, respectively, and for the nine months ended September 30, 2020 and 2019, our net operating lease cost was $2.3 million and $1.9 million, respectively, and were reflected in occupancy expenses on our income statements.

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


	For the Nine Months Ended
(in thousands except for percent and period data)	September 30, 2020			September 30, 2019
Supplemental cash flow information:
Cash paid for amounts included in the measurement of lease liabilities	$	3,724		$	3,682

Other information:
Weighted-average remaining lease term - operating leases, in years		5.3			5.9
Weighted-average discount rate - operating leases		2.6	%		2.8	%

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The following table summarizes the maturity of remaining lease liabilities:



	As of
(dollars in thousands)	September 30, 2020
Lease payments due:
Less than one year	$	2,125
One to three years		3,456
Three to five years		1,411
More than five years		1,449
Total lease payments		8,441
Less: imputed interest		(641)
Lease liabilities	$	7,800

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

6. COMMITMENTS AND CONTINGENCIES

Financial Instruments with off-balance sheet risk

Southern National is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and guarantees of credit card accounts. These instruments involve elements of credit and funding risk in excess of the amount recognized in the consolidated balance sheet. Letters of credit are written conditional commitments issued by Southern National to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. We had letters of credit outstanding totaling $13.7 million and $17.7 million as of September 30, 2020 and December 31, 2019, respectively.

Commitments

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

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7. EARNINGS PER SHARE

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


			Weighted
			Average
	Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
For the three months ended September 30, 2020
Basic EPS	$	9,588	24,270	$	0.40
Effect of dilutive stock options and unvested restricted stock		0	105		(0.01)
Diluted EPS	$	9,588	24,375	$	0.39

For the three months ended September 30, 2019
Basic EPS	$	8,864	24,072	$	0.37
Effect of dilutive stock options and unvested restricted stock		0	302		(0.01)
Diluted EPS	$	8,864	24,374	$	0.36

For the nine months ended September 30, 2020
Basic EPS	$	14,324	24,229	$	0.59
Effect of dilutive stock options and unvested restricted stock		0	121		0
Diluted EPS	$	14,324	24,350	$	0.59

For the nine months ended September 30, 2019
Basic EPS	$	24,203	24,036	$	1.01
Effect of dilutive stock options and unvested restricted stock		0	299		(0.02)
Diluted EPS	$	24,203	24,335	$	0.99

The Company did 0t have any anti-dilutive options as of September 30, 2020 and 2019.

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8. FAIR VALUE

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

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

Level 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

Assets Measured on a Recurring Basis:

Investment Securities Available for Sale

Where quoted prices are available in an active market, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include highly liquid government bonds and mortgage products. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of investment securities with similar characteristics or discounted cash flow. Level 2 investment securities include U.S. agency securities, mortgage-backed securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy. Currently, a majority of Southern National’s available for sale debt investment securities are considered to be Level 2 investment securities, except for a few corporate securities that are classified as Level 3 investment securities.

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


			Fair Value Measurements Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Total at		Identical Assets		Inputs		Inputs
(dollars in thousands)	September 30, 2020		(Level 1)		(Level 2)		(Level 3)
Available for sale securities
Residential government-sponsored mortgage-backed securities	$	42,064	$	0	$	42,064	$	0
Obligations of states and political subdivisions		23,133		0		23,133		0
Corporate securities		10,088		0		9,088		1,000
Trust preferred securities		2,416		0		2,416		0
Residential government-sponsored collateralized mortgage obligations		34,035		0		34,035		0
Government-sponsored agency securities		6,080		0		6,080		0
Agency commercial mortgage-backed securities		28,393		0		28,393		0
SBA pool securities		11,687		0		11,687		0
Total	$	157,896	$	0	$	156,896	$	1,000


			Fair Value Measurements Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Total at		Identical Assets		Inputs		Inputs
(dollars in thousands)	December 31, 2019		(Level 1)		(Level 2)		(Level 3)
Available for sale securities
Residential government-sponsored mortgage-backed securities	$	48,979	$	0	$	48,979	$	0
Obligations of states and political subdivisions		17,582		0		17,582		0
Corporate securities		2,012		0		1,012		1,000
Trust preferred securities		2,568		0		2,568		0
Residential government-sponsored collateralized mortgage obligations		36,689		0		36,689		0
Government-sponsored agency securities		14,822		0		14,822		0
Agency commercial mortgage-backed securities		27,731		0		27,731		0
SBA pool securities		14,437		0		14,437		0
Total	$	164,820	$	0	$	163,820	$	1,000

No corporate securities that are classified as Level 3 above were purchased or sold during 2020 or 2019. These corporate securities did not have a material impact on the income statement for the three and nine months ended September 30, 2020 and 2019.

Assets and Liabilities Measured on a Non-recurring Basis:

Impaired Loans

Generally, we measure the impairment for impaired loans considering the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral is determined by an independent appraisal or evaluation less estimated costs related to selling the collateral. In some cases appraised value is net of costs to sell. Estimated selling costs range from 5% to 10% of collateral valuation at September 30, 2020 and December 31, 2019. Fair value is classified as Level 3 in the fair value hierarchy. Loans identified as impaired totaled $32.2 million (including SBA guarantees of $0.2 million) as of September 30, 2020, with $1.1 million allocation made to the allowance for loan losses compared to a carrying amount of $22.0 million (including SBA guarantees of $4.4 million) with $1.1 million allocation made to the allowance for loan losses at December 31, 2019.

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Other Real Estate Owned (“OREO”)

OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or evaluation less cost to sell. In some cases appraised value is net of costs to sell. Selling costs have been in the range from 5% to 10% of collateral valuation at September 30, 2020 and December 31, 2019. Fair value is classified as Level 3 in the fair value hierarchy. OREO is further evaluated quarterly for any additional impairment. At September 30, 2020 and December 31, 2019, the total amount of OREO was $5.4 million and $6.2 million, respectively.

