Primis Financial (FRST) 10-Q 2019 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2019

Commission File No. 001‑33037

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)

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

6830 Old Dominion Drive

McLean, Virginia 22101

(Address of principal executive offices) (zip code)

(703) 893‑7400

(Registrant’s telephone number, including area code)

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

YES ☒       NO ☐

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

YES ☒       NO ☐

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

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

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

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

Yes ☐   No ☒

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

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

As of May 2, 2019, there were 24,117,326 shares of common stock outstanding.

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10‑Q

March 31, 2019

INDEX

	PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	2
Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2019 and 2018	3
Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2019 and 2018	4
Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018	5
Notes to Unaudited Consolidated Financial Statements	6
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3 – Quantitative and Qualitative Disclosures about Market Risk	37
Item 4 – Controls and Procedures	38
PART II - OTHER INFORMATION
Item 1 – Legal Proceedings	39
Item 1A – Risk Factors	39
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3 – Defaults Upon Senior Securities	39
Item 4 – Mine Safety Disclosures	39
Item 5 – Other Information	39
Item 6 - Exhibits	40
Signatures	41

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share amounts)

	March 31,		December 31,
	2019		2018
	(unaudited)		*
ASSETS
Cash and cash equivalents:
Cash and due from financial institutions	$	6,868	$	6,939
Interest-bearing deposits in other financial institutions		24,973		20,877
Federal funds sold		—		795
Total cash and cash equivalents		31,841		28,611
Securities available for sale, at fair value		156,192		143,377
Securities held to maturity, at amortized cost (fair value of $88,667 and $89,109, respectively)		90,592		92,462
Total loans		2,157,215		2,178,824
Less allowance for loan losses		(11,874)		(12,283)
Net loans		2,145,341		2,166,541
Stock in Federal Reserve Bank and Federal Home Loan Bank		18,427		19,522
Equity investment in mortgage affiliate		3,847		3,829
Preferred investment in mortgage affiliate		3,305		3,305
Bank premises and equipment, net		31,478		32,352
Operating lease right-of-use assets		7,865		—
Goodwill		101,954		101,954
Core deposit intangibles, net		8,246		8,609
Bank-owned life insurance		62,674		62,495
Other real estate owned		5,041		5,077
Deferred tax assets, net		13,876		14,104
Other assets		23,516		19,057
Total assets	$	2,704,195	$	2,701,295
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits	$	328,808	$	320,043
Interest-bearing deposits:
NOW accounts		361,301		345,597
Money market accounts		426,072		355,469
Savings accounts		148,547		151,050
Time deposits		846,325		925,441
Total interest-bearing deposits		1,782,245		1,777,557
Total deposits		2,111,053		2,097,600
Securities sold under agreements to repurchase - short term		13,623		18,721
Federal Home Loan Bank (FHLB) advances - short term		135,640		163,340
Junior subordinated debt - long term		9,596		9,584
Senior subordinated notes - long term		47,080		47,089
Operating lease liabilities		8,856		—
Other liabilities		25,658		16,671
Total liabilities		2,351,506		2,353,005
Commitments and contingencies (See Note 6)
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 5,000,000 shares; no shares issued and outstanding		—		—
Common stock, $0.01 par value. Authorized 45,000,000 shares; 24,107,103 and 24,052,253 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively		241		240
Additional paid in capital		305,879		305,654
Retained earnings		48,300		44,985
Accumulated other comprehensive loss		(1,731)		(2,589)
Total stockholders' equity		352,689		348,290
Total liabilities and stockholders' equity	$	2,704,195	$	2,701,295

*  Derived from audited consolidated financial statements

See accompanying notes to unaudited consolidated financial statements.

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

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

	For the Three Months Ended
	March 31,
	2019		2018
Interest and dividend income:
Interest and fees on loans	$	27,974	$	25,905
Interest and dividends on taxable securities		1,425		1,482
Interest and dividends on tax exempt securities		156		159
Interest and dividends on other earning assets		746		467
Interest on federal funds sold		2		7
Total interest and dividend income		30,303		28,020
Interest expense:
Interest on deposits		7,462		3,270
Interest on repurchase agreements		23		22
Interest on junior subordinated debt		150		128
Interest on senior subordinated notes		712		711
Interest on other borrowings		1,004		1,389
Total interest expense		9,351		5,520
Net interest income		20,952		22,500
Provision for loan losses		200		1,600
Net interest income after provision for loan losses		20,752		20,900
Noninterest income:
Account maintenance and deposit service fees		1,687		1,408
Income from bank-owned life insurance		523		307
Equity gain (loss) from mortgage affiliate		18		(317)
Recoveries related to acquired charged-off loans and investment securities		591		1,483
Other		243		198
Total noninterest income		3,062		3,079
Noninterest expenses:
Salaries and benefits		5,812		6,772
Occupancy expenses		1,803		1,650
Furniture and equipment expenses		710		797
Amortization of core deposit intangible		363		362
Virginia franchise tax expense		563		364
FDIC assessment		—		335
Data processing expense		512		466
Telephone and communication expense		375		594
Net (gain) loss on other real estate owned		(2)		200
Other operating expenses		6,154		2,079
Total noninterest expenses		16,290		13,619
Income before income taxes		7,524		10,360
Income tax expense		1,504		2,101
Net income	$	6,020	$	8,259
Other comprehensive income (loss)
Unrealized gain (loss) on available for sale securities	$	1,084	$	(1,876)
Accretion of amounts previously recorded upon transfer to held to maturity from available for sale		3		4
Net unrealized gain (loss)		1,087		(1,872)
Tax effect		229		(394)
Other comprehensive income (loss):		858		(1,478)
Comprehensive income	$	6,878	$	6,781
Earnings per share, basic	$	0.25	$	0.34
Earnings per share, diluted	$	0.25	$	0.34

See accompanying notes to unaudited consolidated financial statements.

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

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

							Accumulated
			Additional				Other
	Common		Paid in		Retained		Comprehensive
	Stock		Capital		Earnings		Loss		Total
Balance - December 31, 2018	$	240	$	305,654	$	44,985	$	(2,589)	$	348,290
Net income		—		—		6,020		—		6,020
Changes in other comprehensive income on investment securities (net of tax, $229, and accretion of $3)		—		—		—		858		858
Dividends on common stock ($0.09 per share)		—		—		(2,170)		—		(2,170)
Issuance of common stock under Stock Incentive Plan (17,250 shares, net)		1		121		—		—		122
Impact of adoption of ASU 2016-02		—		—		(535)		—		(535)
Stock-based compensation expense		—		104		—		—		104
Balance - March 31, 2019	$	241	$	305,879	$	48,300	$	(1,731)	$	352,689
							Accumulated
			Additional				Other
	Common		Paid in		Retained		Comprehensive
	Stock		Capital		Earnings		Loss		Total
Balance - December 31, 2017	$	239	$	304,932	$	18,753	$	(1,152)	$	322,772
Net income		—		—		8,259		—		8,259
Changes in other comprehensive loss on investment securities (net of tax, $394, and accretion of $3)		—		—		—		(1,478)		(1,478)
Dividends on common stock ($0.08 per share)		—		—		(1,917)		—		(1,917)
Issuance of common stock under Stock Incentive Plan (51,200 shares, net)		1		353		—		—		354
Reclassification from accumulated other comprehensive loss to retained earnings due to adoption of ASU 2018-02		—		—		229		(229)		—
Stock-based compensation expense		—		75		—		—		75
Balance - March 31, 2018	$	240	$	305,360	$	25,324	$	(2,859)	$	328,065

See accompanying notes to unaudited consolidated financial statements.

