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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
or
☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For 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)
Virginia
(State or other jurisdiction of
incorporation or organization)
20-1417448
(I.R.S. Employer
Identification No.)
6830 Old Dominion Drive
McLean, Virginia 22101
(Address of principal executive offices) (Zip code)
(703) 893-7400
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
Trading symbol
SONA
Name of each exchange on which registered
Nasdaq Global Market
Indicate 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 ⌧
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b – 2 of the Exchange Act.:
Large accelerated filer ◻
Accelerated filer ⌧
Smaller reporting company ◻
Emerging growth company ◻
Non-accelerated filer ◻
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issues its audit report. ☒ Yes ☐ No
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, 2020 was approximately $230.8 million based on the closing price of the
common stock on such date.
The number of shares of common stock outstanding as of March 5, 2021 was 24,438,545.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 in conjunction with the registrant’s 2021 Annual
Meeting of Shareholders are incorporated by reference into Part III, Items 10-14 of this Annual Report on Form 10-K.
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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
FORM 10-K
INDEX
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Item 12.
Item 13.
Item 14.
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Item 16.
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART IV
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains statements about future expectations, activities and events that constitute
forward-looking statements within the meaning of, and subject to the protection of, Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Exchange Act and are intended to be covered by the safe harbor provided by the same.
Forward-looking statements are not historical facts and are based on current expectations, estimates and projections about our
industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently
uncertain and beyond our control, particularly with regard to developments related to the novel coronavirus (“COVID-19”).
Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject
to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these
forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results
expressed or implied by the forward-looking statements. The words “believe,” “may,” “forecast,” “should,” “anticipate,”
“estimate,” “expect,” “intend,” “continue,” “would,” “could,” “hope,” “might,” “assume,” “objective,” “seek,” “plan,” “strive” or
similar words, or the negatives of these words, identify forward-looking statements.
Forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the
expectations of future results we express or imply in any forward-looking statements. In addition to the other factors discussed in
the “Risk Factors” section of this Annual Report on Form 10-K, factors that could contribute to those differences include, but are
not limited to:
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the effects of future economic, business and market conditions and disruptions in the credit and financial markets,
domestic and foreign;
the impact of COVID-19 on our business, including the impact of the actions taken by governmental authorities to
contain the virus or address the impact of the virus on the United States economy (including, without limitation, the
Coronavirus Aid, Relief and Economic Security (“CARES” Act)), and the resulting effect of all of such items on our
operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;
adverse results from current or future litigation, regulatory examinations or other legal and/or regulatory actions,
including as a result of our participation in and execution of government programs related to the COVID-19 pandemic;
changes in the local economies in our market areas which adversely affect our customers and their ability to transact
profitable business with us, including the ability of our borrowers to repay their loans according to their terms or a
change in the value of the related collateral;
changes in the availability of funds resulting in increased costs or reduced liquidity, as well as the adequacy of our cash
flow from operations and borrowings to meet our short-term liquidity needs;
a deterioration or downgrade in the credit quality and credit agency ratings of the investment securities in our
investment securities portfolio;
impairment concerns and risks related to our investment securities portfolio of collateralized mortgage obligations,
agency mortgage-backed securities, obligations of states and political subdivisions and pooled trust preferred securities;
the incurrence and possible impairment of goodwill associated with current or future acquisitions and possible adverse
short-term effects on our results of operations;
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, including as a result of the financial impact of
COVID-19;
the concentration of our loan portfolio in loans collateralized by real estate;
our level of construction and land development and commercial real estate loans;
failure to prevent a breach to our Internet-based system and online commerce security, including as a result of increased
remote working by our employees;
changes in the levels of loan prepayments and the resulting effects on the value of our loan portfolio;
the failure of assumptions and estimates underlying the establishment of and provisions made to the allowance for credit
losses;
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our ability to expand and grow our business and operations, including the establishment of additional branches and
acquisition of additional branches and banks, and our ability to realize the cost savings and revenue enhancements we
expect from such activities;
government intervention in the U.S. financial system, including the effects of legislative, tax, accounting and regulatory
actions and reforms, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank
Act”), the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau, the capital ratios of Basel
III as adopted by the federal banking authorities, and the Tax Cuts and Jobs Act of 2017 and the CARES Act;
uncertainty related to the transition away from or new methods of calculating the London Inter-bank Offered Rate
(“LIBOR”);
increased competition for deposits and loans adversely affecting rates and terms;
the continued service of key management personnel;
the potential payment of interest on demand deposit accounts to effectively compete for customers;
potential environmental liability risk associated with properties that we assume upon foreclosure;
increased asset levels and changes in the composition of assets and the resulting impact on our capital levels and
regulatory capital ratios;
risks of current or future mergers and acquisitions, including the related time and cost of implementing transactions and
the potential failure to achieve expected gains, revenue growth or expense savings;
increases in regulatory capital requirements for banking organizations generally, which may adversely affect our ability
to expand our business or could cause us to shrink our business;
acts of God or of war or other conflicts, acts of terrorism, pandemics or other catastrophic events that may affect general
economic conditions;
changes in accounting policies, rules and practices and applications or determinations made thereunder, including the
impact of the adoption of the current expected credit losses (“CECL”) methodology;
fraudulent and negligent acts by loan applicants, mortgage brokers and our employees;
failure to maintain effective internal controls and procedures;
the risk that our deferred tax assets could be reduced if future taxable income is less than currently estimated, if
corporate tax rates in the future are less than current rates, or if sales of our capital stock trigger limitations on the
amount of net operating loss carryforwards that we may utilize for income tax purposes;
our ability to attract and retain qualified employees; and
other factors and risks described under “Risk Factors” herein and in any of our subsequent reports that we file with the
Securities and Exchange Commission (the “Commission” or “SEC”) under the Exchange Act.
Forward-looking statements are not guarantees of performance or results and should not be relied upon as representing
management’s views as of any subsequent date. A forward-looking statement may include a statement of the assumptions or
bases underlying the forward-looking statement. We believe we have chosen these assumptions or bases in good faith and that
they are reasonable. We caution you, however, that assumptions or bases almost always vary from actual results, and the
differences between assumptions or bases and actual results can be material. When considering forward-looking statements, you
should refer to the risk factors and other cautionary statements in this Annual Report on Form 10-K and in our periodic and
current reports filed with the SEC for specific factors that could cause our actual results to be different from those expressed or
implied by our forward-looking statements. These statements speak only as of the date of this Annual Report on Form 10-K (or
an earlier date to the extent applicable). Except as required by applicable law, we undertake no obligation to update publicly these
statements in light of new information or future events.
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Item 1. Business
Overview
PART I
Southern National Bancorp of Virginia, Inc. (“Southern National”, “SNBV”, “we” or “our”) is the bank holding company for
Sonabank (“Sonabank” or the “Bank”), a Virginia state-chartered bank. Sonabank provides a range of financial services to
individuals and small and medium sized businesses. As of December 31, 2020, Southern National had $2.44 billion in total loans,
$3.09 billion in total assets, $2.43 billion in total deposits and $390.6 million in total stockholders’ equity. At December 31,
2020, Sonabank had forty-two full-service branches in Virginia and Maryland and also provides services to customers through
certain internet and mobile applications. Thirty-seven full-service retail branches are in Virginia (Ashland, Burgess, Callao,
Central Garage, Charlottesville, Chester, Clifton Forge, Colonial Heights, Courtland, Deltaville, Fairfax, Front Royal, Gloucester,
Gloucester Point, Hampton, Hartfield, Heathsville, Kilmarnock, Leesburg, McLean, Mechanicsville (2), Middleburg, Midlothian,
New Market, Newport News, Quinton, Reston, Richmond, South Riding, Surry, Tappahannock (2), Urbanna, Warrenton,
Waverly, and Williamsburg) and five full-service retail branches are in Maryland (Bethesda, Brandywine, Owings, Rockville,
and Upper Marlboro). We have administrative offices in Warrenton and Glen Allen, Virginia. Our South Riding branch will be
closing effective April 15, 2021.
As part of the Company’s rebranding initiatives, on January 28, 2021, Southern National announced that it is changing its
name to Primis Financial Corp. and the Bank is changing its name to Primis Bank effective March 31, 2021.
While we offer a wide range of commercial banking services, we focus on making loans secured primarily by commercial
real estate and other types of secured and unsecured commercial loans to small and medium-sized businesses in a number of
industries, as well as loans to individuals for a variety of purposes, including 1-4 family residential loans. We are a leading Small
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. Our principal sources of funds for loans
and investing in securities are deposits and, to a lesser extent, borrowings. We offer a broad range of deposit products, including
checking, NOW, savings, and money market accounts and certificates of deposit. We actively pursue business relationships by
utilizing the business contacts of our senior management, other bank officers and our directors, thereby capitalizing on our
knowledge of our local market areas.
The Bank owns 48.9% of Southern Trust Mortgage, LLC (“STM”), a regional mortgage banking company headquartered in
Virginia Beach, Virginia. As of December 31, 2020, our equity investment in STM totaled $12.7 million and our preferred stock
investment in STM totaled $3.3 million. STM has mortgage banking originators in Delaware, Virginia, Maryland, North Carolina
and South Carolina. STM only originates retail mortgages.
On August 25, 2020, Southern National completed the sale of $60.0 million of its fixed-to-floating rate Subordinated
Notes due 2030 (the “SNBV Subordinated Notes”). The SNBV Subordinated Notes will bear interest at an initial rate of 5.40%
per annum, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2021. From
and including September 1, 2025 to, but excluding the maturity date or the date of earlier redemption (the “floating rate period”),
the interest rate will reset quarterly to an annual interest rate equal to the Benchmark Rate, which is expected to be three-month
Term SOFR, plus 531 basis points for each quarterly interest period during the floating rate period and payable quarterly in
arrears on March 1, June 1, September 1, and December 1 of each year, commencing on December 1, 2025. Notwithstanding the
foregoing, in the event that the Benchmark Rate is less than zero, the Benchmark Rate shall be deemed to be zero.
On November 1, 2020, the Company launched the Panacea Financial division, which will focus on national lending, deposit
gathering, wealth, and insurance needs with unique products and services for the medical community.
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 to their
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respective customers. Through this strategy, we intend to grow our business, expand our customer base and improve our
profitability. The key elements of our strategy are to:
● Utilize the Strength of our Management Team. The experience and market knowledge of our management team is one of
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our greatest strengths and competitive advantages. The Company’s board of directors appointed Mr. Dennis J. Zember,
Jr. as the new president and chief executive officer, effective February 19, 2020. Mr. Zember, currently our chief
executive officer, has more than 24 years of financial experience in the banking industry.
Rebranding Initiative and Proposed Name Change: As part of the Company’s rebranding initiatives, on January 28,
2021, the Board of Directors of the Company approved changing the Company’s name to Primis Financial Corp., to be
effective as of March 31, 2021. The Company’s wholly-owned banking subsidiary, Sonabank, will also change its name
to Primis Bank, effective March 31, 2021. Over the last year, the Company has focused on building the foundation for a
Company with higher expectations around innovation and technology. We want to deliver a better return for our
shareholders and a better experience for our customers. We are committed to train harder, develop more expertise in all
areas and build relationships that will last. Changing our name and our brand, and committing to an image that mirrors
this attitude is critical. Effective March 31, 2021, our ticker symbol will also change from SONA to FRST and our
website will become www.primisbank.com.
Leverage Our Existing Foundation for Additional Growth. Based on our management’s depth of experience and certain
infrastructure investments, we believe that we will be able to take advantage of certain economies of scale typically
enjoyed by larger organizations to expand our operations both organically and through strategic cost-effective branch or
bank acquisitions. We believe that the investments we have made in our data processing, risk management
infrastructure, staff and branch network will be able to support a much larger asset base. We are committed, however, to
control any additional growth in a manner designed to minimize risk and to maintain strong capital ratios.
● Continue to Pursue Selective Acquisition Opportunities. Historically, acquisitions have been a key part of our growth.
We believe that we have demonstrated the skill sets and experience necessary to acquire and integrate successfully 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 targets in our market areas or other attractive areas
with significant core deposits and/or a potential customer base compatible with our growth strategy.
Focus on the Business Owner. It is our goal to be the bank that business owners in our markets turn to first for
commercial banking needs as a result of our superior personal service and the tailored products and services that we
provide. To help achieve this goal, we:
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have a standing credit committee that meets as often as necessary on a “when needed” basis to review
completed loan applications, making extensive use of technology to facilitate our internal communications 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 Sonabank rather
than waiting for SBA processing. We offer a number of different types of SBA loans designed for the small
and medium-sized business owner and many of our SBA loan customers also have other relationships with
Sonabank. This product group is complex and “paper intensive” and not well 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 to allow
customers to make remote deposits from their business locations and gives them access to those funds within
24 to 48 hours; and
provide our business customers with access to SABL, our state-of-the-art asset-based lending system. Unlike
most asset-based lending systems, which are based on manual processes or software that certifies a company’s
borrowing base periodically, SABL provides a real time capability to analyze and adjust borrowing availability
based on actual collateral levels. SABL is predicated on a link between any kind of accounting software used
by the customer and Sonabank’s server.
● Maintain Local Decision-Making and Accountability. We believe that we have a competitive advantage over larger
national and regional financial institutions by providing superior customer service with experienced,
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knowledgeable management, localized decision-making capabilities and prompt credit decisions. We believe that our
customers want to deal directly with the people who make the credit decisions.
Focus on Asset Quality and Strong Underwriting. We consider asset quality to be of primary importance 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 business and retail
customers. To the extent that our asset growth outpaces this local deposit funding source, we plan to continue to borrow
and raise deposits in the national market using deposit intermediaries. We intend to continue our practice of developing
a deposit relationship with each of our loan customers.
General
Our principal business is the acquisition of deposits from the general public through our branch offices and deposit
intermediaries and the use of these deposits to fund our loan and investment security portfolios. We seek to be a full service
community bank that provides a wide variety of financial services to our middle market corporate clients as well 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 active commercial real estate lender. We also invest
funds in mortgage-backed securities, collateralized mortgage obligations, securities issued by agencies of the federal government,
obligations of states and political subdivisions and 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 Loan Bank (“FHLB”) advances and
other borrowed money.
Principal sources of revenue are interest and fees on loans and investment securities, equity earnings from STM, as well as fee
income derived from the maintenance of deposit accounts and income from bank-owned life insurance policies. Our principal
expenses include interest paid on deposits, advances from the FHLB of Atlanta, junior subordinated debt, senior subordinated
notes and other borrowings, and operating expenses.
