Primis Financial (FRST) 10-Q 2020 Q3 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 September 30, 2020

Commission File No. 001-33037

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)

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

6830 Old Dominion Drive

McLean, Virginia 22101

(Address of principal executive offices) (zip code)

(703) 893-7400

(Registrant’s telephone number, including area code)

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

Title of each class:	Trading symbol	Name of each exchange on which registered:
Common Stock, par value $0.01 per share	SONA	NASDAQ Global Market

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

Yes ☒       No ☐

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

Yes ☒       No ☐

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

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

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

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

Yes ☐ No ☒

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

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10-Q

September 30, 2020

INDEX	PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019	2
Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2020 and 2019	3
Consolidated Statement of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019	4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019	6
Notes to Unaudited Consolidated Financial Statements	7
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3 – Quantitative and Qualitative Disclosures about Market Risk	47
Item 4 – Controls and Procedures	49
PART II - OTHER INFORMATION
Item 1 – Legal Proceedings	49
Item 1A – Risk Factors	50
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3 – Defaults Upon Senior Securities	51
Item 4 – Mine Safety Disclosures	51
Item 5 – Other Information	51
Item 6 - Exhibits	52
Signatures	54

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share amounts)

	September 30,		December 31,
	2020		2019
	(unaudited)		*
ASSETS
Cash and cash equivalents:
Cash and due from financial institutions	$	7,186	$	7,909
Interest-bearing deposits in other financial institutions		142,086		24,019
Total cash and cash equivalents		149,272		31,928
Securities available for sale, at fair value		157,896		164,820
Securities held to maturity, at amortized cost (fair value of $50,551 and $72,666, respectively)		49,323		72,448
Total loans		2,523,709		2,186,047
Less allowance for loan losses		(25,779)		(10,261)
Net loans		2,497,930		2,175,786
Stock in Federal Reserve Bank and Federal Home Loan Bank		16,927		17,832
Equity investment in mortgage affiliate		13,238		5,020
Preferred investment in mortgage affiliate		3,305		3,305
Bank premises and equipment, net		30,679		31,184
Operating lease right-of-use assets		7,033		8,013
Goodwill		101,954		101,954
Core deposit intangibles, net		6,168		7,191
Bank-owned life insurance		65,015		63,850
Other real estate owned		5,388		6,224
Deferred tax assets, net		14,477		11,788
Accrued interest receivable		21,076		8,210
Other assets		14,892		12,617
Total assets	$	3,154,573	$	2,722,170
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits	$	467,581	$	339,153
Interest-bearing deposits:
NOW accounts		472,553		391,172
Money market accounts		534,899		466,867
Savings accounts		179,756		144,486
Time deposits		561,685		783,040
Total interest-bearing deposits		1,748,893		1,785,565
Total deposits		2,216,474		2,124,718
Securities sold under agreements to repurchase - short term		16,181		12,883
Paycheck Protection Program Liquidity Facility (PPPLF) borrowings		283,906		0
Federal Home Loan Bank (FHLB) advances		100,000		121,640
Junior subordinated debt - long term		9,669		9,632
Senior subordinated notes - long term		105,709		47,051
Operating lease liabilities		7,800		8,469
Other liabilities		25,851		20,536
Total liabilities		2,765,590		2,344,929
Commitments and contingencies (See Note 6)
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 5,000,000 shares; no shares issued and outstanding		—		—
Common stock, $0.01 par value. Authorized 45,000,000 shares; 24,368,853 and 24,181,534 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively		243		241
Additional paid in capital		308,814		306,755
Retained earnings		76,486		69,462
Accumulated other comprehensive income		3,440		783
Total stockholders' equity		388,983		377,241
Total liabilities and stockholders' equity	$	3,154,573	$	2,722,170

* Derived from audited consolidated financial statements

See accompanying notes to unaudited consolidated financial statements.

2

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

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

	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
	2020			2019		2020		2019
Interest and dividend income:
Interest and fees on loans	$	27,266		$	28,340	$	81,051	$	84,692
Interest and dividends on taxable securities		1,006			1,375		3,382		4,275
Interest and dividends on tax exempt securities		123			145		355		453
Interest and dividends on other earning assets		312			614		1,072		1,750
Total interest and dividend income		28,707			30,474		85,860		91,170
Interest expense:
Interest on deposits		4,357			8,001		16,006		23,117
Interest on federal reserve board borrowings		180			0		201		0
Interest on repurchase agreements		24			20		65		65
Interest on junior subordinated debt		89			158		349		458
Interest on senior subordinated notes		968			711		2,392		2,135
Interest on other borrowings		91			569		861		2,464
Total interest expense		5,709			9,459		19,874		28,239
Net interest income		22,998			21,015		65,986		62,931
Provision for loan losses		2,000			150		16,349		350
Net interest income after provision for loan losses		20,998			20,865		49,637		62,581
Noninterest income:
Account maintenance and deposit service fees		1,633			1,837		4,820		5,312
Income from bank-owned life insurance		394			392		1,165		1,300
Equity gain from mortgage affiliate		3,826			599		8,218		1,175
Recoveries related to acquired charged-off loans and investment securities		288			145		2,707		1,060
Other		130			1		574		380
Total noninterest income		6,271			2,974		17,484		9,227
Noninterest expenses:
Salaries and benefits		7,817			6,567		27,464		19,523
Occupancy expenses		1,432			968		4,776		4,572
Furniture and equipment expenses		719			514		1,977		1,962
Amortization of core deposit intangible		341			352		1,023		1,077
Virginia franchise tax expense		615			563		1,844		1,689
Data processing expense		701			622		2,364		1,704
Telephone and communication expense		382			477		1,119		1,258
Net (gain) loss on other real estate owned		(16)			0		55		(38)
Professional fees		1,494			673		3,560		2,576
Other operating expenses		1,779			1,878		5,004		8,473
Total noninterest expenses		15,264			12,614		49,186		42,796
Income before income taxes		12,005			11,225		17,935		29,012
Income tax expense		2,417			2,361		3,611		4,809
Net income	$	9,588	��	$	8,864	$	14,324	$	24,203
Other comprehensive income:
Unrealized gain on available for sale securities	$	23		$	740	$	3,353	$	4,668
Accretion of amounts previously recorded upon transfer to held to maturity from available for sale		3			4		10		10
Net unrealized gain		26			744		3,363		4,678
Tax effect		5			157		706		983
Other comprehensive income		21			587		2,657		3,695
Comprehensive income	$	9,609		$	9,451	$	16,981	$	27,898
Earnings per share, basic	$	0.40		$	0.37	$	0.59	$	1.01
Earnings per share, diluted	$	0.39		$	0.36	$	0.59	$	0.99