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(dollars in thousands) (Unaudited)

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

See accompanying notes to unaudited consolidated financial statements.

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Unaudited Consolidated Financial Statements

March 31, 2019

1.      ACCOUNTING POLICIES

Southern National Bancorp of Virginia, Inc. (“Southern National” or “SNBV” or the “Company”) is a corporation that was formed on July 28, 2004 under the laws of the Commonwealth of Virginia and is the holding company for Sonabank (“Sonabank” or the “Bank”) a Virginia state-chartered bank which commenced operations on April 14, 2005. As of the close of business on June 23, 2017, SNBV completed its merger with Eastern Virginia Bankshares, Inc. (“EVBS”) and the merger of EVBS’s wholly-owned subsidiary, EVB, with and into SNBV’s wholly-owned subsidiary, Sonabank. Sonabank provides a range of financial services to individuals and small and medium sized businesses. At March 31, 2019, Sonabank had thirty-eight full-service retail branches in Virginia, located in the counties of Chesterfield (2), Essex (2), Fairfax (Reston, McLean and Fairfax), Gloucester (2), Hanover (3), King William, Lancaster, Middlesex (3), New Kent, Northumberland (3), Southampton, Surry, Sussex, and in Charlottesville, Clifton Forge, Colonial Heights, Front Royal, Hampton, Haymarket, Leesburg, Middleburg, New Market, Newport News, Richmond, South Riding, Warrenton, and Williamsburg, and seven full-service retail branches in Maryland, in Rockville, Shady Grove, Bethesda, Upper Marlboro, Brandywine, Owings and Huntingtown.

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

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

Revenue from Contracts with Customers

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

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

6

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

Operating Leases

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

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

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

Use of Estimates

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

Recent Accounting Pronouncements

Adoption of New Accounting Standards:

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

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

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

New Accounting Standards Not Yet Adopted:

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

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

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

2.      STOCK-BASED COMPENSATION

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

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authorized the reservation of an additional 700,000 shares of common stock for the granting of stock awards. The options granted to officers and employees are incentive stock options and the options granted to non-employee directors are non-qualified stock options. The purpose of the plan is to afford key employees an incentive to remain in the employment of Southern National and to assist in the attracting and retaining of non-employee directors by affording them an opportunity to share in Southern National’s 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 replaced the 2010 Plan and has a maximum number of 750,000 shares reserved for issuance. The purpose of the 2017 Plan is to promote the success of the Company by providing greater incentive to employees, non-employee directors, consultants and advisors to associate their personal interests with the long-term financial success of the Company, including its subsidiaries, and with growth in stockholder value, consistent with the Company’s risk management practices. Because the 2017 Plan was approved, shares under the 2004 stock-option plan or 2010 Plan will no longer be awarded.

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

				Weighted
		Weighted		Average	Aggregate
		Average		Remaining	Intrinsic
		Exercise		Contractual	Value
	Shares	Price		Term	(in thousands)
Options outstanding, beginning of period	642,350	$	9.77
Forfeited	(1,400)		9.32
Exercised	(17,250)		6.40
Options outstanding, end of period	623,700	$	9.77	4.9	$	2,988
Exercisable at end of period	480,250	$	9.04	4.2	$	2,551

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

In 2019, 48,500 shares of restricted stock were granted at a weighted average exercise price of $14.15 to certain officers of Southern National under the 2017 Plan and are subject to vesting in five years. These shares are included in the total shares outstanding at March 31, 2019. In 2019, 2,700 shares of restricted stock granted to certain officers of Southern National under the 2017 Plan were forfeited. Restricted stock compensation expense totaled $83 thousand and $6 thousand for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, unrecognized compensation expense associated with restricted stock was $1.4 million, which is expected to be recognized over a weighted average period of 4.4 years.

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3.      INVESTMENT SECURITIES

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

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

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

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

	Amortized		Gross Unrecognized				Fair
	Cost		Gains		Losses		Value
March 31, 2019
Residential government-sponsored mortgage-backed securities	$	9,361	$	4	$	(171)	$	9,194
Obligations of states and political subdivisions		20,693		118		(71)		20,740
Trust preferred securities		2,529		146		(1)		2,674
Residential government-sponsored collateralized mortgage obligations		5,351		—		(66)		5,285
Government-sponsored agency securities		52,658		—		(1,884)		50,774
Total	$	90,592	$	268	$	(2,193)	$	88,667

10

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

The amortized cost amounts are net of recognized other than temporary impairment.

In the three months ended March 31, 2019, $15.3 million of available for sale investment securities were purchased.

The fair value and carrying amount, if different, of debt investment securities as of March 31, 2019, 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	$	3,358	$	3,332	$	4,966	$	4,970
Due in five to ten years		6,584		6,623		18,942		18,454
Due after ten years		16,136		16,160		51,972		50,764
Residential government-sponsored mortgage-backed securities		42,552		42,112		9,361		9,194
Residential government-sponsored collateralized mortgage obligations		42,680		41,877		5,351		5,285
Agency commercial mortgage-backed securities		27,947		27,405		—		—
SBA pool securities		18,921		18,683		—		—
Total	$	158,178	$	156,192	$	90,592	$	88,667

Investment securities with a carrying amount of approximately $160.0 million and $165.7 million at March 31, 2019 and December 31, 2018, respectively, were pledged to secure public deposits, certain other deposits, a line of credit for advances from the Federal Home Loan Bank (“FHLB”) of Atlanta, and repurchase agreements.

Southern National monitors the portfolio for indicators of other than temporary impairment. At March 31, 2019 and December 31, 2018, certain investment securities’ fair values were below cost. As outlined in the table below, there were investment securities with fair values totaling approximately $192.0 million in the portfolio with the carrying value exceeding the estimated fair value that are considered temporarily impaired at March 31, 2019. Because the decline in fair value is attributable to changes in interest rates and market illiquidity, and not credit quality, and because we do not have the intent to sell these investment securities and it is likely that we will not be required to sell the investment securities before their anticipated recovery, management does not consider these investment securities to be other than temporarily impaired as of March 31, 2019.