Available Information
Southern National files annual, quarterly, periodic and other reports under the Securities Exchange Act of 1934, as amended,
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 Activities
Our primary strategic objective is to serve small to medium-sized businesses in our market with a variety of unique and useful
services, including a full array of commercial mortgage and non-mortgage loans. These loans include commercial real estate
loans, construction and permanent loans, development and builder loans, accounts receivable financing, lines of credit, equipment
and vehicle loans, leasing, and commercial overdraft protection. We strive to do business in the areas served by our branches,
which is also where our marketing is focused, and the vast majority of our loan customers are located in existing market areas.
Substantially all of our loans are with borrowers in Virginia, Maryland, West Virginia, and Washington, D.C. The SBA may from
time to time come to us because of our reputation and expertise as an SBA lender and ask us to review a loan outside of our core
counties but within our market area. Prior to making a loan, we obtain loan applications to determine a borrower’s ability to
repay, and the more significant items on these applications are verified through the use of credit reports, financial statements and
confirmations.
The following is a discussion of each of the major types of lending in which we engage. For more information on our lending
activities, see “Item 7. Management’s Discussion and Analysis of Financial Condition.”
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Commercial Real Estate Lending
Permanent. Commercial real estate lending includes loans for permanent financing. Commercial real estate lending typically
involves higher loan principal amounts and the repayment of loans is dependent, in large part, on sufficient income from the
properties securing the loans to cover operating expenses and debt service. As a general practice, we require our commercial real
estate loans to be secured by well-managed income producing properties with adequate margins and to be guaranteed by
responsible parties. We look for opportunities where cash flow from the collateral properties provides adequate debt service
coverage and the guarantor’s net worth is strong. At December 31, 2020, our commercial real estate loans for permanent
financing, including multi-family residential loans and loans secured by farmland, totaled $1.15 billion, or 47.2% of our loan
portfolio. Owner occupied commercial real estate loans totaled $435.0 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, the availability of secondary sources of
repayment and the overall creditworthiness of the borrower. In addition, we look 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 outside appraisers who
are reviewed by our executive vice president of credit risk management and/or our appraisal reviewer. We retain a valid lien on
real estate and obtain a title insurance policy (on first trust loans only) that insures the property is 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-residential properties can
involve risk due to the length of time it may take to bring a finished real estate product to market. As a result, we will only make
these types of loans when pre-leasing or pre-sales or other credit factors suggest that the borrower can carry the debt if the
anticipated market and property cash flow projections change during the construction phase.
Income producing property loans are supported by evidence of the borrower’s capacity to service the debt. All of our
commercial construction loans are guaranteed by the principals or general partners. At December 31, 2020, we had $103.3
million of construction and land development loans outstanding.
Construction loan borrowers are generally pre-qualified for the permanent loan by us or a third party. We obtain a copy of the
contract with the general contractor who must be acceptable to us. All plans, specifications and surveys must include proposed
improvements. We review feasibility studies and risk analyses showing sensitivity of the project to variables such as interest
rates, vacancy rates, lease rates and operating expenses.
Commercial Business Lending
These 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 by accounts receivable,
equipment, inventory and other collateral, such as readily marketable stocks and bonds with adequate margins, cash value in life
insurance policies and savings and time deposits at Sonabank. At December 31, 2020, our commercial business loans totaled
$187.1 million.
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 commercial business loans is due to
the type of collateral securing these loans. The increased risk also derives from the expectation that commercial loans will be
serviced principally from the operations of the business, which may not be successful. Historical trends have shown that these
types of loans have higher delinquencies than mortgage loans. Because of this, we often utilize the SBA 7(a) program (which
generally guarantees the repayment of up to 75% of the principal and accrued interest to us) to reduce the inherent risk associated
with commercial business lending.
Another way that we reduce risk in the commercial loan portfolio is by taking accounts receivable as collateral using our
SABL system. Our accounts receivable financing facilities, which provide a relatively high yield with considerable
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collateral control, are lines of credit under which a company can borrow up to the amount of a borrowing 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 capacity expands as sales increase. Customers can borrow from 75% to
90% of qualified receivables. In most cases, the borrower’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 a percentage 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 and use a third
party to service the leases. Payment is derived from the cash flow of the borrower, so credit quality may not be any lower than it
would be in the case of an unsecured loan for a similar amount and term.
SBA Lending
We have developed an expertise in the federally guaranteed SBA program. The SBA program is an economic development
program which finances the expansion of small businesses. We are a Preferred Lender in the Washington, D.C. and Richmond,
Virginia Districts of the SBA. As an SBA Preferred Lender, our pre-approved status allows us to quickly respond to customers’
needs. Under the SBA program, we generally originate and fund SBA 7(a) loans which qualify for guarantees up to 75% of
principal and accrued interest (up to 90% in select instances). We also originate 504 chapter loans in which we generally 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 cash flow and a
reasonable chance of success. We do not treat the SBA guarantee as a substitute for a borrower meeting our credit standards, and,
except for minimum capital levels or maximum loan terms, the borrower must meet our other credit standards as applicable to
loans outside the SBA process.
Residential Mortgage Lending
Permanent. Our business model generally does not include originating permanent residential mortgage loans. We originate
such loans solely on a case-by-case basis. In the case of conventional loans, we typically lend up to 80% of the appraised value of
single-family residences and require mortgage insurance for loans exceeding that amount. We have no sub-prime loans.
Sonabank has established with STM underwriting guidelines under which it will purchase residential construction only,
construction loans that convert to permanent, and permanent loans primarily in its Virginia and Maryland footprint from STM.
These are largely loans that do not conform to FNMA or FHLMC standards because of size or acreage. We purchased loans in an
aggregate amount of $80.6 million from STM during 2020.
We retain a valid lien on real estate and obtain a title insurance policy that ensures that the property is free of encumbrances.
We also require hazard insurance and flood insurance for all loans secured by real property if the real property is in a flood plain
as designated by the Department of Housing and Urban Development. We also require most borrowers to advance funds on
a monthly basis from which we make disbursements for items such as real estate taxes, private mortgage insurance and hazard
insurance.
Home Equity Lines of Credit (“HELOC”). At December 31, 2020, we had outstanding HELOC balances totaling $91.6
million.
Consumer Lending
We offer various types of secured and unsecured consumer loans. We make consumer loans primarily for personal, family or
household purposes as a convenience to our customer base since these loans are not the focus of our lending activities. As a
general guideline, a consumer’s debt service should not exceed 40% of gross income or 45% of net income. For purposes of this
calculation, debt includes house payment or rent, fixed installment payments, the estimated
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payment for the loan being requested and the minimum required payment on any revolving debt. At December 31, 2020, we had
$22.3 million of consumer loans outstanding.
Credit Approval and Collection Policies
Because future loan losses are so closely intertwined with our underwriting policy, we have instituted what management
believes is a stringent loan underwriting policy. Our underwriting guidelines are tailored for particular credit types, including
lines of credit, revolving credit facilities, demand loans, term loans, equipment loans, real estate 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 market areas served.
For loans less than $1.5 million, we have a standing Credit Committee comprised of certain officers, each of whom has a
defined lending authority in combination with other officers. These individual lending authorities are determined by our
Executive Chairman and Chief Risk Officer and are based on the individual’s technical ability and experience. These lending
authorities are approved by our board of directors. Our Credit Committee is comprised of three levels of members, based on
experience: regular, senior, and executive. The executive members of our Credit Committee include two senior members – our
Chief Credit Officer and our President and CEO and two junior members – our Chief SBA Lending Officer and our Head of
Commercial Banking. Our Chief Credit Risk Officer, must approve risk ratings for loans over $1.5 million, as well as exceptions
to the Credit Policy. Our Commercial Credit Team Lead must approve exceptions to Credit Policy for loans less than $1.5
million. Generally, group credits over $20 million must be approved by the Credit Committee and full Board of Directors or the
Credit Committee plus two outside directors. Under our loan approval process, the sponsoring loan officer’s approval is required
on all credit submissions. This approval must be included in or added to the individual and joining authorities outlined below.
The sponsoring loan officer is primarily responsible for the customer’s relationship with us, including, among other things,
obtaining and maintaining adequate credit file information. We require each loan officer to maintain loan files in an order and
detail that would enable a disinterested 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 of the Credit
Committee on all loans. The approvals required differ based on the size of the borrowing relationship. At least one regular and
one senior or executive member must approve loans up to $500 thousand. One regular, one senior and one executive member of
the committee must approve all loans between $500 thousand and $1.0 million. One regular, one senior and two executive
members must approve loans between $1.0 million and $1.5 million. Loans in the amount of $1.5 million to legal lending limit
are approved by the Executive Credit Committee which meets every Thursday. Members of this committee include our President
and CEO, Chief Credit Officer, Chief Credit Risk Officer, Chief SBA Lending Officer, Head of Commercial Banking
(nonvoting), Director of Small Business and Consumer Lending and Commercial Credit Risk Officer. The Executive Credit
Committee also approves risk ratings, and exceptions to credit policy. As of December 31, 2020, our legal lending limit was
approximately $54.2 million.
The following collection actions are the minimal procedures which management believes are necessary to properly monitor
past due loans and leases. When a borrower fails to make a payment, we contact the borrower in person, in writing or on the
telephone. At a minimum, all borrowers are notified by mail when payments of principal and/or interest are 10 days past due.
Real estate and commercial loan borrowers are assessed a late charge when payments are 10-15 days past due. Customers are
contacted by a loan officer before the loan becomes 60 days delinquent. After 90 days, if the loan has not been brought current or
an acceptable arrangement is not worked out with the borrower, we will institute measures to remedy the default, including
commencing foreclosure action with respect to mortgage loans and repossessions of collateral in the case of consumer loans.
If foreclosure is effected, the property is sold at a public auction in which we may participate as a bidder. If we are the
successful bidder, we include the acquired real estate property in our other real estate owned (“OREO”) account until it is sold.
These assets are initially recorded at fair value net of estimated selling costs. To the extent there is a subsequent decline in fair
value, that amount is charged to operating expense. At December 31, 2020, we had OREO totaling $3.1 million.
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Special Products and Services
To complement our array of loans, we also provide the following special products and services to our commercial customers:
Cash Management Services
Cash Management services are offered that enable the Bank’s business customers to maximize the efficiency of their cash
management. Specific products offered in our Cash Management services program include the following:
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
Some of the products listed above are described in-depth below.
●
SONA 24/7/Check 21: SONA 24/7 is ideal for landlords, property managers, medical professionals, and any other
businesses that accept checks. SONA 24/7 allows customers of Sonabank to have total control over how, when, and
where their checks will be deposited. SONA 24/7 uses the Check Truncation technology outlined by the “Check
Clearing for the 21st Century Act”, passed in October 2004 (“Check 21”). With Check Truncation, paper checks can be
converted to electronic images and processed between participating banks, vastly speeding up the check clearing
process. SONA In-House passes on the benefits of Check Truncation directly to Sonabank’s business customers.
● Lockbox Services: Sonabank will open a lockbox, retrieve and scan incoming checks, and deposit them directly into
the customer’s account. The images of the checks will then be available to view online. This makes 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 cash management tool. Sonabank makes this service cost
effective for all small and medium sized businesses as well.
● Employer Services: Sonabank will provide its business clients with software that allows them to generate ACH payroll
transactions to their employees’ accounts.
●
SABL: Asset Based Lending is a form of “collateral-based” lending. It is a combination of secured lending and short-
term business lending. It is a specialized form of financing that allows a bank’s commercial 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.
SABL is an Asset Based Lending software system built by Sonabank that allows the Bank to monitor the collateral of its
commercial borrowers who have pledged their working assets (accounts receivables and other qualifying assets such as
inventory) as collateral. SABL has the ability to track other offsets (liabilities, e.g.
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other loans the customer has with the Bank) to the line of credit. SABL serves to provide the more stringent controls and
supervision that this type of lending requires.
One control that is typical of Asset Based Lending is that the commercial borrower is required to have its customers
remit invoice payments to a bank controlled lockbox. The bank retrieves these payments and the bank applies them
directly to any outstanding balance on the line. SABL allows for this and can combine that service with remote capture
(Check 21) if warranted.
Most Asset Based Lending systems are manual processes or software that certifies the borrowing base periodically.
These certifications are usually provided in the form of manually created borrowing bases backed up with field exams.
SABL provides a real time capability to analyze and adjust borrowing availability based on the levels of collateral at the
moment.
SABL also offers an automated collateral upload, taking receivable information directly from the clients accounting
system. SABL also offers discretionary borrowings and pay offs, allowing clients to borrow on or pay down their line at
their discretion, as long as they are compliant with the SABL system. Lastly, SABL offers superior reporting, offering
reports to bank officers that provide certain information they need to monitor risk. Customized reports can also be built
for clients.
● Mobiliti: Sona Mobile is perfect for customers on the go, as it is available on a large variety of devices and networks.
Sona Mobile offers easy access to account balances, transactions and internal transfers. Mobile Deposit allows
customers to save time by eliminating the need to visit a branch. The customer can deposit a check through Sona Mobile
by using their certified device (up to $5,000).
Sona Business Mobile can help business customers manage their finances faster than ever. Customers have access to
their information via a wide range of devices and networks. The shared user credentials and security settings between
online and mobile banking make access more efficient for the business customer. Sona Business Mobile offers standard
online banking features, along with enhanced features such as ACH & Wire transfer processing, including granting
approvals to users to complete those processes. Mobile deposit is a time saving tool that allows business customers to
deposit checks through Sona Business Mobile from their certified device (up to $10,000).
● Other Consumer/Retail Products and Services. Other products and services that are offered by the Bank are primarily
directed toward the individual customer and include the following:
Travelers Checks
● Debit cards
● ATM services
●
● Notary service in some branches
● Wire transfers
● Online banking with bill payment services
● Credit Cards
● Kasasa - rewards program
Competition
The banking business is highly competitive, and our profitability depends principally on our ability to compete in the market
areas in which our banking operations are located. We experience substantial competition in attracting and retaining savings
deposits and in lending funds. The primary factors we encounter in competing for savings deposits are convenient office locations
and rates offered. Direct competition for savings deposits comes from other commercial bank and thrift institutions, money
market mutual funds and corporate and government securities which may offer more attractive rates than insured depository
institutions are willing to pay. The primary factors we encounter in competing for loans include, among others, interest rate and
loan origination fees and the range of services offered. Competition for
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origination of loans normally comes from other commercial banks, thrift institutions, mortgage bankers, mortgage brokers,
insurance companies and fintech or digital lending companies. We have been able to compete effectively with other financial
institutions by:
●
●
●
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.