See accompanying notes to unaudited consolidated financial statements.

3

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

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

	For the Three Months Ended September 30, 2020
							Accumulated
			Additional				Other
	Common		Paid in		Retained		Comprehensive
	Stock		Capital		Earnings		Income		Total
Balance - June 30, 2020	$	243	$	308,672	$	69,335	$	3,419	$	381,669
Net income		0		0		9,588		0		9,588
Changes in other comprehensive income on investment securities (net of tax $5)		0		0		0		21		21
Dividends on common stock ($0.10 per share)		0		0		(2,437)		0		(2,437)
Issuance of common stock under Stock Incentive Plan (7,250 shares)		0		50		0		0		50
Stock-based compensation expense		0		92		0		0		92
Balance - September 30, 2020	$	243	$	308,814	$	76,486	$	3,440	$	388,983
	For the Three Months Ended September 30, 2019
							Accumulated
			Additional				Other
	Common		Paid in		Retained		Comprehensive
	Stock		Capital		Earnings		Income		Total
Balance - June 30, 2019	$	241	$	306,049	$	55,983	$	519	$	362,792
Net income		0		0		8,864		0		8,864
Changes in other comprehensive income on investment securities (net of tax $157)		0		0		0		587		587
Dividends on common stock ($0.09 per share)		0		0		(2,173)		0		(2,173)
Issuance of common stock under Stock Incentive Plan (54,450 shares)		0		475		0		0		475
Stock-based compensation expense		0		85		0		0		85
Balance - September 30, 2019	$	241	$	306,609	$	62,674	$	1,106	$	370,630

4

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

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

	For the Nine Months Ended September 30, 2020
							Accumulated
			Additional				Other
	Common		Paid in		Retained		Comprehensive
	Stock		Capital		Earnings		Income		Total
Balance - December 31, 2019	$	241	$	306,755	$	69,462	$	783	$	377,241
Net income		0		0		14,324		0		14,324
Changes in other comprehensive income on investment securities (net of tax $706)		0		0		0		2,657		2,657
Dividends on common stock ($0.30 per share)		0		0		(7,300)		0		(7,300)
Issuance of common stock under Stock Incentive Plan (93,250 shares)		2		574		0		0		576
Stock-based compensation expense		0		1,485		0		0		1,485
Balance - September 30, 2020	$	243	$	308,814	$	76,486	$	3,440	$	388,983
	For the Nine Months Ended September 30, 2019
							Accumulated
			Additional				Other
	Common		Paid in		Retained		Comprehensive
	Stock		Capital		Earnings		Income (Loss)		Total
Balance - December 31, 2018	$	240	$	305,654	$	44,985	$	(2,589)	$	348,290
Net income		0		0		24,203		0		24,203
Changes in other comprehensive income on investment securities (net of tax $983)		0		0		0		3,695		3,695
Dividends on common stock ($0.27 per share)		0		0		(6,514)		0		(6,514)
Issuance of common stock under Stock Incentive Plan (73,900 shares)		1		603		0		0		604
Stock-based compensation expense		0		352		0		0		352
Balance - September 30, 2019	$	241	$	306,609	$	62,674	$	1,106	$	370,630

See accompanying notes to unaudited consolidated financial statements.

5

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

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

See accompanying notes to unaudited consolidated financial statements.

6

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Unaudited Consolidated Financial Statements

September 30, 2020

1.      ACCOUNTING POLICIES

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

At September 30, 2020, Sonabank had NaN full-service branches in Virginia and Maryland and through certain internet and mobile applications. NaN full-service retail branches are in Virginia, located in Ashland, Burgess, Callao, Central Garage, Charlottesville, Chester, Clifton Forge, Colonial Heights, Courtland, Deltaville, Fairfax, Front Royal, Gloucester, Gloucester Point, Hampton, Hartfield, Heathsville, Kilmarnock, Leesburg, McLean, Mechanicsville (2), Middleburg, Midlothian, New Market, Newport News, Quinton, Reston, Richmond, South Riding, Surry, Tappahannock (2), Urbanna, Warrenton, Waverly, and Williamsburg, and 5 full-service retail branches in Maryland, located in Bethesda, Brandywine, Owings, Rockville, and Upper Marlboro. We have administrative offices in Warrenton and Glen Allen, Virginia, and in Georgetown, Washington, D.C.

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

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

Use of Estimates

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

7

Risks and Uncertainties

The outbreak of the novel corona virus disease 2019 (“COVID-19”) has adversely impacted a broad range of industries in which the Company’s customers operate and has impaired and could continue to impair their ability to fulfill their financial obligations to the Company. In March 2020, the World Health Organization declared COVID-19 to be a global pandemic. The spread of COVID-19 has caused significant uncertainty, volatility and disruption in the U.S. and global economy and has disrupted banking and other financial activity in the areas in which the Company operates. Given the ongoing and dynamic nature COVID-19, it is not possible to accurately predict the extent, severity or duration of these conditions or when normal economic and operating conditions will resume. For this reason, the extent to which the COVID-19 pandemic affects our business, operations and financial condition, as well as our regulatory capital and liquidity ratios and credit ratings, is highly uncertain and unpredictable and depends on, among other things, new information that may emerge concerning the scope, duration and severity of the COVID-19 pandemic and actions taken by governmental authorities and other parties in response to the pandemic. If the pandemic is prolonged, the adverse impact on the markets in which we operate and on our business, operations and financial condition could deepen.  

