Southern National Bancorp of Virginia, Inc
Annual Report 2016

Plain-text annual report

SOUTHERN NATIONAL BANCORP OF VIRGINIA INC FORM 10-K (Annual Report) Filed 03/16/17 for the Period Ending 12/31/16 Address Telephone CIK Symbol SIC Code Industry Sector Fiscal Year 1770 TIMBERWOOD BOULEVARD SUITE 100 CHARLOTTESVILLE, VA 22911 (434) 973-5242 0001325670 SONA 6022 - State Commercial Banks Banks Financials 12/31 http://www.edgar-online.com © Copyright 2017, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. ☒☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934TABLE OF CONTENTSUNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549​FORM 10-KFor the fiscal year ended December 31, 2016orFor the transition period from                   to                  ​Commission file number: 001-33037​SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.(Exact name of registrant as specified in its charter)​VIRGINIA20-1417448​​(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)​6830 Old Dominion Drive McLean, Virginia 22101(Address or 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 className of each exchange on which registered​​Common Stock, $0.01 par valueNasdaq Global Market​Securities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.  Yes ☐ No ☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ☐ No ☒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 Actof 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 tosuch filing requirements for the past 90 days.  Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive DataFile required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or forsuch shorter period that the registrant was required to submit and post such files).  Yes ☒ No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not containedherein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K. ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of  “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):Large accelerated filer ☐Smaller reporting company ☐​Accelerated filer    ☒Non-accelerated filer ☐ (Do not check if a smaller reporting company)​Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2016 was approximately $135,038,733 basedon the closing price of the common stock on such date.The number of shares of common stock outstanding as of March 6, 2017 was 12,318,743.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 in conjunction withthe registrant’s 2017 Annual Meeting of Shareholders are incorporated into Part III, Items 10-14 of this Annual Report on Form 10-K.Item 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchasesof Equity SecuritiesItem 6. Selected Financial DataItem 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsItem 7A. Quantitative and Qualitative Disclosures about Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and Related StockholderMattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesItem 15. Exhibits and Financial Statement SchedulesTABLE OF CONTENTS ​SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC. FORM 10-K INDEXPagePART I​12438384040PART II​4144456970119119119PART III​120120120120120PART IV​121i• the effects of future economic, business and market conditions and disruptions in the credit and financialmarkets, domestic and foreign;• changes in the local economies in our market areas adversely affect our customers and their ability totransact profitable business with us, including the ability of our borrowers to repay their loans accordingto their terms or a change in the value of the related collateral;• the possibility that the proposed merger (the “Merger”) with Eastern Virginia Bankshares, Inc. (“EasternVirginia”) does not close when expected or at all because required regulatory or other approvals andconditions to closing are not received or satisfied on a timely basis or at all;• the effect of the announcement or pendency of the Merger on our business relationships, operating results,and business generally;• risks that the proposed Merger disrupts our current plans and operations and potential difficulties in ouremployee retention as a result of the Merger;• changes in the availability of funds resulting in increased costs or reduced liquidity, as well as theadequacy 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 securities in oursecurities portfolio;• impairment concerns and risks related to our investment portfolio of collateralized mortgage obligations,agency mortgage-backed securities, obligations of states and political subdivisions and pooled trustpreferred securities;• the incurrence and possible impairment of goodwill associated with current or future acquisitions andpossible adverse short-term effects on our results of operations;• increased credit risk in our assets and increased operating risk caused by a material change in commercial,consumer and/or real estate loans as a percentage of our total loan portfolio;• the concentration of our loan portfolio in loans collateralized by real estate;• our level of construction and land development and commercial real estate loans;• changes in the levels of loan prepayments and the resulting effects on the value of our loan portfolio;• the failure of assumptions and estimates underlying the establishment of and provisions made to theallowance for loan losses;• our ability to expand and grow our business and operations, including the establishment of additionalbranches and acquisition of additional branches and banks, and our ability to realize the cost savings andrevenue enhancements we expect from such activities;TABLE OF CONTENTSCAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K contains statements about future expectations, activities and events thatconstitute forward-looking statements within the meaning of, and subject to the protection of, Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Exchange Act and are intended to be covered by thesafe harbor provided by the same. Forward-looking statements are based on our beliefs, assumptions andexpectations of our future financial and operating performance and growth plans, taking into account theinformation currently available to us. These statements are not statements of historical fact. The words “believe,”“may,” “forecast,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “continue,” “would,” “could,” “hope,”“might,” “assume,” “objective,” “seek,” “plan,” “strive” or similar words, or the negatives of these words, identifyforward-looking statements.Forward-looking statements involve risks and uncertainties that may cause our actual results to differmaterially from the expectations of future results we express or imply in any forward-looking statements. Inaddition to the other factors discussed in the “Risk Factors” section of this Annual Report on Form 10-K, factorsthat could contribute to those differences include, but are not limited to:ii• changes in governmental monetary and fiscal policies, including interest rate policies of the Board ofGovernors of the Federal Reserve System, or changes in interest rates and market prices, which couldreduce our net interest margins, asset valuations and expense expectations;• increased competition for deposits and loans adversely affecting rates and terms;• the continued service of key management personnel;• the potential payment of interest on demand deposit accounts to effectively compete for customers;• potential environmental liability risk associated with properties that we assume upon foreclosure;• increased asset levels and changes in the composition of assets and the resulting impact on our capitallevels and regulatory capital ratios;• risks of current or future mergers and acquisitions, including the related time and cost of implementingtransactions and the potential failure to achieve expected gains, revenue growth or expense savings;• legislative and regulatory changes, including changes in banking, securities and tax laws and regulationsand their application by our regulators, including those associated with the Dodd Frank Wall StreetReform and Consumer Protection Act (the “Dodd-Frank Act”), changes in the scope and cost of FederalDeposit Insurance Corporation (“FDIC”) insurance and other coverage; and the capital requirementspromulgated by the Basel Committee on Banking Supervision (the “Basel Committee”);• increases in regulatory capital requirements for banking organizations generally, which may adverselyaffect our ability to expand our business or could cause us to shrink our business;• the effects of war or other conflicts, acts of terrorism or other catastrophic events that may affect generaleconomic conditions;• failure to prevent a breach to our Internet-based system and online commerce security;• 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 currentlyestimated, if corporate tax rates in the future are less than current rates, or if sales of our capital stocktrigger limitations on the amount of net operating loss carryforwards that we may utilize for income taxpurposes; and• other factors and risks described under “Risk Factors” herein and in any of our subsequent reports that wefile with the Securities and Exchange Commission (the “Commission” or “SEC”) under the ExchangeAct.TABLE OF CONTENTSForward-looking statements are not guarantees of performance or results and should not be relied upon asrepresenting management’s views as of any subsequent date. A forward-looking statement may include a statementof the assumptions or bases underlying the forward-looking statement. We believe we have chosen theseassumptions or bases in good faith and that they are reasonable. We caution you, however, that assumptions or basesalmost always vary from actual results, and the differences between assumptions or bases and actual results can bematerial. When considering forward-looking statements, you should keep in mind the risk factors and othercautionary statements in this Annual Report on Form 10-K. These statements speak only as of the date of thisAnnual Report on Form 10-K (or an earlier date to the extent applicable). Except as required by applicable law, weundertake no obligation to update publicly these statements in light of new information or future events.iiiTABLE OF CONTENTS ​PART IItem 1. BusinessOverviewSouthern National Bancorp of Virginia, Inc. (“Southern National”, “SNBV”, “we” or “our”) is the bankholding company for Sonabank (“Sonabank” or the “Bank”) a Virginia state chartered bank which commencedoperations on April 14, 2005. Sonabank provides a range of financial services to individuals and small and mediumsized businesses. Sonabank has fifteen branches in Virginia, located in Fairfax County (Reston, McLean andFairfax), in Charlottesville, Warrenton (2), Middleburg, Leesburg (2), South Riding, Front Royal, New Market,Haymarket, Richmond and Clifton Forge, and eight branches in Maryland, in Rockville, Shady Grove, Frederick,Bethesda, Upper Marlboro, Brandywine, Owings and Huntingtown. As of December 31, 2016, we reported, on aconsolidated basis, total assets of  $1.1 billion, total loans, net of deferred fees, of  $930.4 million, total deposits of $913.0 million and shareholders’ equity of  $126.3 million.While we offer a wide range of commercial banking services, we focus on making loans secured primarily bycommercial real estate and other types of secured and unsecured commercial loans to small and medium-sizedbusinesses in a number of industries, as well as loans to individuals for a variety of purposes. We are a leadingSmall Business Administration (SBA) lender among Virginia community banks. We also invest in real estate-related securities, including collateralized mortgage obligations and agency mortgage backed securities. Ourprincipal sources of funds for loans and investing in securities are deposits and, to a lesser extent, borrowings. Weoffer a broad range of deposit products, including checking (NOW), savings, money market accounts andcertificates of deposit. We actively pursue business relationships by utilizing the business contacts of our seniormanagement, other bank officers and our directors, thereby capitalizing on our knowledge of our local market areas.Effective December 4, 2009, Sonabank assumed certain deposits and liabilities and acquired certain assets ofGreater Atlantic Bank from the FDIC, as receiver for Greater Atlantic Bank, pursuant to the terms of a purchase andassumption agreement entered into by the Bank and the FDIC on December 4, 2009 (the “Agreement”). OnDecember 5, 2009, the former Greater Atlantic Bank offices, located in Reston, New Market, Front Royal and SouthRiding, Virginia and Rockville, Maryland opened as Sonabank branches.Covered loan losses are reimbursed in accordance with the FDIC loss sharing agreements. There are twoagreements with the FDIC, one for single family assets which is a 10 year agreement expiring in December 2019,and one for non-single family (commercial) assets which was a 5 year agreement that expired in December 2014.Our FDIC indemnification asset, the estimate of the expected loss amounts to be reimbursed by the FDIC has acurrent carrying value of  $2.1 million and an estimated fair value of  $528 thousand reflecting an overstated FDICindemnification asset. This current overstatement, which is due to improvements in the loss estimates in the singlefamily covered loans, is being amortized down in accordance with accounting rules over the life of the contract (10years for single family covered assets) or the life of the loans, whichever is shorter.On October 1, 2011, we completed the acquisition of the Midlothian branch of the Bank of Hampton Roads inRichmond, Virginia. We assumed deposits in the amount of  $42.2 million.Effective April 27, 2012, Sonabank assumed substantially all of the deposits and liabilities and acquiredsubstantially all of the assets of the HarVest Bank of Maryland from the FDIC as receiver. The acquisition includedHarVest Bank’s branches in Bethesda, North Rockville, Germantown and Frederick, Maryland. Adding these newbranches to our existing branch in Rockville brought Sonabank’s total number of branches in Maryland to five, fourof which are in Montgomery County. This was a strategic acquisition for Sonabank in order to expand into anaffluent market.The merger with Prince George’s Federal Savings Bank (PGFSB) was completed on August 1, 2014. SouthernNational acquired PGFSB in a cash and stock transaction. PGFSB was founded in 1931 and was headquartered inUpper Marlboro, which is the County Seat of Prince George’s County, Maryland.1• Utilize the Strength of our Management Team . The experience and market knowledge of ourmanagement team is one of our greatest strengths and competitive advantages. Our chairman, Georgia S.Derrico, was the founder, chairman of the board and chief executive officer, and our president, R.Roderick Porter, was the president and chief operating officer, of Southern Financial Bancorp, Inc., apublicly traded bank holding company. At the time of its sale to Provident Bankshares, Inc. in April of2004, Southern Financial had $1.5 billion in assets and operated 34 full-service banking offices ofSouthern Financial Bank, which was founded in Fairfax County and subsequently expanded into Centraland Southern Virginia. Including the members of our current senior management team, 35 of ouremployees previously worked with our chairman and president at Southern Financial Bank.TABLE OF CONTENTSPGFSB has four offices, all of which are in Maryland, including a main office in Upper Marlboro and three branchoffices in Dunkirk, Brandywine and Huntingtown. PGFSB has an excellent core deposit base reflecting its tenure inthe communities it serves, and its lending activities have historically been focused on residential mortgages.Full details on each of these acquisitions are contained in Form 8-Ks or 8-K/As filed with the SEC onDecember 10, 2009, October 4, 2011, July 13, 2012, and August 5, 2014, respectively.On May 15, 2014, Southern National Bancorp of Virginia Inc., Jerry Flowers of Southern Trust Mortgage(STM), and Eastern Virginia Bankshares (EVB), the holding company for EVB, completed the purchase of 62percent of STM previously owned by Middleburg Bank. Jerry Flowers and other STM executives now own 51.1percent of STM, Sonabank owns 44 percent and EVB owns 4.9 percent.Sonabank’s equity method investment in STM totaled $3.2 million. Sonabank also acquired 1.8 million sharesof preferred stock in the amount of  $1.8 million in STM with an annual dividend yield of 7.5%. In June 2015,Sonabank acquired additional shares of preferred stock in the amount of  $750 thousand.On December 13, 2016, Southern National and Eastern Virginia Bankshares, Inc. (“Eastern Virginia”), theholding company of EVB, jointly announced the signing of a definitive agreement to merge. The combinationbrings together two banking companies with complementary business lines creating one of the premier bankinginstitutions headquartered in the Commonwealth of Virginia.Upon completion of the transaction, the combined company will have approximately $2.4 billion in total assets,$2.0 billion in total deposits, and $1.8 billion in total loans. The company, which will assume the Southern NationalBancorp of Virginia, Inc. name for the holding company and the Sonabank name for all banking operations, willmaintain its corporate headquarters in McLean, Virginia and the headquarters of the bank in Richmond, Virginia.The company will have 47 branch locations covering markets in both Maryland and Virginia, including theWashington, D.C. and Richmond, Virginia MSAs. These attractive markets are often cited as having some of thebest demographic and income profiles in the country characterized by low unemployment, strong populationgrowth, new business starts and consistent capital expenditure.The transaction is expected to close during the second quarter of 2017 and is subject to the approval of bothcompanies’ shareholders along with regulatory approvals and other customary closing conditions. Pursuant to theterms of the merger agreement, EVB will merge with and into Sonabank immediately after the merger of EasternVirginia with and into Southern National.On January 20, 2017, Southern National announced that it had completed the sale of  $27 million of its fixed-to-floating rate Subordinated Notes due 2027 (the “Notes”). The Notes will initially bear interest at 5.875% perannum until January 31, 2022; thereafter, the Notes will be payable at an annual floating rate equal to three-monthLIBOR plus a spread of 3.95% until maturity or early redemption.Southern National plans to use the net proceeds of the offering for general corporate purposes, including, butnot limited to, contributing capital to its bank subsidiary to support continued growth.We primarily market our products and services to small and medium-sized businesses and to retail consumers.Our strategy is to provide superior service through our employees, who are relationship-oriented and committed totheir respective customers. Through this strategy, we intend to grow our business, expand our customer base andimprove our profitability. The key elements of our strategy are to:2• Leverage Our Existing Foundation for Additional Growth . Based on our management’s depth ofexperience and certain infrastructure investments, we believe that we will be able to take advantage ofcertain economies of scale typically enjoyed by larger organizations to expand our operations bothorganically and through strategic cost-effective branch or bank acquisitions. We believe that theinvestments we have made in our data processing, risk management infrastructure, staff and branchnetwork will be able to support a much larger asset base. We are committed, however, to control anyadditional growth in a manner designed to minimize the risk and to maintain strong capital ratios.• Continue to Pursue Selective Acquisition Opportunities . Historically, acquisitions have been a key partof our growth. Since our formation, we have completed the acquisition of PGFSB, the acquisition ofHarVest Bank of Maryland on April 27, 2012, the acquisition of the Midlothian branch in Richmond,Virginia on October 1, 2011, the acquisition and assumption of certain assets and liabilities of GreaterAtlantic Bank from the FDIC on December 4, 2009, the acquisition of a branch of Millennium Bank inWarrenton, Virginia on September 28, 2009, the acquisition of the Leesburg branch location fromFounders Corporation which opened on February 11, 2008, the acquisition of 1 Service Bank inDecember of 2006 and the acquisition of the Clifton Forge branch of First Community Bancorp, Inc. inDecember of 2005. We intend to continue to review branch and whole bank acquisition opportunities,including possible acquisitions of failed financial institutions in FDIC-assisted transactions, and willpursue these opportunities if they represent the most efficient use of our capital under the circumstances.We believe that we have demonstrated the skill sets and experience necessary to acquire and integratesuccessfully both bank and branch acquisitions, and that with our strong capital position, we are well-positioned to take advantage of acquisition opportunities as they may arise. We intend to focus on targetsin our market areas or other attractive areas with significant core deposits and/or a potential customer basecompatible with our growth strategy.• De novo Branch Expansion . In addition to our acquisition strategy, we plan to open de novo branchesfrom time to time to fill in our existing footprint.• Focus on the Business Owner . It is our goal to be the bank that business owners in our markets turn tofirst for commercial banking needs as a result of our superior personal service and the tailored productsand services that we provide. To help achieve this goal, we:■ have a standing credit committee that meets as often as necessary on a “when needed” basis toreview completed loan applications, making extensive use of technology to facilitate our internalcommunications and thereby enabling us to respond to our customers promptly;■ are an SBA approved “Preferred” lender, which permits us to make SBA loan decisions at Sonabankrather than waiting for SBA processing. We offer a number of different types of SBA loans designedfor the small and medium-sized business owner and many of our SBA loan customers also haveother relationships with Sonabank. This product group is complex and “paper intensive” and notwell utilized by some of our competitors;■ provide Internet business banking at www.sonabank.com which allows our business customers 24-hour web-based access to their accounts so they can confirm or transfer balances, pay bills,download statements and use our “Web Lockbox” or “Sona Cash Manager;”■ provide our business customers with “Sona In-House,” a service that utilizes Check 21 technology toallow customers to make remote deposits from their business locations and gives them access tothose funds within 24 to 48 hours; and■ provide our business customers with access to SABL, our state-of-the-art asset-based lendingsystem. Unlike most asset-based lending systems, which are based on manual processes or softwarethat certifies a company’s borrowing base periodically, SABL provides a real time capability toanalyze and adjust borrowing availability based on actual collateral levels. SABL is predicated on alink between any kind of accounting software used by the customer and Sonabank’s server.TABLE OF CONTENTS3st • Maintain Local Decision-Making and Accountability . We believe that we have a competitive advantageover larger national and regional financial institutions by providing superior customer service withexperienced, knowledgeable management, localized decision-making capabilities and prompt creditdecisions. We believe that our customers want to deal directly with the persons who make the creditdecisions.• Focus on Asset Quality and Strong Underwriting . We consider asset quality to be of primaryimportance and have taken measures in an effort to ensure that, despite the growth in our loan portfolio,we maintain strong asset quality through strong underwriting standards.• Build a Stable Core Deposit Base . We intend to continue to grow a stable core deposit base of businessand retail customers. To the extent that our asset growth outpaces this local deposit funding source, weplan to continue to borrow and raise deposits in the national market using deposit intermediaries. Weintend to continue our practice of developing a deposit relationship with each of our loan customers.TABLE OF CONTENTSGeneralOur principal business is the acquisition of deposits from the general public through our branch offices anddeposit intermediaries and the use of these deposits to fund our loan and investment portfolios. We seek to be a fullservice community bank that provides a wide variety of financial services to our middle market corporate clients aswell as to our retail clients. We are an active commercial lender, have been designated as a “Preferred SBA Lender”and participate in the Virginia Small Business Financing Authority lending program. In addition, we are an activecommercial real estate lender. We also invest funds in mortgage-backed securities, collateralized mortgageobligations, securities issued by agencies of the federal government, obligations of states and political subdivisionsand pooled trust preferred securities.The principal sources of funds for our lending and investment activities are deposits, repayment of loans,prepayments from mortgage-backed securities, repayments of maturing investment securities, Federal Home LoanBank advances and other borrowed money.Principal sources of revenue are interest and fees on loans and investment securities, as well as fee incomederived from the maintenance of deposit accounts and income from bank-owned life insurance policies. Ourprincipal expenses include interest paid on deposits and advances from the Federal Home Loan Bank of Atlanta(“FHLB”) and other borrowings, and operating expenses.Available InformationSouthern National files annual, quarterly and other reports under the Securities Exchange Act of 1934, asamended, with the SEC. These reports are posted and are available at no cost on our website, www.sonabank.com,through the Investor Relations link, as soon as reasonably practicable after we file such documents with the SEC.Our filings are also available through the SEC’s website at www.sec.gov.Lending ActivitiesOur primary strategic objective is to serve small to medium-sized businesses in our market with a variety ofunique and useful services, including a full array of commercial mortgage and non-mortgage loans. These loansinclude commercial real estate loans, construction to permanent loans, development and builder loans, accountsreceivable financing, lines of credit, equipment and vehicle loans, leasing, and commercial overdraft protection. Westrive to do business in the areas served by our branches, which is also where our marketing is focused, and the vastmajority of our loan customers are located in existing market areas. Virtually all of our loans are with borrowers inVirginia, Maryland, West Virginia, or Washington D.C. The Small Business Administration may from time to timecome to us because of our reputation and expertise as an SBA lender and ask us to review a loan outside of our corecounties but within our market area. Prior to making a loan, we obtain loan applications to determine a borrower’sability to repay, and the more significant items on these applications are verified through the use of credit reports,financial statements and confirmations.4TABLE OF CONTENTSThe following is a discussion of each of the major types of lending. For more information on our lendingactivities, see “Item 7. Management’s Discussion and Analysis of Financial Condition.”Commercial Real Estate LendingPermanent. Commercial real estate lending includes loans for permanent financing. Commercial real estatelending typically involves higher loan principal amounts and the repayment of loans is dependent, in large part, onsufficient income from the properties securing the loans to cover operating expenses and debt service. As a generalpractice, we require our commercial real estate loans to be secured by well-managed income producing propertieswith adequate margins and to be guaranteed by responsible parties. We look for opportunities where cash flow fromthe collateral properties provides adequate debt service coverage and the guarantor’s net worth is strong. AtDecember 31, 2016, our commercial real estate loans for permanent financing including multi-family residentialloans and loans secured by farmland totaled $465.0 million, of which $10.4 million was acquired in the HarVesttransaction, $4.7 million was acquired in the Greater Atlantic transaction, and $2.9 million was acquired in thePGFSB transaction. Owner occupied commercial real estate loans totaled $154.8 million.Our underwriting guidelines for commercial real estate loans reflect all relevant credit factors, including,among other things, the income generated from the underlying property to adequately service the debt, theavailability of secondary sources of repayment and the overall creditworthiness of the borrower. In addition, welook to the value of the collateral, while maintaining the level of equity invested by the borrower.All valuations on property which will secure loans over $250 thousand are performed by independent outsideappraisers who are reviewed by our executive vice president of risk management and/or our appraisal reviewer. Weretain a valid lien on real estate and obtain a title insurance policy (on first trust loans only) that insures the propertyis free of encumbrances. In addition, we do title searches on all loans secured by real estate.Construction. We recognize that construction loans for commercial, multifamily and other non-residentialproperties can involve risk due to the length of time it may take to bring a finished real estate product to market. Asa result, we will only make these types of loans when pre-leasing or pre-sales or other credit factors suggest that theborrower can carry the debt if the anticipated market and property cash flow projections change during theconstruction phase.Income producing property loans are supported by evidence of the borrower’s capacity to service the debt. Allof our commercial construction loans are guaranteed by the principals or general partners. At December 31, 2016,we had $91.1 million of construction, land and development loans, of which $3.5 million was acquired in theHarVest transaction and $1.2 million was acquired in the PGFSB transaction.Construction loan borrowers are generally pre-qualified for the permanent loan by us or a third party. Weobtain a copy of the contract with the general contractor who must be acceptable to us. All plans, specifications andsurveys must include proposed improvements. We review feasibility studies and risk analyses showing sensitivity ofthe project to variables such as interest rates, vacancy rates, lease rates and operating expenses.Commercial Business LendingThese loans consist of lines of credit, revolving credit facilities, demand loans, term loans, equipment loans,SBA loans, stand-by letters of credit and unsecured loans. Commercial business loans are generally secured byaccounts receivable, equipment, inventory and other collateral, such as readily marketable stocks and bonds withadequate margins, cash value in life insurance policies and savings and time deposits at Sonabank. At December 31,2016, our commercial business loans totaled $115.4 million, of which $2.1 million was acquired in the HarVesttransaction, $540 thousand was acquired in the Greater Atlantic transaction and $116 thousand was acquired in thePGFSB transaction.In general, commercial business loans involve more credit risk than residential mortgage loans and real estate-backed commercial loans and, therefore, usually yield a higher return to us. The increased risk for commercialbusiness loans is due to the type of collateral securing these loans. The increased risk also5TABLE OF CONTENTSderives from the expectation that commercial loans will be serviced principally from the operations of the business,and that those operations may not be successful. Historical trends have shown that these types of loans do havehigher delinquencies than mortgage loans. Because of this, we often utilize the SBA 7(a) program (which guaranteesthe repayment of up to 90% of the principal and accrued interest to us) to reduce the inherent risk associated withcommercial business lending.Another way that we reduce risk in the commercial loan portfolio is by taking accounts receivable as collateralusing our SABL system. Our accounts receivable financing facilities, which provide a relatively high yield withconsiderable collateral control, are lines of credit under which a company can borrow up to the amount of aborrowing base which covers a certain percentage of the company’s receivables. From our customer’s point of view,accounts receivable financing is an efficient way to finance expanding operations because borrowing capacityexpands as sales increase. Customers can borrow from 75% to 90% of qualified receivables. In most cases, theborrower’s customers pay us directly. For borrowers with a good track record for earnings and quality receivables,we will consider pricing based on an increment above the prime rate for transactions in which we lend up to apercentage of qualified outstanding receivables based on reported aging of the receivables portfolio.We also actively pursue for our customers equipment lease financing opportunities. We provide financing anduse a third party to service the leases. Payment is derived from the cash flow of the borrower, so credit quality maynot be any lower than it would be in the case of an unsecured loan for a similar amount and term.SBA LendingWe have developed an expertise in the federally guaranteed SBA program. The SBA program is an economicdevelopment program which finances the expansion of small businesses. We are a Preferred Lender in theWashington D.C. and Richmond Districts of the SBA. As an SBA Preferred Lender, our pre-approved status allowsus to quickly respond to customers’ needs. Under the SBA program, we originate and fund SBA 7(a) loans whichqualify for guarantees up to 90% of principal and accrued interest. We also originate 504 chapter loans in which wegenerally provide 50% of the financing, taking a first lien on the real property as collateral.We provide SBA loans to potential borrowers who are proposing a business venture, often with existing cashflow and a reasonable chance of success. We do not treat the SBA guarantee as a substitute for a borrower meetingour credit standards, and, except for minimum capital levels or maximum loan terms, the borrower must meet ourother credit standards as applicable to loans outside the SBA process.Residential Mortgage LendingPermanent. Our business model generally does not include originating permanent residential mortgageloans. We do it only on a case-by-case basis. In the case of conventional loans, we typically lend up to 80% of theappraised value of single-family residences and require mortgage insurance for loans exceeding that amount. Wehave no sub-prime loans.On May 15, 2014, we purchased a 44% equity investment and preferred stock of STM, a regional mortgagebanking company headquartered in Virginia Beach. STM has mortgage banking originators in Virginia, Maryland,North Carolina, South Carolina, Delaware and Pennsylvania. Southern Trust Mortgage only originates retailmortgage production.Sonabank has established with STM underwriting guidelines under which it will purchase residentialconstruction only, construction loans that convert to permanent, and permanent loans primarily in its Virginia andMaryland footprint from STM. These will be largely loans that do not conform to FNMA or FHLMC standardsbecause of size or acreage. We purchased loans in an aggregate amount of  $77.4 million during 2016, $2.9 millionof which were construction or construction permanent loans.We retain a valid lien on real estate and obtain a title insurance policy that ensures that the property is free ofencumbrances. We also require hazard insurance and flood insurance for all loans secured by real property if thereal property is in a flood plain as designated by the Department of Housing and Urban Development. We alsorequire most borrowers to advance funds on a monthly basis from which we make disbursements for items such asreal estate taxes, private mortgage insurance and hazard insurance.6TABLE OF CONTENTSHome Equity Lines of Credit. Sonabank rarely originates home equity lines of credit. At December 31,2016, we had outstanding balances totaling $29.2 million, of which $17.7 million were acquired in the GreaterAtlantic transaction and $2.3 million were acquired in the PGFSB transaction.Consumer LendingTo a limited extent, we offer various types of secured and unsecured consumer loans. We make consumer loansprimarily for personal, family or household purposes as a convenience to our customer base since these loans are notthe focus of our lending activities. As a general guideline, a consumer’s debt service should not exceed 40% of hisgross income or 45% of net income. For purposes of this calculation, debt includes house payment or rent, fixedinstallment payments, the estimated payment for the loan being requested and the minimum required payment onany revolving debt. At December 31, 2016, we had $856 thousand of consumer loans outstanding.Credit Approval and Collection PoliciesBecause future loan losses are so closely intertwined with our underwriting policy, we have instituted whatmanagement believes is a stringent loan underwriting policy. Our underwriting guidelines are tailored for particularcredit types, including lines of credit, revolving credit facilities, demand loans, term loans, equipment loans, realestate loans, SBA loans, stand-by letters of credit and unsecured loans. We will make extensions of credit based,among other factors, on the potential borrower’s creditworthiness, likelihood of repayment and proximity to marketareas served.We have a standing Credit Committee comprised of certain officers, each of whom has a defined lendingauthority in combination with other officers. These individual lending authorities are determined by our ChiefExecutive Officer and certain directors and are based on the individual’s technical ability and experience. Theseauthorities must be approved by our board of directors and our Credit Committee. Our Credit Committee iscomprised of four levels of members: junior, regular, senior, and executive, based on experience. Our executivemembers are Ms. Derrico and Messrs. Porter and Baker. Mr. Stevens, Chief Risk Officer, must approve risk ratingsfor loans over $1.5 million, as well as exceptions to the Credit Policy. Loans over a certain size must be approved bythe full Board of Directors or the Credit Committee plus two outside directors. Under our loan approval process, thesponsoring loan officer’s approval is required on all credit submissions. This approval must be included in or addedto the individual and joining authorities outlined below. The sponsoring loan officer is primarily responsible for thecustomer’s relationship with us, including, among other things, obtaining and maintaining adequate credit fileinformation. We require each loan officer to maintain loan files in an order and detail that would enable adisinterested third party to review the file and determine the current status and quality of the credit.In addition to the approval of the sponsoring loan officer, we require approvals from one or more members ofthe Credit Committee on all loans. The approvals required differ based on the size of the borrowing relationship. Atleast one senior or one executive member must approve all loans in the amount of  $350 thousand or more. All threeof the executive members of the committee must approve all loans of $1 million or more. Regardless of the numberof approvals needed, we encourage each member not to rely on another member’s approval as a basis for approvaland to treat his approval as if it were the only approval necessary to approve the loan. Our legal lending limit to oneborrower is 15% of our unimpaired capital and surplus. As of December 31, 2016, our legal lending limit wasapproximately $18.5 million. Our largest group credit as of December 31, 2016, was approximately $16.9 million.The following collection actions are the minimal procedures which management believes are necessary toproperly monitor past due loans and leases. When a borrower fails to make a payment, we contact the borrower inperson, in writing or on the telephone. At a minimum, all borrowers are notified by mail when payments of principaland/or interest are 10 days past due. Real estate and commercial loan borrowers are assessed a late charge whenpayments are 10-15 days past due. Customers are contacted by a loan officer before the loan becomes 60 daysdelinquent. After 90 days, if the loan has not been brought current or an acceptable arrangement is not worked outwith the borrower, we will institute measures to remedy the default, including commencing foreclosure action withrespect to mortgage loans and repossessions of collateral in the case of consumer loans.7• Investment/sweep accounts• Wire Transfer services• Employer Services/Payroll processing services• Zero balance accounts• Night depository services• Lockbox services• Depository transfers• Merchant services (third party)• ACH originations• Business debit cards• Controlled disbursement accounts• SONA 24/7 (Check 21 processing)• Sonabank asset based lending (SABL)• Mobiliti, a mobile banking application for personal and business accounts• SONA 24/7/Check 21: SONA 24/7 is ideal for landlords, property managers, medical professionals,and any other businesses that accept checks. Now the customers of Sonabank can have total control overhow, when, and where their checks will be deposited. SONA 24/7 uses the Check Truncation technologyoutlined by the “Check Clearing for the 21st Century Act”, passed in October 2004 (Check 21). WithCheck Truncation, paper checks can now be converted to electronic images and processed betweenparticipating banks, vastly speeding up the check clearing process. SONA In-House passes on the benefitsof Check Truncation directly to Sonabank’s business customers.• Lockbox Services: Sonabank will open a lockbox, retrieve and scan incoming checks, and deposit themdirectly into the customer’s account. The images of the checks will then be available to view online. Thismakes bookkeeping for the customer fast and easy, and because Sonabank is checking the lockbox daily,funds will often be available sooner. Big businesses have been using lockboxes for decades as a cashmanagement tool. Sonabank makes this service cost effective for all small and medium sized businessesas well.TABLE OF CONTENTSIf foreclosure is effected, the property is sold at a public auction in which we may participate as a bidder. If weare the successful bidder, we include the acquired real estate property in our real estate owned account until it issold. These assets are initially recorded at fair value net of estimated selling costs. To the extent there is asubsequent decline in fair value, that amount is charged to operating expense. At December 31, 2016, we had otherreal estate owned totaling $8.6 million, none of which resulted from foreclosures on loans that were acquired in theGreater Atlantic transaction.Special Products and ServicesTo complement our array of loans, we also provide the following special products and services to ourcommercial customers:Cash Management ServicesCash Management services are offered that enable the Bank’s business customers to maximize the efficiency oftheir cash management. Specific products offered in our cash management services program include the following:Some of the products listed above are described in-depth below.8• Employer Services: Sonabank will provide its business clients with software that allows them togenerate ACH payroll transactions to their employees’ accounts.• SABL: Asset Based Lending is a form of  “collateral-based” lending. It is a combination of securedlending and short-term business lending. It is a specialized form of financing that allows a bank’scommercial customers to pledge their working assets, typically accounts receivable and, to a lesser extent,inventory, as collateral to secure financing. Asset Based Lending borrowers are typically in the service,manufacturing or distribution fields.• Mobiliti: Sona Mobile is perfect for customers on the go, as it is available on a large variety of devicesand networks. Sona Mobile offers easy access to account balances, transactions and internal transfers.Mobile Deposit will allow customers to save time by eliminating the need to visit a branch. The customercan deposit a check through Sona Mobile by using their certified device (up to $2,000).• Other Consumer/Retail Products and Services. Other products and services that are offered by theBank are primarily directed toward the individual customer and include the following:• Debit cards• ATM services• Travelers Checks• Notary service in some branches• Wire transfers• Online banking with bill payment services• Credit CardsTABLE OF CONTENTSSABL is an Asset Based Lending software system built by Sonabank that allows the bank to monitor thecollateral of its commercial borrowers who have pledged their working assets (accounts receivables and otherqualifying assets such as inventory) as collateral. SABL has the ability to track other offsets (liabilities, e.g. otherloans the customer has with the bank) to the line of credit. SABL serves to provide the more stringent controls andsupervision that this type of lending requires.One control that is typical of Asset Based Lending is that the commercial borrower is required to have itscustomers remit invoice payments to a bank controlled lockbox. The bank retrieves these payments and the bankapplies them directly to any outstanding balance on the line. SABL allows for this and can combine that service withremote capture (Check 21) if warranted.Most Asset Based Lending systems are manual processes or software that certifies the borrowing baseperiodically. These certifications are usually provided in the form of manually created borrowing bases backed upwith field exams. SABL provides a real time capability to analyze and adjust borrowing availability based on thelevels of collateral at the moment.SABL also offers an automated collateral upload, taking receivable information directly from the clientsaccounting system. SABL also offers discretionary borrowings and pay offs, allowing clients to borrow on or paydown their line at their discretion, as long as they are compliant with the SABL system. Lastly, SABL offerssuperior reporting, offering reports to bank officers that provide all the information they need to monitor risk.Customized reports can also be built for clients.Sona Business Mobile can help business customers manage their finances faster than ever. Customers haveaccess to their information via a wide range of devices and networks. The shared user credentials and securitysettings between online and mobile banking make access more efficient for the business customer. Sona BusinessMobile offers standard online banking features, along with enhanced features such as ACH & Wire transferprocessing, including granting approvals to users to complete those processes. Mobile deposit is a time saving toolthat will allow business customers to deposit checks through Sona Business Mobile from their certified device (upto $5,000).9• emphasizing customer service and technology;• establishing long-term customer relationships and building customer loyalty; and• providing products and services designed to address the specific needs of our customers.