Human Capital
Our goal is to attract, develop, retain and plan for the succession of key talent and executives to achieve our strategic
objectives. We are continually investing in our workforce to further emphasize diversity and inclusion and to foster our
employees' growth and career development. At December 31, 2020, we had 382 employees, nearly all of whom are fulltime and
of which approximately 75% were female and 25% were minorities. Fostering an inclusive environment requires that all
employees are heard. Our Intranet houses the “Employee Voice” which is a vehicle for employees to make suggestions, asks
questions or voice an opinion regarding the Company’s practices. We are launching “Work Place” on March 31, 2021, which is a
social media platform that will allow our employees to interact with each other and share thoughts on what is important to them
as an individual employee and as a community member.
While the majority of our employees reside in Virginia, our recruitment efforts are both local and nationwide. We utilize a
wide range of recruitment vehicles ranging from college recruitment sites such as “Handshake” to posting on popular job boards
and conducting nationwide profile searches to find qualified candidates. We realize that great people know other great people so
we also offer a referral bonus to our employees. We offer a comprehensive benefits program to our employees that is designed to
give employees the ability to select between a wide variety of benefits that meet their individual needs. We offer four different
medical plans, two of which allow for the employee to make contributions and receive an employer match on a Health Savings
Account. In addition to dental insurance, pet insurance, supplemental insurance and a 401k we offer employer paid short-term
and long-term disability and life insurance. Our employees also enjoy a cash incentive for participating in our Wellness Program.
All new employees attend “Systems Training” where they learn how to utilize key Company systems. New employees are also
required to complete multiple learning modules that cover important compliance and regulatory requirements in the banking
industry. We encourage all employees to obtain job related training by covering the cost of the classes and/or learning materials
and tests.
We have maintained a commitment to the prosperity of each community the Company serves. In addition to providing
financial products built for the needs of our customers, the Company uses associate volunteerism and corporate philanthropy to
build strong community partnerships. Starting in 2021, each employee will be given 8 paid hours to volunteer in their community
or charity of choice.
COVID-19 brought new challenges to the workplace this past year and we responded with personal protection equipment and
guidance on how to mitigate the threat of COVID. Our branches were equipped with plexi-glass barriers and all employees were
provided with masks and gloves. The 2020-2021 COVID Guide with corresponding Incident Report Form was implemented in
2020.
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SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under federal and state law. This discussion is a summary and is
qualified in its entirety by reference to the particular statutory and regulatory provisions described below, and is not intended to
be an exhaustive description of the statutes or regulations applicable to Southern National or the Bank. The business of Southern
National and the Bank is subject to extensive regulation and supervision under federal and state law, including oversight by the
Board of Governors of the Federal Reserve System (“Federal Reserve”) and the Virginia Bureau of Financial Institutions
(“VBFI”), a regulatory division of the Virginia State Corporation Commission.
Changes in laws and regulations may alter the structure, regulation and competitive relationships of financial institutions. In
addition, bank regulatory agencies may issue enforcement actions, policy statements, interpretive letters and similar written
guidance applicable to us or the Bank. It cannot be predicted whether and in what form new laws and regulations, or
interpretations thereof, may be adopted or the extent to which the business of Southern National and the Bank may be affected
thereby, but they may have a material adverse effect on our business, operations, and earnings.
Violations of laws and regulations, or other unsafe and unsound practices, may result in regulatory agencies imposing fines or
penalties, cease and desist orders, or taking other enforcement actions. Under certain circumstances, these agencies may enforce
these remedies directly against officers, directors, employees and other parties participating in the affairs of a bank or bank
holding company. Under federal and state laws and regulations pertaining to the safety and soundness of insured depository
institutions, federal and state banking regulators have the authority to compel or restrict certain actions on our part if they
determine that we have insufficient capital or other resources, or are otherwise operating in a manner that may be deemed to be
inconsistent with safe and sound banking practices. Under this authority, our bank regulators can require us or our subsidiaries to
enter into informal or formal supervisory agreements, including board resolutions, memoranda of understanding, written
agreements and consent or cease and desist orders, pursuant to which we would be required to take identified corrective actions to
address cited concerns and to refrain from taking certain actions.
If we become subject to and are unable to comply with the terms of any future regulatory actions or directives, supervisory
agreements, or orders, then we could become subject to additional, heightened supervisory actions and orders, possibly including
consent orders, prompt corrective action restrictions and/or other regulatory actions, including prohibitions on the payment of
dividends on our common stock and preferred stock. If our regulators were to take such additional supervisory actions, then we
could, among other things, become subject to significant restrictions on our ability to develop any new business, as well as
restrictions on our existing business, and we could be required to raise additional capital, dispose of certain assets and liabilities
within a prescribed period of time, or both. The terms of any such supervisory action could have a material negative effect on our
business, reputation, operating flexibility, financial condition, and the value of our common stock and preferred stock.
Supervision, regulation, and examination of Southern National, the Bank, and our respective subsidiaries by the appropriate
regulatory agencies, as described herein, are intended primarily for the protection of consumers, bank depositors and the Deposit
Insurance Fund (“DIF”) of The Federal Deposit Insurance Corporation (“FDIC”) and the U.S. banking and financial system,
rather than holders of our capital stock.
Bank Holding Company Regulation
Southern National is subject to extensive supervision and regulation by the Federal Reserve System pursuant to the Bank
Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). We are required to file with the Federal
Reserve periodic reports and such other information as the Federal Reserve may request. Ongoing supervision is provided
through regular examinations by the Federal Reserve and other means that allow the regulators to gauge management’s ability to
identify, assess and control risk in all areas of operations in a safe and sound manner and to ensure compliance with laws and
regulations. In addition to regulation by the Federal Reserve as a bank holding company, Southern National is subject to
supervision and regulation by the VBFI under the banking and general business corporation laws of the Commonwealth of
Virginia.
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Activity Limitations. Southern National is registered with the Federal Reserve as a bank holding company. Bank holding
companies generally are limited to the business of banking, managing or controlling banks, and other activities that the Federal
Reserve determines to be closely related to banking, or managing or controlling banks as to be a proper incident thereto. Bank
holding companies are prohibited from acquiring or obtaining control of more than five percent (5%) of the outstanding voting
interests of any company that engages in activities other than those activities permissible for bank holding companies. Examples
of activities that the Federal Reserve has determined to be permissible are making, acquiring, brokering, or servicing loans;
leasing personal property; providing certain investment or financial advice; performing certain data processing services; acting
as agent or broker in selling credit life insurance and other insurance products in certain locations; and performing certain
insurance underwriting activities. The Bank Holding Company Act does not place geographic limits on permissible non-banking
activities of bank holding companies. Even with respect to permissible activities, however, the Federal Reserve has the power to
order a holding company or its subsidiaries to terminate any activity or its control of any subsidiary when the Federal Reserve
has reasonable cause to believe that continuation of such activity or control of such subsidiary would pose a serious risk to the
financial safety, soundness or stability of any bank subsidiary of that holding company.
Source of Strength Obligations. A bank holding company is required to act as a source of financial and managerial strength to
its subsidiary bank. The term “source of financial strength” means the ability of a company, such as us, that directly or indirectly
owns or controls an insured depository institution, such as the Bank, to provide financial assistance to such insured depository
institution in the event of financial distress. The appropriate federal banking agency for the depository institution (in the case of
the Bank, this agency is the Federal Reserve) may require reports from us to assess our ability to serve as a source of strength and
to enforce compliance with the source of strength requirements by requiring us to provide financial assistance to the Bank in the
event of financial distress. If we were to enter bankruptcy or become subject to the orderly liquidation process established by the
Dodd-Frank Act, any commitment by us to a federal bank regulatory agency to maintain the capital of the Bank would be
assumed by the bankruptcy trustee or the FDIC, as appropriate, and entitled to a priority of payment. In addition, the FDIC
provides that any insured depository institution generally will be liable for any loss incurred by the FDIC in connection with the
default of, or any assistance provided by the FDIC to, a commonly controlled insured depository institution. The Bank is an
FDIC-insured depository institution and thus subject to these requirements.
Acquisitions. The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the
Federal Reserve or waiver of such prior approval before it (1) acquires ownership or control of any voting shares of any bank if,
after such acquisition, such bank holding company will own or control more than five percent (5%) of the voting shares of such
bank, (2) acquires all of the assets of a bank, or (3) merges with any other bank holding company. In reviewing a proposed
covered acquisition, among other factors, the Federal Reserve considers (1) the financial and managerial resources of the
companies involved, including pro forma capital ratios; (2) the risk to the stability of the United States banking or financial
system; (3) the convenience and needs of the communities to be served, including performance under the CRA; and (4) the
effectiveness of the companies in combatting money laundering. The Federal Reserve also reviews any indebtedness to be
incurred by a bank holding company in connection with a proposed acquisition to ensure that the bank holding company can
service such indebtedness without adversely affecting its ability to serve as a source of strength to its bank subsidiaries. Well
capitalized and well managed bank holding companies are permitted to acquire control of banks in any state, subject to federal
regulatory approval, without regard to whether such a transaction is prohibited by the laws of any state. However, a bank holding
company may not, following an interstate acquisition, control more than 10% of nationwide insured deposits or 30% of deposits
within any state in which the acquiring bank operates.
Change in Control. Federal law restricts the amount of voting stock of a bank holding company or a bank that a person
(including an entity) may acquire without the prior approval of banking regulators. Under the federal Change in Bank Control
Act and the regulations thereunder, a person or group must give advance notice to and obtain approval from the Federal Reserve
before acquiring control of any bank holding company, such as Southern National. The Change in Bank Control Act creates a
rebuttable presumption of control if a person or group acquires the power to vote 10% or more of our outstanding common
stock. The overall effect of such laws is to make it more difficult to acquire a bank holding company and a bank by tender offer
or similar means than it might be to acquire control of another type of corporation. Consequently, shareholders of the Company
may be less likely to benefit from the rapid increases in stock
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prices that may result from tender offers or similar efforts to acquire control of other companies. Investors should be aware of
these requirements when acquiring shares of our stock.
Virginia Law. Certain state corporation laws may have an anti-takeover affect. Virginia law restricts transactions between a
Virginia corporation and its affiliates and potential acquirers. The following discussion summarizes 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 several exceptions
discussed below, require approval by the holders of at least two-thirds of the remaining voting shares of material acquisition
transactions between a Virginia corporation and any holder of more than 10% of any class of its outstanding voting shares.
Affiliated Transactions include mergers, share exchanges, material dispositions of corporate assets not in the ordinary course of
business, any dissolution of the corporation proposed by or on behalf of an interested shareholder, or any reclassification,
including a reverse stock split, recapitalization, or merger of the corporation with its subsidiaries which increases the percentage
of voting shares owned beneficially by any 10% shareholder by more than 5%.
These provisions were designed to deter certain takeovers of Virginia corporations. In addition, the statute provides 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 the Affiliated Transactions provisions shall not apply to the
corporation. Southern National “opted out” of the Affiliated Transactions provisions when it incorporated.
Virginia law also provides that shares acquired in a transaction that would cause the acquiring person’s voting strength to
meet or exceed any of the three thresholds (20%, 33.33% or 50%) have no voting rights for those shares exceeding that threshold,
unless granted by a majority vote of shares not owned by the acquiring person. This provision empowers an acquiring person to
require the Virginia corporation to hold a special meeting of shareholders to consider the matter within 50 days of the request.
Southern National also “opted out” of this provision at the time of its incorporation.
Governance and Financial Reporting Obligations. We are required to comply with various corporate governance and
financial reporting requirements under the Sarbanes-Oxley Act of 2002, as well as rules and regulations adopted by the SEC, the
Public Company Accounting Oversight Board, and NASDAQ. In particular, we are required to include management and
independent registered public accounting firm reports on internal controls as part of our Annual Report on Form 10-K in order to
comply with Section 404 of the Sarbanes-Oxley Act. We have evaluated our controls, including compliance with the SEC rules
on internal controls, and have and expect to continue to spend significant amounts of time and money on compliance with these
rules. Our failure to comply with these internal control rules may materially adversely affect our reputation, ability to obtain the
necessary certifications to financial statements, and the values of our securities.
Corporate Governance. The Dodd-Frank Act addressed many investor protections, corporate governance, and executive
compensation matters that will affect most U.S. publicly traded companies. The Dodd-Frank Act (1) granted shareholders of
U.S. publicly traded companies an advisory vote on executive compensation; (2) enhanced independence requirements for
Compensation Committee members; and (3) required companies listed on national securities exchanges to adopt incentive-based
compensation claw-back policies for executive officers.
Incentive Compensation. The Dodd-Frank Act required the banking agencies and the SEC to establish joint rules or guidelines
for financial institutions with more than $1.0 billion in assets, such as Southern National and the Bank, which prohibit incentive
compensation arrangements that the agencies determine to encourage inappropriate risks by the institution. The federal banking
agencies issued proposed rules in 2011 and previously issued guidance on sound incentive compensation policies. In 2016, the
federal banking agencies also proposed rules that would, depending upon the assets of the institution, directly regulate incentive
compensation arrangements and would require enhanced oversight and recordkeeping. As of December 31, 2020, these rules
have not been implemented. We and Sonabank have undertaken efforts to ensure that our incentive compensation plans do not
encourage inappropriate risks, consistent with three key principles—that incentive compensation arrangements should
appropriately balance risk and financial rewards, be compatible with effective controls and risk management, and be supported by
strong corporate governance.
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Shareholder Say-On-Pay Votes. The Dodd-Frank Act requires public companies to take shareholders’ votes on proposals
addressing compensation (known as say-on-pay), the frequency of a say-on-pay vote, and the golden parachutes available to
executives in connection with change-in-control transactions. Public companies must give shareholders the opportunity to vote
on the compensation at least every three years and the opportunity to vote on frequency at least every six years, indicating
whether the say-on-pay vote should be held annually, biennially, or triennially.
Anti-tying rules. A bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in
connection with extensions of credit, leases or sales of property, or furnishing of services.
Capital Requirements
Southern National and the Bank are each required under federal law to maintain certain minimum capital levels based on
ratios of capital to total assets and capital to risk-weighted assets. The required capital ratios are minimums, and the federal
banking agencies may determine that a banking organization, based on its size, complexity or risk profile, must maintain a higher
level of capital in order to operate in a safe and sound manner. Risks such as concentration of credit risks and the risk arising
from non-traditional activities, as well as the institution’s exposure to a decline in the economic value of its capital due to
changes in interest rates, and an institution’s ability to manage those risks are important factors that are to be taken into account
in assessing an institution’s overall capital adequacy. The following is a brief description of the relevant provisions of these
capital rules and their potential impact on our capital levels.