Congress, the President, and the Federal Reserve have taken several actions designed to minimize the economic impact of COVID-19. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and healthcare providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts have had and are expected to continue to have a material impact on the Company’s operations. The CARES Act includes provisions that temporarily delay the required implementation date of Financial Accounting Standards Board (“FASB”) ASC Topic 326, Financial Instruments—Credit Losses, and suspend the requirements related to accounting for a troubled debt restructuring (“TDR”), for certain entities.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID-19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full universe or extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.

Financial position and results of operations

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

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

Capital and liquidity

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

8

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

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

Asset valuation

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

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

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

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

Processes, controls and business continuity plan

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

Lending operations and accommodations to borrowers

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

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

Federal Reserve Paycheck Protection Program Liquidity Facility

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

Credit

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

Recent Accounting Pronouncements

Adoption of New Accounting Standards:

In August 2018, FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). This ASU adds, eliminates and modifies certain disclosure requirements for fair value measurements. The amendments in ASU 2018-13 were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption was permitted. The disclosures were adopted using the prospective method for certain disclosures and retrospective for a majority of the disclosures. The Company adopted ASU 2018-13 in the first quarter of 2020 and it did not have a material impact on the Company’s consolidated financial statements.

New Accounting Standards Not Yet Adopted:

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which along with several other subsequent codification updates related to accounting for credit losses, sets forth a “current expected credit loss” ("CECL") model requiring the Company to measure all expected credit losses for financial instruments recorded at amortized cost held at the reporting date. The estimate is to be based on historical experience, current conditions and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. The amendments were effective for the Company beginning January 1, 2020. The Company estimates that the initial adoption of this ASU will result in an increase of approximately $9.0 million in our allowance for loan losses, including transfers of non-accretable discount on purchased credit-impaired loans. The increase is a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses

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expected to be incurred over the life of the portfolio. The adoption of this ASU requires that we establish an allowance for expected credit losses for certain debt securities and other financial assets which are not material. We do not plan to elect the federal banking agencies’ rule providing for an optional three-year phase-in period for the day-one adverse regulatory capital effects upon adopting the standard. The Company elected to defer adoption of CECL until the earlier of the termination date of the current national emergency, declared by the President on March 31, 2020, under the National Emergencies Act in connection with the COVID-19 outbreak, or December 31, 2020. 

In December 2019, FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This ASU simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. This ASU also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods. Early adoption is permitted. Southern National is currently in the process of evaluating the impact of adopting the new guidance on its consolidated financial statements and disclosures.

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

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

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2.      STOCK-BASED COMPENSATION

At the June 21, 2017 Annual Meeting of Stockholders of Southern National, the 2017 Equity Compensation Plan (the “2017 Plan”) was approved as recommended by the Board of Directors. The 2017 Plan replaced the 2010 Plan and has a maximum number of 750,000 shares reserved for issuance. The purpose of the 2017 Plan is to promote the success of the Company by providing greater incentives to employees, non-employee directors, consultants and advisors to associate their personal interests with the long-term financial success of the Company, including its subsidiaries, and with growth in stockholder value, consistent with the Company’s risk management practices. Because the 2017 Plan was approved, shares under the 2004 stock-option plan and 2010 Plan are no longer awarded.

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

				Weighted
		Weighted		Average	Aggregate
		Average		Remaining	Intrinsic
		Exercise		Contractual	Value
	Shares	Price		Term	(in thousands)
Options outstanding, beginning of period	555,750	$	10.02	4.3	$	3,518
Forfeited	(11,700)		10.91
Exercised	(93,250)		7.60
Options outstanding, end of period	450,800	$	10.50	4.0	$	0
Exercisable at end of period	336,540	$	9.63	3.4	$	0

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

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

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

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

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3.      INVESTMENT SECURITIES

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

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

	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
December 31, 2019
Residential government-sponsored mortgage-backed securities	$	48,540	$	455	$	(16)	$	48,979
Obligations of states and political subdivisions		17,041		541		0		17,582
Corporate securities		2,004		8		0		2,012
Trust preferred securities		2,530		283		(245)		2,568
Residential government-sponsored collateralized mortgage obligations		36,511		217		(39)		36,689
Government-sponsored agency securities		14,823		47		(48)		14,822
Agency commercial mortgage-backed securities		27,557		192		(18)		27,731
SBA pool securities		14,622		11		(196)		14,437
Total	$	163,628	$	1,754	$	(562)	$	164,820

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

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

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	Amortized		Gross Unrecognized				Fair
	Cost		Gains		Losses		Value
December 31, 2019
Residential government-sponsored mortgage-backed securities	$	22,925	$	62	$	(52)	$	22,935
Obligations of states and political subdivisions		15,071		165		(1)		15,235
Trust preferred securities		1,938		99		(2)		2,035
Residential government-sponsored collateralized mortgage obligations		3,128		10		(9)		3,129
Government-sponsored agency securities		29,386		108		(162)		29,332
Total	$	72,448	$	444	$	(226)	$	72,666