• banking, managing or controlling banks;TABLE OF CONTENTSCompetitionThe banking business is highly competitive, and our profitability depends principally on our ability to competein the market areas in which our banking operations are located. We experience substantial competition in attractingand retaining savings deposits and in lending funds. The primary factors we encounter in competing for savingsdeposits are convenient office locations and rates offered. Direct competition for savings deposits comes from othercommercial bank and thrift institutions, money market mutual funds and corporate and government securities whichmay offer more attractive rates than insured depository institutions are willing to pay. The primary factors weencounter in competing for loans include, among others, interest rate and loan origination fees and the range ofservices offered. Competition for origination of loans normally comes from other commercial banks, thriftinstitutions, mortgage bankers, mortgage brokers and insurance companies. We have been able to competeeffectively with other financial institutions by:EmployeesAt December 31, 2016, we had 162 full-time equivalent employees, five of whom were executive officers.Management considers its relations with its employees to be good. Neither we nor Sonabank are a party to anycollective bargaining agreement.SUPERVISION AND REGULATIONThe business of Southern National and the Bank are subject to extensive regulation and supervision underfederal and state banking laws and other federal and state laws and regulations, including primary oversight by theBoard of Governors of the Federal Reserve System and secondary oversight by the Bureau of Financial Institutions,a regulatory division of the Virginia State Corporation Commission (“VBFI”), and possibly other authorities. Ingeneral, these laws and regulations are intended for the protection of the customers and depositors of the Bank andnot for the protection of Southern National or its shareholders. Set forth below are brief descriptions of selected lawsand regulations applicable to Southern National and the Bank. These descriptions are not intended to be acomprehensive description of all laws and regulations to which Southern National and the Bank are subject or to becomplete descriptions of the laws and regulations discussed. The descriptions of statutory and regulatory provisionsare qualified in their entirety by reference to the particular statutes and regulations.The earnings of the Bank and therefore of Southern National are affected by general economic conditions,changes in federal and state laws and regulations and actions of various regulatory authorities, including thosereferenced above. Additional changes to the laws and regulations applicable to us are frequently proposed at boththe federal and state levels. The regulatory framework under which we operate has and may continue to changesubstantially as the result of the enactment of the Dodd-Frank Act. The Dodd-Frank Act represents a significantoverhaul of many aspects of the regulation of the financial services industry, addressing, among other things,systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection, interchange fees,derivatives, lending limits, mortgage lending practices, registration of investment advisors and changes among thebank regulatory agencies. Changes in applicable statutes, regulations or regulatory policy may have a material effecton Southern National, the Bank and their business.Federal Reserve Board Oversight, including the Bank Holding Company Act of 1956. Under the BankHolding Company Act of 1956, as amended (“BHCA”), we are subject to periodic examination by the FederalReserve Board (“FRB”) and required to file periodic reports regarding our operations and any additionalinformation that the FRB may require. Our activities at the bank holding company level are limited to:10• furnishing services to or performing services for our bank subsidiary; and• engaging in other activities that the FRB has determined by regulation or order to be so closely related tobanking as to be a proper incident to these activities.TABLE OF CONTENTSSome of the activities that the FRB has determined by regulation to be proper incidents to the business of abank holding company include making or servicing loans and specific types of leases, performing specific dataprocessing services and acting in some circumstances as a fiduciary or investment or financial adviser. SouthernNational does not currently plan to perform any of these activities, but may do so in the future.With some limited exceptions, the BHCA requires every bank holding company to obtain the prior approval ofthe FRB before: (i) acquiring substantially all the assets of any bank; (ii) acquiring direct or indirect ownership orcontrol of any voting shares of any bank if after such acquisition it would own or control more than 5% of the votingshares of such bank (unless it already owns or controls the majority of such shares); or (iii) merging or consolidatingwith another bank holding company. In approving bank acquisitions by bank holding companies, the FRB isrequired to consider, among other things, the financial and managerial resources and future prospects of the bankholding company and the banks concerned, the convenience and needs of the communities to be served, and variouscompetitive factors.In addition, and subject to some exceptions, the BHCA and the Change in Bank Control Act, together withtheir regulations, require FRB approval prior to any person or company acquiring “control” of a bank holdingcompany. Control is conclusively presumed to exist if an individual or company acquires 25% (5% in the case of anacquirer that is a bank holding company) or more of any class of voting securities of the bank holding company.Control is rebuttably presumed to exist if a person acquires 10% or more, of any class of voting securities and eitherhas registered securities under Section 12 of the Exchange Act or no other person owns a greater percentage of thatclass of voting securities immediately after the transaction. The regulations provide a procedure for challenging thisrebuttable control presumption. On September 22, 2008, the FRB issued a policy statement on equity investments inbank holding companies and banks, which allows the FRB to generally be able to conclude that an entity’sinvestment is not “controlling” if the entity does not own in excess of 15% of the voting power and 33% of the totalequity of the bank holding company or bank.In November 1999, Congress enacted the Gramm-Leach-Bliley Act (“GLBA”), which made substantialrevisions to the statutory restrictions separating banking activities from other financial activities. Under the GLBA,as amended, bank holding companies, together with their bank subsidiaries, that are well-capitalized under theprompt-corrective-action provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991(“FDICIA”) and well-managed under applicable FRB regulations and meet other conditions can elect to become“financial holding companies” and engage in certain activities that are not permissible for a bank holding company.As financial holding companies, they and their subsidiaries are permitted to acquire or engage in previouslyimpermissible activities such as insurance underwriting, securities underwriting and distribution, insurance agencyactivities, merchant banking and other activities that the FRB determines to be financial in nature or complementaryto these activities. Although Southern National has not elected to become a financial holding company in order toexercise the broader activity powers provided by the GLBA, we may elect to do so in the future.In addition, as a member of the Federal Reserve System, the Bank is also subject to primary federal oversightby the FRB, as well as secondary oversight by the VBFI and the Bureau. Notably, the discussions below are relevantto both Southern National and the Bank.Bank Permitted Activities and Investments. The activities and investments of state member banks aregenerally limited to those permissible under applicable state law. In addition, under the Federal Deposit InsuranceAct (“FDIA”), a state member bank may not engage in any activity that is not permissible for a national bank unlessthe appropriate bank regulator determines that the activity does not pose a significant risk to the Deposit InsuranceFund (“DIF”) and that the bank meets its minimum capital requirements.11• Created a new regulatory authority, the Consumer Financial Protection Bureau (the “Bureau”),responsible for implementing, examining and enforcing compliance with federal consumer financial laws;• Established new regulatory capital requirements, including changes to leverage and risk-based capitalstandards and changes to the components of permissible tiered capital;• Broadened the base for FDIC insurance assessments from the amount of insured deposits to average totalconsolidated assets less average tangible equity during the assessment period;• Permanently increased FDIC deposit insurance to $250,000;• Permitted banks to engage in de novo interstate branching if the laws of the state where the new branch isto be established would permit the establishment of the branch if it were chartered by such state;• Repealed the federal prohibitions on the payment of interest on demand deposits, thereby permittingdepository institutions to pay interest on business transaction and other accounts;• Required financial holding companies to be well capitalized and well managed as of July 21, 2011. Bankholding companies and banks must also be both well capitalized and well managed in order to acquirebanks located outside their home state;• Eliminated the ceiling on the size of the DIF and increased the floor of the size of the DIF;• Added new limitations on federal preemption;• Imposed new prohibitions and restrictions on the ability of a banking entity to engage in proprietarytrading for its own account and have certain interests in, or relationships with, certain unregistered hedgefunds, private equity funds and commodity pools (together, “covered funds”);• Required that sponsors of asset-backed securities retain a percentage of the credit risk underlying thesecurities;• Required banking regulators to remove references to and requirements of reliance upon credit ratingsfrom their regulations and replace them with appropriate alternatives for evaluating creditworthiness;• Implemented corporate governance revisions, including with regard to executive compensation and proxyaccess by shareholders, that apply to all public companies, not just financial institutions;• Amended the Electronic Fund Transfer Act which, among other things, gave the FRB the authority toestablish rules regarding interchange fees charged for electronic debit transactions by payment cardissuers having assets over $10 billion and to enforce a new statutory requirement that such fees bereasonable and proportional to the actual cost of a transaction to the issuer; and• Increased the authority of the FRB to examine us and our non-bank subsidiaries.TABLE OF CONTENTSDodd-Frank Wall Street Reform and Consumer Protection Act. In July 2010, Congress enacted theDodd-Frank Act regulatory reform legislation, which the President signed into law on July 21, 2010. The Dodd-Frank Act broadly affects the financial services industry by implementing changes to the financial regulatorylandscape aimed at strengthening the sound operation of the financial services sector, including provisions that,among other things:As stated above, the Dodd-Frank Act created the Bureau, a new federal regulatory body with broad authority toregulate the offering and provision of consumer financial products. The authority of the Bureau to supervise andexamine depository institutions with $10 billion or less in assets for compliance with federal consumer laws remainslargely with those institutions’ primary regulators. However, the Bureau may participate in examinations ofinstitutions with $10 billion or less in assets on a “sampling basis” and may refer potential enforcement actionsagainst such institutions to their primary regulators. Accordingly, the Bureau may participate in examinations of theBank, and could supervise and examine other direct or indirect subsidiaries of Southern National that offerconsumer financial products.12TABLE OF CONTENTSSome of these and other major changes could materially impact the profitability of our business, the value ofassets we hold or the collateral available for our loans, require changes to business practices, or force us todiscontinue businesses and expose us to additional costs, taxes, liabilities, enforcement actions and reputational risk.While many of the requirements called for in the Dodd-Frank Act have been implemented, others will continue tobe implemented over time. In light of these significant changes and the discretion afforded to federal regulators, wecannot fully predict the effect that compliance with the Dodd-Frank Act or any implementing regulations will haveon our businesses or ability to pursue future business opportunities. Additional regulations resulting from the Dodd-Frank Act may materially adversely affect our business, financial condition or results of operations.Deposit Insurance. Substantially all of the deposits of the Bank are insured up to applicable limits by theDIF of the FDIC and the Bank must pay deposit insurance assessments to the FDIC for such deposit insuranceprotection. The FDIC maintains the DIF by designating a required reserve ratio. If the reserve ratio falls below thedesignated level, the FDIC must adopt a restoration plan that provides that the DIF will return to an acceptable levelgenerally within 5 years. The DIF reserve ratio is maintained by assessing depository institutions an insurancepremium based upon statutory factors, including the degree of risk the institution poses to the DIF.The Dodd-Frank Act amended the statutory regime governing the DIF. Among other things, the Dodd-FrankAct established a minimum designated reserve ratio (“DRR”) of 1.35 percent of estimated insured deposits, requiredthat the fund reserve ratio reach 1.35 percent by September 30, 2020 and directed the FDIC to amend its regulationsto redefine the assessment base used for calculating deposit insurance assessments. Specifically, the Dodd-FrankAct requires the assessment base to be an amount equal to the average consolidated total assets of the insureddepository institution during the assessment period, minus the sum of the average tangible equity of the insureddepository institution during the assessment period and an amount the FDIC determines is necessary to establishassessments consistent with the risk-based assessment system found in the FDIA.On February 7, 2011, the FDIC approved a final rule that amended its existing DIF restoration plan andimplemented certain provisions of the Dodd-Frank Act. This rule, which took effect April 1, 2011, changed theFDIC’s assessment system from one based on domestic deposits to one based on the average consolidated totalassets of a bank minus its average tangible equity during each quarter. Under the FDIC’s risk-based assessmentsystem, insured institutions are assigned to risk categories based on supervisory evaluations, regulatory capitallevels and certain other factors. The FDIC’s current system represents a change, required by the Dodd-Frank Act,from its prior practice of basing the assessment on an institution’s aggregate deposits. In August 2016, the FDICannounced that the DIF reserve ratio had surpassed 1.15% as of June 30, 2016. As a result, beginning in the thirdquarter of 2016, the range of initial assessment rates for all institutions were adjustment downward such that theinitial annual base deposit insurance assessment rate ranges from 3 to 30 basis points. After the effect of potentialbase-rate adjustments, the total annual base assessment rate could range from 1.5 to 40 basis points. In March 2016,the FDIC adopted a final rule to increase the reserve ratio for the DIF to 1.35% of total insured deposits.Safety and Soundness. There are a number of obligations and restrictions imposed on bank holdingcompanies and their depository institution subsidiaries by federal law and regulatory policy that are designed toreduce potential loss exposure to the depositors of such depository institutions and to the DIF in the event that thedepository institution is insolvent or is in danger of becoming insolvent. These obligations and restrictions are notfor the benefit of investors. The FRB’s Regulation Y, for example, requires a holding company that is not well-capitalized to give the FRB prior notice of any redemption or repurchase of its own equity securities, if theconsideration to be paid, together with the consideration paid for any repurchases or redemptions in the precedingyear, is equal to 10% or more of the holding company’s consolidated net worth. The FRB may oppose thetransaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any lawor regulation.Regulators may pursue an administrative action against any bank holding company or state member bankwhich violates the law, engages in an unsafe or unsound banking practice or which is about to engage in an unsafeand unsound banking practice. The administrative action could take the form of a cease and desist proceeding, aremoval action against the responsible individuals or, in the case of a violation of law13• 4.5 percent CET1 to risk-weighted assets.• 6.0 percent Tier 1 Capital to risk-weighted assets.• 8.0 percent Total Capital to risk-weighted assets.• 4.0 percent Tier 1 capital to average consolidated assets as reported on consolidated financial statements(known as the “leverage ratio”).TABLE OF CONTENTSor unsafe and unsound banking practice, a civil penalty action. A cease and desist order, in addition to prohibitingcertain action, could also require that certain action be undertaken. Under the policies of the FRB, Southern Nationalis required to serve as a source of financial strength to the Bank and to commit resources to support the Bank incircumstances where Southern National might not do so otherwise. Notably, the Dodd-Frank Act codified the FRB’s“source of strength” doctrine. In addition to the foregoing requirements, the Dodd-Frank Act’s new provisionsauthorize the FRB to require a company that directly or indirectly controls a bank to submit reports that are designedboth to assess the ability of such company to comply with its “source of strength” obligations and to enforce thecompany’s compliance with these obligations. The FRB and other federal banking regulators have not yet issuedrules implementing this requirement.Capital Adequacy Requirements. The regulatory capital framework has recently changed as a result of theDodd-Frank Act and a separate, international capital initiative known as “Basel III.” Regulators recently issued rulesimplementing these requirements (“Revised Capital Rules”). Among other things, the Revised Capital Rules raisethe minimum thresholds for required capital and revise certain aspects of the definitions and elements of the capitalthat can be used to satisfy these required minimum thresholds. While the rules became effective on January 1, 2014for certain large banking organizations, most banking organizations, including Southern National and the Bank,were required to begin complying with these new requirements on January 1, 2015.The Revised Capital Rules, among other things, (i) introduce as a new capital measure called “Common EquityTier 1” (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instrumentsmeeting specified requirements, (iii) define CET1 narrowly by requiring that most adjustments to regulatory capitalmeasures be made to CET1 and not to the other components of capital and (iv) expand the scope of the adjustmentsas compared to existing regulations. Further, the Revised Capital Rules set forth the following minimum capitalratios, which began to phase in for certain banking organizations, including Southern National, on January 1, 2015:The Revised Capital Rules also introduce a minimum “capital conservation buffer” equal to 2.5% of anorganization’s total risk-weighted assets, which exists in addition to the required minimum asset ratios identifiedabove. The “capital conservation buffer” must consist entirely of CET1 and is designed to absorb losses duringperiods of economic stress. Thus, when fully phased in on January 1, 2019, the Revised Capital Rules will requireus to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capitalconservation buffer” (resulting in an effective minimum ratio of CET1 to risk-weighted assets of at least 7%), (ii) aminimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer(resulting in an effective minimum Tier 1 capital ratio of 8.5%), (iii) a minimum ratio of total (that is, Tier 1 plusTier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (resulting in an effectiveminimum total capital ratio of 10.5%) and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1capital to average assets.Under the Revised Capital Rules, for most banking organizations, the most common form of Additional Tier 1capital will be non-cumulative perpetual preferred stock, and the most common form of Tier 2 capital will besubordinated notes and a portion of the allocation for loan losses, in each case, subject to certain specificrequirements set forth in the regulation. Under the capital standards that applied prior to January 1, 2015, the effectsof accumulated other comprehensive income items included in shareholders’ equity under U.S. GAAP are excludedfor the purposes of determining capital ratios. Under the Revised Capital Rules, the effects of certain accumulatedother comprehensive items are not excluded. However, the Revised Capital Rules permit most bankingorganizations to make a one-time election to continue to exclude these items. This election was made when we filedthe first of certain periodic regulatory reports after January 1, 2015.14• “well capitalized” — Under the Revised Capital Rules, a well capitalized institution is one that (i) has atotal risk-based capital ratio of 10 percent or greater, (ii) has a Tier 1 risk-based capital ratio of 8 percentor greater, (iii) has a CET1 capital ratio of 6.5 percent or greater, (iv) has a leverage capital ratio of 5percent or greater and (v) is not subject to any order or written directive to meet and maintain a specificcapital level for any capital measure.• “adequately capitalized” — Under the Revised Capital Rules, an adequately capitalized depositoryinstitution is one that has (i) a total risk based capital ratio of 8 percent or more, (ii) a Tier 1 capital ratioof 6 percent or more, (iii) a CET1 capital ratio of 4.5 percent or more, and (iv) a leverage ratio of 4percent or more.• “undercapitalized” — Under the Revised Capital Rules, an undercapitalized depository institution is onethat has (i) a total capital ratio of less than 8 percent, (ii) a Tier 1 capital ratio of less than 6 percent, (iii) aCET1 capital ratio of less than 4.5 percent, or (iv) a leverage ratio of less than 4 percent.• “significantly undercapitalized” — Under the Revised Capital Rules, a significantly undercapitalizedinstitution is one that has (i) a total risk-based capital ratio of less than 6 percent (ii) a Tier 1 capital ratioof less than 4 percent, (iii) a CET1 ratio of less than 3 percent or (iv) a leverage capital ratio of less than 3percent.• “critically undercapitalized” — An insured depository institution is critically undercapitalized if itstangible equity is equal to or less than 2% of tangible assets. The Revised Capital Rules made certainchanges to the framework for calculating an institution’s ratio of tangible equity to total assets.TABLE OF CONTENTSIn addition, under the Revised Capital Rules, certain hybrid securities, such as trust preferred securities,generally do not qualify as Tier 1 capital. However for bank holding companies that had assets of less than $15billion as of December 31, 2009, trust preferred securities issued prior to May 19, 2010 can be treated as Tier 1capital to the extent that they do not exceed 25% of Tier 1 capital after the application of capital deductions andadjustments.Prompt Corrective Action. Under Section 38 of the FDIA, each federal banking agency is required toimplement a system of prompt corrective action for institutions that it regulates. The federal banking agencies(including the FRB) have adopted substantially similar regulations to implement Section 38 of the FDIA. Section 38of the FDIA and the regulations promulgated thereunder also specify circumstances under which the FDIC mayreclassify a well-capitalized bank as adequately capitalized and may require an adequately capitalized bank or anundercapitalized bank to comply with supervisory actions as if it were in the next lower category (except that theFDIC may not reclassify a significantly undercapitalized bank as critically undercapitalized). The thresholds foreach of these categories were recently revised pursuant to the Revised Capital Rules, which are discussed above.These revised categories began to apply to the Bank on January 1, 2015.Under these regulations, insured state banks are assigned to one of the following capital categories:The FRB may take various corrective actions against any undercapitalized bank and any bank that fails tosubmit an acceptable capital restoration plan or fails to implement a plan accepted by the FRB. These powersinclude, but are not limited to, requiring the institution to be recapitalized, prohibiting asset growth, restrictinginterest rates paid, requiring prior approval of capital distributions by any bank holding company that controls theinstitution, requiring divestiture by the institution of its subsidiaries or by the holding company of the institutionitself, requiring a new election of directors, and requiring the dismissal of directors and officers.If certain criteria are met, the aggregate liability of the holding company of an undercapitalized bank is limitedto the lesser of 5% of the institution’s total assets at the time it became undercapitalized or the amount necessary tocause the institution to be “adequately capitalized.” The bank regulators have greater power in situations where aninstitution becomes “significantly” or “critically” undercapitalized or fails to submit a capital restoration plan. Forexample, a bank holding company controlling such an institution can be required to obtain prior FRB approval ofproposed dividends, or might be required to consent to a consolidation or to divest the troubled institution or otheraffiliates.15TABLE OF CONTENTSBrokered Deposit Restrictions. Adequately capitalized institutions (as defined for purposes of the promptcorrective action rules described above) cannot accept, renew or roll over brokered deposits except with a waiverfrom the FDIC, and are subject to restrictions on the interest rates that can be paid on such deposits.Undercapitalized institutions may not accept, renew, or roll over brokered deposits.Volcker Rule. In December 2013, federal regulators, including the FRB, issued final rules to implementSection 619 of the Dodd-Frank Act, known as the “Volcker Rule.” The Volcker Rule generally prohibits insureddepository institutions, such as the Bank, and their holding companies and affiliates, such as Southern National,from engaging in proprietary trading for their own accounts and acquiring or retaining an ownership interest in orhaving certain relationships with “covered funds,” subject to certain exceptions. Southern National and the Bankwere required to conform most of their activities and investments to the requirements of the Volcker Rule byJuly 21, 2015. The FRB extended the conformance deadline to July 21, 2016 for certain legacy “covered funds”activities and investments in place before December 31, 2013, and the FRB expressed its intention to grant the lastavailable statutory extension for such legacy covered funds activities until July 21, 2017. Further, the FederalReserve Board permits limited exemptions, upon application, for divestiture of certain “illiquid” covered funds, foran additional period of up to 5 years beyond that date.Payment of Dividends. Southern National is a legal entity separate and distinct from Sonabank. Theprincipal sources of our cash flow, including cash flow to pay dividends to Southern National’s stockholders, aredividends that Sonabank pays to its sole shareholder, Southern National. Statutory and regulatory limitations applyto Sonabank’s payment of dividends to us as well as to Southern National’s payment of dividends to itsstockholders.It is the policy of the FRB that bank holding companies should pay cash dividends on common stock only outof income available over the past year and only if prospective earnings retention is consistent with theorganization’s expected future needs and financial condition. The policy provides that bank holding companiesshould not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as asource of strength to its banking subsidiaries.Under FRB policy, a bank holding company has historically been required to act as a source of financialstrength to each of its banking subsidiaries. As described above in the discussion of  “Safety and Soundness”requirements, the Dodd-Frank Act codifies this policy as a statutory requirement. Under this requirement, SouthernNational is expected to commit resources to support Sonabank, including at times when we may not be in a financialposition to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks aresubordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. As discussedbelow, a bank holding company, in certain circumstances, could be required to guarantee the capital plan of anundercapitalized banking subsidiary.Capital adequacy requirements serve to limit the amount of dividends that may be paid by Sonabank. Underfederal law, the Bank cannot pay a dividend if, after paying the dividend, the bank will be “undercapitalized.” Thebank regulatory agencies may declare a dividend payment to be unsafe and unsound even though the Bank wouldcontinue to meet its capital requirements after the dividend.The ability of Southern National to pay dividends is also subject to the provisions of Virginia law. Thepayment of dividends by Southern National and Sonabank may also be affected by other factors, such as therequirement to maintain adequate capital above regulatory guidelines. The federal banking agencies have indicatedthat paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafeand unsound banking practice. Under the FDICIA, a depository institution may not pay any dividend if paymentwould cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies haveissued policy statements that provide that bank holding companies and insured banks should generally only paydividends out of current operating earnings.In the event of a bank holding company’s bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, thetrustee will be deemed to have assumed and to cure immediately any deficit under any commitment by the debtorholding company to any of the federal banking agencies to maintain the capital of an insured depository institution.Any claim for breach of such obligation will generally have priority over most other unsecured claims.16TABLE OF CONTENTSBecause we are a legal entity separate and distinct from our subsidiary Sonabank, our right to participate in thedistribution of assets of any subsidiary upon the subsidiary’s liquidation or reorganization will be subject to the priorclaims of the subsidiary’s creditors. In the event of a liquidation or other resolution of an insured depositoryinstitution, the claims of depositors and other general or subordinated creditors are entitled to a priority of paymentover the claims of holders of any obligation of the institution to its shareholders, arising as a result of their status asshareholders, including any depository institution holding company (such as us) or any shareholder or creditorthereof.Privacy. Under the GLBA, financial institutions are required to disclose their policies for collecting andprotecting confidential information. Customers generally may prevent financial institutions from sharing nonpublicpersonal financial information with nonaffiliated third parties except under narrow circumstances, such as theprocessing of transactions requested by the consumer or when the financial institution is jointly sponsoring aproduct or service with a nonaffiliated third party. Additionally, financial institutions generally may not discloseconsumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or othermarketing to consumers. Financial institutions are further required to disclose their privacy policies to customersannually. Financial institutions, however, will be required to comply with state law if it is more protective ofcustomer privacy than the GLBA. Sonabank has established policies and procedures to assure our compliance withall privacy provisions of the GLBA.Audit Reports. Insured institutions with total assets of  $500 million or more must submit annual auditreports prepared by independent auditors to federal and state regulators. In some instances, the audit report of theinstitution’s holding company can be used to satisfy this requirement. Auditors must receive examination reports,supervisory agreements and reports of enforcement actions. For institutions with total assets of  $1 billion or more,financial statements prepared in accordance with generally accepted accounting principles, management’scertifications concerning responsibility for the financial statements, internal controls and compliance with legalrequirements designated by the FDIC, and an attestation by the auditor regarding the statements of managementrelating to the internal controls must be submitted. For institutions with total assets of more than $3 billion,independent auditors may be required to review quarterly financial statements. The FDICIA requires thatindependent audit committees be formed, consisting of outside directors only. The committees of such institutionsmust include members with experience in banking or financial management, must have access to outside counsel,and must not include representatives of large customers.Anti-Terrorism and Anti-Money Laundering Legislation. A major focus of governmental policy onfinancial institutions in recent years has been aimed at combating money laundering and terrorist financing. TheUSA PATRIOT Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United States anti-moneylaundering laws and regulations by imposing significant new compliance and due diligence obligations, creatingnew crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The Financial CrimesEnforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury, has issued and, in some cases,proposed a number of regulations that apply various requirements of the USA Patriot Act to financial institutions.These regulations impose obligations on financial institutions to maintain appropriate policies, procedures andcontrols to detect, prevent and report money laundering and terrorist financing and to verify the identity of theircustomers. Certain of those regulations impose specific due diligence requirements on financial institutions thatmaintain correspondent or private banking relationships with non-U.S. financial institutions or persons. Failure of afinancial institution to maintain and implement adequate programs to combat money laundering and terroristfinancing, or to comply with all of the relevant laws or regulations, could have serious legal and reputationalconsequences for the institution. Bank regulators routinely examine institutions for compliance with these anti-money laundering obligations and recently have been active in imposing “cease and desist” and other regulatoryorders and money penalty sanctions against institutions found to be in violation of these requirements.Office of Foreign Assets Control Regulation. The United States has imposed economic sanctions that affecttransactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rulesbased on their administration by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”).The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they containone or more of the following elements: (i) restrictions on trade with17TABLE OF CONTENTSor investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to asanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to makinginvestments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking ofassets in which the government or specially designated nationals of the sanctioned country have an interest, byprohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S.persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred inany manner without a license from OFAC. Failure to comply with these sanctions could have serious legal andreputational consequences.Virginia Law. Certain state corporation laws may have an anti-takeover affect. Virginia law restrictstransactions between a Virginia corporation and its affiliates and potential acquirers. The following discussionsummarizes the two Virginia statutes that may discourage an attempt to acquire control of Southern National.Virginia Code Sections 13.1-725 – 727.1 govern “Affiliated Transactions.” These provisions, with severalexceptions discussed below, require approval by the holders of at least two-thirds of the remaining voting shares ofmaterial acquisition transactions between a Virginia corporation and any holder of more than 10% of any class of itsoutstanding voting shares. Affiliated Transactions include mergers, share exchanges, material dispositions ofcorporate assets not in the ordinary course of business, any dissolution of the corporation proposed by or on behalfof an interested shareholder, or any reclassification, including a reverse stock split, recapitalization, or merger of thecorporation with its subsidiaries which increases the percentage of voting shares owned beneficially by any 10%shareholder by more than 5%.For three years following the time that a shareholder becomes an owner of 10% of the outstanding votingshares, a Virginia corporation cannot engage in an Affiliated Transaction with that shareholder without approval oftwo-thirds of the voting shares other than those shares beneficially owned by that shareholder, and majorityapproval of the disinterested directors. A disinterested director is a member of the company’s board of directors whowas (i) a member on the date the shareholder acquired more than 10%, and (ii) recommended for election by, or waselected to fill a vacancy and received the affirmative vote of, a majority of the disinterested directors then on theboard. At the expiration of the three-year period, the statute requires approval of Affiliated Transactions by two-thirds of the voting shares other than those beneficially owned by the 10% shareholder.The principal exceptions to the special voting requirement apply to transactions proposed after the three-yearperiod has expired and require either that the transaction be approved by a majority of the corporation’sdisinterested directors or that the transaction satisfies the fair-price requirement of the statute. In general, the fair-price requirement provides that in a two-step acquisition transaction, the 10% shareholder must pay the shareholdersin the second step either the same amount of cash or the same amount and type of consideration paid to acquire theVirginia corporation’s shares in the first step.None of the foregoing limitations and special voting requirements applies to a transaction with any 10%shareholder whose acquisition of shares taking him or her over 10% was approved by a majority of the corporation’sdisinterested directors.These provisions were designed to deter certain takeovers of Virginia corporations. In addition, the statuteprovides that, by affirmative vote of a majority of the voting shares other than shares owned by any 10%shareholder, a corporation can adopt an amendment to its articles of incorporation or bylaws providing that theAffiliated Transactions provisions shall not apply to the corporation. Southern National “opted out” of the AffiliatedTransactions provisions when it incorporated.Virginia law also provides that shares acquired in a transaction that would cause the acquiring person’s votingstrength to meet or exceed any of the three thresholds (20%, 33 ∕ 3 % or 50%) have no voting rights for those sharesexceeding that threshold, unless granted by a majority vote of shares not owned by the acquiring person. Thisprovision empowers an acquiring person to require the Virginia corporation to hold a special meeting ofshareholders to consider the matter within 50 days of the request. Southern National also “opted out” of thisprovision at the time of its incorporation.181 TABLE OF CONTENTSFederal Reserve Monetary Policy. The Bank will be directly affected by government monetary and fiscalpolicy and by regulatory measures affecting the banking industry and the economy in general. The actions of theFRB as the nation’s central bank can directly affect the money supply and, in general, affect the lending activities ofbanks by increasing or decreasing the cost and availability of funds. An important function of the FRB is to regulatethe national supply of bank credit. Among the instruments of monetary policy used by the FRB to implement thisobjective are open market operations in United States government securities, changes in the discount rate onmember bank borrowings and changes in reserve requirements against bank deposits. These means are used invarying combinations to influence overall growth of bank loans, investments and deposits, and interest rates chargedon loans or paid on deposits. The monetary policies of the FRB have had a significant effect on the operating resultsof commercial banks in the past and are expected to continue to do so in the future; however, the effects of thevarious FRB policies on our future business and earnings cannot be predicted.Reserve Requirements. In 1980, Congress enacted legislation that imposed reserve requirements on alldepository institutions that maintain transaction accounts or nonpersonal time deposits. NOW accounts, moneymarket deposit accounts and other types of accounts that permit payments or transfers to third parties fall within thedefinition of transaction accounts and are subject to these reserve requirements, as are any nonpersonal timedeposits at an institution. For net transaction accounts in 2017, the first $15.5 million will be exempt from reserverequirements. A 3.0% reserve ratio will be assessed on net transaction accounts over $15.5 million to and including$115.1 million. A 10.0% reserve ratio will be applied to net transaction accounts in excess of  $115.1 million. Thesepercentages are subject to adjustment by the FRB.Restrictions on Transactions with Affiliates and Insiders. Transactions between banks and their affiliatesare governed by Sections 23A and 23B of the Federal Reserve Act (“FRA”) and the corresponding provisions of theFRB’s Regulation W thereunder. An affiliate of a bank for purposes of Sections 23A and 23B of the FRA andRegulation W is generally any entity that controls, is controlled by or is under common control with such bank, withcertain exceptions. In general, Section 23A and the corresponding provisions of Regulation W limit the amount of a“covered transaction” between Sonabank and an affiliate (including a financial subsidiary of Sonabank) to 10% ofSonabank’s capital stock and surplus and limits the aggregate amount of Sonabank’s “covered transactions” with allaffiliates to 20% of Sonabank’s capital stock and surplus. Section 23A also requires that such covered transactionsbe secured by designated amounts of specified collateral. It also limits the amount of advances to third parties whichare collateralized by the securities or obligations of Southern National or its subsidiaries. “Covered transactions” aredefined by statute to include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, apurchase of assets (unless otherwise exempted by the FRB) from the affiliate, the acceptance of securities issued bythe affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of anaffiliate.Affiliate transactions are also subject to Section 23B of the FRA and the corresponding provisions ofRegulation W, which generally require that certain covered transactions and other transactions between Sonabankand its affiliates be on terms substantially the same, or at least as favorable to Sonabank, as those prevailing at thetime for comparable transactions with or involving other nonaffiliated persons.The restrictions on loans to directors, executive officers, principal shareholders and their related interests(collectively referred to herein as “insiders”) contained in the FRA and Regulation O apply to all insured institutionsand their subsidiaries and holding companies. These restrictions include limits on loans to one borrower andconditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans toinsiders and their related interests. These loans cannot exceed the institution’s total unimpaired capital and surplus,and the FRB may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions forknowingly accepting loans in violation of applicable restrictions.Concentrated Commercial Real Estate Lending Regulations. In 2006, the federal banking agencies,including the FRB, promulgated guidance governing financial institutions with concentrations in commercial realestate lending. The guidance sets forth parameters for risk management practices that are consistent with the leveland nature of a financial institution’s commercial real estate lending portfolio. The guidance provides that a bankhas a concentration in commercial real estate lending if  (i) total reported loans for construction, land development,and other land represent 100% or more of total capital or19TABLE OF CONTENTS(ii) total reported loans secured by multifamily and non-farm non-residential properties and loans for construction,land development, and other land represent 300% or more of total capital and the bank’s commercial real estate loanportfolio has increased 50% or more during the prior 36 months. Owner occupied loans are excluded from thissecond category. If a concentration is present, management must employ heightened risk management practices thataddress the following key elements: including board and management oversight and strategic planning, portfoliomanagement, development of underwriting standards, risk assessment, review and monitoring through marketanalysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercialreal estate lending.In October 2009, the federal banking agencies issued additional guidance on commercial real estate lendingthat emphasizes these considerations and also supports prudent loan workouts for financial institutions working withcommercial real estate borrowers who are experiencing diminished operating cash flows, depreciated collateralvalues, or prolonged delays in selling or renting commercial properties.In addition, the Dodd-Frank Act contains provisions that may impact the Bank’s business by reducing theamount of our commercial real estate lending and increasing the cost of borrowing, including rules relating to riskretention of securitized assets. Section 941 of the Dodd-Frank Act requires, among other things, that a loanoriginator or a securitizer of asset-backed securities retain a percentage of the credit risk of securitized assets. Thebanking agencies have jointly issued a final rule to implement these requirements, which became effective onDecember 24, 2016 for classes of asset-backed securities other than residential mortgage-backed securitizations.Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery and Enforcement Act of 1989contains a “cross-guarantee” provision which generally makes commonly controlled insured depository institutionsliable to the FDIC for any losses incurred in connection with the failure of a commonly controlled depositoryinstitution.Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”) and related regulations,depository institutions have a continuing and affirmative obligation to assist in meeting the credit needs of theirmarket areas, including low and moderate-income areas, consistent with safe and sound banking practice. The CRArequires the adoption by each institution of a CRA statement for each of its market areas describing the depositoryinstitution’s efforts to assist in its community’s credit needs. Depository institutions are periodically examined forcompliance with the CRA and are periodically assigned ratings in this regard. Banking regulators consider adepository institution’s CRA rating when reviewing applications to establish new branches, undertake new lines ofbusiness, and/or acquire part or all of another depository institution. An unsatisfactory rating can significantly delayor even prohibit regulatory approval of a proposed transaction by a bank holding company or its depositoryinstitution subsidiaries.CRA agreements with private parties must be disclosed and annual reports must be made to a bank’s primaryfederal regulatory. A bank holding company will not be permitted to become a financial holding company and nonew activities authorized under the GLBA may be commenced by a holding company or by a financial subsidiary ifany of its bank subsidiaries received less than a “satisfactory” rating in its latest CRA examination. The Bankreceived a “satisfactory” rating in the most recent examination for CRA compliance in July 2015.Fair Lending; Consumer Laws. In addition to the CRA, other federal and state laws regulate variouslending and consumer aspects of the banking business. Governmental agencies, including the Department ofHousing and Urban Development, the Federal Trade Commission and the Department of Justice, have becomeconcerned that prospective borrowers experience discrimination in their efforts to obtain loans from depository andother lending institutions. These agencies have brought litigation against depository institutions allegingdiscrimination against borrowers. Many of these suits have been settled, in some cases for material sums, short of afull trial.These governmental agencies have clarified what they consider to be lending discrimination and have specifiedvarious factors that they will use to determine the existence of lending discrimination under the Equal CreditOpportunity Act and the Fair Housing Act, including evidence that a lender discriminated on a prohibited basis,evidence that a lender treated applicants differently based on prohibited factors in the20TABLE OF CONTENTSabsence of evidence that the treatment was the result of prejudice or a conscious intention to discriminate, andevidence that a lender applied an otherwise neutral non-discriminatory policy uniformly to all applicants, but thepractice had a discriminatory effect, unless the practice could be justified as a business necessity.Banks and other depository institutions also are subject to numerous consumer-oriented laws and regulations.These laws, which include the Truth in Lending Act, the Truth in Savings Act, the Real Estate SettlementProcedures Act, the Electronic Fund Transfer Act, the Equal Credit Opportunity Act, the Fair Housing Act, theHome Mortgage Disclosure Act, the Fair Credit Reporting Act and the Expedited Funds Availability Act requirecompliance by depository institutions with various disclosure requirements and requirements regulating theavailability of funds after deposit or the making of some loans to customers.In addition, oversight responsibility for these and other consumer protection laws and regulations has, in largemeasure, transferred to the Bureau.For example, the Bureau issued rules that have impacted our residential mortgage lending practices, and theresidential mortgage market generally, including rules that implement the “ability-to-repay” requirement andprovide protection from liability for “qualified mortgages,” as required by the Dodd-Frank Act. The ability-to-repayrule, which took effect on January 10, 2014, requires lenders to consider, among other things, income, employmentstatus, assets, employment, payment amounts, and credit history before approving a mortgage, and provides acompliance “safe harbor” for lenders that issue certain “qualified mortgages.” The ability-to-repay rule defines a“qualified mortgage” to have certain specified characteristics, and generally prohibit loans with negativeamortization, interest-only payments, balloon payments, or terms exceeding 30 years from being qualifiedmortgages. The rule also establishes general underwriting criteria for qualified mortgages, including that monthlypayments be calculated based on the highest payment that will apply in the first five years of the loan and that theborrower have a total debt-to-income ratio that is less than or equal to 43 percent. While “qualified mortgages” willgenerally be afforded safe harbor status, a rebuttable presumption of compliance with the ability-to-repayrequirements will attach to “qualified mortgages” that are “higher priced mortgages” (which are generally subprimeloans). In addition, under rules that became effective December 24, 2015, and December 24, 2016, the securitizer ofcertain asset-backed securities must retain not less than 5 percent of the credit risk of the assets collateralizing theasset-backed securities, unless subject to an exemption for asset-backed securities that are collateralized exclusivelyby residential mortgages that qualify as “qualified residential mortgages.” These definitions are expected tosignificantly shape the parameters for the majority of consumer mortgage lending in the U.S.Reflecting the Bureau’s focus on the residential mortgage lending market, the Bureau has also issued rules toimplement requirements of the Dodd-Frank Act pertaining to mortgage loan origination (including with respect toloan originator compensation and loan originator qualifications) and has finalized integrated mortgage disclosurerules that replace and combine certain requirements under the Truth in Lending Act and the Real Estate SettlementProcedures Act. In addition, the Bureau has issued rules that require servicers to comply with new standards andpractices with regard to: error correction; information disclosure; force-placement of insurance; informationmanagement policies and procedures; requiring information about mortgage loss mitigation options be provided todelinquent borrowers; providing delinquent borrowers access to servicer personnel with continuity of contact aboutthe borrower’s mortgage loan account; and evaluating borrowers’ applications for available loss mitigation options.These rules also address initial rate adjustment notices for adjustable-rate mortgages (ARMs), periodic statementsfor residential mortgage loans, and prompt crediting of mortgage payments and response to requests for payoffamounts. The Bureau has indicated that it expects to issue additional mortgage-related rules in the future.In addition, it is anticipated that the Bureau will engage in other rulemakings in the near term that may impactour business, as the Bureau has indicated that, in addition to specific statutory mandates, it is working on a widerange of initiatives to address issues in markets for consumer financial products and services. The Bureau also hasbroad authority to prohibit unfair, deceptive and abusive acts and practices (“UDAAP”) and to investigate andpenalize financial institutions that violate this prohibition. While the statutory language of the Dodd-Frank Act setsforth the standards for acts and practices that violate this prohibition, certain aspects of these standards are untested,which has created some uncertainty regarding21TABLE OF CONTENTShow the Bureau will exercise this authority. The Bureau has, however, begun to bring enforcement actions againstcertain financial institutions for UDAAP violations and issued some guidance on the topic, which provides insightinto the agency’s expectations regarding these standards. Among other things, Bureau guidance and its UDAAP-related enforcement actions have emphasized that management of third-party service providers is essential toeffective UDAAP compliance and that the Bureau is particularly focused on marketing and sales practices.We cannot fully predict the effect that being regulated by a regulatory authority focused on consumer financialprotection, or any new implementing regulations or revisions to existing regulations that may result from theestablishment of this new authority, will have on our businesses.Legislative Initiatives. From time to time, various legislative and regulatory initiatives are introduced inCongress and State Legislatures. Such initiatives may change banking statutes and the operating environment for usand Sonabank in substantial and unpredictable ways. We cannot determine the ultimate effect that any potentiallegislation, if enacted, or implementing regulations with respect thereto, would have, upon the financial condition orresults of our operations or the operations of Sonabank. A change in statutes, regulations or regulatory policiesapplicable to us or Sonabank could have a material effect on the financial condition, results of operations orbusiness of our company and Sonabank.Incentive Compensation. In June 2010, the FRB, the Office of the Comptroller of the Currency, and theFDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentivecompensation policies of banking organizations do not undermine the safety and soundness of such organizations byencouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materiallyaffect the risk profile of an organization, either individually or as part of a group, is based upon the key principlesthat a banking organization’s incentive compensation arrangements should (i) provide incentives that do notencourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatiblewith effective internal controls and risk management, and (iii) be supported by strong corporate governance,including active and effective oversight by the organization’s board of directors. In 2016, the Federal Reserve andthe OCC have also proposed rules that would, depending upon the assets of the institution, directly regulateincentive compensation arrangements and would require enhanced oversight and recordkeeping. As ofDecember 31, 2016, these rules have not been implemented.The FRB will review, as part of the regular, risk-focused examination process, the incentive compensationarrangements of banking organizations, such as us, that are not “large, complex banking organizations.” Thesereviews will be tailored to each organization based on the scope and complexity of the organization’s activities andthe prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be includedin reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which canaffect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be takenagainst a banking organization if its incentive compensation arrangements, or related risk-management control orgovernance processes, pose a risk to the organization’s safety and soundness and the organization is not takingprompt and effective measures to correct the deficiencies.Enforcement Powers of Federal and State Banking Agencies. The federal banking agencies have broadenforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civiland criminal penalties, and appoint a conservator or receiver. Failure to comply with applicable laws, regulations,and supervisory agreements could subject Southern National or the Bank and their subsidiaries, as well as officers,directors, and other institution-affiliated parties of these organizations, to administrative sanctions and potentiallysubstantial civil money penalties. In addition to the grounds discussed above, the appropriate federal bankingagency may appoint the FDIC as conservator or receiver for a banking institution (or the FDIC may appoint itself,under certain circumstances) if any one or more of a number of circumstances exist, including, without limitation,the fact that the banking institution is undercapitalized and has no reasonable prospect of becoming adequatelycapitalized; fails to become adequately capitalized when required to do so; fails to submit a timely and acceptablecapital restoration plan; or materially fails to implement an accepted capital restoration plan. The VBFI also hasbroad enforcement powers over the Bank, including the power to impose orders, remove officers and directors andimpose fines.22TABLE OF CONTENTSFuture Regulatory Uncertainty. Because federal regulation of financial institutions changes regularly and isthe subject of constant legislative debate, we cannot forecast how federal regulation of financial institutions maychange in the future and impact our operations. Southern National fully expects that the financial institution industrywill remain heavily regulated in the near future and that additional laws or regulations may be adopted furtherregulating specific banking practices.The foregoing is only a brief summary of certain statutes, rules, and regulations that may affect SouthernNational and the Bank. Numerous other statutes and regulations also will have an impact on the operations ofSouthern National and the Bank. Supervision, regulation and examination of banks by the regulatory agencies areintended primarily for the protection of depositors, not shareholders. 