Southern National and the Bank are each subject to the following risk-based capital ratios: a common equity Tier 1 ("CET1")
risk-based capital ratio, a Tier 1 risk-based capital ratio, which includes CET1 and additional Tier 1 capital, and a total risk-based
capital ratio, which includes Tier 1 and Tier 2 capital. CET1 is primarily comprised of the sum of common stock instruments and
related surplus net of treasury stock, plus retained earnings and certain qualifying minority interests, less certain adjustments and
deductions, including with respect to goodwill, intangible assets, mortgage servicing assets and deferred tax assets subject to
temporary timing differences. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock, tier 1
minority interests and grandfathered trust preferred securities. Tier 2 capital consists of instruments disqualified from Tier 1
capital, including qualifying subordinated debt, other preferred stock and certain hybrid capital instruments, and a limited amount
of loan loss reserves up to a maximum of 1.25% of risk-weighted assets, subject to certain eligibility criteria. The capital rules
also define the risk-weights assigned to assets and off-balance sheet items to determine the risk-weighted asset components of the
risk-based capital rules, including, for example, certain “high volatility” commercial real estate, past due assets, structured
securities and equity holdings.
The leverage capital ratio, which serves as a minimum capital standard, is the ratio of Tier 1 capital to quarterly average total
consolidated assets net of goodwill, certain other intangible assets, and certain required deduction items. The required minimum
leverage ratio for all banks is 4%.
In addition, effective January 1, 2019, the capital rules require a capital conservation buffer of CET1 of 2.5% above each of
the minimum capital ratio requirements (CET1, Tier 1, and total risk-based capital), which is designed to absorb losses during
periods of economic stress. These buffer requirements must be met for a bank or bank holding company to be able to pay
dividends, engage in share buybacks or make discretionary bonus payments to executive management without restriction.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, requires the federal
bank regulatory agencies to take “prompt corrective action” regarding depository institutions that do not meet minimum capital
requirements. FDICIA establishes five regulatory capital tiers: “well capitalized”, “adequately capitalized”, “undercapitalized”,
“significantly undercapitalized”, and “critically undercapitalized”. A depository institution’s capital tier will depend upon how its
capital levels compare to various relevant capital measures and certain other factors, as established by regulation. FDICIA
generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any
management fee to its holding company if the depository
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institution would thereafter be undercapitalized. The FDICIA imposes progressively more restrictive restraints on operations,
management and capital distributions, depending on the category in which an institution is classified.
To be well-capitalized, the Bank must maintain at least the following capital ratios:
●
●
●
●
6.5% CET1 to risk-weighted assets;
8.0% Tier 1 capital to risk-weighted assets;
10.0% Total capital to risk-weighted assets; and
5.0% leverage ratio.
The Federal Reserve has not yet revised the well-capitalized standard for bank holding companies to reflect the higher capital
requirements imposed under the current capital rules. For purposes of the Federal Reserve’s Regulation Y, bank holding
companies, such as Southern National, must maintain a Tier 1 risk-based capital ratio of 6.0% or greater and a total risk-based
capital ratio of 10.0% or greater to be well-capitalized. If the Federal Reserve were to apply the same or a similar well-capitalized
standard to bank holding companies as that applicable to the Bank, Southern National’s capital ratios as of December 31, 2020
would exceed such revised well-capitalized standard. Also, the Federal Reserve may require bank holding companies, including
Southern National, to maintain capital ratios substantially in excess of mandated minimum levels, depending upon general
economic conditions and a bank holding company’s particular condition, risk profile and growth plans.
Failure to be well-capitalized or to meet minimum capital requirements could result in certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our operations or
financial condition. Failure to meet minimum capital requirements could also result in restrictions on Southern National’s or the
Bank’s ability to pay dividends or otherwise distribute capital or to receive regulatory approval of applications or other
restrictions on its growth.
Both Southern National and the Bank’s regulatory capital ratios were above the applicable well-capitalized standards and met
the capital conservation buffer as of December 31, 2020. Based on current estimates, we believe that Southern National and the
Bank will continue to exceed all applicable well-capitalized regulatory capital requirements and the capital conservation buffer in
2021.
On October 29, 2019, the federal banking agencies jointly issued a final rule to simplify the regulatory capital requirements
for eligible banks and holding companies with less than $10 billion in consolidated assets that opt into the Community Bank
Leverage Ratio (“CBLR”) framework. A qualifying community banking organization with total consolidated assets of less than
$10 billion that exceeds the CBLR threshold would be exempt from the agencies’ current capital framework, including the risk-
based capital requirements and capital conservation buffer described above, and would be deemed well-capitalized under the
agencies’ prompt corrective action regulations. Under the final rule, if a qualifying community banking organization elects to use
the CBLR framework, it will be considered “well-capitalized” so long as its CBLR is greater than 9%. Southern National does
not use the CBLR framework.
In June 2016, the FASB issued ASU 2016-13, which introduced CECL as the methodology to replace the current “incurred
loss” methodology for financial assets measured at amortized cost, and changed the approaches for recognizing and recording
credit losses on available-for-sale debt securities and purchased credit impaired financial assets. Under the incurred loss
methodology, credit losses are recognized only when the losses are probable or have been incurred; under CECL, companies are
required to recognize the full amount of expected credit losses for the lifetime of the financial assets, based on historical
experience, current conditions and reasonable and supportable forecasts. This change results in earlier recognition of credit losses
that the Company deems expected but not yet probable. For SEC reporting companies that do not meet the definition of a smaller
reporting company and with December 31 calendar year ends, such as the Company, CECL became effective January 1, 2020.
The CARES Act allowed us to delay implementation until December 31, 2020.
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Payment of Dividends
Southern National is a legal entity separate and distinct from the Bank and other subsidiaries. Its primary source of cash, other
than securities offerings, is dividends from the Bank. Under the Federal Deposit Insurance Act, no dividends may be paid by an
insured bank if the bank is in arrears in the payment of any insurance assessment due to the FDIC. The payment of dividends by
the Bank may also be affected by other regulatory requirements and policies, such as the maintenance of adequate capital. If, in
the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in, or is about to engage in, an unsafe
or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), such
authority may require, after notice and hearing, that such bank cease and desist from such practice. The Federal Reserve has
formal and informal policies which provide that insured banks should generally pay dividends only out of current operating
earnings.
Under a Federal Reserve policy adopted in 2009, the board of directors of a bank holding company must consider certain
factors to ensure that its dividend level is prudent relative to maintaining a strong financial position, and is not based on overly
optimistic earnings scenarios, such as potential events that could affect its ability to pay, while still maintaining a strong financial
position. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should
consult with the Federal Reserve and eliminate, defer or significantly reduce the bank holding company’s dividends if:
●
●
●
its net income available to shareholders for the past four quarters, net of dividends previously paid during that
period, is not sufficient to fully fund the dividends;
its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective
financial condition; or
it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
Bank Regulation
The operation of the Bank is subject to state and federal statutes applicable to state banks and the regulations of the Federal
Reserve, the FDIC and the Consumer Financial Protection Bureau (“CFPB”). The operations of the Bank may also be subject to
applicable Office of the Comptroller of the Currency (“OCC”) regulation to the extent state banks are granted parity with national
banks. Such statutes and regulations relate to, among other things, required reserves, investments, loans, mergers and
consolidations, issuances of securities, payments of dividends, establishment of branches, consumer protection and other aspects
of the Bank’s operations. Violations of laws and regulations, or other unsafe and unsound practices, may result in these agencies
imposing fines or penalties, cease and desist orders, or taking other enforcement actions. Under certain circumstances, these
agencies may enforce these remedies directly against officers, directors, employees and other parties participating in the affairs of
a bank or bank holding company.
Safety and Soundness. The Federal Deposit Insurance Act requires the federal prudential bank regulatory agencies, such as
the Federal Reserve, to prescribe, by regulation or guideline, operational and managerial standards for all insured depository
institutions relating to: (1) internal controls; (2) information systems and audit systems; (3) loan documentation; (4) credit
underwriting; (5) interest rate risk exposure; and (6) asset quality. The agencies also must prescribe standards for asset quality,
earnings, and stock valuation, as well as standards for compensation, fees and benefits. The federal banking agencies have
adopted regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement these required
standards. These guidelines set forth the safety and soundness standards used to identify and address problems at insured
depository institutions before capital becomes impaired. Under the regulations, if a regulator determines that a bank fails to meet
any standards prescribed by the guidelines, the regulator may require the bank to submit an acceptable plan to achieve
compliance, consistent with deadlines for the submission and review of such safety and soundness compliance plans.
Examinations. The Bank is subject to regulation, reporting, and periodic examinations by the Federal Reserve and the VBFI.
These regulatory authorities routinely examine the Bank’s reserves, loan and investment quality, consumer compliance,
management policies, procedures and practices and other aspects of operations. The Federal Reserve has adopted the Federal
Financial Institutions Examination Council’s (“FFIEC”) rating system and assigns each financial institution a confidential
composite rating based on an evaluation and rating of six essential components of an
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institution’s financial condition and operations, including Capital Adequacy, Asset Quality, Management, Earnings, Liquidity
and Sensitivity to Market Risk, as well as the quality of risk management practices.
Consumer Protection. The Dodd-Frank Act established the CFPB, an independent regulatory authority housed within the
Federal Reserve having centralized authority, including examination and enforcement authority, for consumer protection in the
banking industry. The CFPB has rule writing, examination, and enforcement authority with regard to the Bank’s (and Southern
National’s) compliance with a wide array of consumer financial protection laws, including the Truth in Lending Act, the Real
Estate Settlement Procedures Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act,
the Home Mortgage Disclosure Act, the S.A.F.E. Mortgage Licensing Act, the Fair Credit Reporting Act (except Sections 615(e)
and 628), the Fair Debt Collection Practices Act, and the Gramm-Leach-Bliley Act (sections 502 through 509 relating to
privacy), among others. The CFPB has broad authority to enforce a prohibition on unfair, deceptive, or abusive acts and
practices. Authority to supervise and examine Southern National and the Bank for compliance with federal consumer laws
remains largely with the Federal Reserve. However, the CFPB may participate in examinations on a “sampling basis” and may
refer potential enforcement actions against such institutions to their primary regulators. In addition, the Dodd-Frank Act permits
states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the CFPB, and
state attorneys general are permitted to enforce consumer protection rules adopted by the CFPB against certain institutions.
Deposit Insurance Assessments. The Deposit Insurance Fund (“DIF”) of the FDIC insures the deposits of the Bank generally
up to a maximum of $250,000 per depositor, per insured bank, for each account ownership category. The FDIC charges insured
depository institutions quarterly premiums to maintain the DIF. Deposit insurance assessments are based on average total
consolidated assets minus its average tangible equity, and take into account certain risk-based financial ratios and other factors.
The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or
condition imposed by a bank’s federal regulatory agency. In addition, the Federal Deposit Insurance Act provides that, in the
event of the liquidation or other resolution of an insured depository institution, the claims of depositors of the institution,
including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as
a receiver, will have priority over other general unsecured claims against the institution, including those of the parent bank
holding company.
Insider Transactions. The Federal Reserve has adopted regulations that restrict preferential loans and loan amounts to
“affiliates” and “insiders” of banks, require banks to keep information on loans to major shareholders and executive officers and
bar certain director and officer interlocks between financial institutions.
Reserves. The Bank is subject to Federal Reserve regulations that require the Bank to maintain reserves against transaction
accounts (primarily checking accounts). These reserve requirements are subject to annual adjustment by the Federal Reserve.
Effective March 26, 2020, reserve requirement ratios were reduced to zero percent.
Anti-Money Laundering. A continued focus of governmental policy relating to financial institutions in recent years has been
combating money laundering and terrorist financing. The USA PATRIOT Act broadened the application of anti-money
laundering regulations to apply to additional types of financial institutions such as broker-dealers, investment advisors and
insurance companies, and strengthened the ability of the U.S. Government to help prevent, detect and prosecute international
money laundering and the financing of terrorism. The principal provisions of Title III of the USA PATRIOT Act require that
regulated financial institutions, including state member banks: (i) establish an anti-money laundering program that includes
training and audit components; (ii) comply with regulations regarding the verification of the identity of any person seeking to
open an account; (iii) take additional required precautions with non-U.S. owned accounts; and (iv) perform certain verification
and certification of money laundering risk for their foreign correspondent banking relationships. Failure of a financial institution
to comply with the USA PATRIOT Act’s requirements could have serious legal and reputational consequences for the institution.
Sonabank has augmented its systems and procedures to meet the requirements of these regulations and will continue to revise and
update its policies, procedures and controls to reflect changes required by law.
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FinCEN has adopted rules that require financial institutions to obtain beneficial ownership information with respect to legal
entities with which such institutions conduct business, subject to certain exclusions and exemptions. Bank regulators are focusing
their examinations on anti-money laundering compliance, and we continue to monitor and augment, where necessary, our anti-
money laundering compliance programs.
Bank regulators routinely examine institutions for compliance with these anti-money laundering obligations and have been
active in imposing “cease and desist” and other regulatory orders and money penalty sanctions against institutions found to be in
violation of these requirements. On January 1, 2021, Congress passed federal legislation that made sweeping changes to federal
anti-money laundering laws, including changes that will be implemented in 2021 and subsequent years.
Economic Sanctions. The Office of Foreign Assets Control (“OFAC”) is responsible for helping to ensure that U.S. entities do
not engage in transactions with certain prohibited parties, as defined by various Executive Orders and acts of Congress. OFAC
publishes, and routinely updates, lists of names of persons and organizations suspected of aiding, harboring or engaging in
terrorist acts, including the Specially Designated Nationals and Blocked Persons List. If we find a name on any transaction,
account or wire transfer that is on an OFAC list, we must undertake certain specified activities, which could include blocking or
freezing the account or transaction requested, and we must notify the appropriate authorities.
Concentrations in Lending. During 2006, the federal bank regulatory agencies released guidance on “Concentrations in
Commercial Real Estate Lending” (the “Guidance”) and advised financial institutions of the risks posed by CRE lending
concentrations. The Guidance requires that appropriate processes be in place to identify, monitor and control risks associated with
real estate lending concentrations. Higher allowances for credit losses and capital levels may also be required. The Guidance is
triggered when CRE loan concentrations exceed either:
●
●
Total reported loans for construction, land development, and other land of 100% or more of a bank’s total risk based
capital; or
Total reported loans secured by multifamily and nonfarm nonresidential properties and loans for construction, land
development, and other land of 300% or more of a bank’s total risk based capital.