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

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

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

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

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

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

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

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

December 31, 2019	Less than 12 months				12 Months or More					Total
	Fair		Unrealized		Fair			Unrealized		Fair		Unrealized
Available for Sale	value		Losses		value			Losses		value		Losses
Residential government-sponsored mortgage-backed securities	$	2,686	$	(7)	$	1,758		$	(9)	$	4,444	$	(16)
Trust preferred securities		0		0		795			(245)		795		(245)
Residential government-sponsored collateralized mortgage obligations		4,253		(25)		3,133			(14)		7,386		(39)
Government-sponsored agency securities		4,924		(48)		0			0		4,924		(48)
Agency commercial mortgage-backed securities		2,833		(6)		3,126			(12)		5,959		(18)
SBA pool securities		1,148		(2)		9,420	��		(194)		10,568		(196)
Total	$	15,844	$	(88)	$	18,232		$	(474)	$	34,076	$	(562)

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

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

												% of		Previously
												Current		Recognized
												Defaults and		Cumulative
		Ratings When								Estimated		Deferrals to		Other
	Tranche	Purchased		Current Ratings		Par		Book		Fair		Total		Comprehensive
Security	Level	Moody's	Fitch	Moody's	Fitch	Value		Value		Value		Collateral		Loss (1)
Held to Maturity
ALESCO VII A1B	Senior	Aaa	AAA	Aa1	AA	$	1,874	$	1,754	$	1,743	17	%	$	219
MMCF III B	Senior Sub	A3	A-	Ba1	WD		31		30		29	48	%		4
						$	1,905	$	1,784	$	1,772			$	223
Available for Sale														Cumulative OTTI
Other Than														Related to
Temporarily Impaired:														Credit Loss (2)
TPREF FUNDING II	Mezzanine	A1	A-	Caa3	WD	$	1,500	$	1,040	$	750	32	%	$	400
ALESCO V C1	Mezzanine	A2	A	Caa1	C		2,150		1,490		1,666	15	%		660
						$	3,650	$	2,530	$	2,416			$	1,060
Total						$	5,555	$	4,314	$	4,188

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

(2) Pre-tax.

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

There were 0 other than temporary impairment charges related to credit losses or sales of these securities during the three and nine months ended September 30, 2020 and 2019.

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

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

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

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

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

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4.      LOANS AND ALLOWANCE FOR LOAN LOSSES

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

	September 30, 2020		December 31, 2019
Loans secured by real estate:
Commercial real estate - owner occupied	$	416,717	$	414,479
Commercial real estate - non-owner occupied		605,053		559,195
Secured by farmland		16,608		17,622
Construction and land loans		120,066		150,750
Residential 1-4 family (1)		581,237		604,777
Multi- family residential		107,672		82,055
Home equity lines of credit (1)		97,727		109,006
Total real estate loans		1,945,080		1,937,884
Commercial loans		216,711		221,447
Paycheck Protection Program Loans		348,022		—
Consumer loans		23,078		26,304
Subtotal		2,532,891		2,185,635
Plus (less) deferred costs (fees) on loans		(9,182)		412
Total loans	$	2,523,709	$	2,186,047

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

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

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

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

	Total Loans
			Unpaid
	Recorded		Principal		Related
September 30, 2020	Investment (1)		Balance		Allowance
With no related allowance recorded
Commercial real estate - owner occupied	$	10,192	$	11,632	$	—
Commercial real estate - non-owner occupied (2)		7,009		7,103		—
Construction and land development		1,749		1,818		—
Commercial loans		5,006		6,264		—
Paycheck Protection Program Loans		—		—		—
Residential 1-4 family (3)		5,929		6,958		—
Other consumer loans		18		18		—
Total	$	29,903	$	33,793	$	—
With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—	$	—
Commercial real estate - non-owner occupied (2)		—		—		—
Construction and land development		—		—		—
Commercial loans		2,292		2,304		1,080
Paycheck Protection Program Loans		—		—		—
Residential 1-4 family (3)		—		—		—
Other consumer loans		—		—		—
Total	$	2,292	$	2,304	$	1,080
Grand total	$	32,195	$	36,097	$	1,080

	Total Loans
			Unpaid
	Recorded		Principal		Related
December 31, 2019	Investment (1)		Balance		Allowance
With no related allowance recorded
Commercial real estate - owner occupied	$	6,890	$	8,530	$	—
Commercial real estate - non-owner occupied (2)		3,120		3,363		—
Construction and land development		345		747		—
Commercial loans		5,049		8,490		—
Residential 1-4 family (3)		1,021		2,719		—
Other consumer loans		—		—		—
Total	$	16,425	$	23,849	$	—
With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—	$	—
Commercial real estate - non-owner occupied (2)		176		281		1
Construction and land development		—		—		—
Commercial loans		2,498		2,533		957
Residential 1-4 family (3)		2,841		3,243		92
Other consumer loans		39		39		1
Total	$	5,554	$	6,096	$	1,051
Grand total	$	21,979	$	29,945	$	1,051

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

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

(3) Includes home equity lines of credit.

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

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

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

________________________________________

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

(2) Includes home equity lines of credit.

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

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

	Total Loans
	Average		Interest
	Recorded		Income
Nine Months Ended September 30, 2019	Investment		Recognized
With no related allowance recorded
Commercial real estate - owner occupied	$	4,612	$	227
Commercial real estate - non-owner occupied (1)		4,774		206
Construction and land development		396		43
Commercial loans		5,604		163
Residential 1-4 family (2)		1,665		148
Other consumer loans		—		—
Total	$	17,051	$	787
With an allowance recorded
Commercial real estate - owner occupied	$	—	$	—
Commercial real estate - non-owner occupied (1)		—		—
Construction and land development		—		—
Commercial loans		2,799		147
Residential 1-4 family (2)		345		25
Other consumer loans		—		—
Total	$	3,144	$	172
Grand total	$	20,195	$	959

________________________________________

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

⁽²⁾ Includes home equity lines of credit.