23• increases in loan delinquencies;• increases in nonperforming assets and foreclosures;• decreases in demand for our products and services, which could adversely affect our liquidity position;and• decreases in the value of the collateral securing our loans, especially real estate, which could reducecustomers’ borrowing power.TABLE OF CONTENTS ​Item 1A. Risk FactorsAn investment in our common stock involves risks. The following is a description of the material risks anduncertainties that Southern National believes affect its business and should be considered before making aninvestment in our common stock. Additional risks and uncertainties that we are unaware of, or that we currentlydeem immaterial, also may become important factors that affect us and our business. If any of the risks described inthis Annual Report on Form 10-K were to actually occur, our financial condition, results of operations and cashflows could be materially and adversely affected. If this were to happen, the value of the common stock coulddecline significantly and you could lose all or part of your investment.General market conditions and economic trends could have a material adverse effect on our business,financial condition and results of operations.The state of the economy and various economic factors, including inflation, recession, unemployment, interestrates, declining oil prices and the level of U.S. debt, as well as governmental action and uncertainty resulting fromU.S. and global political trends, may directly and indirectly, have a destabilizing effect on our financial conditionand results of operations. An unfavorable or uncertain national or regional political or economic environment coulddrive losses beyond those which are provided for in our allowance for loan losses and result in the followingconsequences:Any of the foregoing could adversely affect our financial condition and results of operation. While economicconditions in the Commonwealth of Virginia and the U.S. are strong, there can be no assurance that the economywill continue to grow.We will be subject to business uncertainties and contractual restrictions while the proposed merger withEastern Virginia is pending, which could adversely affect our business.Uncertainty about the effect of the proposed merger on employees and customers may have an adverse effecton us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the proposedmerger is completed and could cause customers and others that deal with us to seek to change their existing businessrelationships with us. Retention of certain of our employees may be challenging during the pendency of the Merger,as certain employees may experience uncertainty about their future roles with the continuing corporation. If keyemployees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remainwith us, our business, or the business of the continuing corporation following the merger, could be harmed. Inaddition, subject to certain exceptions, we and Eastern Virginia have agreed to operate our business in the ordinarycourse prior to closing and refrain from taking certain specified actions until the proposed merger occurs. Theserestrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion ofthe proposed merger.Termination of the merger agreement could negatively impact us.If the merger agreement is terminated, our business may be impacted adversely by the failure to pursue otherbeneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipatedbenefits of completing the Merger. Additionally, if the merger agreement is terminated, the market price of ourcommon stock could decline to the extent that the current market prices reflect a market assumption that the Mergerwill be completed. Furthermore, costs relating to the Merger, such as legal, accounting and financial advisory fees,must be paid even if the Merger is not completed. In addition,24TABLE OF CONTENTSfailure to complete the merger could result in reputational harm to us. If the merger agreement is terminated undercertain circumstances, including circumstances involving a change in recommendation by our board of directors, wemay be required to pay Eastern Virginia a termination fee of  $7.5 million.Liquidity risk could impair our ability to fund operations and jeopardize our financial condition, results ofoperations and cash flows.Liquidity is essential to our business. Our ability to implement our business strategy will depend on our abilityto obtain funding for loan originations, working capital, possible acquisitions and other general corporate purposes.An inability to raise funds through deposits, borrowings, securities sold under repurchase agreements, the sale ofloans and other sources could have a substantial negative effect on our liquidity. We do not anticipate that our retailand commercial deposits will be sufficient to meet our funding needs in the foreseeable future. We therefore rely ondeposits obtained through intermediaries, FHLB advances, and other wholesale funding sources to obtain the fundsnecessary to implement our growth strategy.Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable tous could be impaired by factors that affect us specifically or the financial services industry or economy in general,including a decrease in the level of our business activity as a result of a downturn in the markets in which our loansare concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors thatare not specific to us, such as a disruption in the financial markets or negative views and expectations about theprospects for the financial services industry. To the extent we are not successful in obtaining such funding, we willbe unable to implement our strategy as planned which could have a material adverse effect on our financialcondition, results of operations and cash flows.Declines in asset values may result in impairment charges and adversely affect the value of our investments,financial performance and capital.We maintain an investment portfolio that includes, but is not limited to, collateralized mortgage obligations,agency mortgage-backed securities and pooled trust preferred securities. The market value of investments may beaffected by factors other than the underlying performance of the issuer or composition of the bonds themselves, suchas ratings downgrades, adverse changes in the business climate and a lack of liquidity for resales of certaininvestment securities. At each reporting period, we evaluate investments and other assets for impairment indicators.We may be required to record additional impairment charges if our investments suffer a decline in value that isconsidered other-than-temporary. During the years ended December 31, 2016 and 2015, we incurred no other-than-temporary impairment charges. During the year ended December 31, 2014, we incurred other-than-temporaryimpairment charges of  $41 thousand pre-tax on one of our trust preferred securities holdings. If in future periods wedetermine that a significant impairment has occurred, we would be required to charge against earnings the credit-related portion of the other-than-temporary impairment, which could have a material adverse effect on our results ofoperations in the periods in which the write-offs occur.Our pooled trust preferred securities are particularly vulnerable to the performance of the issuer of thesubordinated debentures that are collateral for the trust preferred securities. Deterioration of these trust preferredsecurities can occur because of defaults by the issuer of the collateral or because of deferrals of dividend paymentson the securities. Numerous financial institutions have failed subsequent to their issuance of trust preferredsecurities, and their parent bank holding companies have filed for bankruptcy, which has led to defaults in thesubordinated debentures that collateralize the trust preferred securities. Further, increased regulatory pressure hasbeen placed on financial institutions to maintain capital ratios above the required minimum to be well-capitalized,which often results in restrictions on dividends, and leads to deferrals of dividend payments on the trust preferredsecurities. More specifically, the Federal Reserve has stated that a bank holding company should eliminate, defer orsignificantly reduce dividends if (i) its net income available to shareholders for the past four quarters, net ofdividends paid, is not sufficient to fully fund the dividends, (ii) its prospective rate of earnings retention is notconsistent with its capital needs or (iii) it is in danger of not meeting its minimum regulatory capital adequacy ratios.In addition, although interest deferrals are permitted under the terms of the instruments governing the trust preferred25• significant adverse changes in business climate;• significant changes in credit quality;• significant unanticipated loss of customers;• significant loss of deposits or loans; or• significant reductions in profitability.TABLE OF CONTENTSsecurities, such deferrals are typically limited to 20 consecutive quarterly periods. As a result, many financialinstitutions that commenced deferral periods in 2009 are no longer permitted to defer interest payments, whichcould result in increased defaults on trust preferred securities. Additional defaults in the underlying collateral ordeferrals of dividend payments for these securities could lead to additional charges on these securities and/or other-than-temporary impairment charges on other trust preferred securities we own. Finally, proposed or future changesin the regulatory treatment of both issuers and holders of trust preferred securities could have a negative impact onthe value of the pooled trust preferred securities held in our portfolio.The soundness of other financial institutions could adversely affect us.Financial institutions are interrelated as a result of trading, clearing, counterparty and other relationships. Wehave exposure to many different industries and counterparties, and we routinely execute transactions with a varietyof counterparties in the financial services industry. Many of these transactions expose us to credit risk in the event ofdefault of our counterparty or client. In addition, our credit risk may be exacerbated if the collateral we hold cannotbe sold at prices that are sufficient for us to recover the full amount of our exposure. Any such losses couldmaterially and adversely affect our financial condition and results of operations.If the goodwill that we record in connection with business acquisitions becomes impaired, it could have anegative impact on our profitability.Goodwill represents the amount of acquisition cost over the fair value of net assets we acquire in the purchaseof another entity. We review goodwill for impairment at least annually, or more frequently if events or changes incircumstances indicate the carrying value of the asset might be impaired. Examples of those events or circumstancesinclude the following:As of December 31, 2016, our goodwill totaled $10.5 million. While we have recorded no such impairmentcharges since we initially recorded the goodwill, there can be no assurance that our future evaluations of goodwillwill not result in findings of impairment and related write-downs, which may have a material adverse effect on ourfinancial condition and results of operations.If our nonperforming assets increase, our earnings will suffer.At December 31, 2016, our non-covered nonperforming assets (which consist of nonaccrual loans, loans pastdue 90 days and accruing and other real estate owned (“OREO”)) totaled $12.4 million, or 1.36% of total non-covered loans and OREO, which is a decrease of  $1.9 million, or 13.0%, compared with non-coverednonperforming assets of  $14.3 million, or 1.77%, of total non-covered loans and OREO at December 31, 2015. AtDecember 31, 2014, our non-covered non-performing assets were $18.7 million, or 2.76% of non-covered loans andOREO.Although economic and market conditions are stable, and our nonperforming assets have improved, we mayincur losses if there is an increase in nonperforming assets in the future. Our nonperforming assets adversely affectour net income in various ways. We do not record interest income on nonaccrual loans or OREO, thereby adverselyaffecting our net interest income, and increasing loan administration costs. When we take collateral in foreclosuresand similar proceedings, we are required to mark the related loan to the then fair value of the collateral, which mayultimately result in a loss. We must reserve for probable losses, which is established through a current period chargeto the provision for loan losses as well as from time to time, as appropriate, write down the value of properties in ourOREO portfolio to reflect changing market values. Additionally, there are legal fees associated the resolution ofproblem assets as well as carrying costs26• the viability of the contractor;• the contractor’s ability to successfully complete the project, to meet deadlines and time schedules and tostay within cost estimates; and• concentrations of such loans with a single contractor and its affiliates.TABLE OF CONTENTSsuch as taxes, insurance and maintenance related to our OREO. Further, the resolution of nonperforming assetsrequires the active involvement of management, which can distract them from more profitable activity. Finally, anincrease in the level of nonperforming assets increases our regulatory risk profile. There can be no assurance that wewill not experience future increases in nonperforming assets.A significant amount of our loans are secured by real estate and any declines in real estate values in ourprimary markets could be detrimental to our financial condition and results of operations.Real estate lending (including commercial, construction, land development, and residential loans) is a largeportion of our loan portfolio, constituting $816.1 million, or approximately 87.5% of our total loan portfolio, as ofDecember 31, 2016. Total real estate loans covered under the FDIC loss sharing agreement amount to $28.2 million.Although residential and commercial real estate values have improved in our market area, such improved valuesmay not continue or may slow down. If loans that are collateralized by real estate become troubled during a timewhen market conditions are declining or have declined, then we may not be able to realize the full value of thecollateral that we anticipated at the time of originating the loan, which could require us to increase our provision forloan losses and adversely affect our financial condition and results of operations.As of December 31, 2016, $260.0 million, or approximately 27.9% of our total loans, were secured by single-family residential real estate. This includes $230.8 million in residential 1-4 family loans and $29.2 million in homeequity lines of credit. Total single-family residential real estate loans covered under the FDIC loss sharingagreement amount to $28.2 million. If housing markets in our market areas do not continue to steadily improve ordeteriorate, we may experience an increase in nonperforming loans, provisions for loan losses and charge-offs.If the value of real estate in our market areas were to decline materially, a significant portion of our loanportfolio could become under-collateralized, which could have a material adverse effect on our asset quality,capital structure and profitability.As of December 31, 2016, a significant portion of our loan portfolio was comprised of loans secured bycommercial real estate. In the majority of these loans, real estate was the primary collateral component. In somecases we take real estate as security for a loan even when it is not the primary component of collateral. The realestate collateral that provides the primary or an alternate source of repayment in the event of default may deterioratein value during the term of the loan as a result of changes in economic conditions, fluctuations in interest rates andthe availability of loans to potential purchasers, changes in tax and other laws and acts of nature. If we are requiredto liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, ourearnings and capital could be adversely affected. We are subject to increased lending risks in the form of loandefaults as a result of the high concentration of real estate lending in our loan portfolio. A weak real estate market inour primary market areas could have an adverse effect on the demand for new loans, the ability of borrowers torepay outstanding loans, the value of real estate and other collateral securing the loans and the value of real estateowned by us. If real estate values do not continue to improve or decline, it is also more likely that we would berequired to increase our allowance for loan losses, which could adversely affect our financial condition and resultsof operations.We are subject to risks related to our concentration of construction and land development and commercialreal estate loans.As of December 31, 2016, we had $91.1 million of construction loans. Construction loans are subject to risksduring the construction phase that are not present in standard residential real estate and commercial real estate loans.These risks include:27TABLE OF CONTENTSReal estate construction loans may involve the disbursement of substantial funds with repayment dependent, inpart, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan andalso present risks of default in the event of declines in property values or volatility in the real estate market duringthe construction phase. Our practice, in the majority of instances, is to secure the personal guaranty of individuals insupport of our real estate construction loans which provides us with an additional source of repayment. As ofDecember 31, 2016, we had no non-covered nonperforming construction and development loans and $3.9 million ofnon-covered assets that have been foreclosed. If one or more of our larger borrowers were to default on theirconstruction and development loans, and we did not have alternative sources of repayment through personalguarantees or other sources, or if any of the aforementioned risks were to occur, we could incur significant losses.As of December 31, 2016, we had $465.0 million of commercial real estate loans, including multi-familyresidential loans and loans secured by farmland, none of which is covered by the FDIC loss sharing agreement.Commercial real estate lending typically involves higher loan principal amounts and the repayment is dependent, inlarge part, on sufficient income from the properties securing the loan to cover operating expenses and debt service.In addition, the Dodd-Frank Act contains provisions that may impact the Bank’s business by reducing theamount of our commercial real estate lending and increasing the cost of borrowing, including rules relating to riskretention of securitized assets. Section 941 of the Dodd-Frank Act requires, among other things, that a loanoriginator or a securitizer of asset-backed securities retain a percentage of the credit risk of securitized assets. Thebanking agencies have jointly issued a final rule to implement these requirements, which became effective onDecember 24, 2015 for residential mortgage-backed securitizations and will become effective on December 24,2016 for classes of asset-backed securities other than residential mortgage-backed securitizations. Banks with higherlevels of commercial real estate loans are expected to implement improved underwriting, internal controls, riskmanagement policies and portfolio stress testing, as well as higher levels of allowances for loan losses and capitallevels as a result of commercial real estate lending growth and exposures. Sonabank’s commercial real estate loansare below the thresholds identified as significant by the regulatory guidance. If there is deterioration in ourcommercial real estate portfolio or if regulatory authorities conclude that we have not implemented appropriate riskmanagement policies and practices, it could adversely affect our business and result in a requirement of increasedcapital levels, and such capital may not be available at that time.The benefits of our FDIC loss-sharing agreements may be reduced or eliminated.In connection with Sonabank’s assumption of the banking operations of Greater Atlantic Bank, the Bankentered into the Agreement, which contains loss-sharing provisions. Our decisions regarding the fair value of assetsacquired, including the FDIC loss-sharing assets (referred to herein as the “covered assets”), could be inaccuratewhich could materially and adversely affect our business, financial condition, results of operations, and futureprospects. Management makes various assumptions and judgments about the collectability of the acquired loans,including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral forthe repayment of secured loans. In the Greater Atlantic Bank acquisition, we recorded a loss-sharing asset thatreflects our estimate of the timing and amount of future losses we anticipate occurring in the acquired loan portfolio.In determining the size of the loss-sharing asset, we analyzed the loan portfolio based on historical loss experience,volume and classification of loans, volume and trends in delinquencies and nonaccruals, local economic conditions,and other pertinent information.If our assumptions related to the timing or amount of expected losses are incorrect, there could be a negativeimpact on our operating results. Increases in the amount of future losses in response to different economicconditions or adverse developments in the acquired loan portfolio may result in increased credit loss provisions.Changes in our estimate of the timing of those losses, specifically if those losses are to occur beyond the applicableloss-sharing periods, may result in impairments of the FDIC indemnification asset.28TABLE OF CONTENTSOur ability to obtain reimbursement under the loss-sharing agreements on covered assets depends on ourcompliance with the terms of the loss-sharing agreements.Management must certify to the FDIC on a quarterly basis our compliance with the terms of the FDIC loss-sharing agreements as a prerequisite to obtaining reimbursement from the FDIC for realized losses on coveredassets. The agreements contain specific, detailed and cumbersome compliance, servicing, notification and reportingrequirements, and failure to comply with any of the requirements and guidelines could result in a specific asset orgroup of assets permanently losing their loss-sharing coverage. Additionally, management may decide to forgo loss-share coverage on certain assets to allow greater flexibility over the management of such assets. As of December 31,2016, $28.2 million, or 2.5%, of our assets were covered by the FDIC loss-sharing agreements.Under the terms of the FDIC loss-sharing agreements, the assignment or transfer of a loss-sharing agreement toanother entity generally requires the written consent of the FDIC. Our failure to comply with the terms of the loss-sharing agreements or to manage the covered assets in such a way as to maintain loss-share coverage on all suchassets may cause individual loans or large pools of loans to lose eligibility for loss share payments from the FDIC,which could result in material losses.Changes to government guaranteed loan programs could affect our SBA business.Sonabank relies on originating government guaranteed loans, in particular those guaranteed by the SBA. As ofDecember 31, 2016, Sonabank had $56.6 million of SBA loans, $42.3 million of which were guaranteed and $14.2million were non-guaranteed. Sonabank originated $11.1 million, $20.4 million and $17.1 million in SBA loans inthe years ended December 31, 2016, 2015 and 2014, respectively. Sonabank initially sold the guaranteed portions ofsome of its SBA loans in the secondary market in 2012 and 2011 and intends to continue such sales, which are asource of non-interest income for Sonabank, when market conditions are favorable. We can provide no assurancethat Sonabank will be able to continue originating these loans, that it will be able to sell the loans in the secondarymarket or that it will continue to realize premiums upon any sale of SBA loans.SBA lending is a federal government created and administered program. As such, legislative and regulatorydevelopments can affect the availability and funding of the program. This dependence on legislative funding andregulatory restrictions from time to time causes limitations and uncertainties with regard to the continued funding ofsuch loans, with a resulting potential adverse financial impact on our business. Currently, the maximum limit onindividual 7(a) loans which the SBA will permit is $5.0 million. Any reduction in this level could adversely affectthe volume of our business. As of December 31, 2016, our SBA business constitutes 6.1% of our total loans. Theperiodic uncertainty of the SBA program relative to availability, amounts of funding and the waiver of associatedfees creates greater risk for our business than do more stable aspects of our business.The federal government presently guarantees up to 75% of the principal amount of loans above $150,000 andup to 90% of the principal amount for certain programs under the 7(a) program. SBAExpress loans can beguaranteed by the federal government up to 50%. We can provide no assurance that the federal government willmaintain the SBA program, or if it does, that such guaranteed portion will remain at its current funding level.Furthermore, it is possible that Sonabank could lose its preferred lender status which, subject to certain limitations,allows it to approve and fund SBA loans without the necessity of having the loan approved in advance by the SBA.It is also possible the federal government could reduce the amount of loans which it guarantees. In addition, we aredependent on the expertise of our personnel who make SBA loans in order to continue to originate and service SBAloans. If we are unable to retain qualified employees in the future, our income from the origination of SBA loanscould be substantially reduced.We are subject to credit quality risks and our credit policies may not be sufficient to avoid losses.We are subject to the risk of losses resulting from the failure of borrowers, guarantors and related parties to payinterest and principal amounts on their loans. Although we maintain credit policies and credit underwriting,monitoring and collection procedures, these policies and procedures may not prevent losses, particularly duringperiods in which the local, regional or national economy suffers a general decline. If borrowers fail to repay theirloans, our financial condition and results of operations would be adversely affected.29TABLE OF CONTENTSWe depend on the accuracy and completeness of information from customers and counterparties.In deciding whether to extend credit or enter into other transactions, we rely on information furnished by or onbehalf of customers and counterparties, including financial statements, credit reports and other financialinformation. We also rely on representations of those customers, counterparties or other third parties, such asindependent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleadingfinancial statements, credit reports or other financial information could have a material adverse impact on ourbusiness, financial condition and results of operations.Failure to maintain an effective system of disclosure controls and procedures could have a material adverseeffect on our business, results of operations and financial condition and could impact the price of ourcommon stock.Failure to maintain an effective internal control environment could result in us not being able to accuratelyreport our financial results, prevent or detect fraud, or provide timely and reliable financial information pursuant toour reporting obligations, which could have a material adverse effect on our business, financial condition, andresults of operations. Further, it could cause our investors to lose confidence in the financial information we report,which could affect the trading price of our common stock.Management regularly reviews and updates our disclosure controls and procedures, including our internalcontrol over financial reporting. Any system of controls, however well designed and operated, is based in part oncertain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system aremet. Any failure or circumvention of our controls and procedures or failure to comply with regulations related tocontrols and procedures could have a material adverse effect on our business, results of operations and financialcondition.If our allowance for loan losses is not adequate to cover actual loan losses, our earnings will decrease.As a lender, we are exposed to the risk that our borrowers may not repay their loans according to the terms ofthese loans, and the collateral securing the payment of these loans may be insufficient to ensure repayment. Wemake various assumptions and judgments about the collectability of our loan portfolio, including thecreditworthiness of the borrowers and the value of the real estate and other assets serving as collateral for therepayment of many of our loans. We maintain an allowance for loan losses to cover any probable inherent loanlosses in the loan portfolio. In determining the size of the allowance, we rely on a periodic analysis of our loanportfolio, our historical loss experience and our evaluation of general economic conditions. If our assumptions proveto be incorrect or if we experience significant loan losses, our current allowance may not be sufficient to coveractual loan losses and adjustments may be necessary to allow for different economic conditions or adversedevelopments in our loan portfolio. A material addition to the allowance for loan losses could cause our earnings todecrease. Due to the relatively unseasoned nature of our loan portfolio, we may experience an increase indelinquencies and losses as these loans continue to mature.In addition, federal regulators periodically review our allowance for loan losses and may require us to increaseour provision for loan losses or recognize further charge-offs, based on judgments different than those of ourmanagement. Any significant increase in our allowance for loan losses or charge-offs required by these regulatoryagencies could have a material adverse effect on our results of operations and financial condition.Our business strategy includes strategic growth, and our financial condition and results of operations couldbe negatively affected if we fail to grow or fail to manage our growth effectively.We completed the acquisition of Prince George’s Federal Savings Bank on August 1, 2014, the acquisition ofthe HarVest Bank of Maryland on April 27, 2012, the Midlothian Branch in Richmond, Virginia on October 1,2011, the acquisition and assumption of certain assets and liabilities of Greater Atlantic Bank from the FDIC onDecember 4, 2009, the acquisition of a branch of Millennium Bank in Warrenton, Virginia on September 28, 2009,the acquisition of the Leesburg branch location from Founders Corporation which opened on February 11, 2008, theacquisition of 1st Service Bank in December of 2006 and the acquisition of the Clifton Forge branch of FirstCommunity Bancorp, Inc. in December of 2005.30• actual or anticipated variations in quarterly results of operations;• recommendations by securities analysts;• operating and stock price performance of other companies that investors deem comparable to us;• news reports relating to trends, concerns and other issues in the financial services industry;• perceptions in the marketplace regarding us and/or our competitors;• new technology used, or services offered, by competitors;• significant acquisitions or business combinations, strategic partnerships, joint ventures or capitalcommitments by or involving us or our competitors;• failure to integrate acquisitions or realize anticipated benefits from acquisitions;TABLE OF CONTENTSIn addition to the pending merger with Eastern Virginia, we intend to continue pursuing a growth strategy forour business. Our prospects must be considered in light of the risks, expenses and difficulties frequently encounteredby growing companies such as the continuing need for infrastructure and personnel, the time and costs inherent inintegrating a series of different operations and the ongoing expense of acquiring and staffing new banks or branches.We may not be able to expand our presence in our existing markets or successfully enter new markets and anyexpansion could adversely affect our results of operations. Failure to manage our growth effectively could have amaterial adverse effect on our business, future prospects, financial condition or results of operations, and couldadversely affect our ability to successfully implement our business strategy. Our ability to grow successfully willdepend on a variety of factors, including the continued availability of desirable business opportunities, thecompetitive responses from other financial institutions in our market areas and our ability to manage our growth.There can be no assurance of success or the availability of branch or bank acquisitions in the future.Future growth or operating results may require us to raise additional capital, but that capital may not beavailable, be available on unfavorable terms or may be dilutive.We and Sonabank are each required by the Federal Reserve to maintain adequate levels of capital to supportour operations. In the event that our future operating results erode capital, if Sonabank is required to maintain capitalin excess of well-capitalized standards, or if we elect to expand through loan growth or acquisitions, we may berequired to raise additional capital. Our ability to raise capital will depend on conditions in the capital markets,which are outside our control, and on our financial performance. Accordingly, we cannot be assured of our ability toraise capital on favorable terms when needed, or at all. If we cannot raise additional capital when needed, we will besubject to increased regulatory supervision and the imposition of restrictions on our growth and business. Theseoutcomes could negatively impact our ability to operate or further expand our operations through acquisitions or theestablishment of additional branches and may result in increases in operating expenses and reductions in revenuesthat could have a material adverse effect on our financial condition and results of operations. In addition, in order toraise additional capital, we may need to issue shares of our common stock that would dilute the book value of ourcommon stock and reduce our current shareholders’ percentage ownership interest to the extent they do notparticipate in future offerings.An investment in our common stock is not an insured deposit.Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any otherdeposit insurance fund or by any other public or private entity. Investment in our common stock is inherently riskyfor the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the samemarket forces that affect the price of common stock in any company. As a result, if you acquire our common stock,you may lose some or all of your investment.Our stock price can be volatile.Stock price volatility may make it more difficult for you to resell your common stock when you want and atprices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including,among other things:31• changes in government regulations; and• geopolitical conditions such as acts or threats of terrorism or military conflicts.TABLE OF CONTENTSGeneral market fluctuations, industry factors and general economic and political conditions and events, such aseconomic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price todecrease regardless of operating results.Our business is subject to interest rate risk and variations in interest rates may negatively affect our financialperformance.The majority of our assets and liabilities are monetary in nature and subject us to significant risk from changesin interest rates. Fluctuations in interest rates are not predictable or controllable. Like most financial institutions,changes in interest rates can impact our net interest income as well as the valuation of our assets and liabilities,which is the difference between interest earned from interest-earning assets, such as loans and investment securities,and interest paid on interest-bearing liabilities, such as deposits and borrowings. We expect that we will periodicallyexperience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or viceversa. In either event, if market interest rates should move contrary to our position, this “gap” will negatively impactour earnings. Many factors impact interest rates, including governmental monetary policies, inflation, recession,changes in unemployment, the money supply, and international disorder and instability in domestic and foreignfinancial markets.Based on our analysis of the interest rate sensitivity of our assets, an increase in the general level of interestrates may negatively affect the market value of the portfolio equity, but will positively affect our net interest incomesince most of our assets have floating rates of interest that adjust fairly quickly to changes in market rates of interest.Additionally, an increase in interest rates may, among other things, reduce the demand for loans and our ability tooriginate loans. A decrease in the general level of interest rates may affect us through, among other things, increasedprepayments on our loan and mortgage-backed securities portfolios and increased competition for deposits.Accordingly, changes in the level of market interest rates affect our net yield on interest-earning assets, loanorigination volume, loan and mortgage-backed securities portfolios, and our overall results. Although our assetliability management strategy is designed to control our risk from changes in market interest rates, it may not beable to prevent changes in interest rates from having a material adverse effect on our results of operations andfinancial condition.We are dependent on key personnel and the loss of one or more of those key personnel could impair ourrelationship with our customers and adversely affect our business.Many community banks attract customers based on the personal relationships that the banks’ officers andcustomers establish with each other and the confidence that the customers have in the officers. We significantlydepend on the continued service and performance of our key management personnel. We also believe ourmanagement team’s depth and breadth of experience in the banking industry is integral to executing our businessplan. The loss of the services of members of our senior management team or other key employees or the inability toattract additional qualified personnel as needed could have a material adverse effect on our business.Our profitability depends significantly on local economic conditions in the areas where our operations andloans are concentrated.Our profitability depends on the general economic conditions in our market areas of Northern Virginia,Maryland, Washington D.C., Charlottesville and Clifton Forge (Alleghany County), Front Royal, New Market,Richmond and the surrounding areas. Unlike larger banks that are more geographically diversified, we providebanking and financial services to clients primarily in these market areas. As of December 31, 2016, substantially allof our commercial real estate, real estate construction and residential real estate loans were made to borrowers in ourmarket area. The local economic conditions in this area have a significant impact on our commercial, real estate andconstruction and consumer loans, the ability of the borrowers to repay these loans and the value of the collateralsecuring these loans. In addition, if the population or income growth in this region slows, stops or declines, incomelevels, deposits and housing starts could be adversely affected and could result in the curtailment of our expansion,growth and profitability.32TABLE OF CONTENTSAdditionally, political conditions could impact our earnings. For example, political debate over the budget,taxes and the potential for reduced government spending may adversely impact the economy, and more specificallylocal economic conditions given the concentration of Federal workers and government contractors in our market.Acts or threats of war, terrorism, an outbreak of hostilities or other international or domestic calamities, or otherfactors beyond our control could impact these local economic conditions and could negatively affect the financialresults of our banking operations.The properties that we own and our foreclosed real estate assets could subject us to environmental risks andassociated costs.There is a risk that hazardous substances or wastes, contaminants, pollutants or other environmentally restrictedsubstances could be discovered on our properties or our foreclosed assets (particularly in the case of real estateloans). In this event, we might be required to remove the substances from the affected properties or to engage inabatement procedures at our sole cost and expense. Besides being liable under applicable federal and state statutesfor our own conduct, we may also be held liable under certain circumstances for actions of borrowers or other thirdparties on property that collateralizes one or more of our loans or on property that we own. Potential environmentalliability could include the cost of remediation and also damages for any injuries caused to third-parties. We cannotassure you that the cost of removal or abatement would not substantially exceed the value of the affected propertiesor the loans secured by those properties, that we would have adequate remedies against prior owners or otherresponsible parties or that we would be able to resell the affected properties either prior to or following completionof any such removal or abatement procedures. Any environmental damages on a property would substantiallyreduce the value of such property as collateral and, as a result, we may suffer a loss upon collection of the loan.The small to medium-sized businesses we lend to may have fewer resources to weather a downturn in theeconomy, which may impair a borrower’s ability to repay a loan to us that could materially harm ouroperating results.We make loans to professional firms and privately owned businesses that are considered to be small tomedium-sized businesses. Small to medium-sized businesses frequently have smaller market shares than theircompetition, may be more vulnerable to economic downturns, often need substantial additional capital to expand orcompete and may experience substantial volatility in operating results, any of which may impair a borrower’s abilityto repay a loan. In addition, the success of a small and medium-sized business often depends on the managementtalents and efforts of one or two persons or a small group of persons, and the death, disability or resignation of oneor more of these persons could have a material adverse impact on the business and its ability to repay our loan.Economic downturns in our target markets could cause us to incur substantial loan losses that could materially harmour operating results.We are heavily regulated by federal and state agencies; changes in laws and regulations or failures to complywith such laws and regulations may adversely affect our operations and our financial results.We and Sonabank are subject to extensive regulation, supervision and examination by federal and state bankingauthorities. Any change in applicable regulations or federal or state legislation could have a substantial impact on usand Sonabank, and our respective operations. Additional legislation and regulations may be enacted or adopted inthe future that could significantly affect our powers, authority and operations or the powers, authority and operationsof Sonabank, which could have a material adverse effect on our financial condition and results of operations.Further, bank regulatory authorities have the authority to bring enforcement actions against banks and theirholding companies for unsafe or unsound practices in the conduct of their businesses or for violations of any law,rule or regulation, any condition imposed in writing by the appropriate bank regulatory agency or any writtenagreement with the agency. Possible enforcement actions against us could include the issuance of a cease-and-desistorder that could be judicially enforced, the imposition of civil monetary penalties, the issuance of directives toincrease capital or enter into a strategic transaction, whether by merger or otherwise, with a third party, theappointment of a conservator or receiver, the termination of insurance of deposits, the issuance of removal andprohibition orders against institution-affiliated parties, and the enforcement of such actions through injunctions orrestraining orders. The exercise of this regulatory discretion and power may have a negative impact on us.33TABLE OF CONTENTSAs a regulated entity, Sonabank must maintain certain required levels of regulatory capital that may limitour operations and potential growth.We and Sonabank are subject to various regulatory capital requirements administered by the Federal Reserve.The capital requirements applicable to us and Sonabank changed as a result of the Dodd-Frank Act and theinternational regulatory capital initiative known as Basel III, and could be subject to further change as a result ofadditional government actions or regulatory interpretations. Regulators recently issued the Revised Capital Rules,discussed above in Capital Requirements . We were required to begin complying with the Revised Capital Ruleson January 1, 2015. Among other things, the Revised Capital Rules raised the minimum thresholds for requiredcapital and revised certain aspects of the definitions and elements of the capital that can be used to satisfy theserequired minimum thresholds. The Revised Capital Rules also introduce a minimum “capital conservation buffer”equal to 2.5% of an organization’s total risk-weighted assets, which exists in addition to the required minimumCET1, Tier 1, and Total Capital ratios that are discussed above. Complying with these capital requirements mayaffect our operations, including our asset portfolios and financial performance.Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional,discretionary actions by regulators that, if undertaken, could have a direct material effect on Sonabank’s and ourcompany’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework forprompt corrective action, Sonabank must meet specific capital guidelines that involve quantitative measures ofSonabank’s assets, liabilities and certain off-balance sheet commitments as calculated under these regulations.The Revised Capital Rules require Sonabank to maintain minimum amounts and defined ratios of total,Common Equity Tier I and Tier 1 capital to risk-weighted assets and of Tier 1 capital to adjusted average assets,also known as the leverage ratio.As of December 31, 2016, Sonabank exceeded the amounts required to be well capitalized with respect to allfour required capital ratios. As of December 31, 2016, Sonabank’s leverage, Common Equity Tier I risk-basedcapital, Tier 1 risk-based capital and total risk-based capital ratios were 10.45%, 12.55%, 12.55% and 13.49%,respectivelyMany factors affect the calculation of Sonabank’s risk-based assets and its ability to maintain the level ofcapital required to achieve acceptable capital ratios. For example, changes in risk weightings of assets relative tocapital and other factors may combine to increase the amount of risk-weighted assets in the Tier 1 risk-based capitalratio and the total risk-based capital ratio. Any increases in its risk-weighted assets will require a correspondingincrease in its capital to maintain the applicable ratios. In addition, recognized loan losses in excess of amountsreserved for such losses, loan impairments, impairment losses on securities and other factors will decreaseSonabank’s capital, thereby reducing the level of the applicable ratios.Sonabank’s failure to remain well capitalized for bank regulatory purposes could affect customer confidence,our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on our capital stock,our ability to make acquisitions, and on our business, results of operations and financial condition. Under FDICrules, if Sonabank ceases to be a well capitalized institution for bank regulatory purposes, the interest rates that itpays on deposits and its ability to accept, renew or rollover brokered deposits may be restricted. As of December 31,2016, we had $80.7 million of brokered deposits, which represented 8.84% of our total deposits.We may not be able to successfully compete with others for business.The metropolitan statistical area in which we operate is considered highly attractive from an economic anddemographic viewpoint, and is a highly competitive banking market. We compete for loans, deposits and investmentdollars with numerous regional and national banks, online divisions of out-of-market banks and other communitybanking institutions, as well as other kinds of financial institutions and enterprises, such as securities firms,insurance companies, savings associations, credit unions, mortgage brokers and private lenders. Many competitorshave substantially greater resources than us, and operate under less stringent regulatory environments. Thedifferences in resources and regulations may make it harder for us to compete profitably, reduce the rates that wecan earn on loans and investments, increase the rates we must offer on deposits and other funds and adversely affectour overall financial condition and earnings.34TABLE OF CONTENTSProvisions of our articles of incorporation and bylaws, as well as state and federal banking regulations, coulddelay or prevent a takeover of us by a third party.Our articles of incorporation and bylaws could delay, defer or prevent a third party from acquiring us, despitethe possible benefit to our shareholders, or otherwise adversely affect the price of our common stock.Any individual, acting alone or with other individuals, who are seeking to acquire, directly or indirectly, 10.0%or more of our outstanding common stock must comply with the Change in Bank Control Act, which requires priornotice to the Federal Reserve for any acquisition. Additionally, any entity that wants to acquire 5.0% or more of ouroutstanding common stock, or otherwise control us, may need to obtain the prior approval of the Federal Reserveunder the BHCA of 1956, as amended. As a result, prospective investors in our common stock need to be aware ofand comply with those requirements, to the extent applicable.We are subject to transaction risk, which could adversely affect our business, financial condition and resultsof operation.We, like all businesses, are subject to transaction risk, which is the risk of loss resulting from human error,fraud or unauthorized transactions due to inadequate or failed internal processes and systems, and external eventsthat are wholly or partially beyond our control (including, for example, computer viruses or electrical ortelecommunications outages). Transaction risk also encompasses compliance risk, which is the risk of loss fromviolations of, or noncompliance with, laws, rules, regulations, prescribed practices or ethical standards. Although weseek to mitigate transaction risk through a system of internal controls, there can be no assurance that we will notsuffer losses from transaction risks in the future that may be material in amount. Any losses resulting fromtransaction risk could take the form of explicit charges, increased operational costs, litigation costs, harm toreputation or forgone opportunities, any and all of which could have a material adverse effect on business, financialcondition and results of operations.We must respond to rapid technological changes and these changes may be more difficult or expensive thananticipated.If competitors introduce new products and services embodying new technologies, or if new industry standardsand practices emerge, our existing product and service offerings, technology and systems may become obsolete.Further, if we fail to adopt or develop new technologies or to adapt our products and services to emerging industrystandards, we may lose current and future customers, which could have a material adverse effect on our business,financial condition and results of operations. The financial services industry is changing rapidly and in order toremain competitive, we must continue to enhance and improve the functionality and features of our products,services and technologies. These changes may be more difficult or expensive than we anticipate.The impact of financial reform legislation is uncertain.The Dodd-Frank Act, enacted in 2010, instituted a wide range of regulatory, supervisory, and compliancereforms that will have had and will continue to have an impact on all financial institutions, including the creation ofthe Consumer Financial Protection Bureau with centralized authority, including examination and enforcementauthority, for consumer protection in the banking industry. The Dodd-Frank Act also included, among other things,changes to the deposit insurance and financial regulatory systems, enhanced bank capital requirements andrequirements designed to protect consumers in financial transactions. While many of the requirements called for inthe Dodd-Frank Act have been implemented, others will continue to be implemented over time. In light of thesesignificant changes and the discretion afforded to federal regulators, we cannot fully predict the effect thatcompliance with the Dodd-Frank Act or any implementing regulations will have on our businesses or ability topursue future business opportunities. Regulations implementing the Dodd-Frank Act, or any other aspects of currentproposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, mayimpact the profitability of our business activities or change certain of our business practices, including our ability tooffer new products, obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads, andcould expose us to additional costs, including increased compliance costs. Other35TABLE OF CONTENTSchanges to statutes, regulations, or regulatory policies or supervisory guidance, including changes in theirinterpretation or implementation, may affect us in substantial ways that we cannot predict. These changes also mayrequire Southern National to invest significant management attention and resources to make any necessary changesto our operations in order to comply, and could therefore also materially adversely affect our business, financialcondition, and results of operations.The “ability-to-repay” and “qualified mortgage” rules that may have a negative impact on our loanorigination process and foreclosure proceedings, which could adversely affect our business, operating resultsand financial condition.As described above in Supervision and Regulation — Fair Lending; Consumer Laws , the Bureau adopteda rule that implements the ability-to-repay and qualified mortgage provisions of the Dodd-Frank Act. The ability-to-repay rule, which took effect on January 10, 2014, has impacted our residential mortgage lending practices, and theresidential mortgage market generally.Reflecting the Bureau’s focus on the residential mortgage lending market, the Bureau has also issued rules toimplement requirements of the Dodd-Frank Act pertaining to mortgage loan origination (including with respect toloan originator compensation and loan originator qualifications) and has issued integrated mortgage disclosure rulesthat replaced and combined certain existing requirements under the Truth in Lending Act and the Real EstateSettlement Procedures Act. The Bureau has indicated that it expects to issue additional mortgage-related rules in thefuture.The “qualified mortgage” rules may increase our compliance burden and reduce our lending flexibility anddiscretion, which could negatively impact our ability to originate new loans and the cost of originating new loans.Any loans that we make outside of the “qualified mortgage” criteria could expose us to an increased risk of liabilityand reduce or delay our ability to foreclose on the underlying property. Additionally, qualified “higher pricedmortgages” only provide a rebuttable presumption of compliance and thus may be more susceptible to challengesfrom borrowers. It is difficult to predict the impact of the Bureau’s “qualified mortgage” rules, but any decreases inloan origination volume or increases in compliance and foreclosure costs could negatively affect our business,operating results and financial condition.We currently intend to pay dividends on our common stock; however, our future ability to pay dividends issubject to restrictions.We declared the first cash dividend on our common stock in February 2012, and each quarter thereafterthrough 2016. We also declared a special dividend in the fourth quarters of 2014 and 2015. There are a number ofrestrictions on our ability to pay dividends. It is the policy of the Federal Reserve that bank holding companiesshould pay cash dividends on common stock only out of income available over the past year and only if prospectiveearnings retention is consistent with the organization’s expected future needs and financial condition. The policyprovides that bank holding companies should not maintain a level of cash dividends that undermines the bankholding company’s ability to serve as a source of strength to its banking subsidiaries.Our principal source of funds to pay dividends on our common stock is cash dividends that we receive fromSonabank. The payment of dividends by Sonabank to us is subject to certain restrictions imposed by federal bankinglaws, regulations and authorities. The federal banking statutes prohibit federally insured banks from making anycapital distributions (including a dividend payment) if, after making the distribution, the institution would be “undercapitalized” as defined by statute. In addition, the relevant federal regulatory agencies have authority to prohibit aninsured bank from engaging in an unsafe or unsound practice, as determined by the agency, in conducting anactivity. The payment of dividends could be deemed to constitute such an unsafe or unsound practice, depending onthe financial condition of Sonabank. Regulatory authorities could impose administratively stricter limitations on theability of Sonabank to pay dividends to us if such limits were deemed appropriate to preserve certain capitaladequacy requirements.36TABLE OF CONTENTSThe trading volume in our common stock is less than that of other larger financial services companies.Although our common stock is listed for trading on the NASDAQ Global Market, the trading volume is low,and you are not assured liquidity with respect to transactions in our common stock. A public trading market havingthe desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willingbuyers and sellers of our common stock at any given time. This presence depends on the individual decisions ofinvestors and general economic and market conditions over which we have no control. Given the lower tradingvolume of our common stock, significant sales of our common stock, or the expectation of these sales, could causeour stock price to fall.Severe weather, natural disasters, climate change, acts of war or terrorism and other external events couldsignificantly impact our business .Severe weather, natural disasters, climate change, acts of war or terrorism and other adverse external eventscould have a significant impact on our ability to conduct business. Such events could affect the stability of ourdeposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securingloans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses.Although management has established disaster recovery policies and procedures, there can be no assurance of theeffectiveness of such policies and procedures, and the occurrence of any such event could have a material adverseeffect on our business, financial condition and results of operations.Consumers may decide not to use banks to complete their financial transactions.Technology and other changes are allowing parties to complete financial transactions that historically haveinvolved banks through alternative methods. For example, consumers can now maintain funds that would havehistorically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also completetransactions such as paying bills and/or transferring funds directly without the assistance of banks. The process ofeliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer depositsand the related income generated from those deposits. The loss of these revenue streams and the lower cost depositsas a source of funds could have a material adverse effect on our financial condition and results of operations.Our information systems may experience an interruption or breach in security.We rely heavily on communications and information systems provided both internally and externally toconduct our business. Any failure, interruption or breach in security of these systems (such as a spike in transactionvolume, a cyber-attack or other unforeseen events) could result in failures or disruptions in our customerrelationship management, general ledger, deposit, loan and other systems. While we have policies and proceduresand service level agreements designed to prevent or limit the effect of the failure, interruption or security breach ofour information systems, there can be no assurance that any such failures, interruptions or security breaches will notoccur or, if they do occur, that they will be adequately addressed. While we maintain an insurance policy which webelieve provides sufficient coverage at a manageable expense for an institution of our size and scope with similartechnological systems, we cannot assure shareholders that this policy would be sufficient to cover all relatedfinancial losses and damages should we experience any one or more of our or a third party’s systems failing orexperiencing a cyber-attack. The occurrence of any failures, interruptions or security breaches of our informationsystems could damage our reputation, result in a loss of customer business, subject us to additional regulatoryscrutiny, or expose us to civil litigation and possible financial liability, including remediation costs and increasedprotection costs, any of which could have a material adverse effect on our financial condition and results ofoperations.We face significant cyber and data security risk that could result in the disclosure of confidentialinformation, adversely affect our business or reputation and expose us to significant liabilities .As a financial institution, we are under threat of loss due to hacking and cyber-attacks. This risk has increasedin recent years, and continues to increase, as we continue to expand customer capabilities to utilize internet andother remote channels to transact business. Two of the most significant cyber-attack risks that we face are e-fraudand loss of sensitive customer data. Loss from e-fraud occurs when37TABLE OF CONTENTS ​ ​cybercriminals breach and extract funds directly from customer or our accounts. The attempts to breach sensitivecustomer data, such as account numbers and social security numbers, are less frequent but would present significantreputational, legal and/or regulatory costs to us if successful. Our risk and exposure to these matters remainsheightened because of the evolving nature and complexity of these threats from cybercriminals and hackers, ourplans to continue to provide internet banking and mobile banking channels, and our plans to develop additionalremote connectivity solutions to serve our customers. While we have not experienced any material losses relating tocyber-attacks or other information security breaches to date, we have been the subject of attempted hacking andcyber-attacks and there can be no assurance that we will not suffer such losses in the future.The occurrence of any cyber-attack or information security breach could result in material adverseconsequences to us including damage to our reputation and the loss of customers. We also could face litigation oradditional regulatory scrutiny. Litigation or regulatory actions in turn could lead to significant liability or othersanctions, including fines and penalties or reimbursement of customers adversely affected by a security breach.Even if we do not suffer any material adverse consequences as a result of events affecting us directly, successfulattacks or systems failures at other large financial institutions could lead to a general loss of customer confidence infinancial institutions including Sonabank.Our ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of ourinformation security procedures and contracts and our ability to anticipate the timing and nature of any such eventthat occurs. In recent years, we have incurred significant expense towards improving the reliability of our systemsand their security from attack. Nonetheless, there remains the risk that we may be materially harmed by a cyber-attack or information security breach. Methods used to attack information systems change frequently (with generallyincreasing sophistication), often are not recognized until launched against a target, may be supported by foreigngovernments or other well-financed entities, and may originate from less regulated and remote areas around theworld. As a result, we may be unable to address these methods in advance of attacks, including by implementingadequate preventive measures. If such an attack or breach does occur, we might not be able to fix it timely oradequately. To the extent that such an attack or breach relates to products or services provided by others, we seek toengage in due diligence and monitoring to limit the risk.Item 1B. Unresolved Staff CommentsSouthern National does not have any unresolved staff comments from the SEC to report for the year endedDecember 31, 2016.Item 2. PropertiesThe following table sets forth the date opened or acquired, ownership status and the total deposits, notincluding brokered deposits, for each of our banking locations, as of December 31, 2016:LocationDate Opened or AcquiredOwned or LeasedDeposits (in thousands)​Home Office and Branch:​6830 Old Dominion Drive McLean, Virginia 22101December 2006Leased$60,087​Branch Offices:​511 Main Street Clifton Forge, Virginia 24442December 2005Owned$51,524​1770 Timberwood Boulevard Charlottesville, Virginia 22911April 2005Leased$39,749​11527 Sunrise Valley Drive Reston, Virginia 20191December 2006Leased$50,684​10855 Fairfax Boulevard Fairfax, Virginia 22030December 2006Leased$45,483​38TABLE OF CONTENTSLocationDate Opened or AcquiredOwned or LeasedDeposits (in thousands)​550 Broadview Avenue Warrenton, Virginia 20186April 2007Leased$29,513​1 East Market Street Leesburg, Virginia 20176April 2008Leased$24,042​11 Main Street Warrenton, Virginia 20186September 2009Leased$29,384​11200 Rockville Pike Rockville, Maryland 20852December 2009Leased$81,389​1 South Front Royal Avenue Front Royal, Virginia 22630December 2009Owned$43,786​9484 Congress Street New Market, Virginia 22844December 2009Owned$45,273​43086 Peacock Market Plaza South Riding, Virginia 20152December 2009Leased$22,861​10 West Washington Street Middleburg, Virginia 20117May 2011Leased$15,790​13804 Hull Street Road Midlothian, Virginia 23112October 2011Owned$37,976​9707 Medical Center Drive, Suite 150 Rockville, Maryland 20850April 2012Leased$50,092​37 North Market Street Frederick, Maryland 21701April 2012Leased$33,347​6719 Leaberry Way Haymarket, Virginia 20169August 2012Leased$14,468​7700 Wisconsin Avenue Bethesda, Maryland 22101October 2012Leased$35,509​4009 Old Town Road Huntingtown, Maryland 20639August 2014Leased$18,789​137 E. Chesapeake Beach Road Owings, Maryland 20736August 2014Owned$19,167​14804 Pratt Street Upper Marlboro, Maryland 200772August 2014Owned$69,762​14118 Brandywine Road Brandywine, Maryland 20613August 2014Owned$13,612​Loan Production Offices:​230 Court Square Charlottesville, Virginia 22902March 2005LeasedNA​2217 Princess Anne Street Fredericksburg, Virginia 22401April 2005LeasedNA​550 Broadview Avenue Warrenton, Virginia 20186September 2005LeasedNA​39TABLE OF CONTENTS ​ ​LocationDate Opened or AcquiredOwned or LeasedDeposits (in thousands)Accounting Office:​​70 Main Street, Suite 34 Warrenton, Virginia 20186December 2014Leased​NA​Executive Offices:​​1002 Wisconsin Avenue, N.W. Washington, D.C. 20007April 2005Leased​NA​Item 3. Legal ProceedingsSouthern National and Sonabank may, from time to time, be a party to various legal proceedings arising in theordinary course of business. There are no other proceedings pending, or to management’s knowledge, threatened,against Southern National or Sonabank as of December 31, 2016.Item 4. Mine Safety DisclosuresNot applicable.40Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities(1) The dividend declared in the fourth quarter of 2015 included a special dividend of  $0.20.TABLE OF CONTENTS ​PART IICommon Stock Market PricesOn November 6, 2006, Southern National closed on the initial public offering of its common stock, $0.01 parvalue. The shares of common stock sold in the offering were registered under the Securities Act of 1933, asamended, on a Registration Statement (Registration No. 333-136285) that was declared effective by the Securitiesand Exchange Commission on October 31, 2006. The shares of common stock were sold at a price to the public of $14.00 per share (equivalent to $12.73 after the stock dividend declared in May 2007).Southern National completed a follow-on public offering of its common stock in an underwritten publicoffering on November 4, 2009, selling 4,791,665 shares of common stock, including 624,999 shares sold pursuant toan over-allotment option granted to the underwriter, at a price of  $6.00 per share. The gross proceeds from theshares sold were $28.7 million. The net proceeds to Southern National from the offering were approximately $26.9million after deducting $1.3 million in underwriting commission and an estimated $486 thousand in other expensesincurred in connection with the offering.Southern National’s common stock is traded on the Nasdaq Global Market under the symbol “SONA”. Ourcommon stock began trading on the Nasdaq Capital Market in November 2006, and the exchange listing wasupgraded to the Nasdaq Global Market at the open of trading on December 18, 2007.There were 12,318,743 shares of our common stock outstanding at the close of business on March 6, 2017,which were held by 239 shareholders of record.The following table presents the high and low intra-day sales prices and dividends declared for quarterlyperiods during 2016 and 2015:Market ValuesDividends Declared​2016201520162015 ​HighLowHighLow​First Quarter$13.40$11.92$12.50$10.80$0.08$0.08Second Quarter12.7711.6012.2211.030.080.08Third Quarter13.5911.9512.0010.980.080.08Fourth Quarter16.7812.7413.5411.140.080.28Dividend PolicyDividends are paid at the discretion of our board of directors. While we paid a nonrecurring 10% stockdividend to our holders of common stock in 2007, we declared the first cash dividend on our common stock inFebruary 2012 and each quarter thereafter through 2016. The amount and frequency of dividends, if any, will bedetermined by our board of directors after consideration of our earnings, capital requirements, our financialcondition and our ability to service any equity or debt obligations senior to our common stock, and will depend oncash dividends paid to us by our subsidiary bank. As a result, our ability to pay future dividends will depend on theearnings of Sonabank, its financial condition and its need for funds.There are a number of restrictions on our ability to pay cash dividends. It is the policy of the FRB that bankholding companies should pay cash dividends on common stock only out of net income available over the past yearand only if prospective earnings retention is consistent with the organization’s expected future needs and financialcondition. The policy provides that bank holding companies should not maintain a level of cash dividends thatundermines the bank holding company’s ability to serve as a source of financial41(1)TABLE OF CONTENTSstrength to its banking subsidiary. For a foreseeable period of time, our principal source of cash will be dividendspaid by our subsidiary bank with respect to its capital stock. There are certain restrictions on the payment of thesedividends imposed by federal and state banking laws, regulations and authorities.Regulatory authorities could administratively impose limitations on the ability of our subsidiary bank to paydividends to us if such limits were deemed appropriate to preserve certain capital adequacy requirements or in theinterests of  “safety and soundness.”Recent Sales of Unregistered SecuritiesNoneSecurities Authorized for Issuance under Equity Compensation PlansAs of December 31, 2016, Southern National had outstanding stock options granted under its Stock OptionPlan, which is approved by its shareholders. The following table provides information as of December 31, 2016regarding Southern National’s equity compensation plans under which our equity securities are authorized forissuance:Plan categoryNumber of securities to be issued upon exercise of outstanding options, warrants and rights AWeighted average exercise price of outstanding options, warrants and rights BNumber of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column A) C​Equity compensation plans approved by security holders782,200$9.5627,650Equity compensation plans not approvedby security holders———Total782,200$9.5627,650Issuer Purchases of Equity SecuritiesNone42TABLE OF CONTENTSPerformance GraphThe following chart compares the cumulative total shareholder return on Southern National common stockduring the five years ended December 31, 2016, with the cumulative total return of the Russell 2000 Index and theSNL Bank and Thrift Index for the same period. Dividend reinvestment has been assumed. This comparisonassumes $100 invested on December 31, 2011 in Southern National common stock, the Russell 2000 Index and theSNL Bank and Thrift Index. The historical stock price performance for Southern National common stock shown onthe graph below is not necessarily indicative of future stock performance.201120122013201420152016​Southern National Bancorp of Virginia100.0116.6147.1175.8211.8271.7Russell 2000100.0141.4196.3206.0196.9238.8SNL Bank and Thrift Index100.0116.6159.6178.2181.8229.543(1) Tangible book value per share is calculated by dividing stockholders’ equity less intangible assets by the number ofoutstanding shares of common stock.(2) Efficiency ratio is calculated by dividing noninterest expense by the sum of net interest income plus noninterest income,excluding any gains/losses on sales of securities, gains/write-downs on OREO, gains on acquisitions and gains on sale ofloans.TABLE OF CONTENTS ​Item 6. Selected Financial DataThe following table sets forth selected financial data for Southern National as of December 31, 2016, 2015, 2014, 2013,and 2012, and for the years ended December 31, 2016, 2015, 2014, 2013, and 2012:​​20162015201420132012​(in thousands, except per share amounts)Results of Operations:Interest income$48,947$43,701$38,091$35,116$37,561Interest expense8,6337,0774,6734,6685,828Net interest income40,31436,62433,41830,44831,733Provision for loan losses4,9123,1713,4443,6156,195Net interest income after provision for loan losses35,40233,45329,97426,83325,538Noninterest income2,8203,7812,3641,7535,595Noninterest expenses22,81523,27821,10119,29221,449Income before income taxes15,40713,95611,2379,2949,684Income tax expense5,0954,6673,7543,0363,115Net income$10,312$9,289$7,483$6,258$6,569Per Share Data:Earnings per share – Basic$0.84$0.76$0.63$0.54$0.57Earnings per share – Diluted$0.83$0.75$0.63$0.54$0.57Cash dividends paid per share$0.32$0.52$0.60$0.25$0.25Book value per share$10.30$9.78$9.33$9.20$8.90Tangible book value per share $9.37$8.83$8.36$8.34$8.00Dividend payout ratio38.1068.4295.2446.3043.86Weighted average shares outstanding – Basic12,251,80412,224,49411,846,12611,590,33311,590,212Weighted average shares outstanding – Diluted12,426,78312,330,43111,927,08311,627,44511,596,176Shares outstanding at end of period12,263,64312,234,44312,216,66911,590,61211,590,212Selected Performance Ratios and Other Data:Return on average assets0.950.950.940.890.97Return on average equity8.377.876.765.956.40Yield on earning assets4.864.855.245.486.15Cost of funds1.000.910.750.851.11Net interest margin4.004.074.604.755.19Efficiency ratio 52.5357.6460.4560.7856.25Net charge-offs to average loans0.530.280.510.691.04Allowance for loan losses to total non-covered loans0.951.061.111.421.54Stockholders’ equity to total assets11.0611.5512.4314.8914.25Financial Condition:Total assets$1,142,443$1,036,107$916,645$716,185$723,812Total loans, net of deferred fees930,415829,425703,472546,058530,151Total deposits912,982825,294742,425540,359550,977Stockholders’ equity126,344119,636113,979106,614103,17644(1)%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%(2)%%%%%%%%%%%%%%%%%%%%TABLE OF CONTENTS ​Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsManagement’s discussion and analysis is presented to aid the reader in understanding and evaluating thefinancial condition and results of operations of Southern National. This discussion and analysis should be read withthe consolidated financial statements, the footnotes thereto, and the other financial data included in this report.CRITICAL ACCOUNTING POLICIESOur accounting policies are in accordance with U. S. generally accepted accounting principles and with generalpractices within the banking industry. Management makes a number of estimates and assumptions relating toreported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of theconsolidated financial statements and the reported amounts of revenues and expenses during periods presented.Different assumptions in the application of these methods or policies could result in material changes in ourfinancial statements. As such, the following policies are considered “critical accounting policies” for us.Allowance for Loan LossesThe allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses arecharged against the allowance when management believes the collection of the principal is unlikely. Recoveries ofamounts previously charged-off are credited to the allowance. Management’s determination of the adequacy of theallowance is based on a three year historical average net loss experience for each portfolio segment adjusted forcurrent industry and economic conditions (referred to as “current factors”) and estimates of their effect on loancollectability. While management uses available information to estimate losses on loans, future additions to theallowance may be necessary based on changes in economic conditions, particularly those affecting real estatevalues.The allowance consists of specific and general components. The specific component relates to loans that areindividually classified as impaired. The general component provides for estimated losses in unimpaired loans and isbased on historical loss experience adjusted for current factors.A loan is considered impaired when, based on current information and events, it is probable that SouthernNational will be unable to collect the scheduled payments of principal or interest when due according to the terms ofthe loan documentation. Factors considered by management in determining impairment include payment status,collateral value, and the probability of collecting scheduled principal and interest payments when due, among otherconsiderations. Loans that experience insignificant payment delays and payment shortfalls generally are notclassified as impaired. Management determines the significance of payment delays and payment shortfalls on acase-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower,including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount ofthe shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis forcommercial and construction loans by either the present value of expected future cash flows discounted at the loan’seffective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateraldependent. Individual consumer and residential loans are evaluated for impairment based on the aforementionedcriteria as well as regulatory guidelines.The general component covers non-impaired loans and is based on historical loss experience adjusted forcurrent factors. The historical loss experience is determined by portfolio segment and is based on the actual net losshistory experienced by Southern National over the most recent three years. This actual loss experience is adjustedfor current factors based on the risks present for each portfolio segment. These current factors include considerationof the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs andrecoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards;other changes in lending policies, procedures, and practices; experience, ability, and depth of lending managementand other relevant staff; national and local economic trends and conditions; industry conditions; and effects ofchanges in credit concentrations. The following portfolio segments have been identified: owner occupiedcommercial real estate, non-owner occupied commercial real estate, construction and land development, commercialloans, residential 1 – 445TABLE OF CONTENTSfamily, multi-family residential, loans secured by farmland, home equity lines of credit (HELOC) and consumer.While underwriting practices in this environment are more stringent, the bank estimates the effect of internal factorson future net loss experience to be negligible. Management’s estimate of the effect of current external economicenvironmental conditions on future net loss experience is significant in all loan segments and particularly on loanssecured by real estate including single family 1 – 4, non-owner occupied commercial real estate and constructionand land development loans. These factors include excess inventory, generally less demand driven in part by fewerqualified borrowers and buyers. These considerations have played a significant role in management’s estimate of theadequacy of the allowance for loan and lease losses.Accounting for the FDIC Indemnification Asset and Acquired LoansSouthern National acquired loan portfolios through its acquisitions of Greater Atlantic Bank in 2009, itsacquisition of HarVest Bank of Maryland in 2012, and its acquisition of Prince George’s Federal Savings Bank in2014. The single family residential loans acquired in the Greater Atlantic Bank transaction are referred to as coveredloans because of loss protection provided by the FDIC pursuant to a loss sharing agreement which expires inDecember 2019. The loss sharing agreement related to non-single family residential loans expired inDecember 2014. The loans acquired in the HarVest and Prince George’s transactions are not covered by an FDICloss sharing agreement.The accounting for the covered loans requires Southern Financial to estimate the timing and amount of cashflows to be collected from these loans at acquisition, and to periodically update our estimates of the cash flowsexpected to be collected over the life of the covered loans. Similarly, the accounting for the FDIC indemnificationasset requires us to estimate the timing and amount of cash flows to be received from the FDIC in reimbursementfor losses and expenses related to the covered loans; these estimates are directly related to estimates of cash flows tobe received from the covered loans. The estimated cash flows from the FDIC indemnification asset are sensitive tochanges in the same assumptions that impact expected cash flows on covered loans. If the amount of expected cashflows to be recovered from the FDIC changes, the difference between the carrying amount of the FDICindemnification asset and the revised recoverable amount is accreted or amortized over the remaining term of theFDIC agreement or the life of the loans, whichever is shorter. These estimates are considered to be criticalaccounting estimates because they involve significant judgment and assumptions as to the amount and timing ofcash flows to be collected.Acquired loans are placed into homogenous pools at acquisition. At acquisition, the fair value of the pools ofcredit impaired loans was measured based on the expected cash flows to be derived from each pool. The differencebetween total contractual payments due and the cash flows expected to be received at acquisition was recognized asnon-accretable difference. The excess of expected cash flows over the recorded fair value of each pool at theacquisition is referred to as the accretable yield and is being recognized as interest income over the life of each pool.Acquired loans with no discount attributable, at least in part, to credit quality, performing loans, are accounted foron a contractual basis.We monitor loan pool activity and performance and as conditions or expectations change we update ourexpected cash flows from the pools to determine whether any material changes have occurred in expected cashflows that would be indicative of impairment or necessitate reclassification between non-accretable difference andaccretable yield. Initial and ongoing cash flow expectations incorporate significant assumptions regardingprepayment rates, the timing of resolution of loans, frequency of default, delinquency and loss severity, which isdependent on estimates of underlying collateral values.Prepayment, delinquency and default curves used to forecast pool cash flows are derived from the historicalperformance of the loan pools. Changes in the assumptions that impact forecasted cash flows could result in apotentially material change to the amount of the allowance for loan losses or the rate of accretion on these loans.Other than Temporary Impairment (“OTTI”) of Investment SecuritiesManagement evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis,and more frequently when economic or market conditions warrant such an evaluation. For securities in anunrealized loss position, management considers the extent and duration of the unrealized46TABLE OF CONTENTSloss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intendsto sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position beforerecovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entiredifference between amortized cost and fair value is recognized as impairment through earnings. For debt securitiesthat do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1)OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors,which is recognized in other comprehensive income. The credit loss is defined as the difference between the presentvalue of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entireamount of impairment is recognized through earnings.In order to determine OTTI for purchased beneficial interests that, on the purchase date, were not highly rated,Southern National compares the present value of the remaining cash flows as estimated at the preceding evaluationdate to the current expected remaining cash flows. OTTI is deemed to have occurred if there has been an adversechange in the remaining expected future cash flows.Goodwill Impairment AssessmentGoodwill is evaluated for impairment on an annual basis or more frequently if events or circumstances warrant.Goodwill is primarily related to the 2006 acquisition of 1 Service Bank. The acquisition of PGFSB in 2014increased goodwill by $1.4 million. Our annual assessment timing is during the third calendar quarter. For the 2016assessment, we performed a qualitative assessment to determine if it was more likely than not that the fair value ofour single reporting unit is less than its carrying amount. We concluded that the fair value of our single reportingunit exceeded its carrying amount. Our qualitative assessment considered many factors including, but not limited to,our actual and projected operating performance and profitability, as well as consideration of recent bank merger andacquisition transaction metrics. No impairment was indicated in 2016 or 2015.Other Real Estate Owned (OREO)Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the fairvalue of the collateral at the date of foreclosure based on estimates, including some obtained from third parties, lessestimated costs to sell, establishing a new cost basis. Subsequent to foreclosure, valuations are periodicallyperformed by management, and the assets are carried at the lower of cost or fair value, less estimated costs to sell.Significant property improvements that enhance the salability of the property are capitalized to the extent that thecarrying value does not exceed estimated realizable value. Legal fees, maintenance and other direct costs offoreclosed properties are expensed as incurred.Due to the judgment involved in estimating fair value of the properties, accounting for OREO is regarded as acritical accounting policy. Estimates of value of OREO properties at the date of foreclosure are typically based onreal estate appraisals performed by independent appraisers. These values are generally updated as appraisals becomeavailable.Valuation of Deferred Tax AssetThe provision for income taxes reflects the tax effects of the transactions reported in the financial statements,including taxes currently due as well as changes in deferred taxes. Deferred tax assets and liabilities representestimates of the future tax return consequences of temporary differences between carrying amounts and tax bases ofassets and liabilities. Deferred tax assets and liabilities are computed by using currently enacted income tax ratesand applying those rates to the periods in which the deferred tax assets or liabilities are expected to be realized orsettled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through theprovision for income taxes. As of December 31, 2015 and 2014, management concluded that it is more likely thannot that Southern National will generate sufficient taxable income to fully utilize our deferred tax assets.OVERVIEWSouthern National Bancorp of Virginia, Inc. (“Southern National” or “SNBV”) is a corporation formed onJuly 28, 2004 under the laws of the Commonwealth of Virginia and is the holding company for47st TABLE OF CONTENTSSonabank (“Sonabank”) a Virginia state chartered bank which commenced operations on April 14, 2005. Sonabankprovides a range of financial services to individuals and small and medium sized businesses. Sonabank has fifteenbranches in Virginia, located in Fairfax County (Reston, McLean and Fairfax), in Charlottesville, Warrenton (2),Middleburg, Leesburg (2), South Riding, Front Royal, New Market, Haymarket, Richmond and Clifton Forge, andeight branches in Maryland, in Rockville, Shady Grove, Frederick, Bethesda, Upper Marlboro, Brandywine, Owingsand Huntingtown.While we offer a wide range of commercial banking services, we focus on making loans secured primarily bycommercial real estate and other types of secured and unsecured commercial loans to small and medium-sizedbusinesses in a number of industries, as well as loans to individuals for a variety of purposes. We are a leadingSmall Business Administration (SBA) lender among Virginia community banks. We also invest in real estate-related securities, including collateralized mortgage obligations and agency mortgage backed securities. Ourprincipal sources of funds for loans and investing in securities are deposits and, to a lesser extent, borrowings. Weoffer a broad range of deposit products, including checking (NOW), savings, money market accounts andcertificates of deposit. We actively pursue business relationships by utilizing the business contacts of our seniormanagement, other bank officers and our directors, thereby capitalizing on our knowledge of our local market areas.We completed the acquisition of the HarVest Bank of Maryland on April 27, 2012, the Midlothian Branch inRichmond, Virginia on October 1, 2011 and the acquisition and assumption of certain assets and liabilities ofGreater Atlantic Bank from the FDIC on December 4, 2009. As part of the Greater Atlantic acquisition, the Bankand the FDIC entered into a loss sharing agreement (the “loss sharing agreement”) on approximately $143.4 million(cost basis) of Greater Atlantic Bank’s assets. The Bank will share in the losses on the loans and foreclosed loancollateral with the FDIC as specified in the loss sharing agreement; we refer to these assets collectively as “coveredassetsThe merger with Prince George’s Federal Savings Bank (PGFSB) was completed on August 1, 2014. SouthernNational acquired PGFSB in a cash and stock transaction. PGFSB was founded in 1931 and was headquartered inUpper Marlboro, which is the County Seat of Prince George’s County, Maryland. PGFSB has four offices, all ofwhich are in Maryland, including a main office in Upper Marlboro and three branch offices in Dunkirk, Brandywineand Huntingtown. PGFSB has an excellent core deposit base reflecting its tenure in the communities it serves, andits lending activities have historically been focused on residential mortgages.On December 13, 2016, Southern National and Eastern Virginia Bankshares, Inc. (“Eastern Virginia”), theholding company of EVB, jointly announced today the signing of a definitive agreement to merge. The combinationbrings together two banking companies with complementary business lines creating one of the premier bankinginstitutions headquartered in the Commonwealth of Virginia.RESULTS OF OPERATIONSNet IncomeNet income for the year ended December 31, 2016 was $10.3 million, compared to $9.3 million for the yearended December 31, 2015, and $7.5 million for the year ended December 31, 2014.Net Interest IncomeOur operating results depend primarily on our net interest income, which is the difference between interest anddividend income on interest-earning assets such as loans and investments, and interest expense on interest-bearingliabilities such as deposits and borrowings.Net interest income was $40.3 million during the year ended December 31, 2016, compared to $36.6 millionduring the prior year. Average loans during the year ended December 31, 2016 were $889.6 million compared to$761.6 million during 2015. Sonabank’s net interest margin was 4.00% during the year ended December 31, 2016compared to 4.07% during the year ended December 31, 2015. The loan discount accretion on our three acquisitionswere $2.1 million in the year ended December 31, 2016 compared to $2.6 million in 2015.48(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.TABLE OF CONTENTSAverage loans during 2015 were $761.6 million compared to $608.6 million in 2014. The net interest marginfor the year was 4.07% in 2015, down from 4.60% in 2014. The decline in the net interest margin was partiallyattributable to an increase in the residential loan portfolio resulting from the PGFSB acquisition and the residentialportfolio purchases from STM during the year. Net interest income was $36.6 million during the year endedDecember 31, 2015, compared to $33.4 million during the prior year. The accretion of the discount on loansacquired in the acquisitions of Greater Atlantic Bank, HarVest and Prince Georges Federal Savings Bank (PGFSB)contributed $2.6 million to net interest income during the year ended December 31, 2015, compared to $3.1 millionduring 2014.The following tables detail average balances of interest-earning assets and interest-bearing liabilities, theamount 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 Years Ended December 31, 2016, 2015 and 2014201620152014​Average BalanceInterest Income/​ ExpenseYield/​ RateAverage BalanceInterest Income/​ ExpenseYield/​ RateAverage BalanceInterest Income/​ ExpenseYield/​ Rate​(Dollar amounts in thousands)AssetsInterest-earning assets:Loans, net of deferred fees $889,600$45,3485.10$761,550$40,1045.27$608,604$34,6115.69Investment securities96,8362,9553.0597,5802,8062.8890,1332,6282.92Other earning assets20,7266443.1141,2457911.9228,4848522.99Total earning assets1,007,16248,9474.86900,37543,7014.85727,22138,0915.24Allowance for loan losses(8,634(8,139(7,422Intangible assets11,49911,99111,452Other non-earning assets70,33270,80066,157Total assets$1,080,359$975,027$797,408Liabilities and stockholders’ equityInterest-bearing liabilities:NOW and other demand accounts$36,470600.16$24,306250.10$23,574260.11Money market accounts127,1214530.36138,5594830.35130,4733690.28Savings accounts51,6703330.6444,6612820.6329,0341790.62Time deposits579,1577,2551.25509,9005,6431.11376,3953,4020.90Total interest-bearing deposits794,4188,1011.02717,4266,4330.90559,4763,9760.71Borrowings66,2305320.8058,3586441.1062,8106971.11Total interest-bearing liabilities860,6488,6331.00775,7847,0770.91622,2864,6730.75Noninterest-bearing liabilities:Demand deposits88,41375,12959,205Other liabilities8,1406,1205,158Total liabilites957,201857,033686,649Stockholders’ equity123,158117,994110,759Total liabilities and stockholders’ equity$1,080,359$975,027$797,408Net interest income$40,314$36,624$33,418Interest rate spread3.863.944.49Net interest margin4.004.074.6049(1)(2)%%%%%%%%%%%%)))%%%%%%%%%%%%%%%%%%%%%%%%%%%TABLE OF CONTENTSThe following table summarizes changes in