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Section 1: 10-Q (10-Q)

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2019

 

Commission File No. 001‑33037

 

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Virginia

20‑1417448

(State or other jurisdiction

(I.R.S. Employer Identification No.)

of incorporation or organization)

 

 

6830 Old Dominion Drive

McLean, Virginia 22101

(Address of principal executive offices) (zip code)

 

(703) 893‑7400

(Registrant’s telephone number, including area code)

 

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

 

 

 

 

Title of each class:

Trading symbol

Name of each exchange on which registered:

  Common Stock

        SONA

                            NASDAQ

 

 

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 August 2, 2019, there were 24,143,576 shares of common stock outstanding.

 

 

Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

FORM 10‑Q

June 30, 2019

INDEX

    

PAGE

PART I - FINANCIAL INFORMATION

 

 

 

 

 

Item 1 - Financial Statements

 

 

Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 

 

2

Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2019 and 2018 

 

3

Consolidated Statement of Changes in Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018 

 

4

Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 

 

6

Notes to Unaudited Consolidated Financial Statements 

 

7

 

 

 

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

31

 

 

 

Item 3 – Quantitative and Qualitative Disclosures about Market Risk 

 

42

 

 

 

Item 4 – Controls and Procedures 

 

44

 

 

 

PART II - OTHER INFORMATION 

 

 

 

 

 

Item 1 – Legal Proceedings 

 

45

 

 

 

Item 1A – Risk Factors 

 

45

 

 

 

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

 

45

 

 

 

Item 3 – Defaults Upon Senior Securities 

 

45

 

 

 

Item 4 – Mine Safety Disclosures 

 

45

 

 

 

Item 5 – Other Information 

 

45

 

 

 

Item 6 - Exhibits 

 

46

 

 

 

Signatures 

 

49

 

 

 

 

 

 

 

Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

2019

 

2018

 

 

(unaudited)

 

*

ASSETS

 

 

 

 

 

 

Cash and cash equivalents:

 

 

  

 

 

  

Cash and due from financial institutions

 

$

6,898

 

$

6,939

Interest-bearing deposits in other financial institutions

 

 

26,190

 

 

20,877

Federal funds sold

 

 

 —

 

 

795

Total cash and cash equivalents

 

 

33,088

 

 

28,611

 

 

 

 

 

 

 

Securities available for sale, at fair value

 

 

163,860

 

 

143,377

 

 

 

 

 

 

 

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

 

 

86,815

 

 

92,462

 

 

 

 

 

 

 

Total loans

 

 

2,172,845

 

 

2,178,824

Less allowance for loan losses

 

 

(11,613)

 

 

(12,283)

Net loans

 

 

2,161,232

 

 

2,166,541

Stock in Federal Reserve Bank and Federal Home Loan Bank

 

 

17,364

 

 

19,522

Equity investment in mortgage affiliate

 

 

4,405

 

 

3,829

Preferred investment in mortgage affiliate

 

 

3,305

 

 

3,305

Bank premises and equipment, net

 

 

30,767

 

 

32,352

Operating lease right-of-use assets

 

 

7,924

 

 

 —

Goodwill

 

 

101,954

 

 

101,954

Core deposit intangibles, net

 

 

7,884

 

 

8,609

Bank-owned life insurance

 

 

63,060

 

 

62,495

Other real estate owned

 

 

5,041

 

 

5,077

Deferred tax assets, net

 

 

14,475

 

 

14,104

Other assets

 

 

23,129

 

 

19,057

Total assets

 

$

2,724,303

 

$

2,701,295

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

  

 

 

  

Noninterest-bearing demand deposits

 

$

335,024

 

$

320,043

Interest-bearing deposits:

 

 

  

 

 

  

   NOW accounts

 

 

361,787

 

 

345,597

   Money market accounts

 

 

444,299

 

 

355,469

   Savings accounts

 

 

143,328

 

 

151,050

   Time deposits

 

 

865,988

 

 

925,441

   Total interest-bearing deposits

 

 

1,815,402

 

 

1,777,557

Total deposits

 

 

2,150,426

 

 

2,097,600

 

 

 

 

 

 

 

Securities sold under agreements to repurchase - short term

 