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


			Fair Value Measurements Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Total at		Identical Assets		Inputs		Inputs
(dollars in thousands)	September 30, 2020		(Level 1)		(Level 2)		(Level 3)
Impaired loans:
Commercial real estate - owner occupied	$	10,192	$	0	$	0	$	10,192
Commercial real estate - non-owner occupied ⁽¹⁾		7,009		0		0		7,009
Construction and land development		1,749		0		0		1,749
Commercial loans		7,298		0		0		7,298
Residential 1-4 family⁽²⁾		5,929		0		0		5,929
Consumer		18		0		0		18
Other real estate owned:
Commercial real estate - non-owner occupied ⁽¹⁾		1,678		0		0		1,678
Construction and land development		2,427		0		0		2,427
Residential 1-4 family⁽²⁾		1,283		0		0		1,283


			Fair Value Measurements Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Total at		Identical Assets		Inputs		Inputs
(dollars in thousands)	December 31, 2019		(Level 1)		(Level 2)		(Level 3)
Impaired loans:
Commercial real estate - owner occupied	$	6,890	$	0	$	0	$	6,890
Commercial real estate - non-owner occupied ⁽¹⁾		3,296		0		0		3,296
Construction and land development		345		0		0		345
Commercial loans		7,547		0		0		7,547
Residential 1-4 family⁽²⁾		3,862		0		0		3,862
Consumer		39		0		0		39
Other real estate owned:
Commercial real estate - non-owner occupied ⁽¹⁾		1,984		0		0		1,984
Construction and land development		2,874		0		0		2,874
Residential 1-4 family⁽²⁾		1,366		0		0		1,366

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

(2)	Includes home equity lines of credit.

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Fair Value of Financial Instruments

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


		September 30, 2020				December 31, 2019
	Fair Value	Carrying		Fair		Carrying		Fair
	Hierarchy Level	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	Level 1	$	149,272	$	149,272	$	31,928	$	31,928
Securities available for sale	Level 2 & Level 3		157,896		157,896		164,820		164,820
Securities held to maturity	Level 2		49,323		50,551		72,448		72,666
Stock in Federal Reserve Bank and Federal Home Loan Bank	Level 2		16,927		16,927		17,832		17,832
Equity investment in mortgage affiliate	Level 3		13,238		13,238		5,020		5,020
Preferred investment in mortgage affiliate	Level 3		3,305		3,305		3,305		3,305
Net loans	Level 3		2,497,930		2,536,849		2,175,786		2,180,487
Accrued interest receivable	Level 2 & Level 3		21,076		21,076		8,210		8,210
Financial liabilities:
Demand deposits and NOW accounts	Level 2	$	940,134	$	940,134	$	730,325	$	730,325
Money market and savings accounts	Level 2		714,655		714,655		611,353		611,353
Time deposits	Level 3		561,685		568,258		783,040		786,420
Securities sold under agreements to repurchase	Level 1		16,181		16,181		12,883		12,883
PPPLF borrowings	Level 1		283,906		283,906		0		0
FHLB short term advances	Level 1		100,000		100,000		121,640		121,640
Junior subordinated debt	Level 2		9,669		8,451		9,632		9,206
Senior subordinated notes	Level 2		105,709		110,610		47,051		48,156
Accrued interest payable	Level 1 & Level 3		3,077		3,077		4,907		4,907

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

The investment in common stock of our mortgage affiliate is accounted for using the equity method. Under the equity method, the carrying value of Southern National’s investment in STM was originally recorded at cost but is adjusted periodically to record Southern National’s proportionate share of STM’s earnings or losses through noninterest income and decreased by the amount of cash dividends or similar distributions received from STM. The investment in preferred stock of our mortgage affiliate is considered to be a non-marketable equity security that does not have a readily determinable fair value. Non-marketable equity securities with no recurring market value data available are reviewed periodically and any observable market value change is adjusted through noninterest income. Southern National evaluates its investments in this non-marketable equity security for impairment and recoverability of the recorded investment by considering positive and negative evidence, including the profitability and asset quality of STM, dividend payment history and recent redemption experience. Impairment is assessed at each reporting period and if identified, is recognized in noninterest income. NaN impairment was recorded for the three and nine months ended September 30, 2020 and 2019.

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

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

Other short-term borrowings can consist of FHLB of Atlanta overnight advances, other FHLB advances maturing within one year, federal funds purchased and securities sold under agreements to repurchase (“repo”) that mature within one year, which are secured transactions with customers. The balance in repo accounts at September 30, 2020 and December 31, 2019 was $16.2 million and $12.9 million, respectively.

10. JUNIOR SUBORDINATED DEBT AND SENIOR SUBORDINATED NOTES

In connection with our merger with EVBS, the Company assumed $10.3 million of trust preferred securities that were issued on September 17, 2003 and placed through a trust in a pooled underwriting totaling approximately $650 million. The trust issuer invested the total proceeds from the sale of the trust preferred securities in Floating Rate Junior Subordinated Deferrable Interest Debentures (“Junior Subordinated Debt”) issued by EVBS. At September 30, 2020 and December 31, 2019, we had $9.7 million and $9.6 million, respectively, of Junior Subordinated Debt outstanding. The trust preferred securities pay cumulative cash distributions quarterly at a variable rate per annum, reset quarterly, equal to the three-month LIBOR plus 2.95%. As of September 30, 2020 and December 31, 2019, the interest rate was 3.20% and 4.85%, respectively. The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax purposes.

The trust preferred securities may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. At September 30, 2020, all of the trust preferred securities qualified as Tier 1 capital.

On January 20, 2017, Southern National completed the sale of $27.0 million of its fixed-to-floating rate Subordinated Notes due 2027 (the “SNBV Senior Subordinated Notes”). The SNBV Senior Subordinated Notes will initially bear interest at 5.875% per annum until January 31, 2022; thereafter, the SNBV Senior Subordinated Notes will be payable at an annual floating rate equal to three-month LIBOR plus a spread of 3.95% until maturity or early redemption. At September 30, 2020, all of the SNBV Senior Subordinated Notes qualified as Tier 2 capital.