11

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

March 31, 2019	Less than 12 months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Available for Sale	value		Losses		value		Losses		value		Losses
Residential government-sponsored mortgage-backed securities	$	149	$	—	$	26,635	$	(455)	$	26,784	$	(455)
Obligations of states and political subdivisions		—		—		6,757		(34)		6,757		(34)
Corporate securities		—		—		—		—		—		—
Trust preferred securities		—		—		780		(324)		780		(324)
Residential government-sponsored collateralized mortgage obligations		—		—		41,439		(806)		41,439		(806)
Government-sponsored agency securities		—		—		3,183		(64)		3,183		(64)
Agency commercial mortgage-backed securities		—		—		27,405		(542)		27,405		(542)
SBA pool securities		2,549		(21)		12,026		(232)		14,575		(253)
Total	$	2,698	$	(21)	$	118,225	$	(2,457)	$	120,923	$	(2,478)

March 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	$	—	$	—	$	8,661	$	(171)	$	8,661	$	(171)
Obligations of states and political subdivisions		—		—		6,300		(71)		6,300		(71)
Trust preferred securities		—		—		60		(1)		60		(1)
Residential government-sponsored collateralized mortgage obligations		—		—		5,285		(66)		5,285		(66)
Government-sponsored agency securities		—		—		50,774		(1,884)		50,774		(1,884)
Total	$	—	$	—	$	71,080	$	(2,193)	$	71,080	$	(2,193)

December 31, 2018	Less than 12 months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Available for Sale	value		Losses		value		Losses		value		Losses
Residential government-sponsored mortgage-backed securities	$	393	$	(5)	$	26,910	$	(638)	$	27,303	$	(643)
Obligations of states and political subdivisions		2,220		(78)		13,385		(202)		15,605		(280)
Corporate securities		1,008		(1)		—		—		1,008		(1)
Trust preferred securities		—		—		795		(304)		795		(304)
Residential government-sponsored collateralized mortgage obligations		—		—		42,598		(1,041)		42,598		(1,041)
Government-sponsored agency securities		—		—		3,125		(122)		3,125		(122)
Agency commercial mortgage-backed securities		—		—		27,304		(765)		27,304		(765)
SBA pool securities		6,009		(70)		10,546		(238)		16,555		(308)
Total	$	9,630	$	(154)	$	124,663	$	(3,310)	$	134,293	$	(3,464)

12

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

As of March 31, 2019, we owned pooled trust preferred securities as follows:

												% of		Previously
												Current		Recognized
												Defaults and		Cumulative
		Ratings When								Estimated		Deferrals to		Other
	Tranche	Purchased		Current Ratings		Par		Book		Fair		Total		Comprehensive
Security	Level	Moody's	Fitch	Moody's	Fitch	Value		Value		Value		Collateral		Loss (1)
Held to Maturity
ALESCO VII  A1B	Senior	Aaa	AAA	Aa2	AA	$	2,658	$	2,468	$	2,614	17	%	$	219
MMCF III B	Senior Sub	A3	A-	Ba1	BBB		61		61		60	45	%		4
							2,719		2,529		2,674			$	223
														Cumulative OTTI
Available for Sale														Related to
Other Than Temporarily Impaired:														Credit Loss (2)
TPREF FUNDING II	Mezzanine	A1	A-	Caa3	D		1,500		1,099		775	28	%	$	400
ALESCO V C1	Mezzanine	A2	A	Caa1	C		2,150		1,490		1,805	14	%		660
							3,650		2,589		2,580			$	1,060
Total						$	6,369	$	5,118	$	5,254

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

(2) Pre-tax

Each of these investment securities has been evaluated for other than temporary impairment. In performing a detailed cash flow analysis of each investment security, Sonabank works with independent third parties to estimate expected cash flows and assist with the evaluation of other than temporary impairment. The cash flow analyses performed included the following assumptions:

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

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

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

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

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

13

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

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

	Unrealized Holding
	Losses on		Held to Maturity
For the three months ended March 31, 2018	Available for Sale		Securities		Total
Beginning balance	$	(999)	$	(153)	$	(1,152)
Amounts reclassified from accumulated other comprehensive loss due to the adoption of ASU 2018-02		(199)		(30)		(229)
Subtotal		(1,198)		(183)		(1,381)
Current period other comprehensive (loss) income		(1,482)		4		(1,478)
Ending balance	$	(2,680)	$	(179)	$	(2,859)

4.      LOANS AND ALLOWANCE FOR LOAN LOSSES

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

	March 31, 2019		December 31, 2018
Loans secured by real estate:
Commercial real estate - owner occupied	$	416,750	$	407,031
Commercial real estate - non-owner occupied		549,891		540,698
Secured by farmland		19,682		20,966
Construction and land loans		149,054		146,654
Residential 1-4 family(1)		568,616		565,083
Multi- family residential		83,219		82,516
Home equity lines of credit(1)		121,136		128,225
Total real estate loans		1,908,348		1,891,173
Commercial loans		218,375		255,441
Consumer loans		30,319		32,347
Subtotal		2,157,042		2,178,961
Less deferred costs (fees) on loans		173		(137)
Loans, net of deferred fees	$	2,157,215	$	2,178,824

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

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

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

14

As part of the GAB acquisition, the Bank and the FDIC entered into loss sharing agreements on approximately $143.4 million (contractual basis) of GAB’s assets. There were two agreements with the FDIC: one for single family loans which is a 10‑year agreement expiring in December 2019, and one for non-single family (commercial) assets which was a 5‑year agreement which expired in December 2014. The Bank will continue to share in the losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharing agreement related to single family loans; we refer to these assets collectively as “covered assets.”  Loans that are not covered in the loss sharing agreement are referred to as “non-covered loans”. Covered loans totaled $18.7 million and $18.3 million at March 31, 2019 and December 31, 2018, respectively.

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

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

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

	Total Loans
			Unpaid
	Recorded		Principal		Related
March 31, 2019	Investment (1)		Balance		Allowance
With no related allowance recorded
Commercial real estate - owner occupied	$	4,540	$	5,989	$	—
Commercial real estate - non-owner occupied (2)		3,927		4,421		—
Construction and land development		353		365		—
Commercial loans		3,560		4,240		—
Residential 1-4 family (3)		2,558		4,966		—
Other consumer loans		19		40		—
Total	$	14,957	$	20,021	$	—
With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—	$	—
Commercial real estate - non-owner occupied (2)		—		—		—
Construction and land development		—		—		—
Commercial loans		2,810		4,670		600
Residential 1-4 family (3)		783		831		—
Other consumer loans		—		—		—
Total	$	3,593	$	5,501	$	600
Grand total	$	18,550	$	25,522	$	600

(1) Recorded investment is after cumulative prior charge offs of $2.0 million. These loans also have aggregate SBA guarantees of $4.8 million.