 

14,319

 

 

18,721

Federal Home Loan Bank (FHLB) advances - short term

 

 

110,640

 

 

163,340

Junior subordinated debt - long term

 

 

9,608

 

 

9,584

Senior subordinated notes - long term

 

 

47,070

 

 

47,089

Operating lease liabilities

 

 

8,385

 

 

 —

Other liabilities

 

 

21,063

 

 

16,671

Total liabilities

 

 

2,361,511

 

 

2,353,005

Commitments and contingencies (See Note 6)

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

  

 

 

  

Preferred stock, $0.01 par value. Authorized 5,000,000 shares; no shares issued and outstanding

 

 

 —

 

 

 —

Common stock, $0.01 par value. Authorized 45,000,000 shares; 24,117,326 and 24,052,253 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 

 

241

 

 

240

Additional paid in capital

 

 

306,049

 

 

305,654

Retained earnings

 

 

55,983

 

 

44,985

Accumulated other comprehensive income (loss)

 

 

519

 

 

(2,589)

Total stockholders' equity

 

 

362,792

 

 

348,290

Total liabilities and stockholders' equity

 

$

2,724,303

 

$

2,701,295

*  Derived from audited consolidated financial statements

See accompanying notes to unaudited consolidated financial statements.

2

Table of Contents

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2019

    

2018

    

2019

    

2018

    

Interest and dividend income:

 

 

  

 

 

  

 

 

  

 

 

  

 

Interest and fees on loans

 

$

28,378

 

$

27,697

 

$

56,352

 

$

53,602

 

Interest and dividends on taxable securities

 

 

1,475

 

 

1,400

 

 

2,900

 

 

2,882

 

Interest and dividends on tax exempt securities

 

 

152

 

 

160

 

 

308

 

 

319

 

Interest and dividends on other earning assets

 

 

388

 

 

412

 

 

1,134

 

 

879

 

Interest on federal funds sold

 

 

 —

 

 

14

 

 

 2

 

 

21

 

Total interest and dividend income

 

 

30,393

 

 

29,683

 

 

60,696

 

 

57,703

 

Interest expense:

 

 

  

 

 

  

 

 

  

 

 

  

 

Interest on deposits

 

 

7,654

 

 

3,810

 

 

15,116

 

 

7,080

 

Interest on repurchase agreements

 

 

22

 

 

24

 

 

45

 

 

46

 

Interest on junior subordinated debt

 

 

150

 

 

147

 

 

300

 

 

275

 

Interest on senior subordinated notes

 

 

712

 

 

712

 

 

1,424

 

 

1,423

 

Interest on other borrowings

 

 

891

 

 

1,816

 

 

1,895

 

 

3,205

 

Total interest expense

 

 

9,429

 

 

6,509

 

 

18,780

 

 

12,029

 

Net interest income

 

 

20,964

 

 

23,174

 

 

41,916

 

 

45,674

 

Provision for loan losses

 

 

 —

 

 

1,050

 

 

200

 

 

2,650

 

Net interest income after provision for loan losses

 

 

20,964

 

 

22,124

 

 

41,716

 

 

43,024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

  

 

 

  

 

 

  

 

 

  

 

Account maintenance and deposit service fees

 

 

1,788

 

 

1,375

 

 

3,475

 

 

2,783

 

Income from bank-owned life insurance

 

 

385

 

 

563

 

 

908

 

 

870

 

Equity gain (loss) from mortgage affiliate

 

 

558

 

 

191

 

 

576

 

 

(126)

 

Gain on sales of investment securities

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Recoveries related to acquired charged-off loans and investment securities

 

 

324

 

 

250

 

 

915

 

 

1,733

 

Other

 

 

136

 

 

174

 

 

379

 

 

372

 

Total noninterest income

 

 

3,191

 

 

2,553

 

 

6,253

 

 

5,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expenses:

 

 

  

 

 

  

 

 

  

 

 

  

 

Salaries and benefits

 

 

7,144

 

 

7,007

 

 

12,956

 

 

13,779

 

Occupancy expenses

 

 

1,801

 

 

1,656

 

 

3,604

 

 

3,306

 