net interest income attributable to changes in the volume ofinterest-bearing assets and liabilities compared to changes in interest rates. The change in interest, due to both rateand volume, has been proportionately allocated between rate and volume.Year Ended December 31, 2016 vs. 2015​Year Ended December 31, 2015 vs. 2014​Increase (Decrease) Due to Change in:​Increase (Decrease) Due to Change in:​VolumeRateNet Change​VolumeRateNet Change​( in thousands)Interest-earning assets:Loans, net of deferred fees$6,477$(1,233$5,244$7,786$(2,293$5,493Investment securities(21170149214(36178Other earning assets596(743(147(306245(61Total interest-earning assets7,052(1,8065,2467,694(2,0845,610Interest-bearing liabilities:NOW accounts1619351(1—Money market accounts(4111(302490114Savings accounts45651994103Time deposits8187941,6121,3738682,241Total interest-bearing deposits8388301,6681,4979612,458Borrowings110(222(112(49(4(53Total interest-bearing liabilities9486081,5561,4489572,405Change in net interest income$6,104$(2,414$3,690$6,246$(3,041$3,205Provision for Loan LossesThe provision for loan losses is a current charge to earnings made in order to increase or decrease theallowance for loan losses to a level for inherent probable losses in the loan portfolio based on an evaluation of theloan portfolio, current economic conditions, changes in the nature and volume of lending, historical loan experienceand other known internal and external factors affecting loan collectability. Our loan loss allowance is calculated bysegmenting the loan portfolio by loan type and applying risk factors to each segment. The risk factors aredetermined by considering historical loss data, peer data, as well as applying management’s judgment.The provision for loan losses charged to operations for the years ended December 31, 2016, 2015 and 2014 was$4.9 million, $3.2 million, and $3.4 million, respectively. We had charge-offs totaling $5.0 million during 2016,$2.7 million during 2015, and $3.3 million during 2014. There were recoveries totaling $239 thousand during 2016,$526 thousand during 2015 and $174 thousand during 2014. The increased level of charge-offs in 2016 was mainlydue to a single borrower.The Financial Condition Section of Management’s Discussion and Analysis provides information on our loanportfolio, past due loans, nonperforming assets and the allowance for loan losses.50))))))))))))))))))))TABLE OF CONTENTSNoninterest IncomeThe following table presents the major categories of noninterest income for the years ended December 31,2016, 2015 and 2014 (in thousands):20162015ChangeAccount maintenance and deposit service fees$896$953$(57Income from bank-owned life insurance70063664Equity income from mortgage affiliate1,1091,459(350Gain on sale of securities available for sale—520(520Gain on other assets—7(7Other115206(91Total noninterest income$2,820$3,781$(96120152014Change​Account maintenance and deposit service fees$953$826$127Income from bank-owned life insurance63661719Equity income from mortgage affiliate1,459558901Net impairment losses recognized in earnings—(4141Gain on sale of securities available for sale520—520Gain on other assets7202(195Other2062024Total noninterest income$3,781$2,364$1,417Noninterest income decreased to $2.8 million in the year ended December 31, 2016 from $3.8 million in 2015.Much of the non-interest income in 2015 resulted from the fact that we transferred from our held-to-maturity (HTM)portfolio all of the trust preferred securities and a non-government sponsored residential collateralized mortgageobligation (CMO) that had previously been classified as other than temporarily impaired to the available-for-sale(AFS) classification. We sold five of these trust preferred securities and the CMO recognizing a net gain of  $520thousand in the year ended December 31, 2015. We recognized income from our investment in STM, our mortgageaffiliate, in the amount of  $1.1 million during the year ended December 31, 2016, compared to $1.5 million during2015. STM showed volume growth in the fourth quarter of 2016 with originations of  $212 million, up from $179million in the same quarter of 2015. However, they experienced a fourth quarter loss of  $556 thousand attributableto the operating costs related to the opening of new offices in Innsbrook, Virginia; Raleigh, North Carolina; NewCastle, Delaware and to the cost of installing a new delivery channel. In addition, STM experienced some margincompression. Our share of the fourth quarter 2016 loss was $272 thousand.Noninterest income increased to $3.8 million in 2015 from $2.4 million in 2014. We recognized income fromour equity investment in STM in the amount of  $1.5 million during 2015 compared to $558 thousand in 2014. Weclosed on STM in May 2014, therefore, we recognized approximately seven and one half months of income in theyear ended December 31, 2014. In the second quarter of 2015 we transferred from our held-to-maturity (HTM)portfolio all of the trust preferred securities and a non-government sponsored residential collateralized mortgageobligation (CMO) that had previously been classified as other than temporarily impaired to the available-for-sale(AFS) classification. We sold five of these trust preferred securities and the CMO recognizing a net gain of  $520thousand. Due to the significant deterioration in these issuers’ creditworthiness which could not have beenreasonably anticipated, we feel that our change in classification did not taint our intention to hold to maturity inregards to the remainder of our HTM portfolio.51))))))))TABLE OF CONTENTSNoninterest ExpenseThe following table presents the major categories of noninterest expense for the years ended December 31,2016, 2015 and 2014 (in thousands):20162015ChangeSalaries and benefits$11,675$11,860$(185Occupancy expenses3,1553,269(114Furniture and equipment expenses975815160Amortization of core deposit intangible219261(42Virginia franchise tax expense38735235FDIC assessment543664(121Data processing expense74466876Telephone and communication expense745786(41Amortization of FDIC indemnification asset793630163Net loss on other real estate owned174291(117Merger expense429—429Other operating expenses2,9763,682(706Total noninterest expense$22,815$23,278$(46320152014Change​Salaries and benefits$11,860$10,225$1,635Occupancy expenses3,2693,165104Furniture and equipment expenses81578728Amortization of core deposit intangible26122041Virginia franchise tax expense352455(103FDIC assessment66456995Data processing expense66856999Telephone and communication expense78675135Change in FDIC indemnification asset6301,230(600Net loss (gain) on other real estate owned291(433724Merger expense—487(487Other operating expenses3,6823,076606Total noninterest expense$23,278$21,101$2,177Noninterest expenses were $22.8 million during the year ended December 31, 2016, compared to $23.3 million during the year ended December 31, 2015. During the year ended December 31, 2016 we had lossesof  $375 thousand because of impairment recognized on four other real estate owned (OREO) properties. This waspartially offset by gains on the sale of four properties in the amount of  $201 thousand, resulting in a net loss of $174 thousand. During 2015, we had losses on OREO of  $740 thousand as we charged down five OREO propertieswhich proved challenging to sell. This was partially offset by gains on the sale of six properties in the amount of $449 thousand, resulting in a net loss of  $291 thousand. We had merger related expenses of  $429 thousand in 2016related to the previously announced agreement and plan of merger with EVB, and there were no merger expenses in2015. Employee compensation decreased by $185 thousand compared to the year ended December 31, 2015.52))))))))))))TABLE OF CONTENTSNoninterest expenses were $23.3 million during 2015, compared to $21.1 million during 2014. During 2015,we had losses on other real estate owned (OREO) of  $740 thousand as we charged down five OREO propertieswhich proved challenging to sell. This was partially offset by gains on the sale of six properties in the amount of $449 thousand, resulting in a net loss of  $291 thousand. The net gain on OREO for 2014 was $433 thousand. Thegain in 2014 resulted from the sale of eight OREO properties at a gain of $1.1 million, the sale of three properties at a loss of  $226 thousand, and impairment of  $400 thousand on twoproperties. Merger expenses were $487 thousand during 2014. There were no such expenses in 2015. Employeecompensation increased by $1.6 million during 2015 compared to 2014, mainly as a result of the PGFSB merger.Total full time equivalent employees increased from 153 as of June 30, 2014 to 181 as of December 31, 2015primarily as a result of the PGFSB merger. During the fourth quarter of 2015, we refinanced $20 million of FederalHome Loan Bank of Atlanta advances and incurred a prepayment penalty in the amount of  $184 thousand. Theamortization expense of the FDIC indemnification asset decreased from $1.2 million in 2014, to $630 thousand in2015 primarily because of the expiration of the loss sharing agreement related to non-single family residential loansin December 2014.FINANCIAL CONDITIONTotal assets were $1.1 billion as of December 31, 2016, compared to $1.0 billion as of December 31, 2015.Total loans increased from $829.4 million at the end of December 2015 to $930.4 million at December 31, 2016.Non-covered LoansLoans that are not covered by the FDIC loss sharing agreement are referred to as “non-covered loans.” Totalnon-covered loans, net of deferred fees, grew from $795.1 million at the end of 2015 to $902.2 million at the end of2016. Non-covered commercial real estate loans, owner-occupied and non-owner-occupied increased from $398.0million at the end of 2015 to $434.4 million as of December 31, 2016.Non-covered residential 1 – 4 family loans increases from $165.1 million at December 31, 2015 to 220.3 million at the end of 2016 as a result of the loans purchased from STM in the amount of  $75.0 million during2016.Our commercial real estate lending program includes both loans closed under the Small BusinessAdministration (“SBA”) 7(a) and 504 loan programs and loans closed outside of the SBA programs that serve boththe investor and owner-occupied facility market. The 504 loan program is used to finance long-term fixed assets,primarily real estate and heavy equipment and gives borrowers access to up to 90% financing for a project. SBA7(a) loans may be used for the purchase of real estate, construction, renovation or leasehold improvements, as wellas machinery, equipment, furniture, fixtures, inventory and in some instances, working capital and debt refinancing.The SBA guarantees up to 85% of the loan balance in the 7(a) program, and start-up businesses are eligible toparticipate in the program. During 2016 we closed loans totaling $6.8 million through the SBA’s 7(a) program and$4.3 million under the SBA’s 504 program. During 2015 we closed loans totaling 10.2 million through the SBA’s7(a) program and $10.1 million under the SBA’s 504 program.Covered LoansWe refer to the loans acquired in the Greater Atlantic acquisition as “covered loans” as we will be reimbursedby the FDIC for a substantial portion of any future losses on them under the terms of the loss sharing agreement.The indemnification against losses in the commercial portfolio on the GAB portfolio ended in December 2014. TheFDIC indemnification on the GAB residential mortgages and the GAB HELOCS continues until December 2019.53TABLE OF CONTENTSThe following table summarizes the composition of our loans, net of unearned income at the dates indicated:​​2016​​Total 2016​​2015Total 20152014Total 2014​​​Covered​​Non-covered​​Amount​​Percent​​CoveredNon-coveredAmountPercentCoveredNon-coveredAmountPercent​Mortgage loans on real estate:Commercial real estate –owner-occupied$—$154,807$154,80716.6$—$141,521$141,52117.0$—$136,597$136,59719.4Commercial real estate – non-owner-occupied—279,634279,63430.0—256,513256,51330.8—200,517200,51728.4Secured by farmland—5415410.1—5785780.1—6126120.1Construction and landdevelopment—91,06791,0679.8—67,83267,8328.2—57,93857,9388.2Residential 1 – 4 family10,519220,291230,81024.812,994165,077178,07121.414,837123,233138,07019.6Multi-family residential—30,02130,0213.2—25,50125,5013.1—21,83221,8323.1Home equity lines of credit17,66111,54229,2033.121,37913,79835,1774.223,6589,75133,4094.7Total real estate loans28,180787,903816,08387.534,373670,820705,19384.838,495550,480588,97583.5Commercial loans—115,365115,36512.4—124,985124,98515.0—114,714114,71416.3Consumer loans—8568560.1—1,3661,3660.2—1,5641,5640.2Gross loans28,180904,124932,304100.034,373797,171831,544100.038,495666,758705,253100.0Less deferred fees—(1,889(1,889(2,119(2,1191(1,782(1,781Loans, net of deferred fees$28,180$902,235$930,415$34,373$795,052$829,425$38,496$664,976$703,472​2013Total 2013​​2012Total 2012​​CoveredNon-coveredAmountPercent​​CoveredNon-coveredAmountPercent​Mortgage loans on real estate:Commercial real estate – owner-occupied$1,603$106,225$107,82819.7$4,143$93,288$97,43118.3Commercial real estate – non-owner-occupied5,829150,008155,83728.510,246130,152140,39826.4Secured by farmland1005086080.1—1,4791,4790.3Construction and landdevelopment139,06839,0697.11,26144,94646,2078.7Residential 1 – 4 family16,63166,48283,11315.221,00561,31982,32415.5Multi-family residential58521,49622,0814.061418,77419,3883.7Home equity lines of credit25,7696,43132,2005.931,2929,17840,4707.6Total real estate loans50,518390,218440,73680.568,561359,136427,69780.5Commercial loans1,097104,284105,38119.22,67299,081101,75319.2Consumer loans811,3081,3890.3881,6231,7110.3Gross loans51,696495,810547,506100.071,321459,840531,161100.0Less deferred fees5(1,453(1,4487.00(1,017(1,010Loans, net of deferred fees$51,701$494,357$546,058$71,328$458,823$530,151Covered loan losses are reimbursed in accordance with the FDIC loss sharing agreements. There are twoagreements with the FDIC, one for single family assets which is a 10 year agreement expiring in December 2019,and one for non-single family (commercial) assets which was a 5 year agreement that expired in December 2014.Our FDIC indemnification asset, the estimate of the expected loss amounts to be reimbursed by the FDIC has acurrent carrying value of  $2.1 million and an estimated fair value of $528 thousand reflecting an overstated FDIC indemnification asset. This current overstatement, which is due toimprovements in the loss estimates in the single family covered loans, is being amortized down in accordance withaccounting rules over the life of the contract (10 years for single family covered assets) or the life of the loans,whichever is shorter.54%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%))))))%%%%%%%%%%%%%%%%%%%%%%))))TABLE OF CONTENTSAs of December 31, 2016, substantially all non-covered and covered loans were to customers located inVirginia and Maryland. We are not dependent on any single customer or group of customers whose insolvencywould have a material adverse effect on our operations.At December 31, 2016 we had $154.8 million in non-covered owner-occupied commercial real estate loans,and we had $310.2 million in non-covered non-owner occupied commercial real estate loans including multi-familyresidential loans and loans secured by farmland.The following table sets forth the contractual maturity ranges of the non-covered commercial and constructionand land development loan portfolio and the amount of those loans with fixed and floating interest rates in eachmaturity range as of December 31, 2016 (in thousands):​​​​​After 1 Year Through 5 YearsAfter 5 Years​​​​​One Year or Less​​Fixed Rate​Floating RateFixed RateFloating RateTotal​Construction and landdevelopment$46,002$29,948$7,351$2,303$5,463$91,067Commercial63,93316,4488,1543,02623,804115,365Total$109,935$46,396$15,505$5,329$29,267$206,432Past Due Loans and Nonperforming AssetsWe will generally place a loan on nonaccrual status when it becomes 90 days past due. Loans will also beplaced on nonaccrual status in cases where we are uncertain whether the borrower can satisfy the contractual termsof the loan agreement. Cash payments received while a loan is categorized as nonaccrual will be recorded as areduction of principal as long as doubt exists as to future collections.We maintain updated appraisals, or internal evaluations, on loans secured by real estate, particularly thosecategorized as nonperforming loans and potential problem loans. In instances where appraisals reflect reducedcollateral values, we make an evaluation of the borrower’s overall financial condition to determine the need, if any,for possible specific impairment or write-down to their net realizable values. If foreclosure occurs, we record otherreal estate owned 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, includingour underwriting standards and the relatively short period of time since the loans were originated. Whether our lossand delinquency experience in the area of our portfolio will increase significantly depends upon the value of the realestate securing loans and economic factors such as the overall economy of the region.The following table presents a comparison of non-covered nonperforming assets as of December 31, (inthousands):​​20162015201420132012​Nonaccrual loans$3,795$4,173$5,652$7,814$7,628Loans past due 90 days and accruing interest—————Total nonperforming loans3,7954,1735,6527,8147,628Other real estate owned8,61710,09613,0519,57913,200Total nonperforming assets$12,412$14,269$18,703$17,393$20,828Troubled debt restructurings$688$699$—$5,933$4,327SBA guaranteed amounts included in nonaccrual loans$2,173$3,541$4,664$1,852$2,607Allowance for non-covered loan losses to nonperforming loans226.88201.80130.8090.0891.33Allowance for non-covered loan losses to total non-covered loans0.951.061.111.421.52Nonperforming assets to total non-covered assets1.111.422.132.633.20Nonperforming assets excluding SBA guaranteed loans to total non-covered assets0.921.071.602.352.80Nonperforming assets to total non-covered loans and OREO1.361.772.763.454.41Nonperforming assets excluding SBA guaranteed loans to total non-covered loans and OREO1.121.332.073.083.8655%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%TABLE OF CONTENTSCovered nonperforming assets are not included in the table above because the carrying value includes acomponent for credit losses (the nonaccretable yield).We identify potential problems loans based on loan portfolio credit quality. We define our potential problemloans as our non-covered classified/criticized loans less total non-covered nonperforming loans noted above. AtDecember 31, 2016 our potential problem loans totaled $8.9 million.During the years ending December 31, 2016 and 2015, there were no loans modified in troubled debtrestructurings. One TDR which had been modified in 2013 defaulted during the second quarter of 2015. This loan,in the amount of  $688 thousand, was 30 – 59 days delinquent as of June 30, 2015, but is current as of December 31,2016.It is Sonabank’s practice to concurrently charge off collateral dependent loans at the time loan impairment isrecognized. Charge offs on loans individually evaluated for impairment as of December 31, 2016 totaledapproximately $3.0 million.The following table presents covered nonperforming assets as of December 31, (in thousands):20162015201420132012​Nonaccrual loans$850$698$859$1,622$3,569Loans past due 90 days and accruing interest—————Total nonperforming loans8506988591,6223,569Other real estate owned—343—2,213636Total nonperforming assets$850$1,041$859$3,835$4,205Allowance for Loan LossesWe are very focused on the asset quality of our loan portfolio, both before and after the loan is made. We haveestablished underwriting standards that we believe are effective in maintaining high credit quality in our loanportfolio. We have experienced loan officers who take personal responsibility for the loans they underwrite, astanding credit committee that reviews each loan application carefully, and a requirement that loans that are 60% ormore of our legal lending limit must be approved by three executive members of our standing credit committee andthe full Board of Directors or two outside directors.Our allowance for loan losses is established through charges to earnings in the form of a provision for loanlosses. Management evaluates the allowance at least quarterly. In addition, on a quarterly basis our board ofdirectors reviews our loan portfolio, evaluates credit quality, reviews the loan loss provision and the allowance forloan and lease losses and makes changes as may be required. In evaluating the allowance, management and theBoard of Directors consider the growth, composition and industry diversification of the portfolio, historical loan lossexperience, current delinquency levels and all other known factors affecting loan collectability.The allowance for loan losses represents management’s estimate of an amount appropriate to provide forprobable incurred losses in the loan portfolio in the normal course of business. This estimate is based on averagehistorical losses within the various loan types that compose our portfolio as well as an estimate of the effect thatother known factors such as the economic environment within our market area will have on net losses. Due to theuncertainty of risks in the loan portfolio, we have established an unallocated portion of the allowance whichmanagement believes is prudent and consistent with regulatory requirements. The allowance is also subject toregulatory examinations and determination by the regulatory agencies as to the appropriate level of the allowance.Our loan review program is conducted by the Chief Risk Officer and a third party consultant who reportdirectly to the Audit Committee of the Board of Directors. In accordance with the Bank’s Credit Policy, in 2016,loans and commitments totaling more than 50% of the non-consumer and non-residential loan portfolio outstandingas of December 31, 2015 were reviewed by the third party consultant, and another 30% was done by internal loanreview. In 2017 we plan to have the third party consultant review loans and commitments totaling at least 50% ofthe non-consumer and non-residential loan portfolio outstanding as of December 31, 2016, and another 30% will bedone by internal loan review. The purpose56TABLE OF CONTENTSof loan review is to validate management’s assessment of risk of the individual loans in the portfolio and todetermine whether the loan was approved, underwritten and is being monitored in accordance with the bank’s creditpolicy and regulatory guidance. Management’s risk assessment of individual loans takes into consideration amongother factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’spayment history and current payment status.The following tables set forth the allowance for loan losses allocated by loan category and the percent of loansin each category to total loans at the dates indicated (in thousands):As of December 31,201620152014​​2013​​2012​Allowance for Loan LossesPercent of Loans by Category to Total LoansAllowance for Loan LossesPercent of Loans by Category to Total LoansAllowance for Loan Losses​​Percent of Loans by Category to Total Loans​​Allowance for Loan Losses​​Percent of Loans by Category to Total Loans​​Allowance for Loan Losses​​Percent of Loans by Category to Total Loans​Commercial real estate$2,38950.0$2,40751.0$1,97851.0$1,84452.3$2,45148.7Construction and land development7529.78658.21,6448.21,0687.19708.7Residential 1 – 4 family1,27927.91,40825.51,33924.31,30221.11,16323.1Commercial loans3,36612.33,04115.12,06316.32,79719.22,15319.2Consumer loans780.1480.2530.2600.3440.3Total allocated allowance7,864100.07,769100.07,077100.07,071100.06,781100.0Unallocated allowance74665233719285Total$8,610$8,421$7,414$7,090$7,066The following table presents an analysis of the allowance for covered and non-covered loan losses for theperiods indicated (in thousands):​​For the Year Ended December 31, 2016​​For the Year Ended December 31, 2015​​For the Year Ended December 31, 2014​​For the Year Ended December 31, 2013​​For the Year Ended December 31, 2012​Balance, beginning of period$8,421$7,414$7,090$7,066$6,295Provision charged to operations4,9123,1713,4443,6156,195Recoveries credited to allowance:Real estate – commercial83633159297Real estate – construction, land and other1211394713Real estate – residential 1 – 4 family102422112985Commercial969189169369Consumer413—18Total recoveries239509150464782Total13,57211,09410,68411,14513,272Loans charged off:Real estate – commercial7991,0675731991,331Real estate – construction, land and other449—2506502,119Real estate – residential 1 – 4 family224134497761,071Commercial3,3701,1741,9982,2861,676Consumer32219—1449Total loans charged off4,9622,6733,2704,0556,206Net charge offs4,7232,1643,1203,5915,424Balance, end of period$8,610$8,421$7,414$7,090$7,066Net charge-offs to average loans, net ofunearned income0.530.280.510.691.0357%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%• Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA)and the Federal Home Loan Mortgage Corporation (FHLMC) mortgage-backed securities (MBS)• Collateralized mortgage obligations• Treasury securities• SBA guaranteed loan pools• Agency securities• Obligations of states and political subdivisions• Pooled trust preferred securities comprised of a minimum of 80% bank collateral with an investmentgrade rating or a minimum of 60% bank collateral with a AAA rating at purchase• Other corporate debt securities rated Aa3/AA- or better at purchaseTABLE OF CONTENTSWe believe that the allowance for loan losses at December 31, 2016 is sufficient to absorb probable incurredcredit losses in our loan portfolio based on our assessment of all known factors affecting the collectability of ourloan portfolio. Our assessment involves uncertainty and judgment; therefore, the adequacy of the allowance for loanlosses cannot be determined with precision and may be subject to change in future periods. In addition, bankregulatory authorities, as part of their periodic examination, may require additional charges to the provision for loanlosses in future periods if the results of their reviews warrant additions to the allowance for loan losses.Investment SecuritiesOur securities portfolio provides us with required liquidity and securities to pledge as collateral for certaingovernmental deposits and borrowed funds.Our securities portfolio is managed by our president and our treasurer, both of whom have significantexperience in this area, with the concurrence of our Asset/Liability Committee. In addition to our president (who ischairman of the Asset/Liability Committee) and our treasurer, this committee is comprised of two outside directorsour chief executive officer, our chief financial officer, our chief risk officer and our controller. Investmentmanagement is performed in accordance with our investment policy, which is approved annually by theAsset/Liability Committee and the Board of Directors. Our investment policy addresses our investment strategies,approval process, approved securities dealers and authorized investments. Our investment policy authorizes us toinvest in:Mortgage-backed securities are securities that have been developed by pooling a number of real estatemortgages and which are principally issued by government sponsored entities (GSE’s) such as the GNMA, FNMAand FHLMC. These securities are deemed to have high credit ratings, and minimum regular monthly cash flows ofprincipal and interest are guaranteed by the issuing agencies.Unlike U.S. Treasury and U.S. government agency securities, which have a lump sum payment at maturity,mortgage-backed securities provide cash flows from regular principal and interest payments and principalprepayments throughout the lives of the securities. Mortgage-backed securities which are purchased at a premiumwill generally suffer decreasing net yields as interest rates drop because homeowners tend to refinance theirmortgages. Thus, the premium paid must be amortized over a shorter period. Conversely, mortgage-backedsecurities purchased at a discount will obtain higher net yields in a decreasing interest rate environment. As interestrates rise, the opposite will generally be true. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal, and consequently the average life ofthese securities will be lengthened. If interest rates begin to fall, prepayments will increase.Collateralized mortgage obligations (CMOs) are bonds that are backed by pools of mortgages. The pools canbe GNMA, FNMA or FHLMC pools or they can be private-label pools. The CMOs are designed so that themortgage collateral will generate a cash flow sufficient to provide for the timely repayment of the bonds. Themortgage collateral pool can be structured to accommodate various desired bond repayment schedules, provided thatthe collateral cash flow is adequate to meet scheduled bond payments. This is58(1) Pre-tax, and represents unrealized losses at date of transfer from available-for-sale to held-to-maturity, net ofaccretion(2) Pre-taxTABLE OF CONTENTSaccomplished by dividing the bonds into classes to which payments on the underlying mortgage pools are allocated.The bond’s cash flow, for example, can be dedicated to one class of bondholders at a time, thereby increasing callprotection to bondholders. In private-label CMOs, losses on underlying mortgages are directed to the most junior ofall classes and then to the classes above in order of increasing seniority, which means that the senior classes haveenough credit protection to be given the highest credit rating by the rating agencies.Obligations of states and political subdivisions (municipal securities) are purchased with consideration of thecurrent tax position of the Bank. In-state (Virginia) municipal bonds will be favored when they present betterrelative value than comparable out-of-state municipal bonds. Both taxable and tax-exempt municipal bonds may bepurchased, but only after careful assessment of the market risk of the security. Appropriate credit evaluation must beperformed prior to purchasing municipal bonds.Southern National’s corporate bonds consist of pooled trust preferred securities issued by banks, thrifts andinsurance companies. The collateral pools of these trust preferred securities must be at least 80% banks or thrifts, ifthe rating at the time of purchase is A3/A- or better. If the rating is Aaa/AAA, the collateral pool must be at least60% banks or thrifts. These securities generally have a long term (25 years or more), allow early redemption by theissuers, make periodic variable interest payments and mature at face value. Trust preferred securities allow thedeferral of interest payments for up to five years.We classify our securities as either: “held-to-maturity” or “available-for-sale.” Debt securities that SouthernNational has the positive intent and ability to hold to maturity are classified as held to maturity and carried atamortized cost. Securities classified as available for sale are those debt and equity securities that may be sold inresponse to changes in interest rates, liquidity needs or other similar factors. Securities available for sale are carriedat fair value, with unrealized gains or losses net of deferred taxes, included in accumulated other comprehensiveincome (loss) in stockholders’ equity. Securities totaling $85.3 million were in the held to maturity portfolio atDecember 31, 2016, compared to $96.8 million at December 31, 2015. Securities totaling $3.9 million were in theavailable for sale portfolio at December 31, 2016, compared to $4.2 million at December 31, 2015.As of December 31, 2016, we owned pooled trust preferred securities as follows (in thousands):​​Tranche Level​​Ratings When Purchased​​Current Ratings​​​​​Estimated Fair Value% of Current Defaults and Deferrals to Total CollateralPreviously Recognized Cumulative Other Comprehensive Loss ​​Security​​Moody’sFitch​​Moody’sFitch​​Par Value​Book Value​​Held to Maturity​​​​​(in thousands)ALESCO VII A1B​​Senior​​AaaAAA​​A1A​​$3,688​​$3,389​$3,275​11$239MMCF III B​​Senior Sub​​A3A-​​Ba1BB​​269​​265​233​324​​​​​​​​​3,957​​3,654​3,508​$243Available for Sale Other Than Temporarily Impaired:​​​Cumulative OTTI Related to Credit Loss TPREF FUNDING II​​Mezzanine​​A1A-​​Caa3C​​1,500​​1,099​623​37$400ALESCO V C1​​Mezzanine​​A2A​​Caa3C​​2,150​​1,491​1,036​10659​​​​​​​​​3,650​​2,590​1,659​$1,059Total​​​​​​​​​$7,607​​$6,244​$5,167​59(1)%%(2)%%• .5% of the remaining performing collateral will default or defer per annum.• Recoveries of 7% with a two year lag on all defaults and deferrals.• No prepayments for 10 years and then 1% per annum for the remaining life of the security.• Our securities have been modeled using the above assumptions by independent third parties using theforward LIBOR curve to discount projected cash flows to present values.• residential government-sponsored mortgage-backed securities in the amount of  $18.6 million andresidential government-sponsored collateralized mortgage obligations totaling $2.4 million• callable agency securities in the amount of  $48.0 million• municipal bonds in the amount of  $15.0 million with a taxable equivalent yield of 3.33% and ratings asfollows:TABLE OF CONTENTSEach of these securities has been evaluated for other than temporary impairment (“OTTI”). In performing adetailed cash flow analysis of each security, Sonabank works with independent third parties to estimate expectedcash flows and assist with the evaluation of other than temporary impairment. The cash flow analyses performedincluded the following assumptions:We recognized no OTTI charges during 2016 and 2015, and we recognized OTTI charges of  $41 thousandduring 2014.Other securities in our investment portfolio as of December 31, 2016 were as follows:​Rating ServiceRatingAmount (in thousands)​Moody’sAaa$505Moody’sAa23,616Moody’sAa3706Standard & Poor’sAAA3,063Standard & Poor’sAA+580Standard & Poor’sAA5,900Standard & Poor’sAA-595$14,965For additional information regarding investment securities refer to “Item 8. Financial Statements andSupplementary Data”, Footnote 2.The following table sets forth the amortized cost and estimated fair value of our investment securities bycontractual maturity at December 31, 2016. Expected maturities may differ from contractual maturities becauseborrowers may have the right to call or prepay obligations with or without call or prepayment penalties (inthousands).Securities Available for SaleAmortized CostEstimated Fair ValueWeighted Average Yield​Obligations of states and political subdivisionsDue after ten years$2,280$2,2592.63Trust preferred securitiesDue after ten years2,5901,6592.70$4,870$3,9182.6760%%%TABLE OF CONTENTSSecurities Held to MaturityAmortized Cost​Estimated Fair Value​​Weighted Average Yield​Residential government-sponsored mortgage-backed securitiesDue after one year through five years$152$1635.77Due after five years through ten years2,5182,5552.92Due after ten years15,92416,0662.57Total residential government-sponsored mortgage-backed securities18,59418,7842.64Residential government-sponsored collateralized mortgage obligationsDue after ten years2,3712,3171.70Government-sponsored agency securitiesDue after ten years47,97546,1382.90Obligations of states and political subdivisionsDue after one year through five years1,4591,4401.71Due after five years through ten years5,7265,7202.26Due after ten years5,5215,4372.2312,70612,5972.18Trust preferred securitiesDue after ten years3,6543,5082.70$85,300$83,3442.70The following table sets forth a summary of the investment securities portfolio as of the dates indicated.Available for sale securities are reported at estimated fair value, and held-to-maturity securities are reported atamortized cost (in thousands).December 31,201620152014​Available for sale securities:Obligations of states and political subdivisions$2,259$2,312$2,285Trust preferred securities1,6591,897—$3,918$4,209$2,285Held to maturity securities:Residential government-sponsored mortgage-backed securities$18,594$20,751$22,897Residential government-sponsored collateralized mortgage obligations2,3712,9463,564Government-sponsored agency securities47,97555,93744,949Obligations of states and political subdivisions12,70612,79415,531Other residential collateralized mortgage obligations——599Trust preferred securities3,6544,3526,518$85,300$96,780$94,05861%%%%%%%%%%%%TABLE OF CONTENTSDeposits and Other BorrowingsThe market for deposits is competitive. We offer a line of traditional deposit products that currently includenon-interest-bearing and interest-bearing checking (or NOW accounts), commercial checking, money marketaccounts, savings accounts and certificates of deposit. We compete for deposits through our banking branches withcompetitive pricing, advertising and online banking. We use deposits as a principal source of funding for ourlending, purchasing of investment securities and for other business purposes.Total deposits increased to $913.0 million at December 31, 2016 from $825.3 million as of December 31,2015. Non-interest bearing demand deposits increased from a year-end 2015 level of  $83.8 million to $88.8 millionas of December 31, 2016. Savings account balances increased from $50.0 million to $52.8 million, and timedeposits increased from $531.8 million to $605.6 million over the same period. As of December 31, 2016, we hadbrokered certificates of deposit in the amount of  $66.5 million and brokered money market deposits of  $14.2million. At December 31, 2015, we had brokered certificates of deposit in the amount of  $62.0 million, and we hadbrokered money market deposits of  $15.4 million.The following table sets forth the average balance and average rate paid on each of the deposit categories forthe years ended December 31, 2016, 2015 and 2014:​​2016​​2015​​2014​​​Average Balance​​Average Rate​​Average Balance​​Average Rate​​Average Balance​​Average Rate​(in thousands)Noninterest-bearing deposits$88,413$75,129$59,205Interest-bearing deposits:Savings accounts51,6700.6444,6610.6329,0340.62Money market accounts127,1210.36138,5590.35130,4730.28NOW and other demand accounts36,4700.1624,3060.1023,5740.11Time deposits579,1571.25509,9001.11376,3950.90Total interest-bearing deposits794,4181.02717,4260.90559,4760.71Total deposits$882,831$792,555$618,681The variety of deposit accounts we offered has allowed us to be competitive in obtaining funds and inresponding to the threat of disintermediation (the flow of funds away from depository institutions such as bankinginstitutions into direct investment vehicles such as government and corporate securities). Our ability to attract andmaintain deposits, and the effect of such retention on our cost of funds, has been, and will continue to be,significantly affected by the general economy and market rates of interest.The following table sets forth the maturities of certificates of deposit of  $250 thousand and over as ofDecember 31, 2016 (in thousands):Within 3 Months3 to 6 Months6 to 12 MonthsOver 12 MonthsTotal$ 3,778$ 19,926$ 44,179$ 79,686$ 147,569We use borrowed funds to support our liquidity needs and to temporarily satisfy our funding needs fromincreased loan demand and for other shorter term purposes. We are a member of the FHLB and are authorized toobtain advances from the FHLB from time to time to as needed. The FHLB has a credit program for members withdifferent maturities and interest rates, which may be fixed or variable. We are required to collateralize ourborrowings from the FHLB with our FHLB stock and other collateral acceptable to the FHLB. At December 31,2016 and 2015, total FHLB borrowings were $95.0 million and $74.0 million, respectively. At December 31, 2016,we had $178.7 million of unused and available FHLB lines of credit.62%%%%%%%%%%%%%%%TABLE OF CONTENTSOther short-term borrowings can consist of Federal Home Loan Bank (FHLB) overnight advances, other FHLBadvances maturing within one year, federal funds purchased and, until the second quarter of 2016, securities soldunder agreements to repurchase that mature within one year, which are secured transactions with customers. Duringthe second quarter of 2016, we discontinued offering securities sold under agreements to repurchase and transferredthose accounts into interest-bearing cash management accounts. Other short-term borrowings consist of thefollowing (in thousands):December 31,201620152014​FHLB overnight advances$50,000$49,000$15,250Other short-term FHLB advances maturing 3/27/1710,000——Other short-term FHLB advances maturing 5/4/201710,000——Other short-term FHLB advances maturing 6/5/201710,000——Other short-term FHLB advances maturing 6/19/20175,000——Other short-term FHLB advances maturing 12/15/201710,000——Other short-term FHLB advances maturing 11/4/2016—10,000—Securities sold under agreements to repurchase—10,38113,794Total$95,000$69,381$29,044Weighted average interest rate at year end0.860.510.65For the periods ended December 31, 2016, 2015 and 2014:Average outstanding balance$66,864$34,673$37,810Average interest rate during the year0.740.760.51Maximum month-end outstanding balance$95,000$69,381$66,852Interest Rate Sensitivity and Market RiskWe are engaged primarily in the business of investing funds obtained from deposits and borrowings intointerest-earning loans and investments. Consequently, our earnings depend to a significant extent on our net interestincome, which is the difference between the interest income on loans and other investments and the interest expenseon deposits and borrowing. To the extent that our interest-bearing liabilities do not reprice or mature at the sametime as our interest-earning assets, we are subject to interest rate risk and corresponding fluctuations in net interestincome. We have employed asset/liability management policies that seek to manage our interest income, withouthaving to incur unacceptable levels of credit or investment risk.We use simulation modeling to manage our interest rate risk, and we review quarterly interest sensitivityreports prepared for us by FTN Financial using the Sendero ALM Analysis System. This approach uses a modelwhich generates estimates of the change in our economic value of equity (EVE) over a range of interest ratescenarios. EVE is the present value of expected cash flows from assets, liabilities and off-balance sheet contractsusing assumptions about estimated loan prepayment rates, reinvestment rates and deposit decay rates.The following tables are based on an analysis prepared by FTN Financial setting forth an analysis of ourinterest rate risk as measured by the estimated change in EVE resulting from instantaneous and sustained parallelshifts in the yield curve (plus 400 basis points or minus 200 basis points, measured in 100 basis point increments) asof December 31, 2016 and as of December 31, 2015, and all changes are within our ALM Policy guidelines.63%%%%%%TABLE OF CONTENTSSensitivity of Economic Value of Equity As of December 31, 2016Economic Value of EquityEconomic Value of Equity as a % ofChange in Interest Rates in Basis Points (Rate Shock)Amount$ Change From Base% Change From BaseTotal AssetsEquity Book Value(Dollar amounts in thousands)Up 400$116,120$(37,494-24.4110.1691.91Up 300123,778(29,836-19.4210.8397.97Up 200132,243(21,371-13.9111.58104.67Up 100141,858(11,756-7.6512.42112.28Base153,614—0.0013.45121.58Down 100136,456(17,158-11.1711.94108.00Down 200129,485(24,129-15.7111.33102.49Sensitivity of Economic Value of Equity As of December 31, 2015Economic Value of EquityEconomic Value of Equity as a % ofChange in Interest Rates in Basis Points (Rate Shock)Amount$ Change From Base% Change From BaseTotal AssetsEquity Book Value(Dollar amounts in thousands)Up 400$108,441$(34,579-24.1810.4790.64Up 300115,906(27,114-18.9611.1996.88Up 200124,098(18,922-13.2311.98103.73Up 100133,386(9,634-6.7412.87111.49Base143,020—0.0013.80119.55Down 100130,510(12,510-8.7512.60109.09Down 200122,637(20,383-14.2511.84102.51Our interest rate sensitivity is also monitored by management through the use of a model run by FTN Financialthat generates estimates of the change in the net interest income over a range of interest rate scenarios. Net interestincome depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interestrates earned or paid on them. In this regard, the model assumes that the composition of our interest sensitive assetsand liabilities existing at December 31, 2016 and December 31, 2015 remains constant over the period beingmeasured and also assumes that a particular change in interest rates is reflected uniformly across the yield curveregardless of the duration to maturity or repricing of specific assets and liabilities. All changes are within our ALMPolicy guidelines.Sensitivity of Net Interest Income As of December 31, 2016Adjusted Net Interest IncomeNet Interest Margin​Change in Interest Rates in Basis Points (Rate Shock)Amount$ Change From BasePercent% Change From Base​(Dollar amounts in thousands)Up 400$41,484$3,7593.870.43Up 30041,1723,4473.750.31Up 20039,8982,1733.640.20Up 10038,6889633.530.09Base37,725—3.440.00Down 10037,9612363.460.02Down 20037,473(2523.42-0.0264)%%%)%%%)%%%)%%%%%%)%%%)%%%)%%%)%%%)%%%)%%%%%%)%%%)%%%%%%%%%%%%%%%)%%TABLE OF CONTENTSSensitivity of Net Interest Income As of December 31, 2015Adjusted Net Interest IncomeNet Interest MarginChange in Interest Rates in Basis Points (Rate Shock)Amount$ Change From BasePercent% Change From Base(Dollar amounts in thousands)Up 400$39,018$3,2523.940.32Up 30038,0302,2643.840.22Up 20037,0641,2983.750.13Up 10036,2204543.660.04Base35,766—3.620.00Down 10035,646(1203.60-0.02Down 20035,504(2623.59-0.03Certain 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 inwhich actual yields and costs respond to changes in market interest rates. Accordingly, although the EVE tables andSensitivity of Net Interest Income (NII) tables provide an indication of our interest rate risk exposure at a particularpoint in time, such measurements are not intended to, and do not, provide a precise forecast of the effect of changesin market interest rates on our net worth and net interest income. Sensitivity of EVE and NII are modeled usingdifferent assumptions and approaches. In the low interest rate environment that currently exists, limitations ondownward adjustments for interest rates, particularly as they apply to deposits, can and do result in anomalies inscenarios that are unlikely to occur due to the current low interest rate environment.Liquidity and Funds ManagementThe objective of our liquidity management is to assure the ability to meet our financial obligations. Theseobligations include the payment of deposits on demand or at maturity, the repayment of borrowings at maturity andthe 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 havesought funding from additional sources, including institutional certificates of deposit and the sale of available forsale investment securities. In addition, we maintain lines of credit from the Federal Home Loan Bank of Atlanta andutilize securities sold under agreements to repurchase and reverse repurchase agreement borrowings from approvedsecurities dealers. For additional information about borrowings and anticipated principal repayments refer to thediscussion about Contractual Obligations below and “Item 8. Financial Statements” and Supplementary Data,Footnotes 9 and 10.We prepare a cash flow forecast for one year with the first three months prepared on a weekly basis and on amonthly basis thereafter. The projections incorporate expected cash flows on loans, investments securities, anddeposits based on data used to prepare our interest rate risk analyses. To estimate loan growth over the one yearperiod, the projection incorporates the scheduled loan closings in the Loan Pipeline Report along with othermanagement estimates.We recently purchased liquidity risk software with which we can monitor our liquidity risk at a point in timeand prepare cash flow and funds availability projections over a two year period. The projections can be run using abase case and several stress levels.During the year ended December 31, 2016, we funded our financial obligations with deposits and borrowingsfrom the Federal Home Loan Bank of Atlanta. At December 31, 2016, we had $135.8 million of unfunded lines ofcredit and undisbursed construction loan funds. We had approved loan commitments in the amount of  $6.5 millionas of December 31, 2016. The amount of certificate of deposit accounts maturing in 2017 is $335.3 million as ofDecember 31, 2016. Management anticipates that funding requirements for these commitments can be met from thenormal sources of funds.65%%%%%%%%%%)%%)%%• 4.5 percent CET1 to risk-weighted assets.• 6.0 percent Tier 1 Capital to risk-weighted assets.• 8.0 percent Total Capital to risk-weighted assets.• 4.0 percent Tier 1 leverage ratio to average consolidated assets.TABLE OF CONTENTSCapital ResourcesCapital management consists of providing equity to support both current and future operations. We are subjectto capital adequacy requirements imposed by the Federal Reserve and the Bank is subject to capital adequacyrequirements imposed by the FDIC. The Federal Reserve and the FDIC have adopted risk-based capitalrequirements for assessing bank holding company and member bank capital adequacy. These standards definecapital and establish minimum capital requirements in relation to assets and off-balance sheet exposure, adjusted forcredit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirementsmore sensitive to differences in risk profiles among bank holding companies and banks, to account for off-balancesheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items areassigned to broad risk categories, each with appropriate relative risk weights. The resulting capital ratios representcapital as a percentage of total risk-weighted assets and off-balance sheet items.The regulatory capital framework has recently changed as a result of the Dodd-Frank Act and a separate,international capital initiative known as “Basel III.” Regulators recently issued rules implementing theserequirements (“Revised Capital Rules”). Among other things, the Revised Capital Rules raise the minimumthresholds for required capital and revise certain aspects of the definitions and elements of the capital that can beused to satisfy these required minimum thresholds. While the rules became effective on January 1, 2014 for certainlarge banking organizations, most banking organizations, including Southern National and the Bank, were requiredto begin complying with these new requirements on January 1, 2015.The Revised Capital Rules, among other things, (i) introduce as a new capital measure “Common Equity Tier1” (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meetingspecified requirements, (iii) define CET1 narrowly by requiring that most adjustments to regulatory capitalmeasures be made to CET1 and not to the other components of capital and (iv) expand the scope of the adjustmentsas compared to existing regulations. Further, the Revised Capital Rules set forth the following minimum capitalratios, which began to phase in for certain banking organizations, including Southern National, on January 1, 2015:Under the FDICIA, each federal banking agency revised its risk-based capital standards to ensure that thosestandards take adequate account of interest rate risk, concentration of credit risk and the risks of nontraditionalactivities, as well as reflect the actual performance and expected risk of loss on multifamily mortgages. Under thatstatute, the FDIC has promulgated regulations setting the levels at which an insured institution such as the bankwould be considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantlyundercapitalized” and “critically undercapitalized.” The bank is classified “well capitalized” for purposes of theFDIC’s prompt corrective action regulations. See “Supervision and Regulation — Capital Requirements.”66(1) When fully phased-in on January 1, 2019, the Basel III capital rules include a capital conservation buffer of2.5% that is added on top of each of the minimum risk-based capital ratios noted above. Implementation beganon January 1, 2016 at the 0.625% level and will increase each subsequent January 1, until it reaches 2.5% onJanuary 1, 2019.