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

(3) Includes home equity lines of credit.

15

	Total Loans
			Unpaid
	Recorded		Principal		Related
December 31, 2018	Investment (1)		Balance		Allowance
With no related allowance recorded
Commercial real estate - owner occupied	$	2,795	$	4,777	$	—
Commercial real estate - non-owner occupied (2)		171		333		—
Construction and land development		—		336		—
Commercial loans		3,450		6,013		—
Residential 1-4 family (3)		1,591		5,911		—
Other consumer loans		—		—		—
Total	$	8,007	$	17,370	$	—
With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—	$	—
Commercial real estate - non-owner occupied (2)		—		—		—
Construction and land development		—		—		—
Commercial loans		2,626		3,276		612
Residential 1-4 family (3)		1,429		1,476		6
Other consumer loans		—		—		—
Total	$	4,055	$	4,752	$	618
Grand total	$	12,062	$	22,122	$	618

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

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

(3) Includes home equity lines of credit.

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

	Total Loans
	Average		Interest
	Recorded		Income
Three Months Ended March 31, 2019	Investment		Recognized
With no related allowance recorded
Commercial real estate - owner occupied	$	6,034	$	66
Commercial real estate - non-owner occupied (1)		4,435		37
Construction and land development		370		14
Commercial loans		5,011		11
Residential 1-4 family (2)		5,305		59
Other consumer loans		40		—
Total	$	21,195	$	187
With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—
Commercial real estate - non-owner occupied (1)		—		—
Construction and land development		—		—
Commercial loans		4,712		50
Residential 1-4 family (2)		984		18
Other consumer loans		—		—
Total	$	5,696	$	68
Grand total	$	26,891	$	255

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

(2) Includes home equity lines of credit.

16

	Total Loans
	Average		Interest
	Recorded		Income
Three Months Ended March 31, 2018	Investment		Recognized
With no related allowance recorded
Commercial real estate - owner occupied	$	671	$	9
Commercial real estate - non-owner occupied (1)		877		14
Construction and land development		9,972		—
Commercial loans		4,842		3
Residential 1-4 family (2)		3,548		14
Other consumer loans		—		—
Total	$	19,910	$	40
With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—
Commercial real estate - non-owner occupied (1)		—		—
Construction and land development		—		—
Commercial loans		929		—
Residential 1-4 family (2)		—		—
Other consumer loans		—		—
Total	$	929	$	—
Grand total	$	20,839	$	40

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

(2) Includes home equity lines of credit.

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

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

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

(2) Includes home equity lines of credit.

17

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

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

(2) Includes home equity lines of credit.

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

Activity in the allowance for non-covered loan and lease losses for the three months ended March 31, 2019 and 2018 is summarized below (in thousands):

	Commercial		Commercial
	Real Estate		Real Estate		Construction						Other
	Owner		Non-owner		and Land		Commercial		1-4 Family		Consumer
Three Months Ended March 31, 2019	Occupied		Occupied (1)		Development		Loans		Residential (2)		Loans		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	802	$	1,669	$	821	$	7,097	$	1,106	$	224	$	564	$	12,283
Provision (recovery)		11		624		99		(887)		56		83		214		200
Charge offs		—		(462)		—		(167)		—		(60)		—		(689)
Recoveries		3		—		—		63		8		6		—		80
Ending balance	$	816	$	1,831	$	920	$	6,106	$	1,170	$	253	$	778	$	11,874
Three Months Ended March 31, 2018
Allowance for loan losses:
Beginning balance	$	690	$	1,321	$	692	$	4,496	$	1,586	$	612	$	—	$	9,397
Provision (recovery)		165		229		112		831		(34)		297		—		1,600
Charge offs		—		—		—		(230)		(166)		(91)		—		(487)
Recoveries		4		—		—		175		64		2		—		245
Ending balance	$	859	$	1,550	$	804	$	5,272	$	1,450	$	820	$	—	$	10,755

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

(2) Includes home equity lines of credit.

18

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

	Commercial		Commercial
	Real Estate		Real Estate		Construction						Other
	Owner		Non-owner		and Land		Commercial		1-4 Family		Consumer
March 31, 2019	Occupied		Occupied (1)		Development		Loans		Residential (2)		Loans		Unallocated		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	600	$	—	$	—	$	—	$	600
Collectively evaluated for impairment		816		1,831		920		5,506		1,170		253		778		11,274
Total ending allowance	$	816	$	1,831	$	920	$	6,106	$	1,170	$	253	$	778	$	11,874
Loans:
Individually evaluated for impairment	$	4,540	$	3,927	$	353	$	3,560	$	2,558	$	19	$	—	$	14,957
Collectively evaluated for impairment		412,210		648,865		148,701		214,815		687,194		30,300		—		2,142,085
Total ending loan balances	$	416,750	$	652,792	$	149,054	$	218,375	$	689,752	$	30,319	$	—	$	2,157,042
December 31, 2018
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	600	$	—	$	—	$	—	$	600
Collectively evaluated for impairment		802		1,669		821		6,497		1,106		224		564		11,683
Total ending allowance	$	802	$	1,669	$	821	$	7,097	$	1,106	$	224	$	564	$	12,283
Loans:
Individually evaluated for impairment	$	2,795	$	171	$	—	$	3,450	$	1,591	$	—	$	—	$	8,007
Collectively evaluated for impairment		404,236		644,009		146,654		251,991		691,717		32,347		—		2,170,954
Total ending loan balances	$	407,031	$	644,180	$	146,654	$	255,441	$	693,308	$	32,347	$	—	$	2,178,961

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

(2) Includes home equity lines of credit.

Troubled Debt Restructurings

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

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

As of March 31, 2019, we had two loans in TDRs. One loan was modified in TDRs during the year ending December 31, 2018. One TDR which had been modified in 2013 defaulted in 2015. This loan, in the amount of $656 thousand, was current as of March 31, 2019.

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Credit Quality Indicators

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

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

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

Doubtful loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Southern National had no loans classified Doubtful at March 31, 2019 or December 31, 2018.

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

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

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

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

(2) Includes home equity lines of credit.

(3) Includes SBA guarantees of $4.8 million and $3.4 million as of March 31, 2019 and December 31, 2018.

The amount of foreclosed residential real estate property held at March 31, 2019 and December 31, 2018 was $1.2 million. The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was $1.1 million and $1.5 million at March 31, 2019 and December 31, 2018, respectively.