Furniture and equipment expenses

 

 

738

 

 

712

 

 

1,448

 

 

1,509

 

Amortization of core deposit intangible

 

 

362

 

 

361

 

 

725

 

 

723

 

Virginia franchise tax expense

 

 

563

 

 

492

 

 

1,126

 

 

856

 

Data processing expense

 

 

571

 

 

464

 

 

1,083

 

 

930

 

Telephone and communication expense

 

 

406

 

 

501

 

 

781

 

 

1,095

 

Net (gain) loss on other real estate owned

 

 

(36)

 

 

(40)

 

 

(38)

 

 

160

 

Professional fees

 

 

1,381

 

 

839

 

 

2,985

 

 

1,788

 

Other operating expenses

 

 

962

 

 

1,625

 

 

5,512

 

 

3,090

 

Total noninterest expenses

 

 

13,892

 

 

13,617

 

 

30,182

 

 

27,236

 

Income before income taxes

 

 

10,263

 

 

11,060

 

 

17,787

 

 

21,420

 

Income tax expense

 

 

944

 

 

2,193

 

 

2,448

 

 

4,294

 

Net income

 

$

9,319

 

$

8,867

 

$

15,339

 

$

17,126

 

Other comprehensive income (loss):

 

 

  

 

 

  

 

 

  

 

 

  

 

Unrealized gain (loss) on available for sale securities

 

$

2,844

 

$

(837)

 

$

3,928

 

$

(2,713)

 

Accretion of amounts previously recorded upon transfer to held to maturity from available for sale

 

 

 3

 

 

 2

 

 

 6

 

 

 6

 

Net unrealized gain (loss)

 

 

2,847

 

 

(835)

 

 

3,934

 

 

(2,707)

 

Tax effect

 

 

597

 

 

(175)

 

 

826

 

 

(569)

 

Other comprehensive income (loss)

 

 

2,250

 

 

(660)

 

 

3,108

 

 

(2,138)

 

Comprehensive income

 

$

11,569

 

$

8,207

 

 

18,447

 

 

14,988

 

Earnings per share, basic

 

$

0.39

 

$

0.37

 

$

0.64

 

$

0.71

 

Earnings per share, diluted

 

$

0.38

 

$

0.37

 

$

0.63

 

$

0.71

 

 

See accompanying notes to unaudited consolidated financial statements.

3

Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

Common

 

Paid in

 

Retained

 

Comprehensive

 

 

 

    

Stock

    

Capital

    

Earnings

    

Income (Loss)

    

Total

Balance - March 31, 2019

 

$

241

 

$

305,879

 

$

48,300

 

$

(1,731)

 

$

352,689

Net income

 

 

 —

 

 

 —

 

 

9,319

 

 

 —

 

 

9,319

Changes in other comprehensive income on investment securities (net of tax, $597, and accretion of $3)

 

 

 —

 

 

 —

 

 

 —

 

 

2,250

 

 

2,250

Dividends on common stock ($0.18 per share)

 

 

 —

 

 

 —

 

 

(2,171)

 

 

 —

 

 

(2,171)

Issuance of common stock under Stock Incentive Plan (2,200 shares, net)

 

 

 —

 

 

 7

 

 

 —

 

 

 —

 

 

 7

Impact of adoption of ASU 2016-02

 

 

 

 

 

 

 

 

535

 

 

 

 

 

535

Stock-based compensation expense

 

 

 —

 

 

163

 

 

 —

 

 

 —

 

 

163

Balance - June 30, 2019

 

$

241

 

$

306,049

 

$

55,983

 

$

519

 

$

362,792

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

Common

 

Paid in

 

Retained

 

Comprehensive

 

 

 

    

Stock

    

Capital

    

Earnings

    

Loss

    

Total

Balance - March 31, 2018

 

$

240

 

$

305,360

 

$

25,324

 

$

(2,859)

 

$

328,065

Net income

 

 

 —

 

 

 —

 

 

8,867

 

 

 —

 

 

8,867

Changes in other comprehensive income on investment securities (net of tax, $826, and accretion of $6)

 

 

 —

 

 

 —

 

 

 —

 

 

(660)

 

 

(660)