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

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

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

Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of SNBV. This discussion and analysis should be read with the consolidated financial statements, the footnotes thereto, and the other financial data included in this report and in our annual report on Form 10-K for the year ended December 31, 2019. Results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of results that may be attained for any other period.

FORWARD-LOOKING STATEMENTS

Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control, particularly with regard to developments related to the novel coronavirus (“COVID-19”). Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. The words “believe,” “may,” “forecast,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “continue,” “would,” “could,” “hope,” “might,” “assume,” “objective,” “seek,” “plan,” “strive” or similar words, or the negatives of these words, identify forward-looking statements.

Forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the expectations of future results we express or imply in any forward-looking statements. In addition to the Risk Factor contained in this Quarterly Report on Form 10-Q, as well as the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, factors that could contribute to those differences include, but are not limited to:

●

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

●

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

●

adverse results from current or future litigation, regulatory examinations or other legal and/or regulatory actions, including as a result of our participation in and execution of government programs related to the COVID-19 pandemic;

●

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

●

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

●

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

●

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

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●

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

●

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

●

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

●

failure to prevent a breach to our Internet-based system and online commerce security, including as a result of increased remote working by our employees;

●

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

●

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

●

government intervention in the U.S. financial system, including the effects of legislative, tax, accounting and regulatory actions and reforms, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau, the capital ratios of Basel III as adopted by the federal banking authorities, the Tax Cuts and Jobs Act of 2017 and the CARES Act;

●

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

●

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

●

the continued service of key management personnel;

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

failure to maintain effective internal controls and procedures;

●

our ability to attract and retain qualified employees; and

●

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

Forward-looking statements are not guarantees of performance or results and should not be relied upon as representing management’s views as of any subsequent date. A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe we have chosen these assumptions or bases in good faith and that they are reasonable. We caution you, however, that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. When considering forward-looking statements, you should refer to the risk factors and other cautionary statements in this Quarterly Report on Form 10-Q and in our periodic and current reports filed with the SEC for specific factors that could cause our actual results to be different from those expressed or implied by our forward-looking statements. These statements speak only as of the date of this Quarterly Report on Form 10-Q (or an earlier date to the extent applicable). Except as required by applicable law, we undertake no obligation to update publicly these statements in light of new information or future events.

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OVERVIEW

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

At September 30, 2020, Sonabank had forty-two full-service branches in Virginia and Maryland and through certain internet and mobile applications. Thirty-seven full-service retail branches are in Virginia, located in Ashland, Burgess, Callao, Central Garage, Charlottesville, Chester, Clifton Forge, Colonial Heights, Courtland, Deltaville, Fairfax, Front Royal, Gloucester, Gloucester Point, Hampton, Hartfield, Heathsville, Kilmarnock, Leesburg, McLean, Mechanicsville (2), Middleburg, Midlothian, New Market, Newport News, Quinton, Reston, Richmond, South Riding, Surry, Tappahannock (2), Urbanna, Warrenton, Waverly, and Williamsburg, and five full-service retail branches in Maryland, located in Bethesda, Brandywine, Owings, Rockville, and Upper Marlboro. We have administrative offices in Warrenton and Glen Allen, Virginia, and in Georgetown, Washington, D.C.

RESULTS OF OPERATIONS

Net Income

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

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

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

The 40.8% decrease in the net income during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily driven by higher provision for loan losses in 2020 as the Company made certain adjustments to its qualitative factors in response to the economic impact of COVID-19 that increased the provision by $16.0 million. The decline in net income was also driven by a one-time charge of $4.4 million, net of taxes of salary and benefits expense related to the restructuring of executive management in the first half of 2020 and increased staffing in the commercial lending and Panacea Financial divisions along with the modified incentive and bonus plans in the third quarter of 2020. These decreases were partially offset by an increase in equity gain from the Company’s mortgage affiliate driven by higher margins on closed loans and materially higher volumes from refinance activity as well as production from new hires and teams that were on-boarded in the last half of 2019. The decline in net income was also offset by a decline in

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

Net Interest Income

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

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

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


	Average Balance Sheets and Net Interest
	Analysis For the Three Months Ended
	September 30, 2020						September 30, 2019
			Interest						Interest
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate

	(Dollar amounts in thousands)
Assets
Interest-earning assets:
Loans, net of deferred fees ^{(1) (2)}	$	2,501,614	$	27,266	4.34	%	$	2,165,717	$	28,340	5.19	%
Investment securities		213,039		1,129	2.11	%		242,916		1,520	2.48	%
Other earning assets		163,159		312	0.76	%		65,707		614	3.71	%
Total earning assets		2,877,812		28,707	3.97	%		2,474,340		30,474	4.89	%
Allowance for loan losses		(23,640)						(11,570)
Total non-earning assets		279,924						266,120
Total assets	$	3,134,096					$	2,728,890

Liabilities and stockholders' equity
Interest-bearing liabilities:
NOW and other demand accounts	$	451,583	$	807	0.71	%	$	362,564	$	783	0.86	%
Money market accounts		504,887		800	0.63	%		456,492		2,080	1.81	%
Savings accounts		176,305		130	0.29	%		144,266		115	0.32	%
Time deposits		590,263		2,620	1.77	%		867,533		5,023	2.30	%
Total interest-bearing deposits		1,723,038		4,357	1.01	%		1,830,855		8,001	1.73	%
Borrowings		547,182		1,352	0.98	%		173,867		1,458	3.33	%
Total interest-bearing liabilities		2,270,220		5,709	1.00	%		2,004,722		9,459	1.87	%
Noninterest-bearing liabilities:
Demand deposits		452,500						334,435
Other liabilities		25,869						22,384
Total liabilities		2,748,589						2,361,541
Stockholders' equity		385,507						367,349
Total liabilities and stockholders' equity	$	3,134,096					$	2,728,890
Net interest income			$	22,998					$	21,015
Interest rate spread					2.97	%					3.01	%
Net interest margin					3.18	%					3.37	%

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

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

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

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


	Average Balance Sheets and Net Interest
	Analysis For the Nine Months Ended
	September 30, 2020						September 30, 2019
			Interest						Interest
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate

	(Dollar amounts in thousands)
Assets
Interest-earning assets:
Loans, net of deferred fees ^{(1) (2)}	$	2,368,541	$	81,051	4.57	%	$	2,160,863	$	84,692	5.24	%
Investment securities		222,285		3,737	2.25	%		242,891		4,728	2.60	%
Other earning assets		103,283		1,072	1.39	%		70,543		1,750	3.32	%
Total earning assets		2,694,109		85,860	4.26	%		2,474,297		91,170	4.93	%
Allowance for loan losses		(17,002)						(12,115)
Total non-earning assets		270,306						263,347
Total assets	$	2,947,413					$	2,725,529

Liabilities and stockholders' equity
Interest-bearing liabilities:
NOW and other demand accounts	$	412,083	$	2,338	0.76	%	$	355,511	$	2,198	0.83	%
Money market accounts		487,791		3,204	0.88	%		430,546		5,966	1.85	%
Savings accounts		162,575		353	0.29	%		145,964		345	0.32	%
Time deposits		685,253		10,111	1.97	%		880,610		14,608	2.22	%
Total interest-bearing deposits		1,747,702		16,006	1.22	%		1,812,631		23,117	1.71	%
Borrowings		390,856		3,868	1.32	%		203,469		5,122	3.37	%
Total interest-bearing liabilities		2,138,558		19,874	1.24	%		2,016,100		28,239	1.87	%
Noninterest-bearing liabilities:
Demand deposits		401,616						328,790
Other liabilities		24,055						21,347
Total liabilities		2,564,229						2,366,237
Stockholders' equity		383,184						359,292
Total liabilities and stockholders' equity	$	2,947,413					$	2,725,529
Net interest income			$	65,986					$	62,931
Interest rate spread					3.02	%					3.05	%
Net interest margin					3.27	%					3.40	%

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

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

Provision for Loan Losses

The provision for loan losses is a current charge to earnings made in order to adjust the allowance for loan losses to an appropriate level for inherent probable losses in the loan portfolio based on an evaluation of the loan portfolio, current economic conditions, changes in the nature and volume of lending, historical loan experience and other known internal and external factors affecting loan collectability. Our allowance for loan losses is calculated by segmenting the loan

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portfolio by loan type and applying risk factors to each segment. The risk factors are determined by considering historical loss data, peer data, as well as applying management’s judgment.

The Company elected to defer adoption of the CECL model until the earlier of the national emergency being lifted or December 31, 2020, as provided for by the CARES Act. During the three and nine months ~~ending~~ended September 30, ~~2017, there~~2020, the Company made certain adjustments to its qualitative factors in response to the economic impact of COVID-19 that increased the provision for loan losses by $2.0 million and $16.0 million, respectively. For the three months ended September 30, 2020 and 2019, the provision for loan losses was $2.0 million and $150 thousand, respectively. The provision for loan losses for the nine months ended September 30, 2020 and 2019 was $16.3 million and $350 thousand, respectively. Net recoveries for the three months ended September 30, 2020 was $152 thousand and net charge offs for the nine months ended September 30, 2020 was $831 thousand, compared to net charge offs of $562 thousand and $1.4 million, respectively for the three and nine months ended September 30, 2019.

Noninterest Income

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


	For the Three Months Ended
	September 30,
(dollars in thousands)	2020		2019		Change
Account maintenance and deposit service fees	$	1,633	$	1,837	$	(204)
Income from bank-owned life insurance		394		392		2
Equity gain from mortgage affiliate		3,826		599		3,227
Recoveries related to acquired charged-off loans and investment securities		288		145		143
Other		130		1		129
Total noninterest income	$	6,271	$	2,974	$	3,297

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

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


	For the Nine Months Ended
	September 30,
(dollars in thousands)	2020		2019		Change
Account maintenance and deposit service fees	$	4,820	$	5,312	$	(492)
Income from bank-owned life insurance		1,165		1,300		(135)
Equity gain from mortgage affiliate		8,218		1,175		7,043
Recoveries related to acquired charged-off loans and investment securities		2,707		1,060		1,647
Other		574		380		194
Total noninterest income	$	17,484	$	9,227	$	8,257

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

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charged-off loans ~~modified~~and investment securities. Equity gain from the Company’s mortgage affiliate increased $8.2 million driven by higher margins on closed loans and materially higher volumes from refinance activity as well as production from new hires and teams that were on-boarded in ~~troubled debt restructurings. One TDR which had been modified in 2013 defaulted~~the last half of 2019. The increase was also attributable to a recovery related to a previously charged-off acquired loan of approximately $2.0 million during the second quarter of ~~2015. This loan,~~2020. These increases were partially offset by a decrease of $492 thousand in account maintenance and deposit service fees primarily in account service charges and non-sufficient funds fee. Income from bank-owned life insurance decreased $135 thousand due to death benefits paid in the ~~amount~~first quarter of ~~$677~~2019.

Noninterest Expense

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


	For the Three Months Ended
	September 30,
(dollars in thousands)	2020		2019		Change
Salaries and benefits	$	7,817	$	6,567	$	1,250
Occupancy expenses		1,432		968		464
Furniture and equipment expenses		719		514		205
Amortization of core deposit intangible		341		352		(11)
Virginia franchise tax expense		615		563		52
Data processing expense		701		622		79
Telephone and communication expense		382		477		(95)
Net (gain) loss on other real estate owned		(16)		—		(16)
Professional fees		1,494		673		821
Other operating expenses		1,779		1,878		(99)
Total noninterest expenses	$	15,264	$	12,614	$	2,650

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

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


	For the Nine Months Ended
	September 30,
(dollars in thousands)	2020		2019		Change
Salaries and benefits	$	27,464	$	19,523	$	7,941
Occupancy expenses		4,776		4,572		204
Furniture and equipment expenses		1,977		1,962		15
Amortization of core deposit intangible		1,023		1,077		(54)
Virginia franchise tax expense		1,844		1,689		155
Data processing expense		2,364		1,704		660
Telephone and communication expense		1,119		1,258		(139)
Net (gain) loss on other real estate owned		55		(38)		93
Professional fees		3,560		2,576		984
Other operating expenses		5,004		8,473		(3,469)
Total noninterest expenses	$	49,186	$	42,796	$	6,390