(2) Prompt corrective action provisions are not applicable at the bank holding company level.TABLE OF CONTENTSThe following table provides a comparison of our leverage and risk-weighted capital ratios and the leverageand risk-weighted capital ratios of Southern National and the Bank at the periods indicated to the minimum andwell-capitalized regulatory standards:​​Minimum Required for Capital Adequacy Purposes ​To Be Categorized as Well Capitalized Actual Ratio at December 31,​​20162015​Southern NationalCommon equity tier 1 capital ratio4.50n/a12.6913.13Tier 1 risk-based capital ratio6.00n/a12.6913.13Total risk-based capital ratio8.00n/a13.6314.14Leverage ratio4.00n/a10.5611.06SonabankCommon equity tier 1 capital ratio4.506.5012.5512.99Tier 1 risk-based capital ratio6.008.0012.5512.99Total risk-based capital ratio8.0010.0013.4914.00Leverage ratio4.005.0010.4510.94Impact of Inflation and Changing PricesThe financial statements and related financial data presented in this Annual Report on Form 10-K concerningSouthern National have been prepared in accordance with U. S. generally accepted accounting principles, whichrequire the measurement of financial position and operating results in terms of historical dollars, withoutconsidering changes in the relative purchasing power of money over time due to inflation. The primary impact ofinflation on our operations is reflected in increased operating costs. Unlike most industrial companies, substantiallyall of the assets and liabilities of a financial institution are monetary in nature. As a result, changes in interest rateshave a more significant impact on our performance than do the effects of changes in the general rate of inflation andchanges in prices. Interest rates do not necessarily move in the same direction or in the same magnitude as the pricesof goods and services. Many factors impact interest rates, including the Federal Reserve, inflation, recession,changes in unemployment, the money supply, and international disorder and instability in domestic and foreignfinancial markets. Like most financial institutions, changes in interest rates can impact our net interest incomewhich is the difference between interest earned from interest-earning assets, such as loans and investment securities,and interest paid on interest-bearing liabilities, such as deposits and borrowings, as well as the valuation of ourassets and liabilities.Our interest rate risk management is the responsibility of Sonabank’s Asset/Liability Management Committee(the Asset/Liability Committee). The Asset/Liability Committee has established policies and limits for managementto monitor, measure and coordinate our sources, uses and pricing of funds. The Asset/Liability Committee makesreports to the board of directors on a quarterly basis.Seasonality and CyclesWe do not consider our commercial banking business to be seasonal.67(1)(2)%%%%%%%%%%%%%%%%%%%%%%%%%%%%(1) Certificates of deposit give customers rights to early withdrawal. Early withdrawals may be subject topenalties. The penalty amount depends on the remaining time to maturity at the time of early withdrawal.TABLE OF CONTENTSContractual ObligationsThe following table reflects the contractual maturities of our term liabilities as of December 31, 2016. Theamounts shown do not reflect contractual interest, early withdrawal or prepayment assumptions.Contractual Obligations​​Less Than One YearOne to Three YearsThree to Five YearsMore Than Five YearsTotal​( in thousands)Certificates of deposit $335,344$231,327$38,942$—$605,613FHLB short-term advances95,000———95,000Operating leases1,9072,9719744256,277Total$432,251$234,298$39,916$425$706,890Off-Balance Sheet ArrangementsSouthern National is a party to financial instruments with off-balance sheet risk in the normal course ofbusiness to meet the financing needs of its customers. These financial instruments include commitments to extendcredit and standby letters of credit. These instruments involve elements of credit and funding risk in excess of theamount recognized in the consolidated balance sheet. Letters of credit are written conditional commitments issuedby Southern National to guarantee the performance of a customer to a third party. The credit risk involved in issuingletters of credit is essentially the same as that involved in extending loans to customers. We had letters of creditoutstanding totaling $6.4 million and $6.7 million as of December 31, 2016 and 2015, respectively.Our exposure to credit loss in the event of nonperformance by the other party to the financial instruments forcommitments to extend credit and letters of credit is based on the contractual amount of these instruments. We usethe same credit policies in making commitments and conditional obligations as we do for on-balance sheetinstruments. Unless noted otherwise, we do not require collateral or other security to support financial instrumentswith credit risk.Commitments to extend credit are agreements to lend to a customer as long as there is no violation of anycondition established in the contract. Commitments are made predominately for adjustable rate loans, and generallyhave 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 amountsdo not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis.At December 31, 2016 and 2015, we had unfunded lines of credit and undisbursed construction loan fundstotaling $135.8 million and $132.3 million, respectively. We had approved loan commitments in the amount of  $6.5million and $2.7 million as of December 31, 2016 and 2015, respectively. Virtually all of our unfunded lines ofcredit, undisbursed construction loan funds and approved loan commitments are variable rate.MergerOn December 13, 2016, Southern National and Eastern Virginia Bankshares, Inc. (“Eastern Virginia”), theholding company of EVB, jointly announced today the signing of a definitive agreement to merge. The combinationbrings together two banking companies with complementary business lines creating one of the premier bankinginstitutions headquartered in the Commonwealth of Virginia.68(1)Item 7A. Quantitative and Qualitative Disclosures about Market RiskTABLE OF CONTENTS ​Upon completion of the transaction, the combined company will have approximately $2.4 billion in total assets,$2.0 billion in total deposits, and $1.8 billion in total loans. The company, which will assume the Southern NationalBancorp of Virginia, Inc. name for the holding company and the Sonabank name for all banking operations, willmaintain its corporate headquarters in McLean, Virginia and the headquarters of the bank in Richmond, Virginia.The company will have 47 branch locations covering markets in both Maryland and Virginia, including theWashington, D.C. and Richmond, Virginia MSAs. These attractive markets are often cited as having some of thebest demographic and income profiles in the country characterized by low unemployment, strong populationgrowth, new business starts and consistent capital expenditure.The transaction is expected to close during the second quarter of 2017 and is subject to the approval of bothcompanies’ shareholders along with regulatory approvals and other customary closing conditions. Pursuant to theterms of the merger agreement, EVB will merge with and into Sonabank immediately after the merger of EasternVirginia with and into Southern National.Subsequent EventOn January 20, 2017, Southern National announced that it had completed the sale of  $27 million of its fixed-to-floating rate Subordinated Notes due 2027 (the “Notes”). The Notes will initially bear interest at 5.875% perannum until January 31, 2022; thereafter, the Notes will be payable at an annual floating rate equal to three-monthLIBOR plus a spread of 3.95% until maturity or early redemption. Southern National plans to use the net proceedsof the offering for general corporate purposes, including, but not limited to, contributing capital to its banksubsidiary to support continued growth.This information is incorporated herein by reference from “Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” of this Annual Report on Form 10-K.69TABLE OF CONTENTS ​Item 8. Financial Statements and Supplementary DataREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and Stockholders Southern National Bancorp of Virginia, Inc.We have audited the accompanying consolidated balance sheets of Southern National Bancorp of Virginia, Inc.(the Company) as of December 31, 2016 and 2015, and the related consolidated statements of income andcomprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-yearperiod ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidated financial statements based on ouraudits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,the financial position of Southern National Bancorp of Virginia, Inc. as of December 31, 2016 and 2015, and theresults of their operations and their cash flows for each of the years in the three-year period ended December 31,2016, in conformity with accounting principles generally accepted in the United States of America.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board(United States), Southern National Bancorp of Virginia, Inc.’s internal controls over financial reporting as ofDecember 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of the Treadway Commission, and our report dated March 16, 2017,expressed an unqualified opinion thereon./s/ Dixon Hughes Goodman LLPAtlanta, Georgia March 16, 201770TABLE OF CONTENTSREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and Stockholders Southern National Bancorp of Virginia, Inc.We have audited Southern National Bancorp of Virginia, Inc.’s (the Company) internal control over financialreporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’smanagement is responsible for maintaining effective internal control over financial reporting and for its assessmentof the effectiveness of internal control over financial reporting, included in the accompanying Management’s Reporton Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internalcontrol over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance aboutwhether effective internal control over financial reporting was maintained in all material respects. Our auditincluded obtaining an understanding of internal control over financial reporting, assessing the risk that a materialweakness exists, and testing and evaluating the design and operating effectiveness of internal control based on theassessed risk. Our audit also included performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. A company’s internal control over financial reportingincludes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation of financial statements in accordancewith generally accepted accounting principles, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.In our opinion, Southern National Bancorp of Virginia, Inc. maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the TreadwayCommission.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements of Southern National Bancorp of Virginia, Inc. as ofDecember 31, 2016 and 2015, and for each of the years in the three-year period ended December 31, 2016, and ourreport dated March 16, 2017, expressed an unqualified opinion thereon./s/ Dixon Hughes Goodman LLPAtlanta, Georgia March 16, 201771TABLE OF CONTENTSSOUTHERN NATIONAL BANCORP OF VIRGINIA, INC. CONSOLIDATED BALANCE SHEETS(dollars in thousands, except per share amounts)​​December 31, 2016December 31, 2015​ASSETSCash and cash equivalents:Cash and due from financial institutions$4,656$3,972Interest-bearing deposits in other financial institutions42,73626,364Total cash and cash equivalents47,39230,336Securities available for sale, at fair value3,9184,209Securities held to maturity, at amortized cost (fair value of  $83,344 and $96,464, respectively)85,30096,780Covered loans28,18034,373Non-covered loans902,235795,052Total loans930,415829,425Less allowance for loan losses(8,610(8,421Net loans921,805821,004Stock in Federal Reserve Bank and Federal Home Loan Bank7,9296,929Equity investment in mortgage affiliate4,6294,459Preferred investment in mortgage affiliate2,5552,555Bank premises and equipment, net8,2278,882Goodwill10,51410,514Core deposit intangibles, net8741,093FDIC indemnification asset2,1112,922Bank-owned life insurance23,82623,126Other real estate owned8,61710,439Deferred tax assets, net6,7806,716Other assets7,9666,143Total assets$1,142,443$1,036,107LIABILITIES AND STOCKHOLDERS’ EQUITYNoninterest-bearing demand deposits$88,783$83,769Interest-bearing deposits:NOW accounts26,33828,080Cash management accounts9,658—Money market accounts129,835131,731Savings accounts52,75549,939Time deposits605,613531,775Total interest-bearing deposits824,199741,525Total deposits912,982825,294Securities sold under agreements to repurchase—10,381Federal Home Loan Bank (FHLB) advances-short term95,00059,000Federal Home Loan Bank (FHLB) advances-long term—15,000Other liabilities8,1176,796Total liabilities1,016,099916,471Commitments and contingencies (See Note 14)——Stockholders’ equity:Preferred stock, $.01 par value. Authorized 5,000,000 shares; no shares issued and outstanding——Common stock, $.01 par value. Authorized 45,000,000 shares; issued and outstanding,12,263,643 shares at December 31, 2016 and 12,234,443 at December 31, 2015123122Additional paid in capital104,884104,389Retained earnings22,12615,735Accumulated other comprehensive loss(789(610Total stockholders’ equity126,344119,636Total liabilities and stockholders’ equity$1,142,443$1,036,107See accompanying notes to consolidated financial statements.72))))TABLE OF CONTENTSSOUTHERN NATIONAL BANCORP OF VIRGINIA, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(dollars in thousands, except per share amounts)For the Years Ended December 31,201620152014Interest and dividend income:Interest and fees on loans$45,348$40,104$34,611Interest and dividends on taxable securities2,6192,3952,239Interest and dividends on tax exempt securities336411389Interest and dividends on other earning assets644791852Total interest and dividend income48,94743,70138,091Interest expense:Interest on deposits8,1016,4333,976Interest on borrowings532644697Total interest expense8,6337,0774,673Net interest income40,31436,62433,418Provision for loan losses4,9123,1713,444Net interest income after provision for loan losses35,40233,45329,974Noninterest income:Account maintenance and deposit service fees896953826Income from bank-owned life insurance700636617Equity income from mortgage affiliate1,1091,459558Net gain on other assets—7202Gain on sales of available for sale securities—520—Total other-than-temporary impairment losses (OTTI)——(41Portion of OTTI recognized in other comprehensive income (before taxes)———Net credit related OTTI recognized in earnings——(41Other115206202Total noninterest income2,8203,7812,364Noninterest expenses:Salaries and benefits11,67511,86010,225Occupancy expenses3,1553,2693,165Furniture and equipment expenses975815787Amortization of core deposit intangible219261220Virginia franchise tax expense387352455FDIC assessment543664569Data processing expense744668569Telephone and communication expense745786751Amortization of FDIC indemnification asset7936301,230Net (gain) loss on other real estate owned174291(433Merger expenses429—487Other operating expenses2,9763,6823,076Total noninterest expenses22,81523,27821,101Income before income taxes15,40713,95611,237Income tax expense5,0954,6673,754Net income$10,312$9,289$7,483Other comprehensive income (loss):Unrealized gain (loss) on available for sale securities$(284$(138$299Realized amount on available for sale securities sold, net—(520—Non-credit component of other-than-temporary impairment on held-to-maturity securities—4,27835Amortization and accretion of amounts previously recorded upon transfer to held-to-maturity from available-for sale1232(77Net unrealized gain (loss)(2723,652257Tax effect(931,24287Other comprehensive income (loss)(1792,410170Comprehensive income$10,133$11,699$7,653Earnings per share, basic$0.84$0.76$0.63Earnings per share, diluted$0.83$0.75$0.63See accompanying notes to consolidated financial statements.73))))))))))TABLE OF CONTENTSSOUTHERN NATIONAL BANCORP OF VIRGINIA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014(dollars in thousands, except per share amounts)Common StockAdditional Paid in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal​Balance – January 1, 2014$116$97,127$12,561$(3,190$106,614Comprehensive income:Net income7,4837,483Change in unrealized loss on securities available for sale (net of tax, $102)197197Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax benefit, $15 and accretion, $77 and amounts recorded into other comprehensive income at transfer)(27(27Dividends on common stock ($.60 per share)(7,239(7,239Issuance of common stock under Stock Incentive Plan (100,200shares)1885886Issuance of common stock in exchange for net assets in acquisition(525,858 shares)55,7435,748Stock-based compensation expense317317Balance – December 31, 2014122104,07212,805(3,020113,979Comprehensive income:Net income9,2899,289Change in unrealized loss on securities available for sale (net of tax benefit, $224)(434(434Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $1,466 and accretion, $32 and amounts recorded into other comprehensive income at transfer)2,8442,844Dividends on common stock ($.52 per share)(6,359(6,359Repurchase of common stock (62,177 shares)(1(720(721Issuance of common stock under Stock Incentive Plan (79,950shares)1706707Stock-based compensation expense331331Balance – December 31, 2015122104,38915,735(610119,636Comprehensive income:Net income10,31210,312Change in unrealized loss on securities available for sale (net of tax benefit, $97)(187(187Change in unrecognized loss on securities held to maturity for which a portion of OTTI has been recognized (net of tax, $4 and accretion, $8 and amounts recorded into other comprehensive income at transfer)88Dividends on common stock ($.32 per share)(3,921(3,921Issuance of common stock for warrants exercised (11,000 shares)1100101Issuance of common stock under Stock Incentive Plan (18,200shares)135135Stock-based compensation expense260260Balance – December 31, 2016$123$104,884$22,126$(789$126,344See accompanying notes to consolidated financial statements.74)))))))))))))))))))TABLE OF CONTENTSSOUTHERN NATIONAL BANCORP OF VIRGINIA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS(dollars in thousands)For the Years Ended December 31,​​201620152014​Operating activities:Net income$10,312$9,289$7,483Adjustments to reconcile net income to net cash andcash equivalents provided by operatingactivities:Depreciation798876764Amortization of core deposit intangible219261220Other amortization, net(36149186Accretion of loan discount(1,874(2,510(2,616Amortization of FDIC indemnification asset7936301,230Provision for loan losses4,9123,1713,444Earnings on bank-owned life insurance(700(636(617Equity income on mortgage affiliate(1,109(1,459(558Stock based compensation expense260331317Net gain on sale of available for sale securities—(520—Impairment on securities——41Net (gain) loss on other real estate owned174291(433Provision for (benefit from) deferred income taxes292,132(418Net (increase) decrease in other assets2,924(3851,161Net increase in other liabilities1,3215991,281Net cash and cash equivalents provided by operating activities18,02312,21911,485Investing activities:Proceeds from sales of available for sale securities—3,966—Proceeds from paydowns, maturities and calls of available for sale securities—1—Purchases of held to maturity securities(46,055(18,153(18,284Proceeds from paydowns, maturities and calls of held to maturity securities57,62213,6076,571Loan originations and payments, net(108,760(127,334(100,837Purchase of bank-owned life insurance—(1,500(2,000Net cash received in PGFSB acquisition——22,430Proceeds from sale of PGFSB loans——3,499Investment in mortgage affiliate, net939(119(4,877Net (increase) decrease in stock in Federal Reserve Bank and Federal Home Loan Bank(1,000(1,248327Payments received on FDIC indemnification asset1831,037Proceeds from sale of other real estate owned1,7904,0483,276Purchases of bank premises and equipment(143(307(897Net cash and cash equivalents used in investing activities(95,589(127,036(89,755Financing activities:Net increase in deposits77,30782,869112,838Cash dividends paid – common stock(3,921(6,359(7,239Issuance of common stock under Stock Incentive Plan135707886Issuance of common stock for warrants exercised101——Repurchase of common stock—(721—Proceeds from Federal Home Loan Bank advances-long term—10,000—Repayment of Federal Home Loan Bank advances-long term—(20,000—Net increase (decrease) in securities sold under agreement to repurchase and other short-termborrowings21,00040,337(10,751Net cash and cash equivalents provided by financing activities94,622106,83395,734Increase (decrease) in cash and cash equivalents17,056(7,98417,464Cash and cash equivalents at beginning of period30,33638,32020,856Cash and cash equivalents at end of period$47,392$30,336$38,320Supplemental disclosure of cash flow informationCash payments for:Interest$8,289$6,791$4,454Income taxes4,6042,9933,283Supplemental schedule of noncash investing and financing activitiesTransfer from non-covered loans to other real estate owned—1,3844,409Transfer from covered loans to other real estate owned144343342Transfer from covered loans to non-covered loans——7,344Issuance of common stock in exchange for net assets in acquisition——5,748Transfer from long-term FHLB advances to short-term FHLB advances15,000——Transfer from securities sold under agreement to repurchase to deposits10,381——See accompanying notes to consolidated financial statements.75)))))))))))))))))))))))))))))))))))))))1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIESTABLE OF CONTENTSSOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.Southern National Bancorp of Virginia, Inc. (“Southern National” or “SNBV”) is a corporation formed onJuly 28, 2004 under the laws of the Commonwealth of Virginia and is the holding company for Sonabank(“Sonabank”) a Virginia state chartered bank which commenced operations on April 14, 2005. Sonabank provides arange of financial services to individuals and small and medium sized businesses. Sonabank has fifteen branches inVirginia, located in Fairfax County (Reston, McLean and Fairfax), in Charlottesville, Warrenton (2), Middleburg,Leesburg (2), South Riding, Front Royal, New Market, Haymarket, Richmond and Clifton Forge, and eightbranches in Maryland, in Rockville, Shady Grove, Frederick, Bethesda, Upper Marlboro, Brandywine, Owings andHuntingtown.The accounting policies and practices of Southern National and subsidiary conform to U. S. generally acceptedaccounting principles and to general practice within the banking industry. Major policies and practices are describedbelow:Principles of ConsolidationThe consolidated financial statements include the accounts of Southern National and its wholly ownedsubsidiary. Southern National is a bank holding company that owns all of the outstanding common stock of itsbanking subsidiary, Sonabank. All material intercompany balances and transactions have been eliminated inconsolidation.Use of EstimatesThe preparation of the consolidated financial statements in conformity with U. S. generally acceptedaccounting principles requires management to make estimates and assumptions that affect the reported amounts ofassets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses duringthe reporting period. Actual results could differ from these estimates. Material estimates that are particularlysusceptible to significant change in the near term include: the determination of the allowance for loan losses, the fairvalue of investment securities, other than temporary impairment of investment securities, the valuation of goodwilland intangible assets, fair value measurements related to assets acquired and liabilities assumed from businesscombinations, the FDIC indemnification asset, other real estate owned and deferred tax assets.Investment SecuritiesDebt securities that Southern National has the positive intent and ability to hold to maturity are classified asheld-to-maturity and carried at amortized cost.Securities classified as available for sale are those debt and equity securities that may be sold in response tochanges in interest rates, liquidity needs or other similar factors. Securities available for sale are carried at fair value,with unrealized gains or losses net of deferred taxes, included in accumulated other comprehensive income (loss) instockholders’ equity.Purchased premiums and discounts are recognized in interest income using the interest method over the termsof the securities without anticipating prepayments, except for mortgage-backed securities where prepayments areanticipated. Gains and losses on the sale of securities are recorded on the settlement date and are determined usingthe specific identification method.Southern National purchases amortizing investment securities in which the underlying assets are residentialmortgage loans subject to prepayments. The actual principal reduction on these assets varies from the expectedcontractual principal reduction due to principal prepayments resulting from the borrowers’ election to refinance theunderlying mortgage based on market and other conditions. The purchase premiums and discounts associated withthese assets are amortized or accreted to interest income over the estimated life of the related assets. The estimatedlife is calculated by projecting future prepayments and the resulting principal cash flows until maturity. Prepaymentrate projections utilize actual prepayment speed experience and available market information on like-kindinstruments. The prepayment rates form the 76TABLE OF CONTENTSbasis for income recognition of premiums and discounts on the related assets. Changes in prepayment estimates maycause the earnings recognized on these assets to vary over the term that the assets are held, creating volatility in thenet interest margin. Prepayment rate assumptions are monitored and updated monthly to reflect actual activity andthe most recent market projections.Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis,and more frequently when economic or market conditions warrant such an evaluation. For securities in anunrealized loss position, management considers the extent and duration of the unrealized loss, and the financialcondition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is morelikely than not that it will be required to sell, a security in an unrealized loss position before recovery of itsamortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire differencebetween amortized cost and fair value is recognized as impairment through earnings. For debt securities that do notmeet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI relatedto credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which isrecognized in other comprehensive income. The credit loss is defined as the difference between the present value ofthe cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount ofimpairment is recognized through earnings.In order to determine OTTI for purchased beneficial interests that, on the purchase date, were not highly rated,Southern National compares the present value of the remaining cash flows as estimated at the preceding evaluationdate to the current expected remaining cash flows. OTTI is deemed to have occurred if there has been an adversechange in the remaining expected future cash flows.LoansSouthern National provides mortgage, commercial and consumer loans to customers. A substantial portion ofthe loan portfolio is represented by loans secured by real estate throughout its market area. The ability of SouthernNational’s debtors to honor their contracts is in varying degrees dependent upon the real estate market conditionsand general economic conditions in this area.Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-offare reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses, purchasepremiums and discounts and any deferred loan fees or costs on originated loans. Interest income is accrued on theunpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognizedas an adjustment of the related loan yield using the interest method without anticipating prepayments.As part of the Greater Atlantic Bank (GAB) acquisition, the Bank and the FDIC entered into a loss sharingagreement on approximately $143.4 million (cost basis) of Greater Atlantic Bank’s assets. The Bank will share inthe losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharing agreement; werefer to these assets collectively as “covered assets.” The indemnification against losses in the commercial portfolioon the GAB portfolio ended in December 2014. The FDIC indemnification on the GAB residential mortgages andthe GAB HELOCS continues until December 2019. Loans that are not covered in the loss sharing agreement arereferred to as “non-covered loans.”The accrual of interest on all loans is discontinued at the time the loan is 90 days delinquent unless the credit iswell secured and in process of collection. In all cases, loans are placed on nonaccrual status or charged-off at anearlier date if collection of principal and interest is considered doubtful.All interest accrued but not collected for loans that are placed on nonaccrual status or charged-off is reversedagainst interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, untilqualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amountscontractually due are brought current and future payments are reasonably assured.Most of Southern National’s business activity is with customers located within Virginia and Maryland.Therefore, our exposure to credit risk is significantly affected by changes in the economy in those areas. We are notdependent on any single customer or group of customers whose insolvency would have a material adverse effect onoperations. 77TABLE OF CONTENTSSouthern National has purchased, primarily through acquisitions, individual loans and groups of loans, some ofwhich have shown evidence of credit deterioration since origination. These purchased loans are recorded at fairvalue such that there is no carryover of the seller’s allowance for loan losses. After acquisition, losses arerecognized by an increase in the allowance for loan losses. Purchased credit impaired loans are accounted for usingthe expected cash flow methodology, and purchased performing loans are accounted for using the contractual cashflow methodology.Such purchased loans are accounted for individually or aggregated into pools of loans based on common riskcharacteristics such as, credit score, loan type, and date of origination. Southern National estimates the amount andtiming of expected cash flows for each purchased credit impaired loan or pool, and the expected cash flows inexcess of fair value are recorded as interest income over the remaining life of the loan or pool (accretable yield).The excess of the loans’ or pool’s contractual principal and interest over expected cash flows is not recorded(nonaccretable difference).Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expectedcash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greaterthan the carrying amount, it is recognized as part of future interest income.In accordance with Accounting Standards Codification 310-30, and based on current information and events, ifit becomes probable that there is a significant increase in cash flows previously expected to be collected or if actualcash flows are significantly greater than cash flows previously expected, the Bank will recalculate the amount ofaccretable yield for the acquired loans as the excess of the revised cash flows expected to be collected over the sumof  (1) the initial investment in the loans less (2) cash collected less (3) write downs, if any plus (4) the amount ofyield accreted to date. The amount of accretable yield will be adjusted by reclassification from non-accretable yield.This adjustment would be accounted for as a change in estimate with the amount of periodic accretion adjusted overthe remaining life of the loans.Allowance for Loan and Lease Losses (ALLL)The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses arecharged against the allowance when management believes the collection of the principal is unlikely. Recoveries ofamounts previously charged-off are credited to the allowance. Management’s determination of the adequacy of theallowance is based on a three year historical average net loss experience for each portfolio segment adjusted forcurrent industry and economic conditions and estimates of their effect on loan collectability. While managementuses available information to estimate losses on loans, future additions to the allowance may be necessary based onchanges in economic conditions, particularly those affecting real estate values.The allowance consists of specific and general components. The specific component relates to loans that areindividually classified as impaired. The general component provides for estimated losses in unimpaired loans and isbased on historical loss experience adjusted for current factors.A loan is considered impaired when, based on current information and events, it is probable that SouthernNational will be unable to collect the scheduled payments of principal or interest when due according to the terms ofthe loan. Factors considered by management in determining impairment include payment status, collateral value,and the probability of collecting scheduled principal and interest payments when due. Loans that experienceinsignificant payment delays and payment shortfalls generally are not classified as impaired. Managementdetermines the significance of payment delays and payment shortfalls on a case-by-case basis, taking intoconsideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, thereasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to theprincipal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expectedfuture cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair valueof the collateral if the loan is collateral dependent.The general component covers non-impaired loans and is based on historical loss experience adjusted forcurrent factors. The historical loss experience is determined by portfolio segment and is based on the actual net losshistory experienced by Southern National over the most recent three years. This actual loss experience issupplemented with other economic factors based on the risks present for each portfolio 78TABLE OF CONTENTSsegment. These economic factors include consideration of the following: levels of and trends in delinquencies andimpaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects ofany changes in risk selection and underwriting standards; other changes in lending policies, procedures, andpractices; experience, ability, and depth of lending management and other relevant staff; national and localeconomic trends and conditions; industry conditions; and effects of changes in credit concentrations. The followingportfolio segments have been identified: owner occupied commercial real estate, non-owner occupied commercialreal estate, construction and land development, commercial loans, 1 – 4 family residential, and other consumer.While underwriting practices in this environment are more stringent, the bank estimates the effect of internal factorson future net loss experience to be negligible. Management’s estimate of the effect of current external economicenvironmental conditions on future net loss experience is significant in all loan segments and particularly on loanssecured by real estate including single family 1 – 4, non-owner occupied commercial real estate and constructionand land development loans. These factors include excess inventory, generally less demand driven in part by fewerqualified borrowers and buyers. These considerations have played a significant role in management’s estimate of theadequacy of the allowance for loan and lease losses.Commercial real estate consists of borrowings secured by owner-occupied and non-owner-occupiedcommercial real estate. Repayment of these loans is dependent upon rental income or the subsequent sale of theproperty for loans secured by non-owner-occupied commercial real estate and by cash flows from businessoperations for owner-occupied commercial real estate. Loans for which the source of repayment is rental income areprimarily impacted by local economic conditions which dictate occupancy rates and the amount of rent charged.Commercial real estate loans that are dependent on cash flows from operations can also be adversely affected bycurrent market conditions for their product or service.Construction and land development primarily consist of borrowings to purchase and develop raw land intoresidential and non-residential properties. Construction loans are extended to individuals as well as corporations forthe construction of an individual or multiple properties and are secured by raw land and the subsequentimprovements. Repayment of the loans to real estate developers is dependent upon the sale or lease of properties tothird parties in a timely fashion upon completion. Should there be delays in construction or a downturn in the marketfor those properties, there may be significant erosion in value which may be absorbed by Southern National.Commercial loans consist of borrowings for commercial purposes to individuals, corporations, partnerships,sole proprietorships, and other business enterprises. Commercial loans are generally secured by business assets suchas equipment, accounts receivable, inventory, or any other asset excluding real estate and generally made to financecapital expenditures or operations. Southern National’s risk exposure is related to deterioration in the value ofcollateral securing the loan should foreclosure become necessary. Generally, business assets used or produced inoperations do not maintain their value upon foreclosure which may require Southern National to write-down thevalue significantly to sell.Residential real estate loans consist of loans to individuals for the purchase of primary residences withrepayment primarily through wage or other income sources of the individual borrower. Southern National’s lossexposure to these loans is dependent on local market conditions for residential properties as loan amounts aredetermined, in part, by the fair value of the property at origination.On May 15, 2014, we purchased a 44% equity investment and preferred stock of Southern Trust Mortgage(“STM”), a regional mortgage banking company headquartered in Virginia Beach. STM has mortgage bankingoriginators in Virginia, Maryland, North Carolina and South Carolina. Southern Trust Mortgage only originatesretail mortgage production.Sonabank has established with STM underwriting guidelines under which it will purchase residentialconstruction only, construction loans that convert to permanent, and permanent loans primarily in its Virginia andMaryland footprint from STM. These will be largely loans that do not conform to FNMA or FHLMC standardsbecause of size or acreage.Other consumer loans are comprised of loans to individuals both unsecured and secured and open-end homeequity loans secured by real estate, with repayment dependent on individual wages and other income. The risk ofloss on consumer loans is elevated as the collateral securing these loans, if any, rapidly 79TABLE OF CONTENTSdepreciate in value or may be worthless and/or difficult to locate if repossession is necessary. Losses in thisportfolio are generally relatively low, however, due to the small individual loan size and the balance outstanding asa percentage of Southern National’s entire portfolio.Transfers of Financial AssetsTransfers of financial assets are accounted for as sales, when control over the assets has been relinquished.Control over transferred assets is deemed to be surrendered when the assets have been isolated from SouthernNational, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) topledge or exchange the transferred assets, and Southern National does not maintain effective control over thetransferred assets through an agreement to repurchase them before their maturity.Equity Method InvestmentsSouthern National’s investment in STM, our mortgage affiliate, is being accounted for under the equitymethod. Under the equity method, the carrying value of Southern National’s investment in STM was originallyrecorded at cost but is adjusted periodically to record Southern National’s proportionate share of STM’s earnings orlosses through noninterest income and decreased by the amount of cash dividends or similar distributions receivedfrom STM.Bank Premises and EquipmentLand is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings andrelated components are depreciated using the straight line method with useful lives of 30 years. Furniture, fixturesand equipment are depreciated using the straight-line method with useful lives ranging from 3 to 10 years.Leasehold improvements are amortized over the shorter of their estimated useful lives or the lease term.Goodwill and Intangible AssetsGoodwill resulting from business combinations after January 1, 2009, is generally determined as the excess ofthe fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, overthe fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangibleassets acquired in a purchase business combination and determined to have an indefinite useful life are notamortized, but tested for impairment at least annually. Southern National has selected August 31 as the date toperform the annual goodwill impairment assessment. Intangible assets with definite useful lives are amortized overtheir estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinitelife on our balance sheet.Other intangible assets consist of core deposit intangible assets arising from whole bank and branchacquisitions and are amortized over their estimated useful lives, which range from 6 to 15 years.Stock Based CompensationCompensation cost is recognized for stock options issued to employees, based on the fair value of these awardsat the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation costis recognized over the required service period, generally defined as the vesting period. For awards with gradedvesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entireaward.Bank-owned Life InsuranceSouthern National has purchased life insurance policies on certain key executives. Bank-owned life insuranceis recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is thecash surrender value adjusted for other charges or other amounts due that are probable at settlement. 80TABLE OF CONTENTSOther Real Estate OwnedAssets acquired through or instead of foreclosure are initially recorded at fair value less costs to sell whenacquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, the direct charge-off methodis recorded through expense. Operating costs after acquisition are expensed.Stock in Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB)The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based onthe level of borrowings and other factors, and may invest in additional amounts. We are also required to own FRBstock with a par value equal to 6% of capital. FHLB stock and FRB stock are carried at cost, classified as arestricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash andstock dividends are reported as income.Impairment of Long-Lived AssetsPremises and equipment, core deposit intangible assets, the FDIC indemnification asset and other long-termassets are reviewed for impairment when events indicate their carrying amount may not be recoverable from futureundiscounted cash flows. If impaired, the assets are recorded at fair value.FDIC Indemnification AssetThe acquisition of Greater Atlantic Bank (GAB) on December 4, 2009 was accounted for under the acquisitionmethod of accounting, and the assets and liabilities were recorded at their estimated fair values. The FDICindemnification asset was measured separately from each of the covered asset categories as it is not contractuallyembedded in any of the covered asset categories. The indemnification asset represents the present value of cashflows expected to be received from the FDIC for future losses on covered assets based on the expected credit lossesestimated for each covered loan or loan pool and the loss sharing percentages at the acquisition date. Cash flows arediscounted at a market-based rate to reflect the uncertainty of the timing of the loss sharing reimbursement from theFDIC. The ultimate collectability of this asset is dependent upon the performance of the underlying covered assets,the passage of time and claims paid by the FDIC. We acquired the Greater Atlantic loans in December 2009 andcontinuously evaluate our estimates of expected losses on these loans. During 2016, and based on the actualhistorical losses on the loan pools over the previous 24 month period, expected losses on the acquired GreaterAtlantic loans (the covered loans) were lower than previously forecasted which results in a lower expected recoveryfrom the FDIC. As of December 31, 2016, we expect to recover $528 thousand from the FDIC under theindemnification agreement. The difference between the carrying amount of  $2.1 million and the estimated recoveryis being amortized over the remaining life of the indemnification agreement or the expected life of the loans,whichever is shorter. There were two agreements with the FDIC, one for single family assets which is a 10 yearagreement expiring in December 2019, and one for non-single family (commercial) assets which was a 5 yearagreement which expired in December 2014. The current overstatement is due to improvements in the loss estimatesin the single family covered loans.Retirement PlansEmployee 401(k) plan expense is the amount of matching contributions. Supplemental retirement plan expenseallocates the benefits over years of service.Loss ContingenciesLoss contingencies, including claims and legal actions arising in the ordinary course of business, are recordedas liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.Management does not believe there are such matters that will have a material effect on the financial statements.Dividend RestrictionBanking regulations require maintaining certain capital levels and may limit the dividends paid by the bank tothe holding company or by the holding company to shareholders. 81TABLE OF CONTENTSEstimates and UncertaintiesEstimates including the fair value of financial instruments, other than temporary impairment, the provision forloan losses, expected loan performance and recoveries from the FDIC, and the evaluation of the recoverability ofgoodwill and intangible assets involve uncertainties and matters of significant judgment regarding interest rates,credit risk, repayments and prepayments, and other factors, especially in the absence of broad markets for particularitems. Changes in assumptions or in market conditions could significantly affect the estimates.Operating SegmentsWhile the chief decision-makers monitor the revenue streams of the various products and services, operationsare managed and financial performance is evaluated on a company-wide basis. Discrete financial information is notavailable other than on a company-wide basis. Accordingly, all of the financial service operations are considered bymanagement to be aggregated in one reportable operating segment.ReclassificationsIn certain instances, amounts reported in prior years’ consolidated financial statements have been reclassifiedto conform to the current financial statement presentation. Such reclassifications had no effect on previouslyreported cash flows, shareholders’ equity or net income.Income TaxesIncome tax expense is the total of the current year income tax due or refundable and the change in deferred taxassets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporarydifferences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. Avaluation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would besustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is thelargest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions notmeeting the “more likely than not” test, no tax benefit is recorded. We have no unrecognized tax benefits and do notanticipate any increase in unrecognized benefits during the next twelve months. Should the accrual of any interest orpenalties relative to unrecognized tax benefits be necessary, it is our policy to record such accruals in our income taxaccounts; no such accruals exist as of December 31, 2016. Southern National and its subsidiary file a consolidatedU. S. federal tax return; Sonabank files a Maryland state income tax return and Southern National files a Virginiastate income tax return. These returns are subject to examination by taxing authorities for all years after 2012.Restrictions on CashCash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve andclearing requirements in the amount of  $2.9 million and $872 thousand at December 31, 2016 and 2015,respectively.Consolidated Statements of Cash FlowsFor purposes of reporting cash flows, Southern National defines cash and cash equivalents as cash due frombanks and interest-bearing deposits in other banks with maturities less than 90 days. Net cash flows are reported forcustomer loan and deposit transactions and short-term borrowings.Earnings Per ShareBasic earnings per share (“EPS”) are computed by dividing net income by the weighted average number ofcommon shares outstanding during the year. Diluted earnings per share reflect additional common shares that wouldhave been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income thatwould result from the assumed issuance. Potential common shares that may be issued by SNBV relate solely tooutstanding stock options and warrants and are determined using the treasury stock method. 