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5.LEASES

The Company leases certain premises and equipment under operating leases. At March 31, 2019, the Company had operating lease liabilities totaling $8.9 million and right-of-use assets totaling $7.8 million related to these leases. Operating lease liabilities and right-of-use assets are reflected in our consolidated balance sheets. We do not currently have any financing leases. For the three months ended March 31, 2019, our net operating lease cost was $586 thousand and was reflected in occupancy expenses on our income statement.

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

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

The following table summarizes the maturity of remaining lease liabilities:

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

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

6.     FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

Southern National is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and guarantees of credit card accounts. These instruments involve elements of credit and funding risk in excess of the amount recognized in the consolidated balance sheet. Letters of credit are written conditional commitments issued by Southern National to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. We had letters of credit outstanding totaling $19.2 million as of March 31, 2019 and December 31, 2018.

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.

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

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

7.      EARNINGS PER SHARE

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

			Weighted
			Average
	Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
For the three months ended March 31, 2019
Basic EPS	$	6,020	24,012	$	0.25
Effect of dilutive stock options		—	299		—
Diluted EPS	$	6,020	24,311	$	0.25
For the three months ended March 31, 2018
Basic EPS	$	8,259	23,962	$	0.34
Effect of dilutive stock options and warrants		—	271		—
Diluted EPS	$	8,259	24,233	$	0.34

The Company did not have any anti-dilutive options in 2019 and 2018.

8.      FAIR VALUE

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

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

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

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

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

Assets Measured on a Recurring Basis:

Investment Securities Available for Sale

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

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)	March 31, 2019		(Level 1)		(Level 2)		(Level 3)
Available for sale securities
Residential government-sponsored mortgage-backed securities	$	42,112	$	—	$	42,112	$	—
Obligations of states and political subdivisions		18,339		—		18,339		—
Corporate securities		2,013		—		1,013		1,000
Trust preferred securities		2,580		—		2,580		—
Residential government-sponsored collateralized mortgage obligations		41,877		—		41,877		—
Government-sponsored agency securities		3,183		—		3,183		—
Agency commercial mortgage-backed securities		27,405		—		27,405		—
SBA pool securities		18,683		—		18,683		—
Total	$	156,192	$	—	$	155,192	$	1,000

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

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 March 31, 2019 and December 31, 2018. Fair value is classified as Level 3 in the fair value hierarchy. Loans identified as impaired totaled $18.6 million (including SBA guarantees of $4.8 million) as of March 31, 2019 with no allocation made to the allowance for loan losses compared to a carrying amount of $12.1 million (including SBA guarantees of $3.4 million) with no allocation made to the allowance for loan losses at December 31, 2018.

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 March 31, 2019 and December 31, 2018. Fair value is classified as Level 3 in the fair value hierarchy. OREO is further evaluated quarterly for any additional impairment. At March 31, 2019 and December 31, 2018, the total amount of OREO was $5.0 million and $5.1 million, respectively.

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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)	March 31, 2019		(Level 1)		(Level 2)		(Level 3)
Impaired loans:
Commercial real estate - owner occupied	$	4,540	$	—	$	—	$	4,540
Commercial real estate - non-owner occupied (1)		3,927		—		—		3,927
Commercial loans		6,370		—		—		6,370
Residential 1-4 family (2)		3,341		—		—		3,341
Assets held for sale		600		—		—		600
Other real estate owned:
Commercial real estate - owner occupied (1)		908		—		—		908
Construction and land development		2,902		—		—		2,902
Residential 1-4 family (2)		1,231		—		—		1,231

			Fair Value Measurements Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Total at		Identical Assets		Inputs		Inputs
(dollars in thousands)	December 31, 2018		(Level 1)		(Level 2)		(Level 3)
Impaired loans:
Commercial real estate - owner occupied	$	2,795	$	—	$	—	$	2,795
Commercial real estate - non-owner occupied (1)		171		—		—		171
Commercial loans		6,076		—		—		6,076
Residential 1-4 family (2)		3,020		—		—		3,020
Assets held for sale		600		—		—		600
Other real estate owned:
Commercial real estate - owner occupied (1)		908		—		—		908
Construction and land development		2,938		—		—		2,938
Residential 1-4 family (2)		1,231		—		—		1,231

(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:

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

Carrying amount is the estimated fair value for cash and cash equivalents (including federal funds sold), equity investments in our mortgage affiliate, preferred investments in our mortgage affiliate, accrued interest receivable and payable, demand deposits, savings accounts, money market accounts, securities sold under agreements to repurchase, and short-term debt (FHLB short-term advances and securities sold under agreements to repurchase). Fair value of long-term debt is based on current rates for similar financing. Carrying amount of Federal Reserve Bank and FHLB stock is a reasonable estimate of fair value as these securities are not readily marketable and are based on the ultimate recoverability of the par value. The fair value of off-balance-sheet items is not considered material. Fair value of net loans, certificates of deposits, junior subordinated debt, and senior subordinated notes are measured using the exit-price notion in accordance with the adoption of ASU 2016‑01 in 2018.

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

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

10.     JUNIOR SUBORDINATED DEBT AND SENIOR SUBORDINATED NOTES

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

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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 three-month LIBOR plus 2.95%. As of March 31, 2019 and December 31, 2018, the interest rate was 5.56% and 5.73%, respectively. The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax purposes. The trust preferred securities have a mandatory redemption date of September 17, 2033, and became subject to varying call provisions beginning on September 17, 2008. The Company has fully and unconditionally guaranteed the trust preferred securities through the combined operation of the Junior Subordinated Debt and other related documents. The Company’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company.

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

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

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

Also in connection with our merger with EVBS, the Company assumed the Senior Subordinated Note Purchase Agreement previously entered into by EVBS on April 22, 2015 with certain institutional accredited investors pursuant to which EVBS sold $20.0 million (fair value adjustment of $1.9 million) in aggregate principal amount of its 6.50% Fixed-to-Floating Rate Subordinated Notes due 2025 (the “EVBS Senior Subordinated Notes”) to the investors at a price equal to 100% of the aggregate principal amount of the EVBS Senior Subordinated Notes. The EVBS Senior Subordinated Notes bear interest at an annual rate of 6.50%, payable semi-annually in arrears on May 1 and November 1 of each year ending on May 1, 2020. From and including May 1, 2020 to, but excluding, the maturity date, the EVBS Senior Subordinated Notes will bear interest at an annual rate, reset quarterly, equal to LIBOR determined on the determination date of the applicable interest period plus 502 basis points, payable quarterly in arrears on February 1, May 1, August 1 and November 1 of each year, beginning on August 1, 2020. The Company may, at its option, redeem, in whole or in part, the EVBS Senior Subordinated Notes as early as May 1, 2020, and any partial redemption would be made pro rata among all of the holders. At March 31, 2019 all of the EVBS Senior Subordinated Notes qualified as Tier 2 capital.