The Guidance also applies when a bank has a sharp increase in CRE loans or has significant concentrations of CRE secured
by a particular property type. The Guidance also applies when a bank has a sharp increase in CRE loans or has significant
concentrations of CRE secured by a particular property type.
Community Reinvestment Act. The Bank is subject to the provisions of the CRA, which imposes a continuing and affirmative
obligation, consistent with their safe and sound operation, to help meet the credit needs of entire communities where the bank
accepts deposits, including low- and moderate-income neighborhoods. The Federal Reserve’s assessment of the Bank’s CRA
record is made available to the public. Further, a less than satisfactory CRA rating will slow, if not preclude, expansion of
banking activities and prevent a company from becoming or remaining a financial holding company. Federal CRA regulations
require, among other things, that evidence of discrimination against applicants on a prohibited basis, and illegal or abusive
lending practices be considered in the CRA evaluation. The Bank has a rating of “Satisfactory” in its most recent CRA
evaluation.
Consumer Regulation. Activities of the Bank are subject to a variety of statutes and regulations designed to protect
consumers. These laws and regulations include, among numerous other things, provisions that:
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limit the interest and other charges collected or contracted for by the Bank, including rules respecting the terms of credit
cards and of debit card overdrafts;
govern the Bank’s disclosures of credit terms to consumer borrowers;
require the Bank to provide information to enable the public and public officials to determine whether it is fulfilling its
obligation to help meet the housing needs of the community it serves;
prohibit the Bank from discriminating on the basis of race, creed or other prohibited factors when it makes decisions to
extend credit;
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●
●
govern the manner in which the Bank may collect consumer debts; and
prohibit unfair, deceptive or abusive acts or practices in the provision of consumer financial products and services.
Mortgage Rules. Pursuant to rules adopted by the CFPB, banks that make residential mortgage loans are required to make a
good faith determination that a borrower has the ability to repay a mortgage loan prior to extending such credit, require that
certain mortgage loans contain escrow payments, obtain new appraisals under certain circumstances, comply with integrated
mortgage disclosure rules, and follow specific rules regarding the compensation of loan originators and the servicing of
residential mortgage loans.
Transactions with affiliates. There are various restrictions that limit the ability of the Bank to finance, pay dividends or
otherwise supply funds to Southern National or other affiliates. In addition, banks are subject to certain restrictions under
Section 23A and B of the Federal Reserve Act on certain transactions, including any extension of credit to its bank holding
company or any of its other affiliates, on investments in the securities thereof, and on the taking of such securities as collateral for
loans to any borrower.
Privacy and Cybersecurity. The Bank is subject to federal and state banking regulations that limit its ability to disclose non-
public information about consumers to non-affiliated third parties. These limitations require us to periodically disclose our
privacy policies to consumers and allow consumers to prevent disclosure of certain personal information to a non-affiliated third
party under certain circumstances. Consumers also have the option to direct banks and other financial institutions not to share
information about transactions and experiences with affiliated companies for the purpose of marketing products or services.
Banking institutions are required to implement a comprehensive information security program that includes administrative,
technical, and physical safeguards to ensure the security and confidentiality of customer records and information. These security
and privacy policies and procedures for the protection of confidential and personal information are in effect across our lines of
business. Furthermore, the federal banking regulators regularly issue guidance regarding cybersecurity intended to enhance cyber
risk management. A financial institution is expected to implement multiple lines of defense against cyber-attacks and ensure that
their risk management procedures address the risk posed by potential cyber threats. A financial institution is further expected to
maintain procedures to effectively respond to a cyber-attack and resume operations following any such attack. Southern National
has adopted and implemented policies and procedures to comply with these privacy, information security, and cybersecurity
requirements. On December 18, 2020, the federal banking agencies proposed a new rule that would require banks to notify their
regulators within 36 hours of a “computer-security incident” that rises to the level of a “notification incident.”
Audit Reports. Insured institutions with total assets of $500 million or more must submit annual audit reports prepared by
independent auditors to federal and state regulators. In some instances, the audit report of the institution’s holding company can
be used to satisfy this requirement. Independent auditors must receive examination reports, supervisory agreements and reports of
enforcement actions. For insured institutions with total assets of $1.0 billion or more, financial statements prepared in accordance
with U.S. GAAP, management’s certifications concerning responsibility for the financial statements, internal controls and
compliance with legal requirements designated by the FDIC, and an attestation by the independent auditor regarding the
statements of management relating to the internal controls must be submitted. For insured institutions with total assets of more
than $3.0 billion, independent auditors may be required to review quarterly financial statements. The FDICIA requires that
institutions with total assets of $1.0 billion or more have independent audit committees, consisting of outside directors only. The
committees of insured institutions with total assets of $3.0 billion or more must include members with experience in banking or
financial management, must have access to outside counsel, and must not include representatives of large customers.
The foregoing is only a brief summary of certain statutes, rules, and regulations that may affect Southern National and the Bank.
Numerous other statutes and regulations also will have an impact on the operations of Southern National and the Bank.
Supervision, regulation and examination of banks by the regulatory agencies are intended primarily for the protection of
depositors, not shareholders.
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Item 1A. Risk Factors
An investment in our common stock involves risks. The following is a description of the material risks and uncertainties that
Southern National believes affect its business and should be considered before making an investment in our common stock.
Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important
factors that affect us and our business. If any of the risks described in this Annual Report on Form 10-K were to actually occur,
our financial condition, results of operations and cash flows could be materially and adversely affected. If this were to happen,
the value of our common stock could decline significantly and you could lose part or all of your investment. This Form 10-K also
contains forward-looking statements that may not be realized as a result of certain factors, including, but not limited to, the risks
described herein and in our other public filings with the SEC. Please refer to the section in this Form 10-K entitled “Special
Cautionary Notice Regarding Forward-Looking Statements” for additional information regarding forward-looking statements.
Strategic Risks
Our business strategy includes strategic growth, and our financial condition and results of operations could be negatively
affected if we fail to grow or fail to manage our growth effectively.
We intend to continue pursuing a growth strategy for our business. Our prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by growing companies such as the continuing need for infrastructure and
personnel, the time and costs inherent in integrating 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 any expansion could adversely affect our results of operations. Failure to manage our growth effectively could have
a material adverse effect on our business, future prospects, financial condition or results of operations, and could adversely affect
our ability to successfully implement our business strategy. Our ability to grow successfully will depend on a variety of factors,
including the continued availability of desirable business opportunities, the competitive responses from other financial
institutions in our market areas and our ability to manage our growth.
Although there can be no assurance of success or the availability of branch or bank acquisitions in the future we may seek to
supplement our internal growth through attractive acquisitions. We cannot predict the number, size or timing of acquisitions, or
whether any such acquisition will occur at all. Our acquisition efforts have traditionally focused on targeted banking entities in
markets in which we currently operate and markets in which we believe we can compete effectively. However, as consolidation
of the financial services industry continues, the competition for suitable acquisition candidates may increase and, as the number
of appropriate targets decreases, the prices for potential acquisitions could increase which could reduce our potential returns, and
reduce the attractiveness of these opportunities to us. We may compete with other financial services companies for acquisition
opportunities, and many of these competitors have greater financial resources than we do and may be able to pay more for an
acquisition than we are able or willing to pay.
We must respond to rapid technological changes and these changes may be more difficult or expensive than anticipated.
If competitors introduce new products and services embodying new technologies, or if new industry standards and 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 industry standards, 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 to remain 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.
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The implementation of other new lines of business or new products and services may subject us to additional risk.
We continuously evaluate our service offerings and may implement new lines of business or offer new products and services
within existing lines of business in the future. There are substantial risks and uncertainties associated with these efforts. In
developing and marketing new lines of business and/or new products and services, we undergo a new product process to assess
the risks of the initiative, and invest significant time and resources to build internal controls, policies and procedures to mitigate
those risks, including hiring experienced management to oversee the implementation of the initiative. Initial timetables for the
introduction and development of new lines of business and/or new products or services may not be achieved and price and
profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and
shifting market preferences, may also impact the successful implementation of a new line of business and/or a new product or
service. Furthermore, any new line of business and/or new product or service could require the establishment of new key and
other controls and have a significant impact on our existing system of internal controls. In addition, the financial services market,
including banking services, is undergoing rapid changes with frequent introductions of new technology-driven products and
services. Our future success may depend, in part, on our ability to use technology competitively to offer products and services
that provide convenience to customers and create additional efficiencies in our operations. The widespread adoption of new
technologies has and will continue to require us to make substantial capital expenditures to modify or adapt our systems to
remain competitive and offer new products and services. Our ability to effectively implement new technologies to improve our
operations and systems will impact our competitive position in the financial services industry. Furthermore, we may not be
successful in introducing new products and services in response to industry trends or developments in technology, or those new
products may not be accepted by customers. Failure to successfully manage these risks in the development and implementation of
new lines of business and/or new products or services could have a material adverse effect on our business and, in turn, our
financial condition and results of operations.
We may not be able to successfully integrate our acquisitions or to realize the anticipated benefits of them.
A successful integration of each acquired bank with ours will depend substantially on our ability to successfully consolidate
operations, corporate cultures, systems and procedures and to eliminate redundancies and costs. While we have substantial
experience in successfully integrating institutions we have acquired, we may encounter difficulties during integration, such as:
●
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the loss of key employees;
the disruption of operations and businesses;
loan and deposit attrition, customer loss and revenue loss;
possible inconsistencies in standards, control procedures and policies;
unexpected issues with expected branch closures; and/or
unexpected issues with costs, operations, personnel, technology and credit;
all of which could divert resources from regular banking operations. Additionally, general market and economic conditions or
governmental actions affecting the financial industry generally may inhibit our successful merger integrations.
Further, we acquire banks with the expectation that these mergers will result in various benefits including, among other
things, benefits relating to enhanced revenues, a strengthened market position for the combined company, cross selling
opportunities, technology, cost savings and operating efficiencies. Achieving the anticipated benefits of these mergers is subject
to a number of uncertainties, including whether we integrate these institutions in an efficient and effective manner, and general
competitive factors in the marketplace. Failure to achieve these anticipated benefits could result in a reduction in the price of our
shares as well as in increased costs, decreases in the amount of expected revenues and diversion of management's time and
energy and could materially and adversely affect our business, financial condition and operating results.
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Operational Risks
Outbreak of the novel coronavirus disease 2019 (“COVID-19”) has had and will likely continue to have an adverse impact
on the markets in which we operate and on our business, operations and financial condition.
The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate
and has impaired and could continue to impair their ability to fulfill their financial obligations to the Company. In March 2020,
the World Health Organization declared COVID-19 to be a global pandemic. The spread of COVID-19 has caused significant
uncertainty, volatility and disruption in the U.S. and global economy and has disrupted banking and other financial activity in the
areas in which the Company operates. Given the ongoing and dynamic nature COVID-19, it is not possible to accurately predict
the extent, severity or duration of these conditions or when normal economic and operating conditions will resume. For this
reason, the extent to which the COVID-19 pandemic affects our business, operations and financial condition, as well as our
regulatory capital and liquidity ratios and credit ratings, is highly uncertain and unpredictable and depends on, among other
things, new information that may emerge concerning the scope, duration and severity of the COVID-19 pandemic and actions
taken by governmental authorities and other parties in response to the pandemic. If the pandemic is prolonged, the adverse impact
on the markets in which we operate and on our business, operations and financial condition could deepen.
Congress, the President, and the Federal Reserve have taken several actions designed to minimize the economic impact of
COVID-19. The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020
as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various
measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors.
The package also includes extensive emergency funding for hospitals and healthcare providers. In addition to the general impact
of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts have had and
are expected to continue to have a material impact on the Company’s operations. The CARES Act includes provisions that
temporarily delay the required implementation date of Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 326, Financial Instruments—Credit Losses, and suspend the requirements related to accounting for a
troubled debt restructuring (“TDR”), for certain entities.
The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking
and other financial transactions. If the global response to contain COVID-19 escalates further or is unsuccessful, the Company
could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not
possible to know the full universe or extent that the impact of COVID-19, and resulting measures to curtail its spread, will have
on the Company’s operations, the Company is disclosing potentially material items of which it is aware.
Capital and liquidity
While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by
COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses. The Company relies on
cash on hand as well as dividends from its subsidiary bank to service its debt. If the Company’s capital deteriorates such that its
subsidiary bank is unable to pay dividends to it for an extended period of time, the Company may not be able to service its debt.
The Company maintains access to multiple sources of liquidity. Wholesale funding markets have remained open to us, but
rates for short term funding have recently been volatile. If funding costs are elevated for an extended period of time, it could have
an adverse effect on the Company’s net interest margin. If an extended recession causes a large number of the Company’s deposit
customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.
COVID-19 could cause a further and sustained decline in the Company’s stock price or the occurrence of what management
would deem to be an event that could, under certain circumstances, cause us to perform another goodwill impairment test and
result in an impairment charge being recorded for that period. In the event that the Company
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concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be
recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.
Lending operations and accommodations to borrowers
As a result of COVID-19, businesses in the Company’s markets have experienced significant operational disruptions. In
accordance with regulatory guidelines to work with borrowers during this unstable economic environment, the Company
provided certain modifications, including interest only or principal and interest deferments. As of December 31, 2020, total
modified loans or loans with requests for modifications were $122.0 million and the Company anticipates minimal additional
deferrals in 2021.
With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”),
the Company is actively assisting its customers with loan applications through the program. PPP loans have a two or five
year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA
in accordance with the terms of the program. As of December 31, 2020, the Company had originated 4,269 PPP loans
representing $319.4 million to its customers. Loans funded through the PPP program are guaranteed by the SBA and loans that
meet certain regulatory criteria are subject to forgiveness. In the event that the PPP loans are not fully guaranteed by the SBA, the
Company could be required to establish additional allowance for credit loss through additional credit loss expense charged to
earnings. We started seeing forgiveness of the PPP loans in the fourth quarter of 2020 and continue to expect additional
forgiveness in 2021.
Credit
The Company is working with customers directly affected by COVID-19 and is offering short-term assistance in accordance
with regulatory guidelines. As a result of the economic environment caused by the COVID-19 virus, the Company is engaging in
more frequent communication with borrowers to better understand their financial situation and the challenges they face, allowing
it to respond proactively as needs and issues arise. It is possible that the Company’s asset quality measures could worsen at future
measurement periods if the effects of COVID-19 are prolonged.
We rely on third-party vendors to provide key components of our business infrastructure.