82TABLE OF CONTENTSComprehensive Income (Loss)Comprehensive income (loss) consists of net income and other comprehensive income (loss). Othercomprehensive income (loss) includes unrealized gains and losses on securities available for sale and the non-creditcomponent of other than temporary impairment of securities held-to-maturity which are also recognized as aseparate component of equity.Off Balance Sheet Credit Related Financial InstrumentsIn the ordinary course of business, Southern National has entered into commitments to extend credit andstandby letters of credit. The face amount for these items represents the exposure to loss, before consideringcustomer collateral or ability to repay.Recent Accounting PronouncementsIn September 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update(“ASU”) No. 2014-12, Compensation — Stock Compensation (Topic 718): Accounting for Share-Based PaymentsWhen the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite ServicePeriod . The amendments clarify the proper method of accounting for share-based payments when the terms of anaward provide that a performance target could be achieved after the requisite service period. This ASU requires thata performance target that affects vesting and that could be achieved after the requisite service period be treated as aperformance condition. The performance target should not be reflected in estimating the grant-date fair value of theaward. Compensation cost should be recognized in the period in which it becomes probable that the performancetarget will be achieved and should represent the compensation cost attributable to the period(s) for which therequisite service has already been rendered. The amendments in this ASU are effective for annual periods andinterim periods within those annual periods beginning after December 15, 2015. This ASU did not significantlyimpact SNBV.In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. Underthe ASU, an entity presents debt issuance costs in the balance sheet as a direct deduction from the related debtliability rather than as an asset. Amortization of the costs is reported as interest expense. For public entities, theamendments in ASU 2015-03 were effective for fiscal years beginning after December 15, 2015, and interimperiods within those fiscal years. SNBV has adopted the provisions of these amendments, and they have no impacton its financial reporting.In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to theConsolidation Analysis . The amendments modify the evaluation reporting organizations must perform to determineif certain legal entities should be consolidated as VIEs. Specifically, the amendments: (1) modify the evaluation ofwhether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interestentities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect theconsolidation analysis of reporting entities that are involved with VIEs, particularly those that have feearrangements and related party relationships; and (4) provide a scope exception from consolidation guidance forreporting entities with interests in legal entities that are required to comply with or operate in accordance withrequirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered moneymarket funds. ASU No. 2015-02 became effective for interim and annual reporting periods beginning afterDecember 15, 2015. SNBV has adopted the provisions of these amendments, and they have no impact on itsfinancial reporting.In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying theAccounting for Measurement-Period Adjustments . The amendments in ASU 2015-16 require that an acquirerrecognize adjustments to estimated amounts that are identified during the measurement period in the reportingperiod in which the adjustment amounts are determined. The amendments require that the acquirer record, in thesame period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other incomeeffects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completedat the acquisition date. The amendments also require an entity to present separately on the face of the incomestatement or disclose in the notes the portion of the amount recorded in current-period earnings by line item thatwould have been recorded in previous reporting 83TABLE OF CONTENTSperiods if the adjustment to the estimated amounts had been recognized as of the acquisition date. The amendmentsin this ASU are effective for public business entities for fiscal years beginning after December 15, 2015, includinginterim periods within those fiscal years. The amendments should be applied prospectively to adjustments toprovisional amounts that occur after the effective date with earlier application permitted for financial statements thathave not been issued. Adoption of these amendments had no impact on SNBV’s consolidated financial statements.In January 2016, the FASB issued ASU 2016-1, Financial Instruments Overall (Topic 825): Recognition andMeasurement of Financial Assets and Financial Liabilities . The amendments in ASU 2016-1: (a) require equityinvestments (except for those accounted for under the equity method of accounting or those that result inconsolidation of the investee) to be measured at fair value with changes in fair value recognized in net income;(b) simplify the impairment assessment of equity securities without readily determinable fair values by requiring aqualitative assessment to identify impairment; (c) eliminate the requirement for public business entities to disclosethe method and significant assumptions used to estimate the fair value that is required to be disclosed for financialinstruments measured at amortized cost on the balance sheet; (d) require public business entities to use the exit pricenotion when measuring the fair value of financial instruments for disclosure purposes; (e) require an entity topresent separately in other comprehensive income, the portion of the total change in the fair value of a liabilityresulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability atfair value in accordance with the fair value option for financial instruments; (f) require separate presentation offinancial assets and financial liabilities by measurement category and form of financial assets on the balance sheetor the notes to the financial statements; and (g) clarify that an entity should evaluate the need for a valuationallowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s otherdeferred tax assets. The amendments in this ASU are effective for public companies for fiscal years beginning afterDecember 15, 2017, including interim periods within those fiscal years. SNBV is currently evaluating the impact ofadopting the new guidance on its consolidated financial statements.In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) . The FASB issued this ASU to increasetransparency and comparability among organizations by recognizing lease assets and lease liabilities on the balancesheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing keyinformation about leasing arrangements. The amendments in this ASU are effective for public business entities forannual periods, and interim periods within those annual periods, beginning after December 15, 2018. Earlyapplication of this ASU is permitted for all entities. We lease many of our banking offices under lease agreementswe classify as operating leases. Management is evaluating the impact of recognizing our leases as liabilities.In March 2016, the FASB issued ASU 2016-07 , Investments — Equity Method and Joint Ventures(Topic 323), Simplifying the Transition to the Equity Method of Accounting . The amendments eliminate therequirement that when an investment qualifies for use of the equity method as a result of an increase in the level ofownership interest or degree of influence, an investor must adjust the investment, results of operations, and retainedearnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periodsthat the investment had been held. The amendments require that the equity method investor add the cost of acquiringthe additional interest in the investee to the current basis of the investor’s previously held interest and adopt theequity method of accounting as of the date the investment becomes qualified for equity method accounting. Theamendments require that an entity that has an available-for-sale equity security that becomes qualified for the equitymethod of accounting recognize through earnings the unrealized holding gain or loss in accumulated othercomprehensive income at the date the investment becomes qualified for use of the equity method. The amendmentsare effective for all entities for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2016. The amendments should be applied prospectively upon their effective date to increase the levelof ownership interest or degree of influence that result in the adoption of the equity method. Early adoption ispermitted. SNBV is currently evaluating the impact of adopting the amendments on its consolidated financialstatements, but does not expect the adoption to have a significant impact.In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606).These amendments affect any entity that either enters into contracts with customers to transfer goods or services orenters into contracts for the transfer of nonfinancial assets unless those contracts are within 84TABLE OF CONTENTSthe scope of other standards (e.g. insurance contracts or lease contracts). This ASU will supersede the revenuerecognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates aTopic 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity shouldrecognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects theconsideration to which the entity expects to be entitled in exchange for those goods or services. This ASU alsorequires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arisingfrom customer contracts, including significant judgments and changes in judgments and assets recognized fromcosts incurred to obtain or fulfill a contract. The ASU allows for either full retrospective or modified retrospectiveadoption. In August 2015, the FASB issued ASU 2015-14, Revenue From Contracts With Customers (Topic 606):Deferral of the Effective Date. This ASU defers the effective date of ASU 2014-09, Revenue From Contracts WithCustomers (Topic 606) by one year. The new guidance is effective for interim and annual reporting periodsbeginning after December 15, 2017. Early adoption is permitted for interim and annual reporting periods beginningafter December 15, 2016. Our revenue is balanced between net interest income on financial assets and liabilities,which is explicitly excluded from the scope of the new standard, and noninterest income. The Company has begunto scope its general ledger revenue items and assess its contracts with customers to identify its performanceobligations and will continue to evaluate the impact of adoption on our noninterest income and disclosures.In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718):Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to simplifyseveral aspects of the accounting for share-based payment transactions, including the income tax consequences,classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annualperiods. Early application is permitted. SNBV is currently evaluating the impact of adopting the new guidance on itsconsolidated financial statements, but does not expect the adoption to have a significant impact.In June 2016 , the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments –Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which setsforth a “current expected credit loss” (“CECL”) model requiring the Company to measure all expected credit lossesfor financial instruments held at the reporting date based on historical experience, current conditions and reasonablesupportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of creditlosses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. Forpublic business entities that are U.S. Securities and Exchange Commission filers, the amendments in this update areeffective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.SNBV is currently assessing the impact of the adoption of this ASU on its consolidated financial statements and iscollecting data that will be needed to produce historical inputs into any models created as a result of adopting thisASU.During August 2016, the FASB issued new guidance related to the Statement of Cash Flows in ASU 2016-15.The new guidance clarifies the classification within the statement of cash flows for certain transactions, includingdebt extinguishment costs, zero-coupon debt, contingent consideration related to business combinations, insuranceproceeds, equity method distributions and beneficial interests in securitizations. The guidance also clarifies that cashflows with aspects of multiple classes of cash flows or that cannot be separated by source or use should be classifiedbased on the activity that is likely to be the predominant source or use of cash flows for the item. This guidance iseffective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Theadoption of this guidance is not expected to be material to the consolidated financial statements.In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350):Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates the second step of the previousFASB guidance for testing goodwill for impairment and is intended to reduce cost and complexity of goodwillimpairment testing. The amendments in this ASU modify the concept of impairment from the condition that existswhen the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carryingamount of a reporting unit exceeds its fair value. After determining if the carrying amount of a reporting unitexceeds its fair value, the entity should take an impairment charge of the same amount to the goodwill for thatreporting unit, not to exceed the total goodwill amount for that 852. SECURITIESTABLE OF CONTENTSreporting unit. ASU 2017-04 is effective for annual periods beginning after December 15, 2019, including interimperiods within those annual periods. Early adoption is permitted for interim or annual goodwill impairment testsperformed on testing dates after January 1, 2017. We are currently evaluating the impact of adopting the newguidance on its consolidated financial statements.In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying theDefinition of a Business , which is intended to provide guidance in evaluating whether transactions should beaccounted for as acquisitions (or disposals) of assets or businesses in order to provide stakeholders with moredetailed reporting and less cost to analyze transactions. This ASU provides a screen to determine when a set ofassets is not a business. It requires that when substantially all fair value of gross assets acquired (or disposed of) isconcentrated in a single identifiable asset or group of similar identifiable assets, the set of assets is not a business. Ifthe screen is not met, the amendments in this update provide a framework to assist entities in evaluating whetherboth an input and a substantive process are present for the set to be a business. ASU 2017-01 is effective for annualperiods beginning after December 15, 2017, including interim periods within those annual periods. No disclosuresare required at transition and early adoption is permitted. We are currently evaluating the impact of adopting thenew guidance on its consolidated financial statements.The amortized cost and fair value of available for sale securities and the related gross unrealized gains andlosses recognized in accumulated other comprehensive income (loss) were as follows (in thousands):December 31, 2016Amortized CostGross UnrealizedFair Value​GainsLossesObligations of states and political subdivisions$2,280$9$(30$2,259Trust preferred securities2,590—(9311,659$4,870$9$(961$3,918December 31, 2015Amortized CostGross UnrealizedFair Value​GainsLossesObligations of states and political subdivisions$2,287$25$—$2,312Trust preferred securities2,590—(6931,897$4,877$25$(693$4,209The amortized cost, unrecognized gains and losses, and fair value of securities held to maturity were as follows(in thousands):December 31, 2016Amortized CostGross UnrecognizedFair Value​GainsLossesResidential government-sponsored mortgage-backed securities$18,594$308$(11818,784Residential government-sponsored collateralized mortgageobligations2,371—(542,317Government-sponsored agency securities47,97528(1,86546,138Obligations of states and political subdivisions12,70653(16212,597Trust preferred securities3,654—(1463,508$85,300$389$(2,345$83,344 86)))))))))))TABLE OF CONTENTSDecember 31, 2015Amortized CostGross UnrecognizedFair Value​GainsLossesResidential government-sponsored mortgage-backed securities$20,751$459$(22$21,188Residential government-sponsored collateralized mortgageobligations2,946—(662,880Government-sponsored agency securities55,937222(61855,541Obligations of states and political subdivisions12,794157(6712,884Trust preferred securities4,352—(3813,971$96,780$838$(1,154$96,464The amortized cost amounts are net of recognized other than temporary impairment.During 2016 we sold no securities.In the second quarter of 2015, we transferred from our held-to-maturity (HTM) portfolio all of the trustpreferred securities and a non-government sponsored residential CMO that had been other than temporarilyimpaired to the available-for-sale (AFS) classification. We sold five of these trust preferred securities and the CMOrecognizing gains of  $914 thousand and losses of  $394 thousand. Due to the significant deterioration in theseissuers’ creditworthiness which could not have been reasonably anticipated, we feel that our change in classificationdoes not taint our intentions in regards to the remainder of our HTM portfolio. We consider this transfer to beisolated, nonrecurring and unusual for Southern National.During 2014 we sold no securities.The fair value and amortized cost, if different, of debt securities as of December 31, 2016 by contractualmaturity were as follows (in thousands). Securities not due at a single maturity date, primarily mortgage-backedsecurities and collateralized mortgage obligations, are shown separately.Held to MaturityAvailable for Sale​Amortized CostFair ValueAmortized Cost​Fair Value​Due in one to five years$1,459$1,440$—$—Due in five to ten years5,7275,720——Due after ten years57,14955,0834,8703,918Residential government-sponsored mortgage-backed securities18,59418,784——Residential government-sponsored collateralized mortgageobligations2,3712,317——Total$85,300$83,344$4,870$3,918Securities with a carrying amount of approximately $73.9 million and $89.7 million at December 31, 2016 and2015, respectively, were pledged to secure public deposits, certain deposits and a line of credit for advances fromthe Federal Home Loan Bank of Atlanta (“FHLB”).Southern National monitors the portfolio for indicators of other than temporary impairment. At December 31,2016 and 2015, certain securities’ fair values were below cost. As outlined in the table below, there were securitieswith fair values totaling approximately $65.6 million in the portfolio with the carrying value exceeding theestimated fair value that are considered temporarily impaired at December 31, 2016. Because the decline in fairvalue is attributable to changes in interest rates and market illiquidity, and not credit quality, and because we do nothave the intent to sell these securities and it is likely that we will not be required to sell the securities before theiranticipated recovery, management does not consider these securities to be other-than-temporarily impaired as ofDecember 31, 2016. The following tables present information regarding securities in a continuous unrealized lossposition as of December 31, 2016 and 2015 (in thousands) by duration of time in a loss position: 87))))))TABLE OF CONTENTSDecember 31, 2016Less than 12 months12 Months or MoreTotalAvailable for SaleFair valueUnrealized LossesFair valueUnrealized LossesFair valueUnrealized LossesObligations of states and politicalsubdivisions$1,706$(30$—$—$1,706$(30Trust preferred securities——1,658(9311,658(931$1,706$(30$1,658$(931$3,364$(961Less than 12 months12 Months or MoreTotal​Held to MaturityFair valueUnrecognized LossesFair valueUnrecognized LossesFair valueUnrecognized Losses​Residential government-sponsoredmortgage-backed securities$10,238$(110$457$(8$10,695$(118Residential government-sponsoredcollateralized mortgage obligations1,346(27971(272,317(54Government-sponsored agencysecurities41,110(1,865——41,110(1,865Obligations of states and politicalsubdivisions3,578(981,065(644,643(162Trust preferred securities——3,508(1463,508(146$56,272$(2,100$6,001$(245$62,273$(2,345December 31, 2015Less than 12 months12 Months or MoreTotalAvailable for SaleFair valueUnrealized LossesFair valueUnrealized LossesFair valueUnrealized LossesTrust preferred securities$—$—$1,897$(693$1,897$(693Less than 12 months12 Months or MoreTotal​Held to MaturityFair valueUnrecognized LossesFair valueUnrecognized LossesFair valueUnrecognized Losses​Residential government-sponsoredmortgage-backed securities$5,459$(14$640$(8$6,099$(22Residential government-sponsoredcollateralized mortgage obligations512(52,368(612,880(66Government-sponsored agencysecurities35,453(5079,878(11145,331(618Obligations of states and politicalsubdivisions——2,513(672,513(67Trust preferred securities——3,971(3813,971(381$41,424$(526$19,370$(628$60,794$(1,154 88)))))))))))))))))))))))))))))))))))))))))(1) Pre-tax, and represents unrealized losses at date of transfer from available-for-sale to held-to-maturity, net ofaccretion(2) Pre-tax• .5% of the remaining performing collateral will default or defer per annum.• Recoveries of 7% with a two year lag on all defaults and deferrals.• No prepayments for 10 years and then 1% per annum for the remaining life of the security.• Our securities have been modeled using the above assumptions by independent third parties using the forwardLIBOR curve to discount projected cash flows to present values.TABLE OF CONTENTSAs of December 31, 2016, we owned pooled trust preferred securities as follows (in thousands):SecurityTranche LevelRatings When PurchasedCurrent RatingsPar ValueBook ValueEstimated Fair Value% of Current Defaults and Deferrals to Total CollateralPreviously Recognized Cumulative Other Comprehensive Loss ​Moody’s​​FitchMoody’sFitchHeld to Maturity​​​​​​(in thousands)​ALESCO VII A1BSeniorAaa​​AAAA1A​$3,688​​$3,389​$3,275​11$239​MMCF III BSenior SubA3​​A-Ba1BB​269​​265​233​324​​​​​​​​3,957​​3,654​3,508​$243​Available for Sale Other ThanTemporarilyImpaired:​​​​​​​​​​​Cumulative OTTI Related to Credit Loss ​TPREFFUNDING IIMezzanineA1​​A-Caa3C​1,500​​1,099​623​37$400​ALESCO V C1MezzanineA2​​ACaa3C​2,150​​1,491​1,036​10659​​​​​​​​3,650​​2,590​1,659​$1,059​Total​​​​​​​$7,607​​$6,244​$5,167​Each of these securities has been evaluated for other than temporary impairment (“OTTI”). In performing adetailed cash flow analysis of each security, Sonabank works with independent third parties to estimate expectedcash flows and assist with the evaluation of other than temporary impairment. The cash flow analyses performedincluded the following assumptions:We recognized no OTTI charges during 2016 and 2015, and we recognized OTTI charges of  $41 thousandduring 2014.The following table presents a roll forward of the credit losses recognized in earnings for the periods endedDecember 31, 2016, 2015 and 2014 (in thousands):201620152014​Amount of cumulative other-than-temporary impairment related to credit loss prior to January 1$1,060$8,949$8,911Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized———Amounts related to credit loss for which an other-than-temporary impairment was previously recognized——41Reductions due to sales of securities for which an other-than-temporary impairmentwas previously recognized—(7,889—Reductions due to realized losses——(3Amount of cumulative other-than-temporary impairment related to credit loss as of December 31$1,060$1,060$8,949 89(1)%%(2)%%))TABLE OF CONTENTSChanges in accumulated other comprehensive income by component for the years ended December 31, 2016,2015 and 2014 are shown in the table below. All amounts are net of tax (in thousands).For the year ended December 31, 2016Unrealized Holding Gains (Losses) on Available for Sale SecuritiesHeld to Maturity SecuritiesTotal​Beginning balance$(440$(170$(610Other comprehensive income/(loss) before reclassifications(1878$(179Amounts reclassified from accumulated other comprehensiveincome/(loss)———Net current-period other comprehensive income/(loss)(1878(179Ending balance$(627$(162$(789For the year ended December 31, 2015​​Unrealized Holding Gains (Losses) on Available for Sale SecuritiesHeld to Maturity SecuritiesTotal​Beginning balance$(6$(3,014$(3,020Other comprehensive income/(loss) before reclassifications(43421$(413Amounts reclassified from accumulated other comprehensiveincome/(loss)—2,8232,823Net current-period other comprehensive income/(loss)(4342,8442,410Ending balance$(440$(170$(610For the year ended December 31, 2014​​Unrealized Holding Gains (Losses) on Available for Sale SecuritiesHeld to Maturity SecuritiesTotal​Beginning balance$(203$(2,987$(3,190Other comprehensive income/(loss) before reclassifications197(27170Amounts reclassified from accumulated other comprehensiveincome/(loss)———Net current-period other comprehensive income/(loss)197(27170Ending balance$(6$(3,014$(3,020 90)))))))))))))))))))))))))))3. LOANS(1) Covered Loans were acquired in the Greater Atlantic transaction and are covered under an FDIC loss-shareagreement. The agreement covering non-single family loans expired in December 2014.TABLE OF CONTENTSLoans, net of unearned income, consist of the following at year end (in thousands):​​Covered Loans ​​Non-covered Loans​​Total Loans​​Covered Loans ​​Non-covered Loans​​Total Loans​​​December 31, 2016​​December 31, 2015​Loans secured by real estate:Commercial real estate – owner-occupied$—$154,807$154,807$—$141,521$141,521Commercial real estate – non-owner-occupied—279,634279,634—256,513256,513Secured by farmland—541541—578578Construction and land loans—91,06791,067—67,83267,832Residential 1– 4 family10,519220,291230,81012,994165,077178,071Multi-family residential—30,02130,021—25,50125,501Home equity lines of credit17,66111,54229,20321,37913,79835,177Total real estate loans28,180787,903816,08334,373670,820705,193Commercial loans—115,365115,365—124,985124,985Consumer loans—856856—1,3661,366Gross loans28,180904,124932,30434,373797,171831,544Less deferred fees on loans—(1,889(1,889—(2,119(2,119Loans, net of deferred fees$28,180$902,235$930,415$34,373$795,052$829,425Accounting policy related to the allowance for loan losses is considered a critical policy given the level ofestimation, judgment, and uncertainty in the levels of the allowance required to account for the inherent probablelosses in the loan portfolio and the material effect such estimation, judgment, and uncertainty can have on theconsolidated financial results.As part of the Greater Atlantic acquisition, the Bank and the FDIC entered into loss sharing agreements onapproximately $143.4 million (contractual basis) of Greater Atlantic Bank’s assets. There were two agreements withthe FDIC, one for single family loans which is a 10-year agreement expiring in December 2019, and one for non-single family (commercial) assets which was a 5-year agreement which expired in December 2014. The Bank willshare in the losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharingagreements; we refer to these assets collectively as “covered assets.” Loans that are not covered in the loss sharingagreement are referred to as “non-covered loans”. As of December 31, 2016, non-covered loans included $23.0million of loans acquired in the HarVest acquisition and $42.2 million acquired in the PGFSB acquisition.Accretable discount on the acquired covered loans, the PGFSB loans and the HarVest loans was $6.5 millionand $7.9 million at December 31, 2016 and 2015 respectively.Credit-impaired covered loans are those loans which presented evidence of credit deterioration at the date ofacquisition and it is probable that Southern National would not collect all contractually required principal andinterest payments. Generally, acquired loans that meet Southern National’s definition for nonaccrual status fellwithin the definition of credit-impaired covered loans. 91(1)(1)))))(1) Recorded investment is after cumulative prior charge offs of  $3.0 million. These loans also have aggregateSBA guarantees of  $2.2 million.(2) Includes loans secured by farmland and multi-family residential loans.(3) The Bank recognizes loan impairment and may concurrently record a charge off to the allowance for loanlosses.(4) Includes home equity lines of credit.TABLE OF CONTENTSImpaired loans for the covered and non-covered portfolios were as follows (in thousands):Covered LoansNon-covered LoansTotal Loans​December 31, 2016Recorded InvestmentUnpaid Principal BalanceRelated AllowanceRecorded Investment Unpaid Principal BalanceRelated AllowanceRecorded InvestmentUnpaid Principal BalanceRelated Allowance​With no related allowance recordedCommercial real estate – owner occupied$—$—$—$5,583$5,592$—$5,583$5,592$—Commercial real estate – non-owner occupied —————————Construction and land development—————————Commercial loans———3,0023,603—3,0023,603—Residential 1 – 4 family 9631,113————9631,113—Other consumer loans—————————Total$963$1,113$—$8,585$9,195$—$9,548$10,308$—With an allowance recordedCommercial real estate – owner occupied$—$—$—$688$688$150$688$688$150Commercial real estate – non-owner occupied —————————Construction and land development—————————Commercial loans———3,3785,7987503,3785,798750Residential 1 – 4 family ————————Other consumer loans—————————Total$—$—$—$4,066$6,486$900$4,066$6,486$900Grand total$963$1,113$—$12,651$15,681$900$13,614$16,794$900 92(1)(2)(4)(2)(4)(1) Recorded investment is after cumulative prior charge offs of  $1.2 million. These loans also have aggregateSBA guarantees of  $3.5 million.(2) Includes loans secured by farmland and multi-family residential loans.(3) The Bank recognizes loan impairment and may concurrently record a charge off to the allowance for loanlosses.(4) Includes home equity lines of credit.TABLE OF CONTENTSCovered LoansNon-covered LoansTotal Loans​December 31, 2015Recorded InvestmentUnpaid Principal BalanceRelated AllowanceRecorded Investment Unpaid Principal BalanceRelated AllowanceRecorded InvestmentUnpaid Principal BalanceRelated Allowance​With no related allowance recordedCommercial real estate – owner occupied$—$—$—$6,492$6,986$—$6,492$6,986$—Commercial real estate – non-owner occupied ———136230—136230—Construction and land development—————————Commercial loans———2,1022,698—2,1022,698—Residential 1– 4 family 1,0661,243————1,0661,243—Other consumer loans—————————Total$1,066$1,243$—$8,730$9,914$—$9,796$11,157$—With an allowance recordedCommercial real estate – owner occupied$—$—$—$1,370$1,484$439$1,370$1,484$439Commercial real estate – non-owner occupied —————————Construction and land development—————————Commercial loans———3,3823,3824003,3823,382400Residential 1– 4 family —————————Other consumer loans—————————Total$—$—$—$4,752$4,866$839$4,752$4,866$839Grand total$1,066$1,243$—$13,482$14,780$839$14,548$16,023$839 93(1)(2)(4)(2)(4)(1) Includes loans secured by farmland and multi-family residential loans.(2) Includes home equity lines of credit.(1) Includes loans secured by farmland and multi-family residential loans.(2) Includes home equity lines of credit.TABLE OF CONTENTSThe following tables present the average recorded investment and interest income for impaired loansrecognized by class of loans for the years ended December 31, 2016, 2015 and 2014 (in thousands):​​Covered Loans​​Non-covered Loans​​Total Loans​Year ended 12/31/16​​Average Recorded Investment​​Interest Income Recognized​​Average Recorded Investment​​Interest Income Recognized​​Average Recorded Investment​​Interest Income Recognized​With no related allowance recordedCommercial real estate – owner occupied$—$—$6,454$292$6,454$292Commercial real estate – non-owner occupied ——10331033Construction and land development——————Commercial loans——2,888542,88854Residential 1– 4 family 98832——98832Other consumer loans——————Total$988$32$9,445$349$10,433$381With an allowance recordedCommercial real estate – owner occupied$—$—$694$31$694$31Commercial real estate – non-owner occupied ——————Construction and land development——————Commercial loans——3,4021553,402155Residential 1 – 4 family ——————Other consumer loans——————Total$—$—$4,096$186$4,096$186Grand total$988$32$13,541$535$14,529$567​​Covered Loans​​Non-covered Loans​​Total Loans​Year ended 12/31/15​​Average Recorded Investment​​Interest Income Recognized​​Average Recorded Investment​​Interest Income Recognized​​Average Recorded Investment​​Interest Income Recognized​With no related allowance recordedCommercial real estate – owner occupied$—$—$7,156$297$7,156$297Commercial real estate – non-owner occupied ——8221182211Construction and land development——89—89—Commercial loans——3,428—3,428—Residential 1– 4 family 1,50126——1,50126Other consumer loans——————Total$1,501$26$11,495$308$12,996$334With an allowance recordedCommercial real estate – owner occupied$—$—$2,259$42$2,259$42Commercial real estate – non-owner occupied ——————Construction and land development——93—93—Commercial loans——3,4882133,488213Residential 1 – 4 family ——416—416—Other consumer loans——————Total$—$—$6,256$255$6,256$255Grand total$1,501$26$17,751$563$19,252$589 94(1)(2)(1)(2)(1)(2)(1)(2)(1) Includes loans secured by farmland and multi-family residential loans.(2) Includes home equity lines of credit.TABLE OF CONTENTS​​Covered Loans​​Non-covered Loans​​Total Loans​Year ended 12/31/14​​Average Recorded Investment​​Interest Income Recognized​​Average Recorded Investment​​Interest Income Recognized​​Average Recorded Investment​​Interest Income Recognized​With no related allowance recordedCommercial real estate – owner occupied$599$—$9,508$511$10,107$511Commercial real estate – non-owner occupied 1,611—581—2,192—Construction and land development——421—421—Commercial loans——6,1542236,154223Residential 1 – 4 family 1,317403,984—5,30140Other consumer loans——————Total$3,527$40$20,648$734$24,175$774With an allowance recordedCommercial real estate – owner occupied$—$—$382$14$382$14Commercial real estate – non-owner occupied ——————Construction and land development——93—93—Commercial loans——955—955—Residential 1 – 4 family ——415—415—Other consumer loans——————Total$—$—$1,845$14$1,845$14Grand total$3,527$40$22,493$748$26,020$788The following table presents the aging of the recorded investment in past due loans by class of loans as ofDecember 31, 2016 and 2015 (in thousands):December 31, 201630 – 59 Days Past Due​60 – 89 Days Past Due​​90 Days or More​​Total Past Due​​Nonaccrual Loans​​Loans Not Past Due​​Total Loans​Covered loans:Commercial real estate – owner occupied$—$—$—$—$—$—$—Commercial real estate – non-owner occupied ———————Construction and land development———————Commercial loans———————Residential 1 – 4 family 22195—31685027,01428,180Other consumer loans———————Total$221$95$—$316$850$27,014$28,180Non-covered loans:Commercial real estate – owner occupied$—$—$—$—$637$154,170$154,807Commercial real estate – non-owner occupied —————310,196310,196Construction and land development—————91,06791,067Commercial loans1,349——1,3493,158110,858115,365Residential 1 – 4 family 1,011——1,011—230,822231,833Other consumer loans————856856Total$2,360$—$—$2,360$3,795$897,969$904,124Total loans:Commercial real estate – owner occupied$—$—$—$—$637$154,170$154,807Commercial real estate – non-owner occupied —————310,196310,196Construction and land development—————91,06791,067Commercial loans1,349——1,3493,158110,858115,365Residential 1 – 4 family 1,23295—1,327850257,836260,013Other consumer loans—————856856Total$2,581$95$—$2,676$4,645$924,983$932,304 95(1)(2)(1)(2)(1)(2)(1)(2)(1)(2)(1) Includes loans secured by farmland and multi-family residential loans.(2) Includes home equity lines of credit.TABLE OF CONTENTSDecember 31, 201530 – 59 Days Past Due​60 – 89 Days Past Due​​90 Days or More​​Total Past Due​​Nonaccrual Loans​​Loans Not Past Due​​Total Loans​Covered loans:Commercial real estate – owner occupied$—$—$—$—$—$—$—Commercial real estate – non-owner occupied ———————Construction and land development———————Commercial loans———————Residential 1 – 4 family 11943—16269833,51334,373Other consumer loans———————Total$119$43$—$162$698$33,513$34,373Non-covered loans:Commercial real estate – owner occupied$561$—$—$561$2,071$138,889$141,521Commercial real estate – non-owner occupied —————282,592282,592Construction and land development—————67,83267,832Commercial loans267——2672,102122,616124,985Residential 1 – 4 family 85——85—178,790178,875Other consumer loans1——1—1,3651,366Total$914$—$—$914$4,173$792,084$797,171Total loans:Commercial real estate – owner occupied$561$—$—$561$2,071$138,889$141,521Commercial real estate – non-owner occupied —————282,592282,592Construction and land development—————67,83267,832Commercial loans267——2672,102122,616124,985Residential 1 – 4 family 20443—247698212,303213,248Other consumer loans1——1—1,3651,366Total$1,033$43$—$1,076$4,871$825,597$831,544 96(1)(2)(1)(2)(1)(2)(1) Includes loans secured by farmland and multi-family residential loans.(2) Includes home equity lines of credit.TABLE OF CONTENTSActivity in the allowance for non-covered loan and lease losses by class of loan for the years endedDecember 31, 2016, 2015 and 2014 is summarized below (in thousands):Non-covered loans:​​Commercial Real Estate Owner Occupied​​Commercial Real Estate Non-owner Occupied ​​Construction and Land Development​​Commercial Loans​​1 – 4 Family Residential ​​Other Consumer Loans​​Unallocated​​Total​Year ended December 31,2016Allowance for loan losses:Beginning balance$1,185$1,222$865$3,041$1,408$48$652$8,421Charge offs(799—(449(3,370(22(322—(4,962Recoveries8—12196104—239Provision5112622153,599(117348944,912Ending balance$905$1,484$752$3,366$1,279$78$746$8,610Year ended December 31,2015Allowance for loan losses:Beginning balance$855$1,123$1,644$2,063$1,322$49$337$7,393Charge offs(1,067——(1,174(413(19—(2,673Recoveries1818139912591—526Provision1,37981(9182,061240173153,175Ending balance$1,185$1,222$865$3,041$1,408$48$652$8,421Year ended December 31,2014Allowance for loan losses:Beginning balance$814$985$1,068$2,797$1,302$54$19$7,039Charge offs(573—(250(1,998(449——(3,270Recoveries1023412575—174Provision6041158221,139462(103183,450Ending balance$855$1,123$1,644$2,063$1,322$49$337$7,393 97(1)(2))))))))))))))))))))(1) Includes loans secured by farmland and multi-family residential loans.(2) Represents the portion of increased expected losses which is covered by the loss sharing agreement with theFDIC.(3) Includes home equity lines of credit.TABLE OF CONTENTSActivity in the allowance for covered loan and lease losses by class of loan for the years ended December 31,2016, 2015 and 2014 is summarized below (in thousands).Covered loans:​​Commercial Real Estate Owner Occupied​​Commercial Real Estate Non-owner Occupied ​​Construction and Land Development​​Commercial Loans1 – 4 Family Residential Other Consumer LoansUnallocatedTotal​Year ended December 31, 2016Allowance for loan losses:Beginning balance$—$—$—$—$—$—$—$—Charge offs————————Recoveries————————Adjustments ————————Provision————————Ending balance$—$—$—$—$—$—$—$—Year ended December 31, 2015Allowance for loan losses:Beginning balance$—$—$—$—$17$4$—$21Charge offs————————Recoveries————————Adjustments ————(17——(17Provision—————(4—(4Ending balance$—$—$—$—$—$—$—$—Year ended December 31, 2014Allowance for loan losses:Beginning balance$—$45$—$—$—$6$—$51Charge offs————————Recoveries————————Adjustments —(36——14(2—(24Provision—(9——3——(6Ending balance$—$—$—$—$17$4$—$21 98(1)(3)(2)(2)))))(2))))))(1) Includes loans secured by farmland and multi-family residential loans.(2) Includes home equity lines of credit.TABLE OF CONTENTSThe following table presents the balance in the allowance for non-covered loan losses and the recordedinvestment in non-covered loans by portfolio segment and based on impairment method as of December 31, 2016and 2015 (in thousands):Non-covered loans:​​Commercial Real Estate Owner Occupied​​Commercial Real Estate Non-owner Occupied ​​Construction and Land Development​​Commercial Loans​​1 – 4 Family Residential ​​Other Consumer Loans​​Unallocated​​Total​December 31, 2016Ending allowance balanceattributable to loans:Individually evaluated for impairment$150$—$—$750$—$—$—$900Collectively evaluated for impairment7551,4847522,6161,279787467,710Total ending allowance$905$1,484$752$3,366$1,279$78$746$8,610Loans:Individually evaluated for impairment$6,271$—$—$6,380$—$—$—$12,651Collectively evaluated for impairment148,536310,19691,067108,985231,833856—891,473Total ending loan balances$154,807$310,196$91,067$115,365$231,833$856$—$904,124December 31, 2015Ending allowance balanceattributable to loans:Individually evaluated for impairment$439$—$—$400$—$—$—$839Collectively evaluated for impairment7461,2228652,6411,408486527,582Total ending allowance$1,185$1,222$865$3,041$1,408$48$652$8,421Loans:Individually evaluated for impairment$7,862$136$—$5,484$—$—$—$13,482Collectively evaluated for impairment133,659282,45667,832119,501178,8751,366—783,689Total ending loan balances$141,521$282,592$67,832$124,985$178,875$1,366$—$797,171 99(1)(2)(1) Includes loans secured by farmland and multi-family residential loans.(2) Includes home equity lines of credit.TABLE OF CONTENTSThe following table presents the balance in the allowance for covered loan losses and the recorded investmentin covered loans by portfolio segment and based on impairment method as of December 31, 2016 and 2015 (inthousands).Covered loans:​​Commercial Real Estate Owner Occupied​​Commercial Real Estate Non-owner Occupied ​​Construction and Land Development​​Commercial Loans​​1 – 4 Family Residential ​​Other Consumer Loans​​Unallocated​​Total​December 31, 2016Ending allowance balanceattributable to loans:Individually evaluated for impairment$—$—$—$—$—$—$—$—Collectively evaluated forimpairment————————Total ending allowance$—$—$—$—$—$—$—$—Loans:Individually evaluated for impairment$—$—$—$—$963$—$—$963Collectively evaluated forimpairment————27,217——27,217Total ending loan balances$—$—$—$—$28,180$—$—$28,180December 31, 2015Ending allowance balanceattributable to loans:Individually evaluated for impairment$—$—$—$—$—$—$—$—Collectively evaluated forimpairment————————Total ending allowance$—$—$—$—$—$—$—$—Loans:Individually evaluated for impairment$—$—$—$—$1,066$—$—$1,066Collectively evaluated forimpairment————33,307——33,307Total ending loan balances$—$—$—$—$34,373$—$—$34,373Troubled Debt RestructuringsA modification is classified as a troubled debt restructuring (“TDR”) if both of the following exist: (1) theborrower is experiencing financial difficulty and (2) the Bank has granted a concession to the borrower. The Bankdetermines that a borrower may be experiencing financial difficulty if the borrower is currently delinquent on any ofits debt, or if the Bank is concerned that the borrower may not be able to perform in accordance with the currentterms of the loan agreement in the foreseeable future. Many aspects of the borrower’s financial situation areassessed when determining whether they are experiencing financial difficulty, particularly as it relates tocommercial borrowers due to the complex nature of the loan structure, business/industry risk andborrower/guarantor structures. Concessions may include the reduction of an interest rate at a rate lower than currentmarket rate for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, orprincipal forgiveness. When evaluating whether a concession has been granted, the Bank also considers whether theborrower has provided additional collateral or guarantors and whether such additions adequately compensate theBank for the restructured terms, or if the revised terms are consistent with those currently being offered to new loancustomers. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficultyand whether a concession has been granted is subjective in nature and management’s judgment is required whendetermining whether a modification is a TDR. 100(1)(2)TABLE OF CONTENTSAlthough 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 paymentterms from principal and interest to interest only, and/or extensions in term maturity.During the year ending December 31, 2016, there were no loans modified in troubled debt restructurings. OneTDR which had been modified in 2013 defaulted during the second quarter of 2015. This loan, in the amount of $688 thousand, was current as of December 31, 2016.During the year ending December 31, 2015, there were no loans modified in troubled debt restructurings. OneTDR which had been modified in 2013 defaulted during the second quarter of 2015. This loan, in the amount of $699, was current as of December 31, 2015.Credit Quality IndicatorsThrough its system of internal controls Southern National evaluates and segments loan portfolio credit qualityon a quarterly basis using regulatory definitions for Special Mention, Substandard and Doubtful. Special Mentionloans are considered to be criticized. Substandard and Doubtful loans are considered to be classified. SouthernNational has no loans classified Doubtful.Special Mention loans are loans that have a potential weakness that deserves management’s close attention. Ifleft uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or ofthe institution’s credit position.Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or ofthe collateral pledged if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize theliquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss ifthe deficiencies are not corrected.Doubtful loans have all the weaknesses inherent in those classified as substandard, with the addedcharacteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts,conditions, and values, highly questionable and improbable.As of December 31, 2016 and 2015, and based on the most recent analysis performed, the risk category ofloans by class of loans was as follows (in thousands):Covered LoansNon-covered LoansTotal Loans​December 31, 2016Classified/​ Criticized PassTotalSpecial MentionSubstandard PassTotalClassified/​ CriticizedPass​​Total​Commercial real estate –owner occupied$—$—$—$—$6,271$148,536$154,807$6,271$148,536$154,807Commercial real estate –non-owner occupied —————310,196310,196—310,196310,196Construction and landdevelopment—————91,06791,067—91,06791,067Commercial loans———286,380108,957115,3656,408108,957115,365Residential 1– 4 family 96327,21728,180——231,833231,833963259,050260,013Other consumer loans—————856856—856856Total$963$27,217$28,180$28$12,651$891,445$904,124$13,642$918,662$932,304 101(1)(3)(2)(4)(1) Credit quality is enhanced by a loss sharing agreement with the FDIC in the covered portfolio. The same creditquality indicators used in the non-covered portfolio are combined.(2) Includes loans secured by farmland and multi-family residential loans.(3) Includes SBA guarantees of  $2.2 million and $3.5 million as of December 31, 2016 and 2015, respectively.(4) Includes home equity lines of credit.TABLE OF CONTENTSCovered LoansNon-covered LoansTotal Loans​December 31, 2015Classified/​ Criticized PassTotalSpecial MentionSubstandard PassTotalClassified/​ CriticizedPass​Total​Commercial real estate –owner occupied$—$—$—$3,666$7,862$129,993$141,521$11,528$129,993$141,521Commercial real estate –non-owner occupied ————136282,456282,592136282,456282,592Construction and landdevelopment———552—67,28067,83255267,28067,832Commercial loans———4,0145,484115,487124,9859,498115,487124,985Residential 1 – 4 family 1,06633,30734,373——178,875178,8751,066212,182213,248Other consumer loans—————1,3661,366—1,3661,366Total$1,066$33,307$34,373$8,232$13,482$775,457$797,171$22,780$808,764$831,544The amount of foreclosed residential real estate property held at December 31, 2016 and 2015, was $3.4million and $4.1 million, respectively. The recorded investment in consumer mortgage loans collateralized byresidential real estate property that were in the process of foreclosure was $1.8 million and $763 thousand atDecember 31, 2016 and 2015, respectively.Purchased LoansThe following table presents the carrying amount of purchased impaired and non-impaired loans from the GABacquisition as of December 31, 2016 and 2015 (in thousands):​​December 31, 2016​​December 31, 2015​​​Purchased Impaired Loans​​Purchased Non-impaired Loans​​Total​​Purchased Impaired Loans​Purchased Non-impaired LoansTotal​Commercial real estate$1,080$3,630$4,710$1,247$4,045$5,292Construction and land development——————Commercial loans193347540197314511Residential 1 – 4 family—28,18028,180—34,37334,373Other consumer loans—1414—2626Total$1,273$32,171$33,444$1,444$38,758$40,202The indemnification against losses in the non-single family portfolio on the GAB portfolio ended inDecember 2014. The FDIC indemnification on the GAB residential mortgages and home equity lines of creditcontinues until December 2019. 