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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, 2018. Results of operations for the three months ended March 31, 2019 are not necessarily indicative of results that may be attained for any other period.

FORWARD-LOOKING STATEMENTS

Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on our beliefs, assumptions and expectations of our future financial and operating performance and growth plans, taking into account the information currently available to us. These statements are not statements of historical fact. 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, 2018, 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;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

· 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 or other catastrophic events that may affect general economic conditions;

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

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

· failure to maintain effective internal controls and procedures;

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

· our ability to attract and retain qualified employees; and

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

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

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 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 March 31, 2019, Sonabank had thirty-eight full-service retail branches in Virginia, located in the counties of Chesterfield (2), Essex (2), Fairfax (Reston, McLean and Fairfax), Gloucester (2), Hanover (3), King William, Lancaster, Middlesex (3), New Kent, Northumberland (3), Southampton, Surry, Sussex, and in Charlottesville, Clifton Forge, Colonial Heights, Front Royal, Hampton, Haymarket, Leesburg, Middleburg, New Market, Newport News, Richmond, South Riding, Warrenton, and Williamsburg, and seven full-service retail branches in Maryland, in Rockville, Shady Grove, Bethesda, Upper Marlboro, Brandywine, Owings and Huntingtown.

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

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RESULTS OF OPERATIONS

Net Income

Net income for the three months ended March 31, 2019 was $6.0 million, or $0.25 basic and diluted earnings per share, compared to net income of $8.3 million, or $0.34 per basic and diluted earnings per share, for the three months ended March 31, 2018. 

During the first quarter of 2019, the Company had a nonrecurring other loss of $3.2 million and related legal expense of $502 thousand. 

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

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 $21.0 million for the quarter ended March 31, 2019 compared to $22.5 million for the first quarter of 2018, which was a direct result of the rising costs of funds including deposits and borrowings. Southern National’s net interest margin for the three months ended March 31, 2019 was 3.41% compared to 3.66% for the three months ended December 31, 2018 and 3.82% for the three months ended March 31, 2018. Total income on interest-earning assets was $30.3 million and $28.0 million for the three months ended March 31, 2019 and 2018, respectively. The yield on average interest-earning assets was 4.94% and 4.75% for the first quarter of 2019 and 2018, respectively. Interest and fees on loans totaled $28.0 million and $26.0 million for the first quarter of 2019 and 2018, respectively.  The accretion of the discount on loans acquired in the acquisitions of EVBS, Greater Atlantic Bank, HarVest and Prince Georges Federal Savings Bank contributed $816 thousand to net interest income during the three months ended March 31, 2019 compared to $1.2 million during the three months ended March 31, 2018. The decrease in accretion was due to the slowdown in acquired loan prepayments and payoffs. Average loans during the first quarter of 2019 were $2.16 billion compared to $2.08 billion during  the first quarter of 2018.

Total interest expense was $9.4 million and $5.5 million for the three months ended March 31, 2019 and 2018, respectively.  Interest on deposits was  $7.5 million and $3.3 million for the three months ended March 31, 2019 and 2018, respectively. Total average interest-bearing deposits for the first quarter of 2019 and 2018 were $1.82 billion and $1.53 billion, respectively. The yield on total average interest-bearing deposits was 1.66% and 0.87% for the quarter ended March 31, 2019 and 2018, respectively.  Interest expense on total average borrowings, which include securities sold under agreements to repurchase, FHLB advances, junior subordinated debt, and senior subordinated notes, was $1.9 million and $2.2 million for the three months ended March 31, 2019 and 2018, respectively. Total average borrowings were $214.0 million and $426.0 million for the three months ended March 31, 2019 and 2018, 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
	March 31,
	2019						2018
			Interest						Interest
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate
	(Dollar amounts in thousands)
Assets
Interest-earning assets:
Loans, net of deferred fees (1) (2)	$	2,155,252	$	27,974	5.26	%	$	2,075,887	$	25,905	5.06	%
Investment securities		237,420		1,581	2.70	%		257,630		1,641	2.58	%
Other earning assets		90,370		685	3.08	%		58,284		474	3.30	%
Total earning assets		2,483,041		30,241	4.94	%		2,391,801		28,020	4.75	%
Allowance for loan losses		(12,296)						(10,386)
Total non-earning assets		257,217						255,063
Total assets	$	2,727,963					$	2,636,478
Liabilities and stockholders' equity
Interest-bearing liabilities:
NOW and other demand accounts	$	345,935	$	642	0.75	%	$	327,395	$	315	0.39	%
Money market accounts		401,615		1,828	1.85	%		342,706		560	0.66	%
Savings accounts		147,589		115	0.32	%		163,143		127	0.32	%
Time deposits		926,137		4,877	2.14	%		699,008		2,268	1.32	%
Total interest-bearing deposits		1,821,276		7,462	1.66	%		1,532,252		3,270	0.87	%
Borrowings		213,929		1,889	3.58	%		425,982		2,250	2.14	%
Total interest-bearing liabilities		2,035,205		9,351	1.86	%		1,958,234		5,520	1.14	%
Noninterest-bearing liabilities:
Demand deposits		320,299						329,299
Other liabilities		19,414						18,471
Total liabilities		2,374,919						2,306,004
Stockholders' equity		353,044						330,474
Total liabilities and stockholders' equity	$	2,727,963					$	2,636,478
Net interest income			$	20,890					$	22,500
Interest rate spread					3.08	%					3.61	%
Net interest margin					3.41	%					3.82	%

(1) 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 provision for loan losses for the quarter ended March 31, 2019 and 2018 was $200 thousand and $1.6 million, respectively. Net charge offs for the three months ended March 31, 2019 and 2018 was $609 thousand and $242 thousand, respectively. 

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Noninterest Income

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

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

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

Noninterest Expense

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

	For the Three Months Ended
	March 31,
(dollars in thousands)	2019		2018		Change
Salaries and benefits	$	5,812	$	6,772	$	(960)
Occupancy expenses		1,803		1,650		153
Furniture and equipment expenses		710		797		(87)
Amortization of core deposit intangible		363		362		1
Virginia franchise tax expense		563		364		199
FDIC assessment		—		335		(335)
Data processing expense		512		466		46
Telephone and communication expense		375		594		(219)
Net (gain) loss on other real estate owned		(2)		200		(202)
Other operating expenses		6,154		2,079		4,075
Total noninterest expenses	$	16,290	$	13,619	$	2,671

Noninterest expense was $16.3 million and $13.6 million during the three months ended March 31, 2019 and 2018, respectively. The increase in noninterest expenses was primarily due to a nonrecurring other loss of $3.2 million with related legal expense of $502 thousand during the first quarter of 2019. Employee compensation and benefits expense totaled $5.8 million and $6.8 million for the first quarter of 2019 and 2018, respectively. The decrease was due to a reduction in staffing. Occupancy expenses and equipment expenses remained flat year over year. The Company recognized a gain of $2 thousand on the sale of other real estate owned (“OREO”) during the first quarter of 2019 compared to a $200 thousand loss for the first quarter of 2018. Other expenses totaled $6.0 million and $1.9 million for three months ended March 31, 2019 and 2018, respectively.