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

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

	30 - 59		60 - 89		90
	Days		Days		Days		Total		Nonaccrual		Loans Not		Total
December 31, 2019	Past Due		Past Due		or More		Past Due		Loans (3)		Past Due		Loans
Total loans:
Commercial real estate - owner occupied	$	813	$	—	$	—	$	813	$	—	$	413,666	$	414,479
Commercial real estate - non-owner occupied (1)		936		—		—		936		—		657,936		658,872
Construction and land development		746		275		—		1,021		—		149,729		150,750
Commercial loans		234		62		—		296		6,337		214,814		221,447
Residential 1-4 family (2)		4,060		—		—		4,060		2,524		707,199		713,783
Other consumer loans		107		—		—		107		39		26,158		26,304
Total	$	6,896	$	337	$	—	$	7,233	$	8,900	$	2,169,502	$	2,185,635

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

(2) Includes home equity lines of credit.

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

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

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Activity in the allowance for loan and lease losses by class of loan for the three months ended September 30, 2020 and 2019 is summarized below (in thousands):

	Commercial		Commercial
	Real Estate		Real Estate		Construction						Other
	Owner		Non-owner		and Land		Commercial		1-4 Family		Consumer
Three Months Ended September 30, 2020	Occupied		Occupied (1)		Development		Loans		Residential (2)		Loans		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	3,558	$	8,378	$	717	$	5,490	$	3,854	$	903	$	727	$	23,627
Provision (recovery)		1,480		330		7		909		(589)		(59)		(78)		2,000
Charge offs		—		—		—		(12)		(47)		(27)		—		(86)
Recoveries		—		4		—		—		225		9		—		238
Ending balance	$	5,038	$	8,712	$	724	$	6,387	$	3,443	$	826	$	649	$	25,779
Three Months Ended September 30, 2019
Allowance for loan losses:
Beginning balance	$	833	$	1,890	$	802	$	5,834	$	1,127	$	273	$	854	$	11,613
Provision (recovery)		(113)		(281)		16		133		347		11		37		150
Charge offs		—		(1)		—		(266)		(315)		(65)		—		(647)
Recoveries		(1)		4		—		65		8		9		—		85
Ending balance	$	719	$	1,612	$	818	$	5,766	$	1,167	$	228	$	891	$	11,201

Activity in the allowance for loan and lease losses by class of loan for the nine months ended September 30, 2020 and 2019 is summarized below (in thousands):

	Commercial		Commercial
	Real Estate		Real Estate		Construction						Other
	Owner		Non-owner		and Land		Commercial		1-4 Family		Consumer
Nine Months Ended September 30, 2020	Occupied		Occupied (1)		Development		Loans		Residential (2)		Loans		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	810	$	1,720	$	683	$	5,418	$	1,266	$	190	$	174	$	10,261
Provision for non-purchased loans		4,223		6,983		41		1,574		2,208		701		475		16,205
Provision for purchase credit impaired loans		—		—		—		144		—		—		—		144
Provision		4,223		6,983		41		1,718		2,208		701		475		16,349
Charge offs		—		—		—		(834)		(292)		(92)		—		(1,218)
Recoveries		5		9		—		85		261		27		—		387
Ending balance	$	5,038	$	8,712	$	724	$	6,387	$	3,443	$	826	$	649	$	25,779
Nine Months Ended September 30, 2019
Allowance for loan losses:
Beginning balance	$	802	$	1,669	$	821	$	7,097	$	1,106	$	224	$	564	$	12,283
Provision (recovery)		497		399		(3)		(1,235)		166		199		327		350
Charge offs		(782)		(463)		—		(433)		(405)		(221)		—		(2,304)
Recoveries		202		7		—		337		300		26		—		872
Ending balance	$	719	$	1,612	$	818	$	5,766	$	1,167	$	228	$	891	$	11,201

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

(2) Includes home equity lines of credit.

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

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

	Commercial		Commercial
	Real Estate		Real Estate		Construction					Paycheck			Other
	Owner		Non-owner		and Land		Commercial		Protection		1-4 Family		Consumer
September 30, 2020	Occupied		Occupied (1)		Development		Loans		Program		Residential (2)		Loans		Unallocated		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	1,080	$	—	$	—	$	—	$	—	$	1,080
Collectively evaluated for impairment		5,038		8,712		724		5,307		—		3,443		826		649		24,699
Total ending allowance	$	5,038	$	8,712	$	724	$	6,387	$	—	$	3,443	$	826	$	649	$	25,779
Loans:
Individually evaluated for impairment	$	10,192	$	7,009	$	1,749	$	7,298	$	—	$	5,929	$	18	$	—	$	32,195
Collectively evaluated for impairment		406,525		722,324		118,317		209,413		348,022		673,035		23,060		—		2,500,696
Total ending loan balances	$	416,717	$	729,333	$	120,066	$	216,711	$	348,022	$	678,964	$	23,078	$	—	$	2,532,891
December 31, 2019
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	957	$	—	$	85	$	—	$	—	$	1,042
Collectively evaluated for impairment		810		1,720		683		4,461		—		1,181		190		174		9,219
Total ending allowance	$	810	$	1,720	$	683	$	5,418	$	—	$	1,266	$	190	$	174	$	10,261
Loans:
Individually evaluated for impairment	$	6,890	$	3,120	$	345	$	7,544	$	—	$	1,443	$	—	$	—	$	19,342
Collectively evaluated for impairment		407,589		655,752		150,405		213,903		—		712,340		26,304		—		2,166,293
Total ending loan balances	$	414,479	$	658,872	$	150,750	$	221,447	$	—	$	713,783	$	26,304	$	—	$	2,185,635

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

(2) Includes home equity lines of credit.

Troubled Debt Restructurings

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

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The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty and whether a concession has been granted is subjective in nature and management’s judgment is required when determining whether a modification is a TDR.

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

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

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

Credit Quality Indicators

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 0 loans classified Doubtful at September 30, 2020 or December 31, 2019.