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

FINANCIAL CONDITION

Balance Sheet Overview

Total assets were $3.15 billion as of September 30, ~~2017.~~2020 and $2.72 billion as of December 31, 2019. Total loans increased 15.4%, from $2.19 billion at December 31, 2019 to $2.52 billion at September 30, 2020, with loan growth in 2020 primarily due to PPP loan originations. Excluding PPP loans, loans outstanding decreased $10.4 million, or 0.47%, since December 31, 2019. Total deposits were $2.22 billion at September 30, 2020, compared to $2.12 billion at December 31, 2019 and total equity was $389.0 million and $377.2 million at September 30, 2020 and December 31, 2019, respectively.

Loan Portfolio

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

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

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


	September 30, 2020		December 31, 2019
Loans secured by real estate:
Commercial real estate - owner occupied	$	416,717	$	414,479
Commercial real estate - non-owner occupied		605,053		559,195
Secured by farmland		16,608		17,622
Construction and land loans		120,066		150,750
Residential 1-4 family		581,237		604,777
Multi-family residential		107,672		82,055
Home equity lines of credit		97,727		109,006
Total real estate loans		1,945,080		1,937,884

Commercial loans		216,711		221,447
Paycheck Protection Program		348,022		—
Consumer loans		23,078		26,304
Subtotal		2,532,891		2,185,635
Plus deferred costs on loans		(9,182)		412
Total loans	$	2,523,709	$	2,186,047

As of September 30, 2020 and December 31, 2019, substantially all of our loans were to customers located in Virginia and Maryland. We are not dependent on any single customer or group of customers whose insolvency would have a material adverse effect on operations.

Asset Quality

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

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

Our loss and delinquency experience on our loan portfolio has been limited by a number of factors, including our underwriting standards and the relatively short period of time since the loans were originated. Whether losses and delinquencies in our portfolio will increase significantly depends upon the value of the real estate securing the loans and economic factors, such as the overall economy in our market area, including as a result of the impact of COVID-19.

OREO at September 30, ~~2016, there were no loans modified in troubled debt restructurings. One TDR which had been modified in 2013 defaulted~~2020 was $5.4 million, compared to $6.2 million at December 31, 2019. The decrease was primarily driven by sale of properties during the ~~second~~year and a write-down on OREO during the first quarter of ~~2015. This loan,~~2020.

Loans acquired in the ~~amount~~GAB transaction covered under an FDIC loss-share agreement expired on December 31, 2019 and therefore any references to “non-covered” loans do not apply to any periods after December 31, 2019. Nonaccrual loans were $11.2 million (excluding $4.1 million of ~~$692 thousand,~~loans fully covered by SBA guarantees) at September 30, 2020, compared to $4.8 million (non-covered and excluding $4.1 million of loans fully covered by SBA guarantees) at

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

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

The following table presents a comparison of nonperforming assets as of September 30, ~~2016.~~

~~Covered Loans~~2020 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~~2019 (in thousands):


	September 30,			December 31,
	2020			2019 ⁽¹⁾
Nonaccrual loans	$	15,270		$	8,900
Loans past due 90 days and accruing interest		—			—
Total nonperforming loans		15,270			8,900
Other real estate owned		5,388			6,224
Total nonperforming assets	$	20,658		$	15,124

Troubled debt restructurings	$	1,629		$	697
SBA guaranteed amounts included in nonaccrual loans	$	4,076		$	4,129

Allowance for loan losses to nonperforming loans		168.82	%		115.30	%
Allowance for loan losses to total loans		1.04	%		0.47	%
Nonperforming assets excluding SBA guaranteed loans to total assets		0.53	%		0.41	%

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

Not included in the table above are $436.6 million of loans that were ~~$1.1 million~~subject to COVID-relateddeferrals at September 30, ~~2017 and $850 thousand at December 31, 2016.~~2020. Some of these loans may become potential problem loans in 2021.

We identify potential problem loans based on loan portfolio credit quality. We define our potential problem loans as our non-covered classified/criticized loans less total non-covered nonperforming loans noted above. At September 30, ~~2017~~2020 and December 31, ~~2016, there were no covered~~2019, our potential problem loans ~~past due 90 days or more~~totaled $4.0 million and ~~accruing interest.~~

$0.7 million, respectively.

Investment Securities

Investment securities, available for sale and held to maturity, totaled ~~$264.6~~$207.2 million at September 30, ~~2017 up~~2020 down from ~~$89.2~~$237.3 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.~~

2019.

Investment securities in our portfolio as of September 30, ~~2017~~2020 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~~$35.5 million;

·●

agency residential mortgage-backed securities in the amount of $71.9 million;

●

corporate bonds in the amount of ~~$2.0~~$10.1 million;

·●

commercial mortgage-backed securities in the amount of ~~$28.1~~$28.4 million;

·●

SBA loan pool securities in the amount of ~~$26.0~~$11.7 million;

·●

callable agency securities in the amount of ~~$54.4~~$11.1 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);~~$4.1 million; and

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·●

municipal bonds in the amount of ~~$41.5~~$34.4 million (fair value of ~~$41.6~~$34.6 million) with a taxable equivalent yield of ~~3.43%~~3.4% and ratings as of September 30, 2020 as follows:


Moody's	Amount		Standard & Poor's	Amount
Rating	(in thousands)		Rating	(in thousands)
Aaa	$	12,169	AAA	$	11,700
Aa1		6,607	AA+		6,733
Aa2		3,994	AA		6,890
Aa3		697	AA-		1,831
A1		2,334	A+		1,003
A2		1,003	A		830
Baa1		—	BBB+		—
NA		7,793	NA		5,610
Total	$	34,597	Total	$	34,597

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 the ~~first~~three and nine months ended September 30, 2020, $14.3 million and $29.3 million, respectively, of ~~2017, we purchased $11.8~~available for sale investment securities were purchased. During the nine months ended September 30, 2020, $15.2 million of ~~callable agency securities. Two callable agency~~held to maturity investment securities inwere purchased. No held to maturity investment securities were purchased during the ~~amount $5.3~~three months ended September 30, 2020. During the three and nine months ended September 30, 2019, $10.0 million and $35.1 million, respectively, of available for sale investment securities were purchased. Held to maturity investment securities of $10.2 million were ~~called. Additionally,~~purchased during the ~~second quarter of 2017, as part of our restricting of our~~three and nine months ended September 30, 2019. No investment securities ~~portfolio, $3.2 million of odd-lot residential government-sponsored mortgage-backed securities~~were sold during the three and ~~$1.3 million of odd-lot residential government-sponsored collateralized mortgage obligations were sold.~~

nine months ended September 30, 2020 and 2019.