Dividends on common stock ($0.18 per share)

 

 

 —

 

 

 —

 

 

(1,922)

 

 

 —

 

 

(1,922)

Issuance of common stock under Stock Incentive Plan (19,450 shares, net)

 

 

 —

 

 

 6

 

 

 —

 

 

 —

 

 

 6

Stock-based compensation expense

 

 

 —

 

 

94

 

 

 —

 

 

 —

 

 

94

Balance - June 30, 2018

 

$

240

 

$

305,460

 

$

32,269

 

$

(3,519)

 

$

334,450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

Table of Contents

SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

Common

 

Paid in

 

Retained

 

Comprehensive

 

 

 

    

Stock

    

Capital

    

Earnings

    

Income (Loss)

    

Total

Balance - December 31, 2018

 

$

240

 

$

305,654

 

$

44,985

 

$

(2,589)

 

$

348,290

Net income

 

 

 —

 

 

 —

 

 

15,339

 

 

 —

 

 

15,339

Changes in other comprehensive income on investment securities (net of tax, $826, and accretion of $6)

 

 

 —

 

 

 —

 

 

 —

 

 

3,108

 

 

3,108

Dividends on common stock ($0.18 per share)

 

 

 —

 

 

 —

 

 

(4,341)

 

 

 —

 

 

(4,341)

Issuance of common stock under Stock Incentive Plan (19,450 shares, net)

 

 

 1

 

 

128

 

 

 —

 

 

 —

 

 

129

Stock-based compensation expense

 

 

 —

 

 

267

 

 

 —

 

 

 —

 

 

267

Balance - June 30, 2019

 

$

241

 

$

306,049

 

$

55,983

 

$

519

 

$

362,792

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

Common

 

Paid in

 

Retained

 

Comprehensive

 

 

 

    

Stock

    

Capital

    

Earnings

    

Loss

    

Total

Balance - December 31, 2017

 

$

239

 

$

304,932

 

$

18,753

 

$

(1,152)

 

$

322,772

Net income

 

 

 —

 

 

 —

 

 

17,126

 

 

 —

 

 

17,126

Changes in other comprehensive loss on investment securities (net of tax, $394, and accretion of $3)

 

 

 —

 

 

 —

 

 

 —

 

 

(2,138)

 

 

(2,138)

Dividends on common stock ($0.08 per share)

 

 

 —

 

 

 —

 

 

(3,839)

 

 

 —

 

 

(3,839)

Issuance of common stock under Stock Incentive Plan (51,200 shares, net)

 

 

 1

 

 

359

 

 

 —

 

 

 —

 

 

360

Reclassification from accumulated other comprehensive loss to retained earnings due to adoption of ASU 2018-02

 

 

 —

 

 

 —

 

 

229

 

 

(229)

 

 

 —

Stock-based compensation expense

 

 

 —

 

 

169

 

 

 —

 

 

 —

 

 

169

Balance - June 30, 2018

 

$

240

 

$

305,460

 

$

32,269

 

$

(3,519)

 

$

334,450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

5

Table of Contents

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

(dollars in thousands) (Unaudited)

 

 

 

 

 

 

 

 

    

2019

    

2018

Operating activities:

 

 

  

 

 

  

Net income

 

$

15,339

 

$

17,126

Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:

 

 

  

 

 

  

Depreciation and amortization

 

 

3,411

 

 

3,732

Amortization of operating lease right-of-use assets

 

 

1,275

 

 

 —

Accretion of loan discount

 

 

(1,788)

 

 

(2,453)

Amortization of FDIC indemnification asset

 

 

354

 

 

350

Provision for loan losses

 

 

200

 

 

2,650

Earnings on bank-owned life insurance

 

 

(908)

 

 

(706)

Equity (gain) loss on mortgage affiliate

 

 

(576)

 

 

126

Stock-based compensation expense

 

 

267

 

 

169

Gain on bank-owned life insurance death benefit

 

 

 —

 

 

(164)

(Gain) loss on other real estate owned

 

 

(38)

 

 

160

Provision for deferred income taxes

 

 

(1,197)

 

 

 —

Net (increase) decrease in other assets

 

 

(4,210)