Third-party vendors provide key components of our business operations such as data processing, recording and monitoring
transactions, online banking interfaces and services, Internet connections and network access. We have selected these third-party
vendors carefully and have conducted the due diligence consistent with regulatory guidance and best practices. While we have
ongoing programs to review third-party vendors and assess risk, we do not control their actions. Any problems caused by these
third parties, including those resulting from disruptions in communication services provided by a vendor, failure of a vendor to
handle current or higher volumes, cyber-attacks and security breaches at a vendor, failure of a vendor to provide services for any
reason or poor performance of services, could adversely affect our ability to deliver products and services to our customers and
otherwise conduct our business. Financial or operational difficulties of a third-party vendor could also hurt our operations if those
difficulties interfere with the vendor’s ability to serve us. Furthermore, our vendors could also be sources of operational and
information security risk to us, including from breakdowns or failures of their own systems or capacity constraints. Replacing
these third-party vendors could also create significant delay and expense. Accordingly, use of such third parties creates an
unavoidable inherent risk to our business operations.
We face significant cyber and data security risk that could result in the disclosure of confidential information, adversely
affect our business or reputation and expose us to significant liabilities.
As a financial institution, we are under threat of loss due to hacking and cyber-attacks. This risk has increased in recent years,
and continues to increase, as we continue to expand customer capabilities to utilize internet and other remote channels to transact
business. Two of the most significant cyber-attack risks that we face are e-fraud and loss of sensitive customer data. Loss from e-
fraud occurs when cybercriminals breach and extract funds directly from customer or our accounts. The attempts to breach
sensitive customer data, such as account numbers and social security numbers, are less frequent but would present significant
reputational, legal and/or regulatory costs to us if successful. Our risk and
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exposure to these matters remains heightened because of the evolving nature and complexity of these threats from cybercriminals
and hackers, our plans to continue to provide internet banking and mobile banking channels, and our plans to develop additional
remote connectivity solutions to serve our customers. While we have not experienced any material losses relating to cyber-attacks
or other information security breaches since 2017, we have been subject of hacking and cyber-attack and there can be no
assurance that we will not suffer additional losses in the future.
In response to the COVID-19 pandemic, we have modified our business practices with a portion of our employees working
remotely from their homes to have our operations uninterrupted as much as possible. Further, technology in employees’ homes
may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available
to employees to be more limited or less reliable than in our offices. The continuation of these work-from-home measures also
introduces additional operational risk, including increased cybersecurity risk. These cyber risks include greater phishing,
malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and
telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information,
limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in
destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including
wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our
operations and the operations of any impacted customers.
The occurrence of any cyber-attack or information security breach could result in material adverse consequences to us
including damage to our reputation and the loss of customers. We also could face litigation or additional regulatory scrutiny.
Litigation or regulatory actions in turn could lead to significant liability or other sanctions, including fines and penalties or
reimbursement of customers adversely affected by security breach. Even if we do not suffer any material adverse consequences
as a result of other future events, successful attacks or systems failures at the Bank or at other financial institutions could lead to a
general loss of customer confidence in financial institutions including the Bank.
Our ability to mitigate the adverse consequences of occurrences is in part dependent on the quality of our information security
procedures and contracts and our ability to anticipate the timing and nature of any such event that occurs. In recent years, we
have incurred significant expense towards improving the reliability of our systems and their security from attack. Nonetheless,
there remains the risk that we may be materially harmed by cyber-attack and information security breach or others in the future.
Methods used to attack information systems change frequently (with generally increasing sophistication), often are not
recognized until launched against a target, may be supported by foreign governments or other well-financed entities, and may
originate from less regulated and remote areas around the world. As a result, we may be unable to address these methods in
advance of attacks, including by implementing adequate preventive measures. If such an attack or breach does occur, we might
not be able to fix it timely or adequately. To the extent that such an attack or breach relates to products or services provided by
others, we seek to engage in due diligence and monitoring to limit the risk. In addition, as the regulatory environment related to
information security, data collection and use, and privacy becomes increasingly rigorous, with new and constantly changing
requirements applicable to our business, compliance with those requirements could also result in additional costs.
We are dependent on key personnel and the loss of one or more of those key personnel could impair our relationship with
our customers and adversely affect our business.
Many community banks attract customers based on the personal relationships that the banks’ officers and customers establish
with each other and the confidence that the customers have in the officers. We significantly depend on the continued service and
performance of our key management personnel. We also believe our management team’s depth and breadth of experience in the
banking industry is integral to executing our business plan. The loss of the services of members of our senior management team
or other key employees or the inability to attract additional qualified personnel as needed could have a material adverse effect on
our business.
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Credit Risks
We are subject to risks related to our concentration of construction and land development and commercial real estate
loans.
As of December 31, 2020, we had $103.3 million of construction and land development loans. Construction and land
development loans are subject to risks during the construction phase that are not present in standard residential real estate and
commercial real estate loans. These risks include:
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the viability of the contractor;
the contractor’s ability to successfully complete the project, to meet deadlines and time schedules and to stay
within cost estimates; and
concentrations of such loans with a single contractor and its affiliates.
Real estate construction and land development loans may involve the disbursement of substantial funds with repayment
dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan and
also present risks of default in the event of declines in property values or volatility in the real estate market during the
construction phase. Our practice, in the majority of instances, is to secure the personal guaranty of individuals in support of our
real estate construction and land development loans which provides us with an additional source of repayment. As of December
31, 2020, we did not have any nonperforming construction and land development loans and had $1.2 million of assets that have
been foreclosed. If one or more of our larger borrowers were to default on their construction and land development loans, and we
did not have alternative sources of repayment through personal guarantees or other sources, or if any of the aforementioned risks
were to occur, we could incur significant losses.
As of December 31, 2020, we had $1.15 billion of commercial real estate loans, including multi-family residential loans and
loans secured by farmland. Commercial real estate lending typically involves higher loan principal amounts and the repayment is
dependent, in large part, on sufficient income from the properties securing the loan to cover operating expenses and debt service.
A significant amount of our loans are secured by real estate and any declines in real estate values in our primary 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 large portion of our
loan portfolio, constituting $1.91 billion, or approximately 78.0% of our total loan portfolio, as of December 31, 2020. Although
residential and commercial real estate values are strong in our market area, such values may not remain elevated. If loans that are
collateralized by real estate become troubled during a time when market conditions are declining or have declined, then we may
not be able to realize the full value of the collateral that we anticipated at the time of originating the loan, which could require us
to increase our provision for credit losses and adversely affect our financial condition and results of operations.
As of December 31, 2020, $648.9 million, or approximately 26.5% of our total loans, were secured by single-family
residential real estate. This includes $557.3 million in residential 1-4 family loans and $91.6 million in home equity lines of
credit. If housing prices in our market areas do not remain strong or deteriorate, we may experience an increase in nonperforming
loans, provision for credit losses and charge-offs.
If the value of real estate in our market areas were to decline materially, a significant portion of our loan portfolio could
become under-collateralized, which could have a material adverse effect on our asset quality, capital structure and
profitability.
As of December 31, 2020, 47.2% of our loan portfolio was comprised of loans secured by commercial real estate, including
multi-family residential loans and loans secured by farmland. In the majority of these loans, real estate was the primary collateral
component. In some cases we take real estate as security for a loan even when it is not the primary component of collateral. The
real estate collateral that provides the primary or an alternate source of repayment in the event of default may deteriorate in value
during the term of the loan as a result of changes in economic conditions,
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fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax and other laws and acts of nature.
If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our
earnings and capital could be adversely affected. We are subject to increased lending risks in the form of loan defaults as a result
of the high concentration of real estate lending in our loan portfolio. A weak real estate market in our primary market areas could
have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate
and other collateral securing the loans and the value of real estate owned by us. If real estate values decline, it is also more likely
that we would be required to increase our allowance for credit losses, which could adversely affect our financial condition and
results of operations.
If our nonperforming assets increase, our earnings will suffer.
At December 31, 2020, our nonperforming assets (which consist of nonaccrual loans, loans past due 90 days and accruing and
OREO) totaled $17.5 million, or 0.72% of total loans and OREO, which is an increase of $2.4 million, or 16.0%, compared with
non-covered nonperforming assets (which consist of non-covered nonaccrual loans, loans past due 90 days and accruing and
OREO), which totaled $15.1 million, or 0.69% of total non-covered loans and OREO at December 31, 2019. At December 31,
2018, our non-covered nonperforming assets were $11.8 million, or 0.54% of total non-covered loans and OREO.
Economic and market conditions are unstable, and our nonperforming assets as a percentage of total loans and OREO has
improved, we may incur losses if there is a continued increase in nonperforming assets in the future. Our nonperforming assets
adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or OREO, thereby
adversely affecting our net interest income, and increasing loan administration costs. When we take collateral in foreclosures and
similar proceedings, we are required to mark the related loan to the then fair value of the collateral, which may ultimately result
in a loss. We must reserve for probable losses, which is established through a current period charge to the provision for credit
losses as well as from time to time, as appropriate, a write down of the value of properties in our OREO portfolio to reflect
changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying
costs such as taxes, insurance and maintenance related to our OREO. Further, the resolution of nonperforming assets requires the
active involvement of management, which can distract them from more profitable activity. Finally, an increase in the level of
nonperforming assets increases our regulatory risk profile. There can be no assurance that we will not experience future increases
in nonperforming assets.
If our allowance for credit 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 of these loans, and
the collateral securing the payment of these loans may be insufficient to ensure repayment. We make various assumptions and
judgments about the collectability of our loan portfolio, including the creditworthiness of the borrowers and the value of the real
estate and other assets serving as collateral for the repayment of many of our loans. The amount of the allowance represents
management's best estimate of current expected credit losses on loans considering available information, from internal and
external sources, relevant to assessing collectability over the loans' contractual terms, adjusted for expected prepayments when
appropriate. If our assumptions prove to be incorrect or if we experience significant loan losses, our current allowance may not be
sufficient to cover actual loan losses and adjustments may be necessary to allow for different economic conditions or adverse
developments in our loan portfolio. A material addition to the allowance for credit losses could cause our earnings to decrease.
Due to the relatively unseasoned nature of our loan portfolio, we may experience an increase in delinquencies and losses as these
loans continue to mature.
In addition, federal regulators periodically review our allowance for credit losses and may require us to increase our provision
for credit losses or recognize further charge-offs, based on judgments different than those of our management. Any significant
increase in our allowance for credit losses or charge-offs required by these regulatory agencies could have a material adverse
effect on our results of operations and financial condition.
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The small to medium-sized businesses we lend to may have fewer resources to weather a downturn in the economy, which
may impair a borrower’s ability to repay a loan to us that could materially harm our operating results.
We make loans to professional firms and privately owned businesses that are considered to be small to medium-sized
businesses. Small to medium-sized businesses frequently have smaller market shares than their competition, may be more
vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial
volatility in operating results, any of which may impair a borrower’s ability to repay a loan. In addition, the success of a small
and medium-sized business often depends on the management talents and efforts of one or two persons or a small group of
persons, and the death, disability or resignation of one or 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 harm our operating results.
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 pay interest 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 during periods in which the local, regional or
national economy suffers a general decline. If borrowers fail to repay their loans, our financial condition and results of operations
would be adversely affected.
Market Risks
Our profitability depends significantly on local economic conditions in the areas where our operations and loans are
concentrated, and our geographic concentration makes us vulnerable to local weather catastrophes, public health issues,
and other external events, which could adversely affect our results of operations and financial condition.
We operate in a mixed market environment with influences from both rural and urban areas. 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, Northern Neck, Middle Peninsula, Richmond, Hampton Roads and the
surrounding areas. Unlike larger banks that are more geographically diversified, we provide banking and financial services to
clients primarily in these market areas. As of December 31, 2020, substantially all of our commercial real estate, real estate
construction and residential real estate loans were made to borrowers in our market area. The local economic conditions in this
area have a significant impact on our commercial, real estate and construction and consumer loans, the ability of the borrowers to
repay these loans and the value of the collateral securing these loans. In addition, if the population or income growth in these
market areas slows, stops or declines, income levels, deposits and housing starts could be adversely affected and could result in
the curtailment of our expansion, growth and profitability.
Additionally, 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 specifically local economic conditions
given the concentration of Federal workers and government contractors in our market. Further, the occurrence of events such as
hurricanes, tropical storms, tornados, winter storms, freezes, flooding and other large-scale weather catastrophes in and along the
Atlantic coast, and further public health issues, such as pandemics or other widespread health emergencies, could adversely affect
our financial condition or results of operations. Such areas could be adversely impacted by such events in those regions, the
nature and severity of which are difficult to predict. Furthermore, climate change could increase the frequency and severity of
these risks. These and other unpredictable external events could have an adverse effect on us in that such events could materially
disrupt our operations or the ability or willingness of its customers to access the financial services offered by the Company. These
events could reduce our earnings and cause volatility in our financial results for any fiscal quarter or year and have a material
adverse effect on our financial condition and/or results of operations.
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Our business is subject to interest rate risk and variations in interest rates may negatively affect our financial
performance.
The majority of our assets and liabilities are monetary in nature and subject us to significant risk from changes in 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 periodically experience “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 vice versa. In either event, if market interest rates should move contrary to our position, this “gap”
will negatively impact our 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 foreign
financial markets.
Based on our analysis of the interest rate sensitivity of our assets, an increase in the general level of interest rates may
negatively affect the market value of the portfolio equity, but will positively affect our net interest income since 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 to originate loans. A decrease in the general
level of interest rates may affect us through, among other things, increased prepayments 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, loan origination volume, loan and mortgage-backed securities portfolios, and our overall
results. Although our asset liability management strategy is designed to control our risk from changes in market interest rates, it
may not be able to prevent changes in interest rates from having a material adverse effect on our results of operations and
financial condition.
Declines in asset values may result in impairment charges and adversely affect the value of our investment securities,
financial performance and capital.
We maintain an investment securities portfolio that includes, but is not limited to, collateralized mortgage obligations, agency
mortgage-backed securities and pooled trust preferred securities. The market value of investment securities may be affected by
factors other than the underlying performance of the issuer or composition of the bonds themselves, such as ratings downgrades,
adverse changes in the business climate and a lack of liquidity for resales of certain investment securities. At each reporting
period, we evaluate investment securities and other assets for impairment indicators. We may be required to record additional
impairment charges if our investment securities suffer a decline in value that is considered other-than-temporary. During
the years ended December 31, 2020, 2019 and 2018, we incurred no other-than-temporary impairment charges related to credit
losses or sales of securities. If in future periods we determine 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 of operations in the periods in which the write-offs occur.