At September 30, ~~2017,~~2020, we owned pooled trust preferred securities as follows (in thousands):


												% of		Previously
												Current		Recognized
												Defaults and		Cumulative
		Ratings								Estimated		Deferrals to		Other
	Tranche	When Purchased		Current Ratings		Par		Book		Fair		Total		Comprehensive
Security	Level	Moody's	Fitch	Moody's	Fitch	Value		Value		Value		Collateral		Loss⁽¹⁾

						(in thousands)
Held to Maturity
ALESCO VII A1B	Senior	Aaa	AAA	Aa1	AA	$	1,874	$	1,754	$	1,743	17	%	$	219
MMCF III B	Senior Sub	A3	A-	Ba1	WD		31		30		29	48	%		4
						$	1,905	$	1,784	$	1,772			$	223

															Cumulative OTTI
Available for Sale														Related to
Other Than Temporarily Impaired:														Credit Loss⁽²⁾
TPREF FUNDING II	Mezzanine	A1	A-	Caa3	WD	$	1,500	$	1,040	$	750	32	%	$	400
ALESCO V C1	Mezzanine	A2	A	Caa1	C		2,150		1,490		1,666	15	%		660
						$	3,650	$	2,530	$	2,416			$	1,060

Total						$	5,555	$	4,314	$	4,188

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

(2)

Pre-tax.

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

~~(2) Pre-tax~~

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

We recognized no other than temporary impairment charges during the three and nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively.

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Liquidity and Funds Management

The objective of our liquidity management is to ~~assure~~ensure the ability to meet our financial obligations. These obligations include the payment of deposits on demand or at maturity, the repayment of borrowings at maturity and the ability to fund commitments and other new business opportunities. We obtain funding from a variety of sources, including customer deposit accounts, customer certificates of deposit and payments on our loans and investments. Historically, our level of core deposits has been insufficient to fully fund our lending activities. As a result, we have sought funding from additional sources, including institutional certificates of deposit and the sale of available for sale investment securities. In addition, we maintain lines of credit with the FHLB of Atlanta, federal funds lines of credit with three correspondent banks and utilize securities sold under agreements to repurchase and reverse repurchase agreement borrowings from approved securities dealers.

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

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 months ended September 30, ~~2017,~~2020, we funded our financial obligations with deposits and borrowings from the FHLB of ~~Atlanta and the issuance of the SNBV Senior Subordinated Notes in January 2017.~~Atlanta. At September 30, ~~2017,~~2020, we had ~~$391.0~~$348.5 million of unfunded lines of credit and undisbursed construction loan funds. The amount of certificate of deposit accounts maturing in less than one year was $434.3 million as of September 30, 2020. Management anticipates that funding requirements for these commitments can be met from the normal sources of funds.

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

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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 Bank~~Sonabank at the ~~dates~~periods indicated to the minimum and well-capitalized required regulatory ~~standards (dollars in thousands):~~standards:

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 %


	Minimum
	Required for
	Capital				Actual Ratio at
	Adequacy		To Be Categorized		September 30,		December 31,
	Purposes		as Well Capitalized⁽¹⁾		2020		2019
Sonabank
Common equity tier 1 capital ratio	4.50	%	6.50	%	15.05	%	14.81	%
Tier 1 risk-based capital ratio	6.00	%	8.00	%	15.05	%	14.81	%
Total risk-based capital ratio	8.00	%	10.00	%	16.23	%	15.29	%
Leverage ratio	4.00	%	5.00	%	12.26	%	12.07	%

(1)

When fully phased-in on January 1, 2019, the Basel III capital rules include 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 each subsequent January 1, until it reaches 2.5% on January 1, 2019.

~~(2)~~

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

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

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are engaged primarily in the business of investing funds obtained from deposits and borrowings into interest-earning loans and investments. Consequently, our earnings depend to a significant extent on our net interest income, which is the difference between the interest income on loans and other investments and the interest expense on deposits and borrowings. To the extent that our interest-bearing liabilities do not reprice or mature at the same time as our interest-earning assets, we are subject to interest rate risk and corresponding fluctuations in net interest income. Out Asset-Liability Committee (“ALCO”) meets regularly and is responsible for reviewing our interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk. The policies established by the ALCO are reviewed and approved by our Board of Directors. We have employed asset/liability management policies that seek to manage our net interest income, without having to incur unacceptable levels of credit or investment risk.

We use simulation modeling to manage our interest rate risk, and we review quarterly interest ~~sensitivity reports prepared for us by FTN Financial using the Sendero ALM Analysis System.~~sensitivity. This approach uses a model which generates estimates of the change in our economic value of equity (“EVE”) over a range of interest rate scenarios. EVE is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts using assumptions about estimated loan prepayment rates, reinvestment rates and deposit decay rates.

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The following tables are based on ~~an analysis prepared by FTN Financial setting forth~~ an analysis of our interest rate risk as measured by the estimated change in EVE resulting from instantaneous and sustained parallel shifts in the yield curve (plus 400 basis points or minus ~~200~~100 basis points, measured in 100 basis point increments) as of September 30, ~~2017~~2020 and as of December 31, ~~2016.~~2019. All changes are within our Asset/Liability Risk Management Policy guidelines except for the change resulting from the ~~200~~100 basis point decrease in interest rates at September 30, ~~2017~~2020 and ~~the change resulting from the 100 basis point decrease in interest rates at~~ December 31, ~~2016.~~2019.