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FINANCIAL CONDITION

Balance Sheet Overview

Total assets were $2.70 billion as of March 31, 2019 and as of December 31, 2018. Total loans decreased 1.0%, from $2.18 billion at December 31, 2018 to $2.16 billion at March 31, 2019, primarily due to unanticipated large loan payoffs of $50.0 million, partially offset by growth of $29.4 million during the first quarter of 2019. Total deposits were $2.11 billion at March 31, 2019 compared to $2.10 billion at December 31, 2018 and total equity was $352.7 million and $348.3 million at March 31, 2019 and December 31, 2018, respectively.

Loan Portfolio

Loan demand remains strong in the Company’s markets. Loan growth in the first three months of 2019 of $29.4 million was offset by $40.0 million in five hospitality loans that paid off due to property sales and under-market rates offered by other financial institutions and a $10.0 million construction loan moved to a competitor on a nonrecourse basis. Additionally, in the first quarter of 2019, $33.9 million of commercial loans were reclassified into loans secured by real estate, upon review and validation of collateral and Call Report codes.

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

	March 31, 2019		December 31, 2018
Loans secured by real estate:
Commercial real estate - owner occupied	$	416,750	$	407,031
Commercial real estate - non-owner occupied		549,891		540,698
Secured by farmland		19,682		20,966
Construction and land loans		149,054		146,654
Residential 1-4 family		568,616		565,083
Multi-family residential		83,219		82,516
Home equity lines of credit		121,136		128,225
Total real estate loans		1,908,348		1,891,173
Commercial loans		218,375		255,441
Consumer loans		30,319		32,347
Gross loans		2,157,042		2,178,961
Less deferred fees on loans		173		(137)
Loans, net of deferred fees	$	2,157,215	$	2,178,824

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

Asset Quality

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

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

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

Other real estate owned ("OREO") at March 31, 2019 was $5.0 million compared to $5.1 million at December 31, 2018. 

Non-covered nonaccrual loans were $1.9 million (excluding $4.8 million of loans fully covered by SBA guarantees) at March 31, 2019 compared to $2.5 million (excluding $3.4 million of loans fully covered by SBA guarantees) as of December 31, 2018. The ratio of non-covered nonperforming assets (excluding the SBA guaranteed loans) to total non-covered assets decreased from 0.28% at December 31, 2018 to 0.26% at March 31, 2019.

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

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

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

	March 31,			December 31,
	2019			2018
Nonaccrual loans	$	7,418		$	6,709
Loans past due 90 days and accruing interest		—			—
Total nonperforming loans		7,418			6,709
Other real estate owned		5,041			5,077
Total non-covered nonperforming assets	$	12,459		$	11,786
Troubled debt restructurings	$	688		$	692
SBA guaranteed amounts included in nonaccrual loans	$	4,762		$	3,391
Allowance for loan losses to nonperforming loans		178.26	%		207.63	%
Allowance for loan losses to total non-covered loans		0.56	%		0.57	%
Nonperforming assets excluding SBA guaranteed loans to total non-covered assets		0.26	%		0.28	%

Investment Securities

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

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

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

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

· corporate bonds in the amount of $2.0 million;

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

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

· callable agency securities in the amount of $55.8 million;

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

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· municipal bonds in the amount of $39.0 million with a taxable equivalent yield of 3.0% and ratings as of March 31, 2019 as follows:

Moody's	Amount		Standard & Poor's	Amount
Rating	(in thousands)		Rating	(in thousands)
Aaa	$	6,332	AAA	$	7,021
Aa1		11,459	AA+		7,526
Aa2		3,146	AA		11,532
Aa3		1,879	AA-		1,774
A1		1,862	A+		1,028
A2		1,536	A		842
Baa1		1,017	BBB+		1,017
NA		11,849	NA		8,340
Total	$	39,080	Total	$	39,080

$15.3 million of available for sale investment securities were purchased during the first quarter of 2019. No investment securities were sold during the first three months of 2019.

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

												% of		Previously
												Current		Recognized
												Defaults and		Cumulative
		Ratings								Estimated		Deferrals to		Other
	Tranche	When Purchased		Current Ratings		Par		Book		Fair		Total		Comprehensive
Security	Level	Moody's	Fitch	Moody's	Fitch	Value		Value		Value		Collateral		Loss (1)
						(in thousands)
Held to Maturity
ALESCO VII A1B	Senior	Aaa	AAA	Aa2	AA	$	2,658	$	2,468	$	2,614	17	%	$	219
MMCF III B	Senior Sub	A3	A-	Ba1	BBB		61		61		60	45	%		4
							2,719		2,529		2,674			$	223
															Cumulative OTTI
Available for Sale														Related to
Other Than Temporarily Impaired:														Credit Loss (2)
TPREF FUNDING II	Mezzanine	A1	A-	Caa3	D		1,500		1,099		775	28	%	$	400
ALESCO V C1	Mezzanine	A2	A	Caa1	C		2,150		1,490		1,805	14	%		660
							3,650		2,589		2,580			$	1,060
Total						$	6,369	$	5,118	$	5,254

(1) 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 months ended March 31, 2019 and 2018, respectively.

Liquidity and Funds Management

The objective of our liquidity management is to assure the ability to meet our financial obligations. These obligations include the payment of deposits on demand or at maturity, the repayment of borrowings at maturity and the ability to fund commitments and other new business opportunities. We obtain funding from a variety of sources, including customer

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

During the three months ended March 31, 2019, we funded our financial obligations with deposits, borrowings from the FHLB of Atlanta and the proceeds from issuance of the SNBV Senior Subordinated Notes in January 2018.  At March 31, 2019, we had $334.2 million of unfunded commitments. Management anticipates that funding requirements for these commitments can be met from the normal sources of funds.