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

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

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

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

(2) Includes home equity lines of credit.

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

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

5.      LEASES

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

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

	For the Nine Months Ended
(in thousands except for percent and period data)	September 30, 2020			September 30, 2019
Supplemental cash flow information:
Cash paid for amounts included in the measurement of lease liabilities	$	3,724		$	3,682
Other information:
Weighted-average remaining lease term - operating leases, in years		5.3			5.9
Weighted-average discount rate - operating leases		2.6	%		2.8	%

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The following table summarizes the maturity of remaining lease liabilities:

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

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

6.     COMMITMENTS AND CONTINGENCIES

Financial Instruments with off-balance sheet risk

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

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

Commitments

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

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

27

7.      EARNINGS PER SHARE

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

			Weighted
			Average
	Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
For the three months ended September 30, 2020
Basic EPS	$	9,588	24,270	$	0.40
Effect of dilutive stock options and unvested restricted stock		0	105		(0.01)
Diluted EPS	$	9,588	24,375	$	0.39
For the three months ended September 30, 2019
Basic EPS	$	8,864	24,072	$	0.37
Effect of dilutive stock options and unvested restricted stock		0	302		(0.01)
Diluted EPS	$	8,864	24,374	$	0.36
For the nine months ended September 30, 2020
Basic EPS	$	14,324	24,229	$	0.59
Effect of dilutive stock options and unvested restricted stock		0	121		0
Diluted EPS	$	14,324	24,350	$	0.59
For the nine months ended September 30, 2019
Basic EPS	$	24,203	24,036	$	1.01
Effect of dilutive stock options and unvested restricted stock		0	299		(0.02)
Diluted EPS	$	24,203	24,335	$	0.99

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

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8.      FAIR VALUE

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

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

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

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

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

Assets Measured on a Recurring Basis:

Investment Securities Available for Sale

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

29

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

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

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

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

Assets and Liabilities Measured on a Non-recurring Basis:

Impaired Loans

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

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Other Real Estate Owned (“OREO”)

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

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

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

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

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

(2) Includes home equity lines of credit.

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Fair Value of Financial Instruments

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

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

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

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

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

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

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

10.     JUNIOR SUBORDINATED DEBT AND SENIOR SUBORDINATED NOTES

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

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

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

Also in connection with our merger with EVBS, the Company assumed the Senior Subordinated Note Purchase Agreement previously entered into by EVBS on April 22, 2015 with certain institutional accredited investors pursuant to which EVBS sold $20.0 million (fair value adjustment of $1.1 million) in aggregate principal amount of its 6.50% Fixed-to-Floating Rate Subordinated Notes due 2025 (the “EVBS Senior Subordinated Notes”) to the investors at a price equal to 100% of the aggregate principal amount of the EVBS Senior Subordinated Notes. At September 30, 2020, 80% of the EVBS Senior Subordinated Notes qualified as Tier 2 capital.

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

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

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

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

FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

● the continued service of key management personnel;

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

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

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

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

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

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

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

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

● failure to maintain effective internal controls and procedures;

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

● our ability to attract and retain qualified employees; and

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

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

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OVERVIEW

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

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

RESULTS OF OPERATIONS

Net Income

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

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

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

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

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

Net Interest Income

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

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

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

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

	Average Balance Sheets and Net Interest
	Analysis For the Three Months Ended
	September 30, 2020						September 30, 2019
			Interest						Interest
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate
	(Dollar amounts in thousands)
Assets
Interest-earning assets:
Loans, net of deferred fees (1) (2)	$	2,501,614	$	27,266	4.34	%	$	2,165,717	$	28,340	5.19	%
Investment securities		213,039		1,129	2.11	%		242,916		1,520	2.48	%
Other earning assets		163,159		312	0.76	%		65,707		614	3.71	%
Total earning assets		2,877,812		28,707	3.97	%		2,474,340		30,474	4.89	%
Allowance for loan losses		(23,640)						(11,570)
Total non-earning assets		279,924						266,120
Total assets	$	3,134,096					$	2,728,890
Liabilities and stockholders' equity
Interest-bearing liabilities:
NOW and other demand accounts	$	451,583	$	807	0.71	%	$	362,564	$	783	0.86	%
Money market accounts		504,887		800	0.63	%		456,492		2,080	1.81	%
Savings accounts		176,305		130	0.29	%		144,266		115	0.32	%
Time deposits		590,263		2,620	1.77	%		867,533		5,023	2.30	%
Total interest-bearing deposits		1,723,038		4,357	1.01	%		1,830,855		8,001	1.73	%
Borrowings		547,182		1,352	0.98	%		173,867		1,458	3.33	%
Total interest-bearing liabilities		2,270,220		5,709	1.00	%		2,004,722		9,459	1.87	%
Noninterest-bearing liabilities:
Demand deposits		452,500						334,435
Other liabilities		25,869						22,384
Total liabilities		2,748,589						2,361,541
Stockholders' equity		385,507						367,349
Total liabilities and stockholders' equity	$	3,134,096					$	2,728,890
Net interest income			$	22,998					$	21,015
Interest rate spread					2.97	%					3.01	%
Net interest margin					3.18	%					3.37	%