	Sensitivity of Economic Value of Equity
	As of September 30, 2020
							Economic Value of
	Economic Value of Equity						Equity as a % of
Change in Interest Rates			$ Change		% Change		Total		Equity
in Basis Points (Rate Shock)	Amount		From Base		From Base		Assets		Book Value

	(dollar amounts in thousands)
Up 400	$	343,805	$	(809)	(0.23)	%	10.90	%	88.39	%
Up 300		348,284		3,670	1.06	%	11.04	%	89.54	%
Up 200		350,895		6,281	1.82	%	11.12	%	90.21	%
Up 100		353,269		8,655	2.51	%	11.20	%	90.82	%
Base		344,614		—	—	%	10.92	%	88.59	%
Down 100		306,296		(38,318)	(11.12)	%	9.71	%	78.74	%


	Sensitivity of Economic Value of Equity
	As of December 31, 2019
							Economic Value of
	Economic Value of Equity						Equity as a % of
Change in Interest Rates			$ Change		% Change		Total		Equity
in Basis Points (Rate Shock)	Amount		From Base		From Base		Assets		Book Value

	(dollar amounts in thousands)
Up 400	$	323,871	$	(45,102)	(12.22)	%	11.90	%	85.85	%
Up 300		336,822		(32,151)	(8.71)	%	12.37	%	89.29	%
Up 200		349,192		(19,781)	(5.36)	%	12.83	%	92.56	%
Up 100		363,935		(5,038)	(1.37)	%	13.37	%	96.47	%
Base		368,973		—	0.00	%	13.55	%	97.81	%
Down 100		353,371		(15,602)	(4.23)	%	12.98	%	93.67	%

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 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 30, ~~2017~~2020 and December 31, ~~2016~~2019 remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. All changes are within our Asset/Liability Risk Management Policy guidelines at September 30, ~~2017~~2020 and December 31, ~~2016.~~2019.


	Sensitivity of Net Interest Income
	As of September 30, 2020
	Adjusted Net Interest Income				Net Interest Margin
Change in Interest Rates			$ Change				% Change
in Basis Points (Rate Shock)	Amount		From Base		Percent		From Base

	(dollar amounts in thousands)
Up 400	$	88,693	$	(4,462)	3.36	%	(0.17)	%
Up 300		89,907		(3,248)	3.41	%	(0.12)	%
Up 200		90,938		(2,217)	3.44	%	(0.08)	%
Up 100		92,281		(874)	3.50	%	(0.03)	%
Base		93,155		—	3.53	%	—	%
Down 100		92,980		(175)	3.52	%	(0.01)	%

Sensitivity of Net Interest Income
As of September 30, 2017
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 $ 94,535 $ 9,578 3.99 % 0.38 %
Up 300 92,442 7,485 3.90 % 0.29 %
Up 200 90,178 5,221 3.82 % 0.21 %
Up 100 87,755 2,798 3.72 % 0.11 %
Base 84,957 - 3.61 % 0.00 %
Down 100 85,228 271 3.63 % 0.02 %
Down 200 85,574 617 3.64 % 0.03 %

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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 %


	Sensitivity of Net Interest Income
	As of December 31, 2019
	Adjusted Net Interest Income				Net Interest Margin
Change in Interest Rates			$ Change				% Change
in Basis Points (Rate Shock)	Amount		From Base		Percent		From Base

	(dollar amounts in thousands)
Up 400	$	74,096	$	(8,158)	3.00	%	(0.33)	%
Up 300		76,355		(5,899)	3.09	%	(0.24)	%
Up 200		78,458		(3,796)	3.18	%	(0.15)	%
Up 100		80,649		(1,605)	3.27	%	(0.07)	%
Base		82,254		—	3.33	%	—	%
Down 100		81,273		(981)	3.29	%	(0.04)	%

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in EVE requires the making of certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. Accordingly, although the EVE tables and NII tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net worth and NII. Sensitivity of EVE and NII are modeled using different assumptions and approaches. 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, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d ~~-15(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.

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

(b) Changes in Internal Control over Financial Reporting. ~~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.

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 30, ~~2017.~~2020.

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ITEM 1A – RISK FACTORS

~~Other than as set forth below, as of September~~The Company disclosed risk factors in its Annual Report on Form 10-K for the year ended December 31, 2019 and in its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, ~~2017 there~~2020. The risks described may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition, and/or operating results. The following risk factors have been ~~no material changes~~included in this Quarterly Report on Form 10-Q in response to the ~~risk~~global market disruptions that have resulted from the COVID-19 pandemic.

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

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

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

●

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

●

declines in collateral values;

●

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

●

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

●

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

●

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

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

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

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

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A significant amount of the loan growth we experienced during the second and third quarter was a direct result of PPP loans; this loan growth is likely to end in the near-term. Furthermore, since the inception of the PPP, a number of banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP and claims related to agent fees. We are exposed to similar litigation regarding our procedures used to process applications for the PPP and related matters. If any such litigation is not resolved in a manner favorable to us, it may result in significant financial liability or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation or negative media attention could have a material adverse impact on our business, financial condition and results of operations. The PPP has also attracted interest from federal and state enforcement authorities, oversight agencies, regulators and Congressional committees. State Attorney Generals and other federal and state agencies may assert that they are not subject to the provisions of the CARES Act and the PPP regulations entitling us to rely on borrower certifications, and they may take more aggressive actions against us for alleged violations of the provisions governing our participation in the PPP. Federal and state regulators can impose or request that we consent to substantial sanctions, restrictions and requirements if they determine there are violations of laws, rules or regulations or weaknesses or failures with respect to general standards of safety and soundness, which could adversely affect our business, reputation, results of operation and financial condition.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of our known risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2019.

~~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.

~~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.