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 at prices you find
attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:
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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 capital commitments by or
involving us or our competitors;
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failure to integrate acquisitions or realize anticipated benefits from acquisitions;
changes in valuations of Goodwill and other Intangible Assets;
changes in government regulations; and
geopolitical conditions such as acts or threats of terrorism, military conflicts or pandemics.
General market fluctuations, industry factors and general economic and political conditions and events, such as economic
slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of
operating results.
The 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 having the desired characteristics of
depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at
any given time. This presence depends on the individual decisions of investors and general economic and market conditions over
which we have no control. Given the lower trading volume of our common stock, significant sales of our common stock, or the
expectation of these sales, could cause our stock price to fall.
Liquidity Risks
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition, results of operations
and cash flows.
Liquidity is essential to our business. Our ability to implement our business strategy will depend on our ability to 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 agreements to repurchase, the sale of loans and other sources could
have a substantial negative effect on our liquidity. We do not anticipate that our retail and commercial deposits will be sufficient
to meet our funding needs in the foreseeable future. We therefore rely on deposits obtained through intermediaries, FHLB
advances, and other wholesale funding sources to obtain the funds necessary to implement our growth strategy.
Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to us 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 loans are concentrated or adverse regulatory
action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the
financial markets or negative views and expectations about the prospects for the financial services industry. To the extent we are
not successful in obtaining such funding, we will be unable to implement our strategy as planned which could have a material
adverse effect on our financial condition, results of operations and cash flows.
Capital Adequacy Risks
Future growth or operating results may require us to raise additional capital, but that capital may not be available, be
available on unfavorable terms or may be dilutive.
Sonabank is required by the FRB to maintain adequate levels of capital to support our operations. In the event that our future
operating results erode capital, if the Bank is required to maintain capital in excess of well-capitalized standards, or if we elect to
expand through loan growth or acquisitions, we may be required 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
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financial performance. Accordingly, we cannot be assured of our ability to raise capital on favorable terms when needed, or at all.
If we cannot raise additional capital when needed, we will be subject to increased regulatory supervision and the imposition of
restrictions on our growth and business. These outcomes could negatively impact our ability to operate or further expand our
operations through acquisitions or the establishment of additional branches and may result in increases in operating expenses and
reductions in revenues that could have a material adverse effect on our financial condition and results of operations. In addition,
in order to raise additional capital, we may need to issue shares of our common stock that would dilute the book value of our
common stock and reduce our current shareholders’ percentage ownership interest to the extent they do not participate in future
offerings.
We may issue a new series of preferred stock or debt securities, which would be senior to our common stock and may
cause the market price of our common stock to decline.
We have issued $27.0 million in aggregate principal amount of 5.875% Fixed-to-Floating Rate Subordinated Notes due
January 31, 2027 and $60.0 million of fixed-to-floating rate Subordinated Notes due 2030. In the future, we may increase our
capital resources by making additional offerings of debt or equity securities, which may include senior or additional subordinated
notes, classes of preferred shares and/or common shares. Holders of our common stock are not entitled to preemptive rights or
other protections against dilution. Preferred shares and debt, if issued, have a preference on liquidating distributions or a
preference on dividend or interest payments that could limit our ability to make a distribution to the holders of our common
stock. Future issuances and sales of parity preferred stock, or the perception that such issuances and sales could occur, may also
cause prevailing market price for our common stock to decline and may adversely affect our ability to raise additional capital in
the financial markets at times and prices favorable to us. Further issuances of our common stock could be dilutive to holders of
our common stock.
We currently intend to pay dividends on our common stock; however, our future ability to pay dividends is subject to
restrictions.
We declared the first cash dividend on our common stock in February 2012, and each quarter thereafter through 2019. There
are a number of restrictions on our ability to pay dividends. It is the policy of the FRB that bank holding companies should pay
cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is
consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding
companies should not maintain a level of cash dividends that undermines the bank holding 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 from the Bank. The
payment of dividends by the Bank to us is subject to certain restrictions imposed by federal banking laws, regulations and
authorities. The federal banking statutes prohibit federally insured banks from making any capital distributions (including a
dividend payment) if, after making the distribution, the institution would be "under capitalized" as defined by statute. In addition,
the relevant federal regulatory agencies have authority to prohibit an insured bank from engaging in an unsafe or unsound
practice, as determined by the agency, in conducting an activity. The payment of dividends could be deemed to constitute such an
unsafe or unsound practice, depending on the financial condition of the Bank. Regulatory authorities could impose
administratively stricter limitations on the ability of the Bank to pay dividends to us if such limits were deemed appropriate to
preserve certain capital adequacy requirements.
Regulatory Risks
We are heavily regulated by federal and state agencies; changes in laws and regulations or failures to comply with such
laws and regulations may adversely affect our operations and our financial results.
We and the Bank are subject to extensive regulation, supervision and examination by federal and state banking authorities.
Any change in applicable regulations or federal or state legislation could have a substantial impact on us and the Bank, and our
respective operations. Additional legislation and regulations may be enacted or adopted in the future
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that could significantly affect our powers, authority and operations or the powers, authority and operations of the Bank, 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 their holding
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 written agreement with the agency. Possible
enforcement actions against us could include the issuance of a cease-and-desist order that could be judicially enforced, the
imposition of civil monetary penalties, the issuance of directives to increase capital or enter into a strategic transaction, whether
by merger or otherwise, with a third party, the appointment of a conservator or receiver, the termination of insurance on deposits,
the issuance of removal and prohibition orders against institution-affiliated parties, and the enforcement of such actions through
injunctions or restraining orders. The exercise of this regulatory discretion and power may have a negative impact on us.
As a regulated entity, Sonabank must maintain certain required levels of regulatory capital that may limit our operations
and potential growth.
As further described above under Supervision and Regulation—Capital Requirements, Southern National and the Bank each
are subject to various regulatory capital requirements administered by the FRB.
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 the Bank’s and our consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet commitments as
calculated under these regulations.
As of December 31, 2020, Southern National and the Bank exceeded the amounts required to be well capitalized with respect
to all four required capital ratios. As of December 31, 2020, Southern National’s leverage, CET1 risk-based capital, Tier 1 risk-
based capital and Total risk-based capital ratios were 9.69%, 13.05%, 13.52% and 19.58%, respectively. As of December 31,
2020, the Bank’s leverage, CET1 risk-based capital, Tier 1 risk-based capital and Total risk-based capital ratios were 11.25%,
15.83%, 15.83% and 17.09%, respectively.
Many factors affect the calculation of Southern National and the Bank’s risk-based assets and its ability to maintain the level
of capital required to achieve acceptable capital ratios. For example, changes in risk weightings of assets relative to capital and
other factors may combine to increase the amount of risk-weighted assets in the Tier 1 risk-based capital ratio and the Total risk-
based capital ratio. Any increases in its risk-weighted assets will require a corresponding increase in its capital to maintain the
applicable ratios. In addition, recognized loan losses in excess of amounts reserved for such losses, loan impairments, impairment
losses on investment securities and other factors will decrease the Bank’s capital, thereby reducing the level of the applicable
ratios.
Southern National and the Bank’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 FRB rules, if the Bank
ceases to be a well-capitalized institution for bank regulatory purposes, the interest rates that it pays on deposits and its ability to
accept, renew or rollover brokered deposits may be restricted. As of December 31, 2020, we had $270 thousand of brokered
deposits, which represented 0.01% of our total deposits.
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Financial Reporting Risks
Failure to maintain an effective system of disclosure controls and procedures could have a material adverse effect on our
business, results of operations and financial condition and could impact the price of our common stock.
Failure to maintain an effective internal control environment could result in us not being able to accurately report our
financial results, prevent or detect fraud, or provide timely and reliable financial information pursuant to our reporting
obligations, which could have a material adverse effect on our business, financial condition, and results 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 internal control over financial
reporting. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide
only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls
and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on
our business, results of operations and financial condition.
Item 1B. Unresolved Staff Comments
Southern National does not have any unresolved staff comments from the SEC to report for the year ended December 31, 2020.
Item 2. Properties
Southern National’s principal office is located at 6830 Old Dominion Drive, McLean, Virginia. Southern National and
Sonabank also have executive offices located at 1002 Wisconsin Avenue, N.W., Washington, DC and 10900 Nuckols Road,
Suite 325, Glen Allen, Virginia. Including these main locations, our bank owns 32 properties and leases 25 properties, all of
which are used as branch locations or for housing operational units in Maryland and Virginia. At December 31, 2020, Sonabank
had forty-two full-service branches in Virginia and Maryland and also provides services to customers through certain internet and
mobile applications. Thirty-seven full-service retail branches are in Virginia (Ashland, Burgess, Callao, Central Garage,
Charlottesville, Chester, Clifton Forge, Colonial Heights, Courtland, Deltaville, Fairfax, Front Royal, Gloucester, Gloucester
Point, Hampton, Hartfield, Heathsville, Kilmarnock, Leesburg, McLean, Mechanicsville (2), Middleburg, Midlothian, New
Market, Newport News, Quinton, Reston, Richmond, South Riding, Surry, Tappahannock (2), Urbanna, Warrenton, Waverly,
and Williamsburg) and five full-service retail branches are in Maryland (Bethesda, Brandywine, Owings, Rockville, and Upper
Marlboro). We have administrative offices in Warrenton and Glen Allen, Virginia. Our South Riding branch will be closing
effective April 15, 2021.
Southern National believes its facilities are in good operating condition, are suitable and adequate for its operational needs and
are adequately insured.
Item 3. Legal Proceedings
Southern National and Sonabank are from time to time a party, as both plaintiff and defendant, to various claims and proceedings
arising in the ordinary course of the Bank’s business, including administrative and/or legal proceedings that may include
employment-related claims, as well as claims of lender liability, breach of contract, and other similar lending-related claims.
While the ultimate resolution of these matters cannot be determined at this time, the Bank’s management presently believes that
such matters, individually and in the aggregate, will not have a material adverse effect on the Bank’s financial condition or results
of operations.
Item 4. Mine Safety Disclosures.
Not applicable.
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Table of Contents
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Market Prices
Southern National’s common stock is traded on the Nasdaq Global Market under the symbol “SONA”. There were
24,438,545 shares of our common stock outstanding at the close of business on March 5, 2021, which were held by 1,347
shareholders of record. As of that date, the closing price of our common stock on the NASDAQ Global Market was $15.75.
Recent Sales of Unregistered Securities
None.
Securities Authorized for Issuance under Equity Compensation Plans
As of December 31, 2020, Southern National had outstanding stock options granted under the 2010 Stock Awards and
Incentive Plan (the “2010 Plan”) and the 2017 Equity Compensation Plan (the “2017 Plan”), which were approved by its
shareholders. The following table provides information as of December 31, 2020 regarding Southern National’s equity
compensation plans under which our equity securities are authorized for issuance:
Number of securities
to be issued upon exercise
of outstanding options
A
Weighted average
exercise price of
outstanding options
B
450,800
$
—
$
450,800
10.50
—
10.50
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities reflected
in column A)
C
552,800
—
552,800
Plan category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security
holders
Total
Issuer Purchases of Equity Securities
None.
Dividends
We declared the first cash dividend on our common stock in February 2012, and each quarter thereafter through 2020. There
are a number of restrictions on our ability to pay dividends. It is the policy of the FRB that bank holding companies should pay
cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is
consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding
companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source
of strength to its banking subsidiaries. Banking regulations require maintaining certain capital levels and may limit the dividends
paid by the Bank to Southern National or by Southern National to shareholders. The Company’s ability to pay dividends to
stockholders is largely dependent upon the dividends it receives from the Bank, and the Bank is subject to regulatory limitations
on the amount of cash dividends it may pay.
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Table of Contents
Performance Graph
The following chart compares the cumulative total shareholder return on Southern National common stock during the
five years ended December 31, 2020, with the cumulative total return of the Russell 2000 Index and the NASDAQ Bank Index
for the same period. Dividend reinvestment has been assumed. This comparison assumes $100 invested on December 31, 2015 in
Southern National common stock, the Russell 2000 Index and the NASDAQ Bank Index. The historical stock price performance
for Southern National common stock shown on the graph below is not necessarily indicative of future stock performance.
Southern National Bancorp of Virginia, Inc.
Russell 2000 Index
NASDAQ Bank Index
2015
100.00
100.00
100.00
2016
125.11
119.48
135.02
2017
122.74
135.18
139.77
2018
101.23
118.72
114.74
2019
125.19
146.89
139.10
2020
92.73
173.86
124.31
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Item 6. Selected Financial Data
The following table sets forth selected financial data for Southern National as of and for the years ended December 31, 2020,
2019, 2018, 2017, and 2016:
Results of Operations:
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit
losses
Noninterest income
Noninterest expenses
Income before income taxes
Income tax expense
Net income
Per Share Data:
Earnings per share - Basic
Earnings per share - Diluted
Cash dividends paid per share
Book value per share
Dividend payout ratio
Weighted average shares outstanding - Basic
Weighted average shares outstanding - Diluted
Shares issued and outstanding at end of period
Selected Performance Ratios and Other Data:
Return on average assets
Return on average equity
Yield on earning assets
Cost of funds
Net interest margin
Net charge-offs to average loans
Allowance for credit losses to total loans (1)
Stockholders' equity to total assets
Financial Condition:
Total assets
Total loans
Total deposits
Stockholders' equity
2020
117,779
26,139
91,640
19,450
72,190
25,451
67,740
29,901
6,614
23,287
2019
2017
2018
(in thousands, except per share amounts)
2016
$
$
120,524
36,924
83,600
350
83,250
12,586
56,592
39,244
6,077
33,167
$
$
118,907
27,841
91,066
4,200
86,866
10,199
53,760
43,305
9,614
33,691
$
$
83,570
15,653
67,917
8,625
59,292
5,429
49,149
15,572
13,147
2,425
$
$
48,947
8,633
40,314
4,912
35,402
2,820
22,815
15,407
5,095
10,312
$
0.96
$
0.96
$
0.40
16.03
$
41.64 %
$
1.38
$
1.36
$
0.36
15.60
$
26.09 %
$
1.40
$
1.39
$
0.32
14.48
$
22.86 %
$
0.13
$
0.13
$
0.32
13.48
$
246.15 %
0.84
0.83
0.32
10.30
38.10 %
$
$
$
$
$
$
24,239,481
24,362,665
24,368,612
24,050,037
24,325,182
24,181,534
24,012,437
24,272,617
24,052,253
18,390,810
18,671,392
23,936,453
12,251,804
12,426,783
12,263,643
0.78 %
6.04 %
4.31 %
1.01 %
3.35 %
0.07 %
1.49 %
12.64 %
1.22 %
9.13 %
4.88 %
1.58 %
3.39 %
0.11 %
0.47 %
13.86 %
1.25 %
9.99 %
4.86 %
1.19 %
3.72 %
0.06 %
0.57 %
12.89 %
0.13 %
1.02 %
4.76 %
0.94 %
3.87 %
0.51 %
0.46 %
12.35 %
0.95 %
8.37 %
4.84 %
0.91 %
3.99 %
0.53 %
0.95 %
11.06 %
$ 3,088,673
2,440,496
2,432,606
390,554
$ 2,722,170
2,186,047
2,124,718
377,241
$ 2,701,295
2,178,824
2,097,600
348,290
$ 2,614,252
2,062,328
1,865,156
322,772
$ 1,142,443
930,415
912,982
126,344
(1)
Included non-covered loans for the years ended December 31, 2019, 2018, 2017, and 2016.