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

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

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

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

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

	Average Balance Sheets and Net Interest
	Analysis For the Nine Months Ended
	September 30, 2020						September 30, 2019
			Interest						Interest
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate
	(Dollar amounts in thousands)
Assets
Interest-earning assets:
Loans, net of deferred fees (1) (2)	$	2,368,541	$	81,051	4.57	%	$	2,160,863	$	84,692	5.24	%
Investment securities		222,285		3,737	2.25	%		242,891		4,728	2.60	%
Other earning assets		103,283		1,072	1.39	%		70,543		1,750	3.32	%
Total earning assets		2,694,109		85,860	4.26	%		2,474,297		91,170	4.93	%
Allowance for loan losses		(17,002)						(12,115)
Total non-earning assets		270,306						263,347
Total assets	$	2,947,413					$	2,725,529
Liabilities and stockholders' equity
Interest-bearing liabilities:
NOW and other demand accounts	$	412,083	$	2,338	0.76	%	$	355,511	$	2,198	0.83	%
Money market accounts		487,791		3,204	0.88	%		430,546		5,966	1.85	%
Savings accounts		162,575		353	0.29	%		145,964		345	0.32	%
Time deposits		685,253		10,111	1.97	%		880,610		14,608	2.22	%
Total interest-bearing deposits		1,747,702		16,006	1.22	%		1,812,631		23,117	1.71	%
Borrowings		390,856		3,868	1.32	%		203,469		5,122	3.37	%
Total interest-bearing liabilities		2,138,558		19,874	1.24	%		2,016,100		28,239	1.87	%
Noninterest-bearing liabilities:
Demand deposits		401,616						328,790
Other liabilities		24,055						21,347
Total liabilities		2,564,229						2,366,237
Stockholders' equity		383,184						359,292
Total liabilities and stockholders' equity	$	2,947,413					$	2,725,529
Net interest income			$	65,986					$	62,931
Interest rate spread					3.02	%					3.05	%
Net interest margin					3.27	%					3.40	%

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

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

Provision for Loan Losses

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

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

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

Noninterest Income

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

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

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

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

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

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

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

Noninterest Expense

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

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

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

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

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

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

FINANCIAL CONDITION

Balance Sheet Overview

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

Loan Portfolio

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

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

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

	September 30, 2020		December 31, 2019
Loans secured by real estate:
Commercial real estate - owner occupied	$	416,717	$	414,479
Commercial real estate - non-owner occupied		605,053		559,195
Secured by farmland		16,608		17,622
Construction and land loans		120,066		150,750
Residential 1-4 family		581,237		604,777
Multi-family residential		107,672		82,055
Home equity lines of credit		97,727		109,006
Total real estate loans		1,945,080		1,937,884
Commercial loans		216,711		221,447
Paycheck Protection Program		348,022		—
Consumer loans		23,078		26,304
Subtotal		2,532,891		2,185,635
Plus deferred costs on loans		(9,182)		412
Total loans	$	2,523,709	$	2,186,047

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

Asset Quality

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

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

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

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

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

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

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

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

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

	September 30,			December 31,
	2020			2019 (1)
Nonaccrual loans	$	15,270		$	8,900
Loans past due 90 days and accruing interest		—			—
Total nonperforming loans		15,270			8,900
Other real estate owned		5,388			6,224
Total nonperforming assets	$	20,658		$	15,124
Troubled debt restructurings	$	1,629		$	697
SBA guaranteed amounts included in nonaccrual loans	$	4,076		$	4,129
Allowance for loan losses to nonperforming loans		168.82	%		115.30	%
Allowance for loan losses to total loans		1.04	%		0.47	%
Nonperforming assets excluding SBA guaranteed loans to total assets		0.53	%		0.41	%

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

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

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

Investment Securities

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

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

● residential government-sponsored collateralized mortgage obligations in the amount of $35.5 million;

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

● corporate bonds in the amount of $10.1 million;

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

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

● callable agency securities in the amount of $11.1 million;

● trust preferred securities in the amount of $4.1 million; and

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

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

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

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

												% of		Previously
												Current		Recognized
												Defaults and		Cumulative
		Ratings								Estimated		Deferrals to		Other
	Tranche	When Purchased		Current Ratings		Par		Book		Fair		Total		Comprehensive
Security	Level	Moody's	Fitch	Moody's	Fitch	Value		Value		Value		Collateral		Loss (1)
						(in thousands)
Held to Maturity
ALESCO VII A1B	Senior	Aaa	AAA	Aa1	AA	$	1,874	$	1,754	$	1,743	17	%	$	219
MMCF III B	Senior Sub	A3	A-	Ba1	WD		31		30		29	48	%		4
						$	1,905	$	1,784	$	1,772			$	223
															Cumulative OTTI
Available for Sale														Related to
Other Than Temporarily Impaired:														Credit Loss (2)
TPREF FUNDING II	Mezzanine	A1	A-	Caa3	WD	$	1,500	$	1,040	$	750	32	%	$	400
ALESCO V C1	Mezzanine	A2	A	Caa1	C		2,150		1,490		1,666	15	%		660
						$	3,650	$	2,530	$	2,416			$	1,060
Total						$	5,555	$	4,314	$	4,188

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

(2) Pre-tax.

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

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

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Liquidity and Funds Management

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

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

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

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

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

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Capital Resources

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

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

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

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

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

	Sensitivity of Economic Value of Equity
	As of September 30, 2020
							Economic Value of
	Economic Value of Equity						Equity as a % of
Change in Interest Rates			$ Change		% Change		Total		Equity
in Basis Points (Rate Shock)	Amount		From Base		From Base		Assets		Book Value
	(dollar amounts in thousands)
Up 400	$	343,805	$	(809)	(0.23)	%	10.90	%	88.39	%
Up 300		348,284		3,670	1.06	%	11.04	%	89.54	%
Up 200		350,895		6,281	1.82	%	11.12	%	90.21	%
Up 100		353,269		8,655	2.51	%	11.20	%	90.82	%
Base		344,614		—	—	%	10.92	%	88.59	%
Down 100		306,296		(38,318)	(11.12)	%	9.71	%	78.74	%