~~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) filed August 4, 2006)

3.2		Certificate of Amendment to the Articles of Incorporation dated January 31, 2005 (incorporated herein by reference to Exhibit 3.2 to Southern National’s Registration Statement on Form S-1 (Registration No. 333-136285) filed on August 4, 2006)

3.3		Certificate of Amendment to the Articles of Incorporation dated April 13, 2006 (incorporated herein by reference to Exhibit 3.3 to Southern National’s Registration Statement on Form S-1 (Registration No. 333-136285) filed on August 4, 2006)

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

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

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

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

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

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

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

101		The following materials from Southern National Bancorp of Virginia, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2017,~~2020, formatted in Inline XBRL (Extensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income and Comprehensive Income (unaudited), (iii) Consolidated Statement of Changes in Stockholders’ Equity (unaudited), (iv) Consolidated Statements of Cash Flows (unaudited), and (v) Notes to Consolidated Financial Statements (unaudited).

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

+ Management contract or compensatory plan or arrangement

* Filed with this Quarterly Report on Form 10-Q

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

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Signatures

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


			Southern National Bancorp of Virginia, Inc.
			(Registrant)



November 9, ~~2017~~2020			/s/ ~~Joe A. Shearin~~Dennis J. Zember
(Date)			~~Joe A. Shearin,~~ Dennis J. Zember,
			~~President and~~ Chief Executive Officer
			(~~Principal~~President and Executive Officer)


November 9, ~~2017~~2020			/s/ ~~J. Adam Sothen~~Jeffrey L. Karafa
(Date)			~~J. Adam Sothen,~~ Jeffrey L. Karafa,
			Executive Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer)

~~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, par value $0.01 per share	SONA	NASDAQ Global Market


Large accelerated filer ☐	Accelerated filer ☒	Smaller reporting company ☐

Non-accelerated filer ☐	Emerging growth company ☐

INDEX		PAGE

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements
Consolidated Balance Sheets as of September 30, ~~2017~~2020 and December 31, ~~2016~~2019		2
Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, ~~2017~~2020 and ~~2016~~2019		3
Consolidated Statement of Changes in Stockholders’ Equity for the three and nine months ended September 30, ~~2017~~2020 and 2019		4
Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2020 and ~~2016~~2019		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~~ 34

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

Item 4 – Controls and Procedures		49

PART II - OTHER INFORMATION

Item 1 – Legal Proceedings		50 49

Item 1A – Risk Factors		50

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

Item 3 – Defaults Upon Senior Securities		51

Item 4 – Mine Safety Disclosures		51

Item 5 – Other Information		51

Item 6 - Exhibits		51 52

Signatures		52 54

~~Certifications~~

	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

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016

Interest and dividend income:
Interest and fees on loans	$	26,726		$	11,792		$	51,819		$	33,790
Interest and dividends on taxable securities		1,464			581			2,620			2,059
Interest and dividends on tax exempt securities		159			84			333			252
Interest and dividends on other earning assets		458			162			829			482
Interest on federal funds sold		4			-			4			-
Total interest and dividend income		28,811			12,619			55,605			36,583
Interest expense:
Interest on deposits		3,391			2,128			7,809			5,918
Interest on repurchase agreements		12			-			13			18
Interest on junior subordinated debt		120			-			129			-
Interest on senior subordinated notes		712			-			1,483			-
Interest on other borrowings		726			118			1,225			388
Total interest expense		4,961			2,246			10,659			6,324

Net interest income		23,850			10,373			44,946			30,259

Provision for loan losses		5,250			2,050			6,850			4,062
Net interest income after provision for loan losses		18,600			8,323			38,096			26,197

Noninterest income:
Account maintenance and deposit service fees		1,518			225			2,098			675
Income from bank-owned life insurance		305			175			631			524
Equity (loss) income from mortgage affiliate		(83	)		749			(450	)		1,381
(Loss) gain on sales of investment securities		(2	)		-			255			-
Other		561			26			580			88
Total noninterest income		2,299			1,175			3,114			2,668

Noninterest expenses:
Salaries and benefits		7,746			2,699			13,750			8,753
Occupancy expenses		1,703			783			3,338			2,377
Furniture and equipment expenses		907			283			1,401			720
Amortization of core deposit intangible		360			44			483			168
Virginia franchise tax expense		364			96			605			290
FDIC assessment		186			165			391			478
Data processing expense		440			184			858			533
Telephone and communication expense		567			201			912			586
Amortization of FDIC indemnification asset		173			187			540			606
Net (gain) loss on other real estate owned		(106	)		(9	)		213			74
Merger expenses		168			-			9,094			-
Other operating expenses		1,928			725			3,745			2,403
Total noninterest expenses		14,436			5,358			35,330			16,988
Income before income taxes		6,463			4,140			5,880			11,877
Income tax expense		2,089			1,375			2,294			3,757
Net income	$	4,374		$	2,765		$	3,586		$	8,120

Other comprehensive income (loss):
Unrealized gain (loss) on available for sale securities	$	242		$	188		$	323		$	(296	)
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
Net unrealized gain (loss)		247			191			77			(286	)
Tax effect		(84	)		(64	)		(26	)		98
Other comprehensive income (loss)		163			127			51			(188	)
Comprehensive income	$	4,537		$	2,892		$	3,637		$	7,932
Earnings per share, basic	$	0.18		$	0.23		$	0.22		$	0.66
Earnings per share, diluted	$	0.18		$	0.22		$	0.21		$	0.65

								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

	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			-

	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

						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

															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		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

	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

	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

			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	$	-

	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	%

	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	%

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

						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	%

	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 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	%

	Sensitivity of Net Interest Income
	As of September 30, 2017
	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	$	94,535	$	9,578		3.99	%		0.38	%
Up 300		92,442		7,485		3.90	%		0.29	%
Up 200		90,178		5,221		3.82	%		0.21	%
Up 100		87,755		2,798		3.72	%		0.11	%
Base		84,957		-		3.61	%		0.00	%
Down 100		85,228		271		3.63	%		0.02	%
Down 200		85,574		617		3.64	%		0.03	%