 

 

1,230

Net increase (decrease) in other liabilities

 

 

3,362

 

 

(2,169)

Net cash and cash equivalents provided by operating activities

 

 

15,491

 

 

20,051

Investing activities:

 

 

  

 

 

  

Purchases of available for sale investment securities

 

 

(25,110)

 

 

 —

Proceeds from paydowns, maturities and calls of available for sale investment securities

 

 

7,711

 

 

7,363

Proceeds from paydowns, maturities and calls of held to maturity investment securities

 

 

5,463

 

 

2,498

Sales of FRB and FHLB stock

 

 

2,158

 

 

756

Net (increase) decrease in loans

 

 

6,896

 

 

(91,728)

Purchase of bank-owned life insurance

 

 

 —

 

 

(12,000)

Proceeds from bank-owned life insurance death benefit

 

 

343

 

 

477

Proceeds from sales of other real estate owned, net of improvements

 

 

74

 

 

1,857

Proceeds from sales of bank premise and equipment and assets held for sale

 

 

 —

 

 

2,136

Purchases of bank premises and equipment

 

 

(73)

 

 

(1,805)

Net cash and cash equivalents used in investing activities

 

 

(2,538)

 

 

(90,446)

Financing activities:

 

 

  

 

 

  

Net increase in deposits

 

 

52,837

 

 

115,153

Cash dividends paid on common stock

 

 

(4,341)

 

 

(3,839)

Issuance of common stock under Stock Incentive Plan

 

 

129

 

 

360

Net decrease in short-term borrowings

 

 

(57,101)

 

 

(14,579)

Net cash and cash equivalents provided by (used in) financing activities

 

 

(8,476)

 

 

97,095

Increase in cash and cash equivalents

 

 

4,477

 

 

26,700

Cash and cash equivalents at beginning of period

 

 

28,611

 

 

25,463

Cash and cash equivalents at end of period

 

$

33,088

 

$

52,163

Supplemental disclosure of cash flow information

 

 

  

 

 

  

Cash payments for:

 

 

  

 

 

  

Interest

 

$

18,643

 

$

11,663

Income taxes

 

 

2,937

 

 

4,516

Non-cash investing and financing activities:

 

 

 

 

 

 

Initial recognition of operating lease right-of-use assets

 

 

8,615

 

 

 —

Initial recognition of operating lease liabilities

 

 

9,099

 

 

 —

 

See accompanying notes to unaudited consolidated financial statements.

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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.

Notes to Unaudited Consolidated Financial Statements

June 30, 2019

1.      ACCOUNTING POLICIES

Southern National Bancorp of Virginia, Inc. (“Southern National” or “SNBV” or the “Company”) is a corporation that was formed on July 28, 2004 under the laws of the Commonwealth of Virginia and is the holding company for Sonabank (“Sonabank” or the “Bank”) a Virginia state-chartered bank which commenced operations on April 14, 2005. As of the close of business on June 23, 2017, SNBV completed its merger with Eastern Virginia Bankshares, Inc. (“EVBS”) and the merger of EVBS’s wholly-owned subsidiary, EVB, with and into SNBV’s wholly-owned subsidiary, Sonabank. Sonabank provides a range of financial services to individuals and small and medium sized businesses. At June 30, 2019, Sonabank had thirty-eight full-service retail branches in Virginia, located in the counties of Chesterfield (2), Essex (2), Fairfax (Reston, McLean and Fairfax), Gloucester (2), Hanover (3), King William, Lancaster, Middlesex (3), New Kent, Northumberland (3), Southampton, Surry, Sussex, and in Charlottesville, Clifton Forge, Colonial Heights, Front Royal, Hampton, Haymarket, Leesburg, Middleburg, New Market, Newport News, Richmond, South Riding, Warrenton, and Williamsburg, and seven full-service retail branches in Maryland, in Rockville, Shady Grove, Bethesda, Upper Marlboro, Brandywine, Owings and Huntingtown.

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

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

Revenue from Contracts with Customers

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

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

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

Operating Leases

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

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

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

Use of Estimates

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

Recent Accounting Pronouncements

Adoption of New Accounting Standards:

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as oper