	Sensitivity of Economic Value of Equity
	As of December 31, 2019
							Economic Value of
	Economic Value of Equity						Equity as a % of
Change in Interest Rates			$ Change		% Change		Total		Equity
in Basis Points (Rate Shock)	Amount		From Base		From Base		Assets		Book Value
	(dollar amounts in thousands)
Up 400	$	323,871	$	(45,102)	(12.22)	%	11.90	%	85.85	%
Up 300		336,822		(32,151)	(8.71)	%	12.37	%	89.29	%
Up 200		349,192		(19,781)	(5.36)	%	12.83	%	92.56	%
Up 100		363,935		(5,038)	(1.37)	%	13.37	%	96.47	%
Base		368,973		—	0.00	%	13.55	%	97.81	%
Down 100		353,371		(15,602)	(4.23)	%	12.98	%	93.67	%

Our interest rate sensitivity is also monitored by management through the use of a model that generates estimates of the change in the net interest income (“NII”) over a range of interest rate scenarios. NII depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. In this regard, the model assumes that the composition of our interest sensitive assets and liabilities existing at September 30, 2020 and December 31, 2019 remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. All changes are within our Asset/Liability Risk Management Policy guidelines at September 30, 2020 and December 31, 2019.

	Sensitivity of Net Interest Income
	As of September 30, 2020
	Adjusted Net Interest Income				Net Interest Margin
Change in Interest Rates			$ Change				% Change
in Basis Points (Rate Shock)	Amount		From Base		Percent		From Base
	(dollar amounts in thousands)
Up 400	$	88,693	$	(4,462)	3.36	%	(0.17)	%
Up 300		89,907		(3,248)	3.41	%	(0.12)	%
Up 200		90,938		(2,217)	3.44	%	(0.08)	%
Up 100		92,281		(874)	3.50	%	(0.03)	%
Base		93,155		—	3.53	%	—	%
Down 100		92,980		(175)	3.52	%	(0.01)	%

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	Sensitivity of Net Interest Income
	As of December 31, 2019
	Adjusted Net Interest Income				Net Interest Margin
Change in Interest Rates			$ Change				% Change
in Basis Points (Rate Shock)	Amount		From Base		Percent		From Base
	(dollar amounts in thousands)
Up 400	$	74,096	$	(8,158)	3.00	%	(0.33)	%
Up 300		76,355		(5,899)	3.09	%	(0.24)	%
Up 200		78,458		(3,796)	3.18	%	(0.15)	%
Up 100		80,649		(1,605)	3.27	%	(0.07)	%
Base		82,254		—	3.33	%	—	%
Down 100		81,273		(981)	3.29	%	(0.04)	%

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

ITEM 4 – CONTROLS AND PROCEDURES

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

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

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

PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

Southern National and Sonabank are from time to time a party, as both plaintiff and defendant, to various claims and proceedings arising in the ordinary course of the Bank’s business, including administrative and/or legal proceedings that may include employment-related claims, as well as claims of lender liability, breach of contract, and other similar lending-related claims. While the ultimate resolution of these matters cannot be determined at this time, the Bank’s management presently believes that such matters, individually and in the aggregate, will not have a material adverse effect on the Bank’s financial condition or results of operations. There are no proceedings pending, or to management’s knowledge, threatened, that represent a significant risk against Southern National or Sonabank as of September 30, 2020.

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ITEM 1A – RISK FACTORS

The Company disclosed risk factors in its Annual Report on Form 10-K for the year ended December 31, 2019 and in its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020. The risks described may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition, and/or operating results. The following risk factors have been included in this Quarterly Report on Form 10-Q in response to the global market disruptions that have resulted from the COVID-19 pandemic.

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

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

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

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

● declines in collateral values;

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

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

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

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

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

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

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

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

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

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

Not applicable.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 – OTHER INFORMATION

Not applicable.

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ITEM 6 - EXHIBITS

(a) Exhibits.

Exhibit No.	Description
3.1	Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to Southern National’s Registration Statement on Form S-1 (Registration No. 333-136285) filed August 4, 2006)
3.2	Certificate of Amendment to the Articles of Incorporation dated January 31, 2005 (incorporated herein by reference to Exhibit 3.2 to Southern National’s Registration Statement on Form S-1 (Registration No. 333-136285) filed on August 4, 2006)
3.3	Certificate of Amendment to the Articles of Incorporation dated April 13, 2006 (incorporated herein by reference to Exhibit 3.3 to Southern National’s Registration Statement on Form S-1 (Registration No. 333-136285) filed on August 4, 2006)
3.4	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to Southern National’s Current Report on Form 8-K filed on October 22, 2020)
4.1	Subordinated Indenture, dated as of August 25, 2020, between Southern National Bancorp of Virginia, Inc. and Wilmington Trust, National Association (incorporated herein by reference to Exhibit 4.1 to Southern National’s Current Report on Form 8-K filed on August 25, 2020)
4.2	First Supplemental Indenture, dated as of August 25, 2020, between Southern National Bancorp of Virginia, Inc. and Wilmington Trust, National Association (incorporated herein by reference to Exhibit 4.2 to Southern National’s Current Report on Form 8-K filed on August 25, 2020)
4.3	Form of 5.40% Fixed-to-Floating Rate Subordinated Notes due 2030 (included in Exhibit 4.2)
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials from Southern National Bancorp of Virginia, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL (Extensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income and Comprehensive Income (unaudited), (iii) Consolidated Statement of Changes in Stockholders’ Equity (unaudited), (iv) Consolidated Statements of Cash Flows (unaudited), and (v) Notes to Consolidated Financial Statements (unaudited).
104	The cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document).

+     Management contract or compensatory plan or arrangement

*      Filed with this Quarterly Report on Form 10-Q

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

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Signatures

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

	Southern National Bancorp of Virginia, Inc.
	(Registrant)
November 9, 2020	/s/ Dennis J. Zember
(Date)	Dennis J. Zember,
	Chief Executive Officer
	(President and Executive Officer)
November 9, 2020	/s/ Jeffrey L. Karafa
(Date)	Jeffrey L. Karafa,
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

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