102(1)(3)(2)(4)TABLE OF CONTENTSChanges in the carrying amount and accretable yield for purchased impaired and non-impaired loans from theGreater Atlantic acquisition were as follows for the years ended December 31, 2016 and 2015 (in thousands):​​December 31, 2016December 31, 2015​​​Purchased Impaired​Purchased Non-impairedPurchased ImpairedPurchased Non-impaired​​​Accretable Yield​​Carrying Amount of Loans​Accretable Yield​​Carrying Amount of LoansAccretable YieldCarrying Amount of LoansAccretable Yield​​Carrying Amount of Loans​Balance at beginning of period$—$1,444$4,597$38,758$—$1,480$5,191$44,354Additions————————Accretion——(1,0851,085——(1,6111,611Reclassifications fromnonaccretable balance——269———1,061—Adjustment-transfer to OREO——(20(169——(44(343Payments received—(171—(7,503—(36(6,864Balance at end of period$—$1,273$3,761$32,171$—$1,444$4,597$38,758The following table presents the carrying amount of purchased impaired and non-impaired loans from theHarVest acquisition as of December 31, 2016 and 2015 (in thousands):December 31, 2016​​December 31, 2015​Purchased Impaired LoansPurchased Non-impaired Loans​​Total​​Purchased Impaired Loans​​Purchased Non-impaired Loans​​Total​Commercial real estate$258$10,150$10,408$296$12,637$12,933Construction and land development4882,9963,4845523,1023,654Commercial loans—2,0622,062—2,7452,745Residential 1 – 4 family8186,2217,0398409,39210,232Other consumer loans—22—22Total$1,564$21,431$22,995$1,688$27,878$29,566Changes in the carrying amount and accretable yield for purchased impaired and non-impaired loans from theHarVest acquisition were as follows for the years ended December 31, 2016 and 2015 (in thousands):​​December 31, 2016December 31, 2015​​​Purchased Impaired​Purchased Non-impairedPurchased ImpairedPurchased Non-impaired​​​Accretable Yield​​Carrying Amount of Loans​Accretable Yield​​Carrying Amount of LoansAccretable YieldCarrying Amount of LoansAccretable Yield​​Carrying Amount of Loans​Balance at beginning of period$—$1,688$858$27,878$—$1,771$1,218$32,230Additions————————Accretion——(196139——(360360Reclassifications fromnonaccretable balance————————Payments received—(124—(6,586—(83—(4,712Balance at end of period$—$1,564$662$21,431$—$1,688$858$27,878 103))))))))))))))))4. FAIR VALUELevel 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has theability to access as of the measurement dateLevel 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assetsor liabilities; quoted prices in markets that are not active; or other inputs that are observable or canbe corroborated by observable market dataLevel 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about theassumptions that market participants would use in pricing an asset or liabilityTABLE OF CONTENTSThe following table presents the carrying amount of purchased impaired and non-impaired loans from thePGFSB acquisition as of December 31, 2016 and 2015 (in thousands):December 31, 2016​​December 31, 2015​Purchased Impaired LoansPurchased Non-impaired Loans​​Total​​Purchased Impaired Loans​​Purchased Non-impaired Loans​​Total​Commercial real estate$225$2,638$2,863$339$2,880$3,219Construction and land development3558601,2153648921,256Commercial loans—116116—174174Residential 1 – 4 family—38,01838,018—47,13347,133Other consumer loans—142142—184184Total$580$41,774$42,354$703$51,263$51,966Changes in the carrying amount and accretable yield for purchased impaired and non-impaired loans from thePGFSB acquisition were as follows for the year ended December 31, 2016 and 2015 (in thousands):​​December 31, 2016December 31, 2015​​​Purchased Impaired​Purchased Non-impairedPurchased ImpairedPurchased Non-impaired​​​Accretable Yield​​Carrying Amount of Loans​Accretable Yield​​Carrying Amount of LoansAccretable YieldCarrying Amount of LoansAccretable Yield​​Carrying Amount of Loans​Balance at beginning of period$—$703$2,462$51,263$—$1,020$2,908$58,763Additions————————Accretion——(366365—(446446Reclassifications fromnonaccretable balance————————Disbursements————————Adjustment-transfer to OREO————————Payments received—(123—(9,854—(317—(7,946Balance at end of period$—$580$2,096$41,774$—$703$2,462$51,263ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observableinputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levelsof inputs that may be used to measure fair value:The following is a description of the valuation methodologies used for instruments measured at fair value, aswell as the general classification of such instruments pursuant to the valuation hierarchy:Assets Measured on a Recurring BasisSecurities Available for SaleWhere quoted prices are available in an active market, securities are classified within Level 1 of the valuationhierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchangetraded equities. If quoted market prices are not available, then fair values are estimated by 104))))))TABLE OF CONTENTSusing pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2securities would include U. S. agency securities, mortgage-backed securities, obligations of states and politicalsubdivisions and certain corporate, asset-backed and other securities. In certain cases where there is limited activityor less transparency around inputs to the valuation, securities are classified within Level 3 of the valuationhierarchy. Currently, all of Southern National’s available-for-sale debt securities are considered to be Level 2securities.Assets measured at fair value on a recurring basis are summarized below:​​​​​Fair Value Measurements Using​​​Total at December 31, 2016​​Quoted Prices in Active Markets for Identical Assets (Level 1)​​Significant Other Observable Inputs (Level 2)​​Significant Unobservable Inputs (Level 3)​(dollars in thousands)Financial assets:Available for sale securitiesObligations of states and political subdivisions$2,259$—$2,259$—Trust preferred securities1,659—1,659—$3,918$—$3,918$—​​​​​Fair Value Measurements Using​​​Total at December 31, 2015​​Quoted Prices in Active Markets for Identical Assets (Level 1)​​Significant Other Observable Inputs (Level 2)​​Significant Unobservable Inputs (Level 3)​(dollars in thousands)Financial assets:Available for sale securitiesObligations of states and political subdivisions$2,312$—$2,312$—Trust preferred securities1,897—1,897—$4,209$—$4,209$—Assets and Liabilities Measured on a Non-recurring Basis:Impaired LoansGenerally, we measure the impairment for impaired loans considering the fair value of the loan’s collateral (ifthe loan is collateral dependent). Fair value of the loan’s collateral is determined by an independent appraisal orevaluation less estimated costs related to selling the collateral. In some cases appraised value is net of costs to sell.Estimated selling costs range from 6% to 10% of collateral valuation at December 31, 2016 and 2015. Fair value isclassified as Level 3 in the fair value hierarchy. Non-covered loans identified as impaired totaled $12.7 million(including SBA guarantees of  $2.2 million) as of December 31, 2016 with an allocated allowance for loan lossestotaling $900 thousand compared to a carrying amount of  $13.5 million (including SBA guarantees of  $3.5 million)with an allocated allowance for loan losses totaling $839 thousand at December 31, 2015. Covered impaired loanstotaled $963 thousand and $1.1 million at December 31, 2016 and 2015, respectively.Other Real Estate Owned (OREO)OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisalor evaluation less cost to sell. In some cases appraised value is net of costs to sell. Selling costs have been in therange from 6% to 7.6% of collateral valuation at December 31, 2016 and 2015. Fair value is classified as Level 3 inthe fair value hierarchy. OREO is further evaluated quarterly for any additional impairment. At December 31, 2016,the total amount of non-covered OREO was $8.6 million and we had no covered OREO. As of December 31, 2015,the total amount of non-covered OREO was $10.1 million, and covered OREO was $343 thousand. 105(1) Includes loans secured by farmland and multi-family residential loans.TABLE OF CONTENTSAssets measured at fair value on a non-recurring basis are summarized below:​​​​​Fair Value Measurements Using​​​Total at December 31, 2016​​Quoted Prices in Active Markets for Identical Assets (Level 1)​​Significant Other Observable Inputs (Level 2)​​Significant Unobservable Inputs (Level 3)​(dollars in thousands)Impaired non-covered loans:Commercial real estate – owner occupied$6,121$6,121Commercial loans5,6305,630Impaired covered loans:Residential 1 – 4 family963963Non-covered other real estate owned:Commercial real estate – owner occupied1,1101,110Commercial real estate – non-owner occupied 237237Construction and land development3,8633,863Residential 1 – 4 family3,4073,407​​​​​Fair Value Measurements Using​​​Total at December 31, 2015​​Quoted Prices in Active Markets for Identical Assets (Level 1)​​Significant Other Observable Inputs (Level 2)​​Significant Unobservable Inputs (Level 3)​(dollars in thousands)Impaired non-covered loans:Commercial real estate – owner occupied$7,423$7,423Commercial real estate – non-owner occupied 136136Commercial loans5,0845,084Impaired covered loans:Residential 1 – 4 family1,0661,066Non-covered other real estate owned:Commercial real estate – owner occupied1,1101,110Commercial real estate – non-owner occupied 237237Construction and land development5,0075,007Residential 1 – 4 family3,7413,741Covered other real estate owned:Residential 1– 4 family343343 106(1)(1)(1)5. BANK PREMISES AND EQUIPMENTTABLE OF CONTENTSFair Value of Financial InstrumentsThe carrying amount, estimated fair values and fair value hierarchy levels (previously defined) of financialinstruments were as follows (in thousands):December 31, 2016December 31, 2015​Fair Value Hierarchy LevelCarrying AmountFair ValueCarrying AmountFair Value​Financial assets:Cash and cash equivalentsLevel 1$47,392$47,392$30,336$30,336Securities available for saleSee previous table3,9183,9184,2094,209Securities held to maturityLevel 285,30083,34496,78096,464Stock in Federal Reserve Bank and Federal Home LoanBankn/a7,929n/a6,929n/aEquity investment in mortgage affiliateLevel 34,6294,6294,4594,459Preferred investment in mortgage affiliateLevel 32,5552,5552,5552,555Net non-covered loansLevel 3893,625903,085786,631793,541Net covered loansLevel 328,18032,17334,37338,077Accrued interest receivableLevel 2 & Level 33,2023,2022,9142,914FDIC indemnification assetLevel 32,1115282,922745Financial liabilities:Demand depositsLevel 1124,779124,779111,849111,849Money market and savings accountsLevel 1182,590182,590181,670181,670Certificates of depositLevel 3605,613605,394531,775531,456Securities sold under agreements to repurchase and othershort-term borrowingsLevel 195,00095,00069,38169,381FHLB long term advancesLevel 3——15,00015,041Accrued interest payableLevel 1 & Level 31,1901,190846846Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable andpayable, demand deposits, savings accounts, money market accounts, short-term debt, and variable rate loans thatreprice frequently and fully. For fixed rate loans or deposits and for variable rate loans with infrequent repricing orrepricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life.A discount for liquidity risk was not considered necessary in estimating the fair value of loans. It was not practicableto determine the fair value of Federal Reserve Bank and Federal Home Loan Bank stock due to restrictions placedon its transferability. Carrying amount is the estimated fair value for the equity investment and the preferredinvestment in the mortgage affiliate. Fair value of long-term debt is based on current rates for similar financing. Thefair value of the FDIC indemnification asset was determined by discounting estimated future cash flows using thelong-term risk free rate plus a premium and represents the present value of our current expectation for recoveriesfrom the FDIC on covered loans. The fair value of off-balance-sheet items is not considered material. The fair valueof loans is not presented on an exit price basis.Bank premises and equipment as of December 31, 2016 and 2015 were as follows (in thousands):20162015Land$2,261$2,261Building and improvements5,8425,842Leasehold improvements2,4282,428Furniture and equipment4,3324,18914,86314,720Less accumulated depreciation and amortization6,6365,838Bank premises and equipment, net$8,227$8,882 1076. GOODWILL AND INTANGIBLE ASSETSTABLE OF CONTENTSFuture minimum rental payments required under non-cancelable operating leases for bank premises that haveinitial or remaining terms in excess of one year as of December 31, 2016 are as follows (in thousands):2017$1,90720181,63020191,34120208252021149Thereafter425$6,277The leases contain options to extend for periods of 2 to 6 years. Rental expense for 2016, 2015 and 2014 was$2.0 million, $2.0 million and $2.0 million, respectively.GoodwillSouthern National has recorded $10.5 million of goodwill at December 31, 2016 and 2015, respectively.Goodwill is evaluated for impairment on an annual basis or more frequently if events or circumstances warrant.Goodwill is primarily related to the 2006 acquisition of 1 Service Bank. The acquisition of PGFSB in 2014increased goodwill by $1.4 million. Our annual assessment timing is during the third calendar quarter. For the 2016assessment, we performed a qualitative assessment to determine if it was more likely than not that the fair value ofour single reporting unit is less than its carrying amount. We concluded that the fair value of our single reportingunit exceeded its carrying amount and that it was not necessary to perform the two-step test pursuant to ASC 350-20. Our qualitative assessment considered many factors including, but not limited to, our actual and projectedoperating performance and profitability, as well as consideration of recent bank merger and acquisition transactionmetrics. No impairment was indicated in 2016 or 2015.Intangible AssetsIntangible assets were as follows at year end (in thousands):December 31, 2016Gross Carrying ValueAccumulated AmortizationNet Carrying Value​Amortizable core deposit intangibles$7,477$(6,603$874December 31, 2015Gross Carrying ValueAccumulated AmortizationNet Carrying Value​Amortizable core deposit intangibles$7,477$(6,384$1,093Estimated amortization expense of intangibles for the years ended December 31 follows (in thousands):2017$1942018184201917420201112021111Thereafter100$874 108st ))7. FDIC INDEMNIFICATION ASSET8. DEPOSITSTABLE OF CONTENTSThe indemnification asset represents our estimate of future expected recoveries under the FDIC loss sharingarrangement for covered loans acquired in the Greater Atlantic Bank acquisition in 2009. The estimated fair value ofthe indemnification asset was $8.8 million at December 4, 2009, the date of acquisition. The following tablepresents changes in the indemnification asset for the periods indicated (in thousands):20162015Balance as of January 1$2,922$3,571Payments from FDIC(18(3Reforecasting adjustment—(16Accretion (amortization)(793(630Balance as of December 31$2,111$2,922During 2016, and based on the actual historical losses on the loan pools over the previous 24 month period,expected losses on the acquired Greater Atlantic loans (the covered loans) were lower than previously forecastedwhich results in a lower expected recovery from the FDIC. As of December 31, 2016, we expect to recover $528thousand from the FDIC under the indemnification agreement. The difference between the carrying amount of  $2.1million and the estimated recovery is being amortized over the remaining life of the indemnification agreement orthe expected life of the loans, whichever is shorter.There were two agreements with the FDIC, one for single family assets which is a 10 year agreement expiringin December 2019, and one for non-single family (commercial) assets which was a 5 year agreement which expiredin December 2014. The current overstatement is due to improvements in the loss estimates in the single familycovered loans.The aggregate amount of time deposits in denominations of  $250 thousand or more at December 31, 2016 and2015 was $147.6 million and $99.5 million, respectively. At December 31, 2016, the scheduled maturities of timedeposits are as follows (in thousands):2017$335,3442018179,719201951,608202016,692202122,250$605,613The following table sets forth the maturities of certificates of deposit of  $250 thousand and over as ofDecember 31, 2016 (in thousands):Within 3 Months3 to 6 Months6 to 12 MonthsOver 12 MonthsTotal$3,778$19,926$44,179$79,686$147,569As of December 31, 2016, we had brokered certificates of deposit in the amount of  $66.5 million and brokeredmoney market deposits of  $14.2 million. At December 31, 2015, we had brokered certificates of deposit in theamount of  $62.0 million, and we had brokered money market deposits of  $15.4 million.For our deposit agreements with certain customers, we hold the collateral in a segregated custodial account. Weare required to maintain adequate collateral levels. In the event the collateral fair value falls below stipulated levels,we will pledge additional securities. We closely monitor collateral levels to ensure adequate levels are maintained,while mitigating the potential risk of over-collateralization. 109)))))9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER SHORT-TERMBORROWINGS10. FEDERAL HOME LOAN BANK ADVANCES — LONG-TERMTABLE OF CONTENTSOther short-term borrowings can consist of Federal Home Loan Bank (FHLB) overnight advances, other FHLBadvances maturing within one year, federal funds purchased and, until the second quarter of 2016, securities soldunder agreements to repurchase that mature within one year, which are secured transactions with customers. Duringthe second quarter of 2016, we discontinued offering securities sold under agreements to repurchase and transferredthose accounts into interest-bearing cash management accounts.Other short-term borrowings consist of the following (in thousands):December 31,201620152014FHLB overnight advances$50,000$49,000$15,250Other short-term FHLB advances maturing 3/27/1710,000——Other short-term FHLB advances maturing 5/4/201710,000——Other short-term FHLB advances maturing 6/5/201710,000——Other short-term FHLB advances maturing 6/19/20175,000——Other short-term FHLB advances maturing 12/15/201710,000——Other short-term FHLB advances maturing 11/4/2016—10,000—Securities sold under agreements to repurchase—10,38113,794Total$95,000$69,381$29,044Weighted average interest rate at year end0.860.510.65For the periods ended December 31, 2016, 2015 and 2014:Average outstanding balance$66,864$34,673$37,810Average interest rate during the year0.740.760.51Maximum month-end outstanding balance$95,000$69,381$66,852See Note 10 for amounts pledged as collateral to secure FHLB advances.At December 31, 2016 and 2015, we have pledged callable agency securities, residential government-sponsored mortgage-backed securities and collateralized mortgage obligations with a carrying value of  $13.6million and $26.7 million, respectively, to customers who require collateral for overnight repurchase agreementsand other deposits.At year end, long-term advances from the Federal Home Loan Bank were as follows (in thousands):December 31,20162015​FHLB fixed rate advance maturing June 2017 with a rate of 2.26%$—$5,000FHLB fixed rate advance maturing June 2017 with a rate of 0.80%—10,000Total FHLB advances$—$15,000Each FHLB advance is payable at its maturity date, with a prepayment penalty for fixed rate advances paid offearlier than maturity. Residential 1-4 family mortgage loans in the amount of approximately $128.9 million and$30.2 million were pledged as collateral for Federal Home Loan Bank of Atlanta (“FHLB”) advances as ofDecember 31, 2016 and 2015, respectively. Home equity lines of credit (HELOCs) in the amount of approximately$17.5 million and $20.9 million were pledged as collateral for FHLB advances at December 31, 2016 and 2015,respectively. Commercial mortgage loans in the amount of approximately $172.6 million and $164.7 million werepledged as collateral for FHLB advances as of December 31, 2016 110%%%%%%11. INCOME TAXESTABLE OF CONTENTSand 2015, respectively. Investment securities in the amount of  $46.7 million and $44.6 million were pledged ascollateral for FHLB advances at December 31, 2016 and 2015, respectively. At December 31, 2016, Sonabank hadavailable collateral to borrow an additional $178.7 million from the FHLB.Net deferred tax assets consist of the following components as of December 31, 2016 and 2015 (in thousands):20162015Deferred tax assets:Allowance for loan losses$2,997$2,934Organization costs72100Unearned loan fees and other656739Other real estate owned write-downs9451,063FDIC assisted transactions timing difference—827Other than temporary impairment charge369369Net unrealized loss on securities available for sale406314Purchase accounting9341,205Deferred compensation878707Other871188Total deferred tax assets8,1288,446Deferred tax liabilities:FDIC indemnification asset7351,018Depreciation613712Total deferred tax liabilities1,3481,730Net deferred tax assets$6,780$6,716No valuation allowance was deemed necessary on deferred tax assets in 2016 or 2015. Management believesthat the realization of the deferred tax assets is more likely than not based on the expectation that Southern Nationalwill generate the necessary taxable income in future periods.We have no unrecognized tax benefits and do not anticipate any increase in unrecognized benefits during thenext twelve months. Should the accrual of any interest or penalties relative to unrecognized tax benefits benecessary, it is our policy to record such accruals in our income tax accounts; no such accruals existed as ofDecember 31, 2016, 2015 or 2014. Southern National and its subsidiary file a consolidated U. S. federal tax return,and Southern National files a Virginia state income tax return. Sonabank files a Maryland state income tax return.These returns are subject to examination by taxing authorities for all years after 2012.The provision for income taxes consists of the following for the years ended December 31, 2016, 2015 and2014 (in thousands):201620152014Current tax expenseFederal$4,781$2,367$4,047State285168125Total current tax expense5,0662,5354,172Deferred tax benefitFederal282,123(394State19(24Total deferred tax expense (benefit)292,132(418Total income tax expense$5,095$4,667$3,754 111)))12. EMPLOYEE BENEFITS13. STOCK-BASED COMPENSATIONTABLE OF CONTENTSThe income tax expense differed from the amount of income tax determined by applying the U.S. Federalincome tax rate of 34% to pretax income for the years ended December 31, 2016, 2015 and 2014 due to thefollowing (in thousands):201620152014Computed expected tax expense at statutory rate$5,238$4,745$3,821Reduction in tax expense resulting from:Income from bank-owned life insurance(238(216(210Other, net95138143Income tax expense$5,095$4,667$3,754Southern National has a 401(k) plan that allows employees to make pre-tax contributions for retirement. The401(k) plan provides for discretionary matching contributions by Southern National. Expense for 2016, 2015 and2014 was $132 thousand, $108 thousand and $102 thousand, respectively.A deferred compensation plan that covers two executive officers was established in 2007. Under the plan, theBank pays each participant, or their beneficiary, the amount of compensation deferred plus accrued interest over 10years, beginning with the individual’s retirement. A liability is accrued for the obligation under these plans. Theexpense incurred for the deferred compensation in 2016, 2015 and 2014 was $495 thousand, $403 thousand and$340 thousand, respectively. The deferred compensation liability was $2.5 million and $2.0 million as ofDecember 31, 2016 and 2015, respectively.In 2004, the Board of Directors adopted a stock option plan that authorized the reservation of up to 302,500shares of common stock and provided for the granting of stock options to certain directors, officers and employees.The 2010 Stock Awards and Incentive Plan was approved by the Board of Directors in January 2010 and approvedby the stockholders at the Annual Meeting in April 2010. The 2010 plan authorized the reservation of an additional700,000 shares of common stock for the granting of stock awards. The options granted to officers and employees areincentive stock options and the options granted to non-employee directors are non-qualified stock options. Thepurpose of the plan is to afford key employees an incentive to remain in the employ of Southern National and toassist in the attracting and retaining of non-employee directors by affording them an opportunity to share inSouthern National’s future success. Under the plan, the option’s price cannot be less than the fair market value ofthe stock on the grant date. The maximum term of the options is ten years and options granted may be subject to agraded vesting schedule.Southern National granted 136,000 options during 2016. The fair value of each option granted is estimated onthe date of grant using the Black-Scholes options-pricing model. The following weighted-average assumptions wereused to value options granted in the years indicated:201620152014Expected life10 years​10 years​10 years​Expected volatility14.1614.7129.30Risk-free interest rate1.622.262.48Weighted average fair value per option granted$0.63$0.51$2.88Dividend yield4.445.512.55 112)))%%%%%%%%%14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISKTABLE OF CONTENTSA summary of the activity in the stock option plan for 2016 follows:​​Shares​Weighted Average Exercise PriceWeighted Average Remaining Contractual TermAggregate Intrinsic Value (in thousands)​Options outstanding, beginning of period664,400$9.00Granted136,00011.99Forfeited——Exercised(18,2007.44Options outstanding, end of period782,200$9.566.5$5,301Vested or expected to vest782,200$9.566.7$5,301Exercisable at end of period418,910$7.994.7$3,365Stock-based compensation expense was $260 thousand, $331 thousand and $317 thousand for the years endedDecember 31, 2016, 2015 and 2014, respectively.As of December 31, 2016, unrecognized compensation expense associated with stock options was $451thousand which is expected to be recognized over a weighted average period of 2.4 years.Southern National is a party to financial instruments with off-balance sheet risk in the normal course ofbusiness to meet the financing needs of its customers. These financial instruments include commitments to extendcredit and standby letters of credit. These instruments involve elements of credit and funding risk in excess of theamount recognized in the consolidated balance sheet. Letters of credit are written conditional commitments issuedby Southern National to guarantee the performance of a customer to a third party. The credit risk involved in issuingletters of credit is essentially the same as that involved in extending loans to customers. We had letters of creditoutstanding totaling $6.4 million and $6.7 million as of December 31, 2016 and 2015, respectively.Our exposure to credit loss in the event of nonperformance by the other party to the financial instruments forcommitments to extend credit and letters of credit is based on the contractual amount of these instruments. We usethe same credit policies in making commitments and conditional obligations as we do for on-balance sheetinstruments. Unless noted otherwise, we do not require collateral or other security to support financial instrumentswith credit risk.Commitments to extend credit are agreements to lend to a customer as long as there is no violation of anycondition established in the contract. Commitments are made predominately for adjustable rate loans, and generallyhave 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 amountsdo not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis.At December 31, 2016 and 2015, we had unfunded lines of credit and undisbursed construction loan fundstotaling $135.8 million and $132.3 million, respectively. We had approved loan commitments in the amount of  $6.5million and $2.7 million as of December 31, 2016 and 2015, respectively. Virtually all of our unfunded lines ofcredit, undisbursed construction loan funds and approved loan commitments are variable rate. 113)15. EARNINGS PER SHARE16. REGULATORY MATTERSTABLE OF CONTENTSThe following is a reconciliation of the denominators of the basic and diluted EPS computations for 2016, 2015and 2014 (in thousands, except per share data):Income (Numerator)Weighted Average Shares (Denominator)Per Share AmountFor the year ended December 31, 2016Basic EPS$10,31212,252$0.84Effect of dilutive stock options and warrants175—Diluted EPS$10,31212,427$0.83For the year ended December 31, 2015Basic EPS$9,28912,224$0.76Effect of dilutive stock options and warrants106—Diluted EPS$9,28912,330$0.75For the year ended December 31, 2014Basic EPS$7,48311,846$0.63Effect of dilutive stock options and warrants81—Diluted EPS$7,48311,927$0.63There were 678,721 anti-dilutive options and warrants during 2016. There were 643,164 anti-dilutive optionsand warrants during 2015, and there were 622,593 anti-dilutive options and warrants during 2014.Southern National and its subsidiary bank are subject to various regulatory capital requirements administeredby the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory —and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effecton our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt correctiveaction (PCA), we must meet specific capital guidelines that involve quantitative measures of our assets, liabilitiesand certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts andclassification are also subject to qualitative judgments by the regulators about components, risk weightings andother factors. At December 31, 2016 and 2015, the most recent regulatory notifications categorized the Bank as wellcapitalized under regulatory framework for prompt corrective action.Quantitative measures established by regulation to ensure capital adequacy require Southern National tomaintain minimum amounts and ratios of Total and Tier I capital (as defined in the regulations) to average assets (asdefined). Management believes, as of December 31, 2016, that Southern National meets all capital adequacyrequirements to which it is subject. 114(1) When fully phased-in on January 1, 2019, the Basel III capital rules include a capital conservation buffer of2.5% that is added on top of each of the minimum risk-based capital ratios noted above. Implementation beganon January 1, 2016 at the 0.625% level and will increase each subsequent January 1, until it reaches 2.5% onJanuary 1, 2019.(2) Prompt corrective action provisions are not applicable at the bank holding company level.TABLE OF CONTENTSThe capital amounts and ratios for Southern National and Sonabank at year end are presented in the followingtable (in thousands):​​Actual​​Required For Capital Adequacy Purposes ​​To Be Categorized as Well Capitalized ​​Amount​​Ratio​​AmountRatio​​AmountRatioDecember 31, 2016Southern NationalCommon equity tier 1 capital ratio$116,07612.69$41,1714.50n/an/aTier 1 risk-based capital ratio116,07612.6954,8946.00n/an/aTotal risk-based capital ratio124,68613.6373,1938.00n/an/aLeverage ratio116,07610.5643,9654.00n/an/aSonabankCommon equity tier 1 capital ratio$114,77912.55$41,1514.50$59,4406.50Tier 1 risk-based capital ratio114,77912.5554,8686.0073,1578.00Total risk-based capital ratio123,38913.4973,1578.0091,44710.00Leverage ratio114,77910.4543,9474.0054,9345.00December 31, 2015Southern NationalCommon equity tier 1 capital ratio$109,27613.13$37,2544.50n/an/aTier 1 risk-based capital ratio109,27613.1349,9396.00n/an/aTotal risk-based capital ratio117,69714.1466,5858.00n/an/aLeverage ratio109,27611.0639,5094.00n/an/aSonabankCommon equity tier 1 capital ratio$108,05412.99$37,4364.50$54,0756.50Tier 1 risk-based capital ratio108,05412.9949,9156.0066,5538.00Total risk-based capital ratio116,47514.0066,5538.0083,19210.00Leverage ratio108,05410.9439,4934.0049,3665.00Southern National’s principal source of funds for dividend payments is dividends received from the Bank.Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies.Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the currentyear’s net profits, combined with the retained net profits of the preceding two years, subject to the capitalrequirements described above. During 2017, the Bank could, without prior approval, declare dividends ofapproximately $19.6 million plus any 2017 net profits retained to the date of the dividend declaration. 115(1)(2)%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%17. PARENT COMPANY FINANCIAL INFORMATIONTABLE OF CONTENTSCondensed financial information of Southern National Bancorp of Virginia, Inc. follows (in thousands):CONDENSED BALANCE SHEETS DECEMBER 31,20162015ASSETSCash$856$823Investment in subsidiary125,047118,413Other assets441400Total assets$126,344$119,636LIABILITIES AND STOCKHOLDERS’ EQUITYStockholders’ equity:Common stock$123$122Additional paid in capital104,884104,389Retained earnings22,12615,735Accumulated other comprehensive loss(789(610Total stockholders’ equity126,344119,636Total liabilities and stockholders’ equity$126,344$119,636CONDENSED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014 (in thousands)201620152014Cash dividends received from Sonabank$3,600$6,300$6,500Other operating expenses153204162Income before tax benefit and undistributed income of Sonabank3,4476,0966,338Income tax benefit(52(69(55Equity in undistributed net income of Sonabank6,8133,1241,090Net income$10,312$9,289$7,483 116)))))18. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)TABLE OF CONTENTSCONDENSED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014 ( in thousands)201620152014Operating activities:Net income$10,312$9,289$7,483Adjustments to reconcile net income to net cash and cashequivalents provided by operating activities:Equity in undistributed net income of subsidiary(10,413(9,424(7,590Other, net219262264Net cash and cash equivalents provided by operating activities118127157Investing activities:Dividend from bank subsidiary3,6006,3006,500Net cash and cash equivalents provided by investing activities3,6006,3006,500Financing activities:Issuance of common stock236707886Repurchase of common stock—(721—Dividend payment on common stock(3,921(6,359(7,239Net cash and cash equivalents used in financing activities(3,685(6,373(6,353Increase (decrease) in cash and cash equivalents3354304Cash and cash equivalents at beginning of period823769465Cash and cash equivalents at end of period$856$823$769The following is a summary of the accumulated other comprehensive loss balances, net of tax (in thousands):Balance at December 31, 2015Current Period ChangeBalance at December 31, 2016​Unrealized gains (losses) on securities available for sale$(440$(187$(627Unrecognized loss on securities held to maturity for whichother than temporary impairment charges have been taken311—311Unrealized loss on securities available for sale transferred to held to maturity(4818(473Total$(610$(179$(789 117))))))))))))))))))19. RELATED PARTY TRANSACTIONS20. QUARTERLY FINANCIAL DATA (UNAUDITED)21. SUBSEQUENT EVENTTABLE OF CONTENTSSonabank has entered into loan transactions with STM in the ordinary course of business on substantially thesame terms, including interest rates and collateral, as those prevailing at the same time for comparable transactionswith other customers, and did not, in the opinion of management, involve more than normal credit risk. Thefollowing table summarizes the changes in the loan amount outstanding during the periods indicated (in thousands):20162015Loans outstanding at January 1$10,438$9,383Principal advances149,725132,206Principal paid(152,037(131,151Balance at December 31$8,126$10,438Sonabank has established with STM underwriting guidelines under which it will purchase residentialconstruction only, construction loans that convert to permanent, and permanent loans primarily in its Virginia andMaryland footprint from STM. These will be largely loans that do not conform to FNMA or FHLMC standardsbecause of size or acreage. We purchased loans in an aggregate amount of  $77.4 million during 2016, and $51.4million during 2015.Sonabank has also entered into deposit transactions with its directors, principal officers and STM, all of whichare under the same terms as other customers. The aggregate amount of these deposit accounts were $5.9 million and$7.6 million as of December 31, 2016 and 2015, respectively.Interest IncomeNet Interest IncomeIncome Before TaxesNet IncomeEarnings Per Share​BasicDiluted​(dollars in thousands)2016First quarter$11,673$9,712$3,555$2,566$0.21$0.21Second quarter12,29110,1744,1822,7890.230.23Third quarter12,61910,3734,1402,7650.230.22Fourth quarter12,36410,0553,5302,1920.180.182015First quarter$10,435$8,927$2,986$2,004$0.16$0.16Second quarter10,7329,0243,6942,4660.200.20Third quarter11,1489,1833,7262,4810.200.20Fourth quarter11,3869,4903,5502,3380.190.19On January 20, 2017, Southern National announced that it had completed the sale of  $27 million of its fixed-to-floating rate Subordinated Notes due 2027 (the “Notes”). The Notes will initially bear interest at 5.875% perannum until January 31, 2022; thereafter, the Notes will be payable at an annual floating rate equal to three-monthLIBOR plus a spread of 3.95% until maturity or early redemption.Southern National plans to use the net proceeds of the offering for general corporate purposes, including butnot limited to, contributing capital to its bank subsidiary to support continued growth. 118))TABLE OF CONTENTS ​ ​ ​Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and Procedures(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this AnnualReport on Form 10-K, under the supervision and with the participation of management, including our chiefexecutive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d -15(e) under the Securities Exchange Actof 1934) utilizing the framework established in “Internal Control — Integrated Framework (2013)” issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Based upon that evaluation, our chiefexecutive officer and chief financial officer have concluded that these controls and procedures are effective as of theend of the period covered by this Annual Report on Form 10-K.Disclosure controls and procedures are our controls and other procedures that are designed to ensure thatinformation required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of1934 is accumulated and communicated to our management, including our principal executive officer and principalfinancial officer, as appropriate, to allow timely decisions regarding required disclosure.(b) Management’s Report on Internal Control Over Financial Reporting. Management of Southern Nationalis responsible for establishing and maintaining adequate internal control over financial reporting for SouthernNational Bancorp of Virginia, Inc. and its subsidiaries (“we” and “our”), as that term is defined in Exchange ActRules 13a-15(f). Southern National conducted an evaluation of the effectiveness of our internal control overSouthern National’s financial reporting as of December 31, 2016 based on the framework in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.Based on that evaluation, we concluded that our internal control over financial reporting is effective as ofDecember 31, 2016.Dixon Hughes Goodman LLP, an independent registered public accounting firm, has audited the consolidatedfinancial statements included in this Annual Report and has issued a report on the effectiveness of our internalcontrol over financial reporting, which report is included in “Part II — Item 8. Financial Statements andSupplementary Data” of this Report.(c) Changes in Internal Control over Financial Reporting. There have been no changes in SouthernNational’s internal control over financial reporting that materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.Item 9B. Other InformationNone. 119Item 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and Related ShareholderMattersItem 13. Certain Relationships, Related Transactions and Director IndependenceItem 14. Principal Accounting Fees and ServicesTABLE OF CONTENTS ​ ​ ​ ​ ​PART IIIThe information under the captions “Election of Directors,” “Continuing Directors and Executive Officers,”“Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance — Committees of the Boardof Directors — Audit Committee,” “Corporate Governance — Director Nominations Process” and “CorporateGovernance — Code of Ethics” in the Company’s definitive Proxy Statement for its 2017 Annual Meeting ofShareholders to be filed with the Securities and Exchange Commission within 120 days after December 31, 2016pursuant to Regulation 14A under the Exchange Act (the “2017 Proxy Statement”), is incorporated herein byreference in response to this item.The information under the captions “Executive Compensation and Other Matters,” “Director Compensation”and “Compensation Committee Report on Executive Compensation” in the 2017 Proxy Statement is incorporatedherein by reference in response to this item.The information under the caption “Beneficial Ownership of Common Stock by Management of the Companyand Principal Stockholders” in the 2017 Proxy Statement is incorporated herein by reference in response to thisitem.The information required by this Item concerning securities authorized for issuance under equity compensationplans is incorporated herein by reference to Part II, Item 5 of this Annual Report on Form 10-K.The information under the captions “Corporate Governance — Director Independence” and “CertainRelationships and Related Party Transactions” in the 2017 Proxy Statement is incorporated herein by reference inresponse to this item.The information under the caption “Fees and Services of Independent Registered Public Accounting Firm” inthe 2017 Proxy Statement is incorporated herein by reference in response to this item.120Item 15. Exhibits and Financial Statement Schedules(a)(1) Financial Statements(a)(2) Financial Statement SchedulesTABLE OF CONTENTS ​PART IVThe following documents are filed as part of this report:The following consolidated financial statements and reports of independent registered publicaccounting firm are in Part II, Item 8:Reports of Independent Registered Public Accounting FirmConsolidated Balance Sheets — December 31, 2016 and 2015Consolidated Statements of Income and Comprehensive Income — Years ended December 31, 2016,2015 and 2014Consolidated Statements of Changes in Stockholders’ Equity — Years ended December 31, 2016,2015 and 2014Consolidated Statements of Cash Flows — Years ended December 31, 2016, 2015 and 2014Notes to Consolidated Financial StatementsAll schedules are omitted since they are not required, are not applicable, or the required informationis shown in the consolidated financial statements or notes thereto.121(a)(3) ExhibitsTABLE OF CONTENTSThe following are filed or furnished, as noted below, as part of this Annual Report on Form 10-K and this listincludes the Exhibit Index.Exhibit No.Description2.1Agreement and Plan of Merger dated as of December 13, 2016, by and among Southern NationalBancorp of Virginia, Inc. and Eastern Virginia Bankshares, Inc. (incorporated herein by reference toExhibit 2.1 to Southern National’s Current Report on Form 8-K filed on December 14, 2016)3.1Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to Southern National’sRegistration Statement on Form S-1 (Registration No. 333-136285))3.2Certificate of Amendment to the Articles of Incorporation dated January 31, 2005 (incorporated hereinby reference to Exhibit 3.2 to Southern National’s Registration Statement on Form S-1 (RegistrationNo. 333-136285))3.3Certificate of Amendment to the Articles of Incorporation dated April 13, 2006 (incorporated hereinby reference to Exhibit 3.3 to Southern National’s Registration Statement on Form S-1 (RegistrationNo. 333-136285))3.4Amended and Restated Bylaws (incorporated by reference to Exhibit 3.4 to Southern National’sAnnual Report on Form 10-K for the year ended December 31, 2006)3.5Amendment No. 1 to Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.1to Southern National’s Current Report on Form 8-K filed on October 14, 2009)4.1Specimen Stock Certificate of Southern National (incorporated herein by reference to Exhibit 4.1 toSouthern National’s Registration Statement on Form S-1 (Registration No. 333-136285))4.2Form of Warrant Agreement (incorporated herein by reference to Exhibit 4.2to Southern National’sRegistration Statement on Form S-1 (Registration No. 333-136285))4.3Form of Amendment to Warrant Agreement (incorporated herein by reference to Exhibit 4.3 toSouthern National’s Registration Statement on Form S-1 (Registration No. 333-136285))10.1Form of Affiliate Agreement, dated as of December 13, 2016, between Southern National Bancorp ofVirginia, Inc., Eastern Virginia Bankshares, Inc. and certain shareholders of Southern NationalBancorp of Virginia, Inc. (incorporated herein by reference to Exhibit 99.1 to Southern National’sCurrent Report on Form 8-K filed on December 14, 2016)10.2Form of Affiliate Agreement, dated as of December 13, 2016, between Southern National Bancorp ofVirginia, Inc., Eastern Virginia Bankshares, Inc. and certain shareholders of Eastern VirginiaBankshares, Inc. (incorporated herein by reference to Exhibit 99.2 to Southern National’s CurrentReport on Form 8-K filed on December 14, 2016)10.3Form of Voting and Election of Consideration, dated as of December 13, 2016, by and amongSouthern National Bancorp of Virginia, Inc., Eastern Virginia Bankshares, Inc. and certainshareholders of Eastern Virginia Bankshares, Inc. (incorporated herein by reference to Exhibit 99.3 toSouthern National’s Current Report on Form 8-K filed on December 14, 2016)10.4Agreement and Plan of Merger among Southern National Bancorp of Virginia, Inc., Prince George’sFederal Savings Bank, Sonabank and SONA Interim Federal Savings Bank, dated as of January 8,2014 (incorporated herein by reference to Appendix A to the proxy statement/​prospectus contained inSouthern National’s Registration Statement on Form S-4 filed on March 14, 2014 (Registration No.333-194564))10.5First Amendment to the Agreement and Plan of Merger by and among Prince George’s FederalSavings Bank, Southern National Bancorp of Virginia, Inc., Sonabank and SONA Interim FederalSavings Bank, dated as of February 20, 2014 (incorporated herein by reference to Appendix A to theproxy statement/prospectus contained in Southern National’s Registration Statement on Form S-4 filedon March 14, 2014 (Registration No. 333-194564))122+ Management contract or compensatory plan or arrangement* Filed herewith** Furnished herewithTABLE OF CONTENTSExhibit No.Description10.6Southern National Bancorp of Virginia, Inc. 2004 Stock Option Plan (incorporated herein by referenceto Exhibit 10.1 to Southern National’s Registration Statement on Form S-1 (Registration No. 333-136285))10.7Form of Change in Control Agreement with Georgia S. Derrico and R. Roderick Porter (incorporatedherein by reference to Exhibit 10.2 to Southern National’s Registration Statement on Form S-1(Registration No. 333-136285))10.8Form of Southern National Bancorp of Virginia, Inc. Incentive Stock Option Agreement (incorporatedherein by reference to Exhibit 10.3 to Southern National’s Registration Statement on Form S-1/A filedon October 29, 2009 (Registration No. 333-162467))10.9Supplemental Executive Retirement Plan for Georgia Derrico (incorporated herein by reference toExhibit 10.4 to Southern National’s Registration Statement on Form S-1/A filed on October 29, 2009(Registration No. 333-162467))10.10Supplemental Executive Retirement Plan for Rod Porter (incorporated herein by reference to Exhibit10.5 to Southern National’s Registration Statement on Form S-1/A filed on October 29, 2009(Registration No. 333-162467))10.11Southern National Bancorp of Virginia, Inc. 2010 Stock Awards and Incentive Plan (incorporatedherein by reference to Exhibit 4.2 to Southern National’s Registration Statement on Form S-8(Registration No. 333-166511))10.12Form of Southern National Bancorp of Virginia, Inc. Incentive Stock Option Agreement (incorporatedherein by reference to Exhibit 4.3 to Southern National’s Registration Statement on Form S-8(Registration No. 333-166511))11.0Statement re: Computation of Per Share Earnings (incorporated by reference to Note 15 of the notes toconsolidated financial statements included in this Annual Report on Form 10-K)21.0*Subsidiaries of the Registrant23.1*Consent of Dixon Hughes Goodman LLP31.1*Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1**Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of theSarbanes-Oxley Act of 2002123TABLE OF CONTENTSSouthern National Bancorp of Virginia, Inc. will furnish, upon written request, a copy of any exhibit listed aboveupon the payment of a reasonable fee covering the expense of furnishing the copy. Requests should be directed to:William H. Lagos, Sr. Vice President and Chief Financial Officer Southern National Bancorp of Virginia, Inc. 70 Main Street, Suite 34 Warrenton, Virginia 20186124TABLE OF CONTENTSSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.Southern National Bancorp of Virginia, Inc.By:/s/ Georgia S. DerricoGeorgia S. Derrico Chairman of the Board and Chief Executive Officer (Principal Executive Officer)Date: March 16, 2017By:/s/ William H. LagosWilliam H. Lagos Sr. Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)Date: March 16, 2017Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on the dates indicated.Date: March 16, 2017​Signature​Title​/s/ Georgia S. DerricoGeorgia S. DerricoChairman of the Board and Chief Executive Officer/s/ R. Roderick PorterR. Roderick PorterPresident and Director/s/ Neil J. CallNeil J. CallDirector/s/ Charles A. KabbashCharles A. KabbashDirector/s/ Frederick L. BollererFrederick L. BollererDirector/s/ John J. ForchJohn J. ForchDirector/s/ W. Bruce JenningsW. Bruce JenningsDirector/s/ Robert ClagettRobert ClagettDirector125Exhibit 21.0​Subsidiaries of Southern National Bancorp of Virginia, Inc.SubsidiaryState of IncorporationSonabankVirginiaExhibit 23.1​CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and Stockholders Southern National Bancorp of Virginia, Inc.We consent to the incorporation by reference in the registration statements on Forms S-8 (Nos. 333-189730and 333-166511) of Southern National Bancorp of Virginia, Inc. of our reports, dated March 16, 2017, related to theconsolidated balance sheets of Southern National Bancorp of Virginia, Inc. as of December 31, 2016 and 2015, andthe related consolidated statements of income and comprehensive income, changes in stockholders’ equity and cashflows for each of the years in the three-year period ended December 31, 2015, and the effectiveness of internalcontrol over financial reporting as of December 31, 2016, which reports appear in Southern National Bancorp ofVirginia, Inc.’s 2016 Annual Report on Form 10-K./s/ Dixon Hughes Goodman LLPAtlanta, Georgia March 16, 20171. I have reviewed this report on Form 10-K of Southern National Bancorp of Virginia, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairlypresent in all material respects the financial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control overfinancial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures tobe designed under our supervision, to ensure that material information relating to the registrant, includingits consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;b) Designed such internal control over financial reporting, or caused such internal control over financialreporting to be designed under our supervision, to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles;c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in thisreport our conclusions about the effectiveness of the disclosure controls and procedures, as of the end ofthe period covered by this report based on such evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting thatoccurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the caseof an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internalcontrol over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board ofdirectors (or persons performing the equivalent functions):a) All significant deficiencies and material weaknesses in the design or operation of internal control overfinancial reporting which are reasonably likely to adversely affect the registrant’s ability to record,process, summarize and report financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significantrole in the registrant’s internal control over financial reporting.Exhibit 31.1​CERTIFICATIONSI, Georgia S. Derrico, certify that:Date: March 16, 2017/s/ Georgia S. DerricoGeorgia S. Derrico, Chairman of the Board and Chief Executive Officer (Principal Executive Officer)1. I have reviewed this report on Form 10-K of Southern National Bancorp of Virginia, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairlypresent in all material respects the financial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control overfinancial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures tobe designed under our supervision, to ensure that material information relating to the registrant, includingits consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;b) Designed such internal control over financial reporting, or caused such internal control over financialreporting to be designed under our supervision, to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles;c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in thisreport our conclusions about the effectiveness of the disclosure controls and procedures, as of the end ofthe period covered by this report based on such evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting thatoccurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the caseof an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internalcontrol over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board ofdirectors (or persons performing the equivalent functions):a) All significant deficiencies and material weaknesses in the design or operation of internal control overfinancial reporting which are reasonably likely to adversely affect the registrant’s ability to record,process, summarize and report financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significantrole in the registrant’s internal control over financial reporting.Exhibit 31.2​CERTIFICATIONSI, William H. Lagos, certify that:Date: March 16, 2017/s/ William H. LagosWilliam H. Lagos, Senior Vice President and Chief Financial Officer (Principal Financial Officer)Exhibit 32.1​CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Southern National Bancorp of Virginia, Inc. (“Southern National”) onForm 10-K for the period ending December 31, 2016 as filed with the Securities and Exchange Commission on thedate hereof  (the “Report”), the undersigned Chief Executive Officer and Chief Financial Officer of SouthernNational hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of2002, that based on their knowledge and belief: 1) the Report fully complies with the requirements of Section 13(a)or 15(d) of the Securities Exchange Act of 1934, and 2) the information contained in the Report fairly presents, inall material respects, the financial condition and results of operations of Southern National as of and for the periodscovered in the Report./s/ Georgia S. DerricoGeorgia S. Derrico, Chief Executive Officer/s/ William H. LagosWilliam H. Lagos, Chief Financial OfficerMarch 16, 2017

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