Capital Resources

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

					Required for Capital				To Be Categorized as
		Actual			Adequacy Purposes (1)				Well Capitalized (2)
March 31, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio
Southern National
Common equity tier 1 capital ratio	$	243,458	11.75	%	$	93,235	4.50	%		n/a	n/a
Tier 1 risk-based capital ratio		253,458	12.23	%		124,313	6.00	%		n/a	n/a
Total risk-based capital ratio		312,333	15.07	%		165,751	8.00	%		n/a	n/a
Leverage ratio		253,458	9.69	%		104,671	4.00	%		n/a	n/a
Sonabank
Common equity tier 1 capital ratio	$	292,517	13.88	%	$	94,808	4.50	%	$	136,945	6.50	%
Tier 1 risk-based capital ratio		292,517	13.88	%		126,411	6.00	%		168,548	8.00	%
Total risk-based capital ratio		304,391	14.44	%		168,548	8.00	%		210,685	10.00	%
Leverage ratio		292,517	11.17	%		104,740	4.00	%		105,342	5.00	%
December 31, 2018
Southern National
Common equity tier 1 capital ratio	$	239,554	11.57	%	$	93,135	4.50	%		n/a	n/a
Tier 1 risk-based capital ratio		249,554	12.06	%		124,180	6.00	%		n/a	n/a
Total risk-based capital ratio		308,838	14.92	%		165,573	8.00	%		n/a	n/a
Leverage ratio		249,554	9.57	%		104,338	4.00	%		n/a	n/a
Sonabank
Common equity tier 1 capital ratio	$	288,018	13.64	%	$	95,020	4.50	%	$	137,251	6.50	%
Tier 1 risk-based capital ratio		288,018	13.64	%		126,693	6.00	%		168,924	8.00	%
Total risk-based capital ratio		300,301	14.22	%		168,924	8.00	%		211,156	10.00	%
Leverage ratio		288,018	11.03	%		104,420	4.00	%		105,578	5.00	%

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

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

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

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

	Sensitivity of Economic Value of Equity
	As of March 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	$	346,269	$	(27,638)	(7.39)	%	12.81	%	97.39	%
Up 300		354,226		(19,681)	(5.26)	%	13.10	%	99.63	%
Up 200		362,350		(11,557)	(3.09)	%	13.40	%	101.91	%
Up 100		369,289		(4,618)	(1.24)	%	13.66	%	103.86	%
Base		373,907		—	—	%	13.83	%	105.16	%
Down 100		339,139		(34,768)	(9.30)	%	12.55	%	95.38	%
Down 200		300,104		(73,803)	(19.74)	%	11.10	%	84.41	%

	Sensitivity of Economic Value of Equity
	As of December 31, 2018
							Economic Value of
	Economic Value of Equity						Equity as a % of
Change in Interest Rates			$ Change		% Change		Total		Equity
in Basis Points (Rate Shock)	Amount		From Base		From Base		Assets		Book Value
	(dollar amounts in thousands)
Up 400	$	338,853	$	(33,298)	(8.95)	%	12.54	%	97.03	%
Up 300		347,409		(24,742)	(6.65)	%	12.85	%	99.48	%
Up 200		356,429		(15,722)	(4.22)	%	13.19	%	102.07	%
Up 100		362,312		(9,839)	(2.64)	%	13.40	%	103.75	%
Base		372,151		—	0.00	%	13.77	%	106.57	%
Down 100		341,397		(30,754)	(8.26)	%	12.63	%	97.76	%
Down 200		303,809		(68,342)	(18.36)	%	11.24	%	87.00	%

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

	Sensitivity of Net Interest Income
	As of March 31, 2019
	Adjusted Net Interest Income				Net Interest Margin
Change in Interest Rates			$Change				% Change
in Basis Points (Rate Shock)	Amount		From Base		Percent		From Base
	(dollar amounts in thousands)
Up 400	$	96,292	$	7,575	3.87	%	0.26	%
Up 300		94,542		5,825	3.81	%	0.20	%
Up 200		92,584		3,867	3.74	%	0.13	%
Up 100		90,861		2,144	3.68	%	0.07	%
Base		88,717		—	3.61	%	—	%
Down 100		88,863		146	3.62	%	0.01	%
Down 200		88,725		8	3.62	%	0.01	%

	Sensitivity of Net Interest Income
	As of December 31, 2018
	Adjusted Net Interest Income				Net Interest Margin
Change in Interest Rates			$ Change				% Change
in Basis Points (Rate Shock)	Amount		From Base		Percent		From Base
	(dollar amounts in thousands)
Up 400	$	101,121	$	9,785	4.05	%	0.35	%
Up 300		97,784		6,448	3.97	%	0.23	%
Up 200		96,305		4,969	3.88	%	0.16	%
Up 100		93,719		2,383	3.78	%	0.07	%
Base		91,336		—	3.70	%	—	%
Down 100		91,719		383	3.72	%	0.04	%
Down 200		91,165		(171)	3.70	%	0.03	%

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in EVE requires the making of certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. Accordingly, although the EVE tables and NII tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net worth and NII. Sensitivity of EVE and NII are modeled using different assumptions and approaches.

ITEM 4 – CONTROLS AND PROCEDURES

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

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

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

PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

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

ITEM 1A – RISK FACTORS

As of March 31, 2019, there have been no material changes to the risk factors faced by Southern National from those previously disclosed on our Annual Report on Form 10‑K for the year ended December 31, 2018.

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

Not applicable

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable

ITEM 5 – OTHER INFORMATION

Not applicable

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ITEM 6 - EXHIBITS

(a) Exhibits.

Exhibit No.	Description
3.1	Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to Southern National’s Registration Statement on Form S‑1 (Registration No. 333‑136285))
3.2	Certificate of Amendment to the Articles of Incorporation dated January 31, 2005 (incorporated herein by reference to Exhibit 3.2 to Southern National’s Registration Statement on Form S‑1 (Registration No. 333‑136285))
3.3	Certificate of Amendment to the Articles of Incorporation dated April 13, 2006 (incorporated herein by reference to Exhibit 3.3 to Southern National’s Registration Statement on Form S‑1 (Registration No. 333‑136285))
3.4	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.4 to Southern National’s Annual Report on Form 10‑K for the year ended December 31, 2006)
3.5	Amendment No. 1 to Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.1 to Southern National’s Current Report on Form 8‑K filed on October 14, 2009)
3.6	Amendment No. 2 to Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.1 to Southern National’s Current Report on Form 8‑K filed on April 5, 2017)
10.1+*	Employment Agreement, dated as of February 28, 2019, by and between George C. Sheflett and Southern National Bancorp of Virginia, Inc.
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials from Southern National Bancorp of Virginia, Inc. Quarterly Report on Form 10‑Q for the quarter ended March 31, 2019, formatted in XBRL (Extensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income and Comprehensive Income (unaudited), (iii) Consolidated Statement of Changes in Stockholders’ Equity (unaudited), (iv) Consolidated Statements of Cash Flows (unaudited), and (v) Notes to Consolidated Financial Statements (unaudited).

+     Management contract or compensatory plan or arrangement

*      Filed with this Quarterly Report on Form 10‑Q

**    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)
May 9, 2019	/s/ Joe A. Shearin
(Date)	Joe A. Shearin,
	Chief Executive Officer
	(Principal Executive Officer)
May 9, 2019	/s/ Jeffrey L. Karafa
(Date)	Jeffrey L. Karafa,
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

41