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Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7 of our Annual Report on Form 10-K generally discusses year-to-year comparisons between the years ended December
31, 2020 and 2019. Discussions of comparisons between 2019 and 2018 are not included in this Form10-K but can be found in
“Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on
Form10-K for the year ended December 31, 2019.
Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition
and results of operations of Southern National. This discussion and analysis should be read with the consolidated financial
statements, the footnotes thereto, and the other financial data included in this report.
COVID-19 PANDEMIC
In March 2020, the World Health Organization declared COVID-19 as a global pandemic. This public health crisis has
resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and
consumer activity in the United States and globally, including the markets that we serve. In response to the crisis, the Board of
Governors of the Federal Reserve reduced benchmark federal fund interest rates to near zero. In addition, in March 2020, the
CARES Act was enacted. The CARES Act contains substantial tax and spending provisions intended to address the financial
impact of the COVID-19 pandemic.
The COVID-19 pandemic has resulted in significant health, economic and other major consequences throughout the
communities the Company serves, as well as nationally and globally. The Company has implemented a number of procedures in
response to the pandemic to support the safety and well-being of our employees, customers and shareholders that continue
through the date of this report:
● We have addressed the safety of our branches and while the branches generally remain open to customers, we have
taken steps, and continue to evaluate ways, to encourage transactions through our drive-thru facilities;
● At the onset of the pandemic, we pro-actively conducted outreach to commercial loan customers to understand the
potential impact that COVID-19 could have on their business. We implemented deferral arrangements in accordance
with the CARES Act and bank regulatory guidance. To help mitigate the effects of COVID-19, loan customers could
apply for a deferral of payments, or portions thereof, for up to 90 days. After 90 days, customers could apply for an
additional deferral, and a small proportion of our customers requested such an additional deferral. The majority of our
deferrals have resumed payment. At December 31, 2020, there were 44 loans in COVID-19 related deferment with an
aggregate outstanding balance of $122.0 million; and
● We have chosen to participate in the CARES Act Paycheck Protection Program that will provide government
guaranteed and forgivable loans to our customers. As of December 31, 2020, the Company had funded approximately
$319.4 million of SBA approved PPP loans to over 4,269 customers.
The Company continues to closely monitor the pandemic and expects to make future changes to respond to the pandemic as it
evolves.
CRITICAL ACCOUNTING POLICIES
Our accounting policies are in accordance with U.S. GAAP and with general practices within the banking industry.
Management makes a number of estimates and assumptions relating to reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated 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 our financial statements. As such, the following policies are considered “critical accounting policies”
for us.
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Allowance for Credit Losses (“ACL”)
The allowance for credit losses on loans is a contra-asset valuation account, calculated in accordance with ASC 326 that is
deducted from the amortized cost basis of loans to present the net amount expected to be collected. The amount of the allowance
represents management's best estimate of current expected credit losses on loans considering available information, from internal
and external sources, relevant to assessing collectability over the loans' contractual terms, adjusted for expected prepayments
when appropriate. The contractual term excludes expected extensions, renewals and modifications unless (i) management has a
reasonable expectation that a trouble debt restructuring will be executed with an individual borrower or (ii) such extension or
renewal options are not unconditionally cancellable by us and, in such cases, the borrower is likely to meet applicable conditions
and likely to request extension or renewal. Relevant available information includes historical credit loss experience, current
conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation
of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk
characteristics, environmental conditions or other relevant factors. The allowance for credit losses is measured on a collective
basis for portfolios of loans when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated for
expected credit losses on an individual basis and excluded from the collective evaluation. Expected credit losses for collateral
dependent loans, including loans where the borrower is experiencing financial difficulty but foreclosure is not probable, are based
on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
Credit loss expense related to loans reflects the totality of actions taken on all loans for a particular period including any
necessary increases or decreases in the allowance related to changes in credit loss expectations associated with specific loans or
pools of loans. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any
credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information
available, the ultimate appropriateness of the allowance is dependent upon a variety of factors beyond our control, including the
performance of our loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan
classifications.
In calculating the allowance for credit losses, most loans are segmented into pools based upon similar characteristics and risk
profiles. Common characteristics and risk profiles include the type/purpose of loan, underlying collateral, geographical similarity
and historical/expected credit loss patterns. In developing these loan pools for the purposes of modeling expected credit losses,
we also analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic
conditions and scenarios as well as other portfolio stress factors. For allowance modeling purposes, our loan pools include (i)
commercial real estate - owner occupied, (ii) commercial real estate - non-owner occupied, (iii) construction and land
development, (iv) commercial, (v) agricultural loans, (vi) residential 1-4 family and (vii) consumer loans. We periodically
reassess each pool to ensure the loans within the pool continue to share similar characteristics and risk profiles and to determine
whether further segmentation is necessary.
For each loan pool, we measure expected credit losses over the life of each loan utilizing a combination of inputs: (i)
probability of default (“PD”), which is the likelihood that loan will stop performing/default, (ii) probability of attrition (“PA”),
which is the likelihood that a loan will pay-off prior to maturity, (iii) loss given default (“LGD”), which is the expected loss rate
for loans in default and (iv) exposure at default (“EAD”), which is the estimated outstanding principal balance of the loans upon
default, including the expected funding of unfunded commitments outstanding as of the measurement date. Inputs are pool-
specific, though not necessarily solely reliant on internally-sourced data. Internal data is supplemented by, but not replaced by,
peer data when required, primarily to determine the PD input. The various pool-specific inputs may be adjusted for current
macroeconomic assumptions, as further discussed below, and other factors such as differences in underwriting standards,
portfolio mix, or when historical asset terms do not reflect the contractual terms of the financial assets being evaluated as of the
measurement date. Each time we measure expected credit losses, we assess the relevancy of historical information and consider
any necessary adjustments to address any differences in current asset-specific characteristics.
Significant macroeconomic variables utilized in our allowance models include, among other things, (i) VA Gross Domestic
Product, (ii) VA House Price Index, and (iii) VA unemployment rates. The macroeconomic variables utilized as inputs in forecast
modeling were subjected to a variety of analysis procedures and were selected primarily based on
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statistical relevancy and correlation to historical credit losses, where historical credit losses may be fully internally-sourced or
supplemented with peer data.
PDs were estimated by analyzing the relationship between the historical performance of each loan pool and historical
economic trends over a complete economic cycle. Again, historical performance data is either fully internally-sourced or
supplemented with peer data where necessary. PDs are adjusted to reflect the current impact of certain macroeconomic variables
as well as their expected changes over a reasonable and supportable forecast period. We have determined that we are reasonably
able to forecast the macroeconomic variables used in our forecast modeling processes with an acceptable degree of confidence
for a total of four quarters. This forecast period is followed by an additional eight quarter reversion process whereby the
forecasted macroeconomic variables are reverted to their historical mean on a straight-line basis. By reverting these economic
inputs to their historical mean and considering loan/borrower specific attributes, our allowance models are intended to yield a
measurement of expected credit losses that reflects average historical loss rates (which may be supplemented by peer data) for
periods subsequent to the initial twelve-quarters consisting of the forecast and reversion periods. The LGD is linked to PD based
on benchmark historical loss averages for each loan pool. That is, LGD is dynamic with PD; as PD increases, so will LGD, and
vice versa. In this context, “benchmark” refers to the use of third-party data, and “historical loss averages” refers to the fraction
of defaulted balance that tends to be lost. By nature of its connection to PD, LGD is by extension adjusted to reflect the current
impact of certain macroeconomic variables as well as their expected changes over the four-quarter forecast period and eight-
quarter reversion process, which management considers to be both reasonable and supportable. This same forecast/reversion
period is used for all macroeconomic variables used in all of our economic forecast models. PA and EAD are estimated using
either a Discounted Cash Flow or Remaining Life model, both of which use various timing inputs to estimate the loan balance
that remains at various future points in time, and thus also at the time of a default event.
Management qualitatively adjusts allowance model results for risk factors that are not considered within our quantitative
modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These qualitative
factor (“Q-Factor”) adjustments may increase or decrease management's estimate of expected credit losses by a calculated
percentage or amount based upon the estimated level of risk. The various risks that may be considered in making Q-Factor
adjustments include, among other things, the impact of (i) changes in lending policies and procedures, including changes in
underwriting standards and practices for collections, write-offs, and recoveries, (ii) actual and expected changes in international,
national, regional, and local economic and business conditions and developments that affect the collectability of the loan pools,
(iii) changes in the nature and volume of the loan pools and in the terms of the underlying loans, (iv) changes in the experience,
ability, and depth of our lending management and staff, (v) changes in volume and severity of past due financial assets, the
volume of non-accrual assets, and the volume and severity of adversely classified or graded assets, (vi) changes in the quality of
our credit review function, (vii) changes in the value of the underlying collateral for loans that are non-collateral dependent, (viii)
the existence, growth, and effect of any concentrations of credit and (ix) other factors such as the regulatory, legal and
technological environments; competition; and events such as natural disasters or health pandemics.
In some cases, management may determine that an individual loan exhibits unique risk characteristics which differentiate the
loan from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual
basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by
analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic
conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based
upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided
substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the
collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the
collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of
real estate collateral supporting collateral dependent loans is evaluated by our internal appraisal services using a methodology
that is consistent with the Uniform Standards of Professional Appraisal Practice. The fair value of collateral supporting collateral
dependent construction loans is based on an “as is” valuation.
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Accounting for Acquired Loans
Southern National has purchased, primarily through acquisitions, individual loans and groups of loans, some of which have
shown evidence of credit deterioration since origination. These purchased loans are recorded at fair value such that there is no
carryover of the seller’s allowance for credit losses. We adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments, on January 1, 2020 which now requires us to record purchased
financial assets with credit deterioration (PCD assets), defined as a more-than-insignificant deterioration in credit quality since
origination or issuance, at the purchase price plus the allowance for credit losses expected at the time of acquisition. Under this
method, there is no credit loss expense affecting net income on acquisition of PCD assets. Changes in estimates of expected
credit losses after acquisition are recognized as credit loss expense (or reversal of credit loss expense) in subsequent periods as
they arise. Any non-credit discount or premium resulting from acquiring a pool of purchased financial assets with credit
deterioration shall be allocated to each individual asset. At the acquisition date, the initial allowance for credit losses determined
on a collective basis shall be allocated to individual assets to appropriately allocate any non-credit discount or premium. The non-
credit discount or premium, after the adjustment for the allowance for credit losses, shall be accreted to interest income using the
interest method based on the effective interest rate determined after the adjustment for credit losses at the adoption date.
A purchased financial asset that does not qualify as a PCD asset is accounted for similar to an originated financial asset.
Generally, this means that an entity recognizes the allowance for credit losses for non-PCD assets through net income at the time
of acquisition. In addition, both the credit discount and non-credit discount or premium resulting from acquiring a pool of
purchased financial assets that do not qualify as PCD assets shall be allocated to each individual asset. This combined discount or
premium shall be accreted to interest income using the effective yield method.
Goodwill
Under FASB ASC 350, Intangibles – Goodwill and Other, goodwill is not amortized, but rather tested annually for
impairment. Southern National evaluates goodwill for impairment on an annual basis or more frequently if events or
circumstances warrant. Our annual assessment occurs during the third calendar quarter. Goodwill totaled $101.9 million at
December 31, 2020. There was no impairment recorded for the years ended December 31, 2020, 2019 and 2018.
Valuation of Deferred Tax Asset
The provision for income taxes reflects the tax effects of the transactions reported in the consolidated financial statements,
including taxes currently due as well as changes in deferred taxes. Deferred tax assets and liabilities represent estimates of the
future tax return consequences of temporary differences between carrying amounts and tax bases of assets and liabilities.
Deferred tax assets and liabilities are computed by using currently enacted income tax rates and applying those rates to the
periods in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. As of December 31, 2020 and
2019, management concluded that it is more likely than not that Southern National will generate sufficient taxable income to
fully utilize our deferred tax assets.
OVERVIEW
Southern National is a corporation that was formed on July 28, 2004 under the laws of the Commonwealth of Virginia and is
the holding company for Sonabank, a Virginia state-chartered bank which commenced operations on April 14, 2005. Sonabank
provides a range of financial services to individuals and small and medium sized businesses.
At December 31, 2020, Sonabank had forty-two full-service branches in Virginia and Maryland and also provides services to
customers through certain internet and mobile applications. Thirty-seven full-service retail branches are in Virginia (Ashland,
Burgess, Callao, Central Garage, Charlottesville, Chester, Clifton Forge, Colonial Heights, Courtland, Deltaville, Fairfax, Front
Royal, Gloucester, Gloucester Point, Hampton, Hartfield, Heathsville, Kilmarnock, Leesburg, McLean, Mechanicsville (2),
Middleburg, Midlothian, New Market, Newport News, Quinton, Reston, Richmond, South Riding, Surry, Tappahannock (2),
Urbanna, Warrenton, Waverly, and Williamsburg) and five full-service retail branches are in Maryland (Bethesda, Brandywine,
Owings, Rockville, and Upper Marlboro). We have
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administrative offices in Warrenton and Glen Allen, Virginia. Our South Riding branch will be closing effective April 15, 2021.
While we offer a wide range of commercial banking services, we focus on making loans secured primarily by commercial
real estate and other types of secured and unsecured commercial loans to small and medium-sized businesses in a number of
industries, as well as loans to individuals for a variety of purposes. We are a leading SBA lender among Virginia community
banks. We also invest in real estate-related investment securities, including collateralized mortgage obligations and agency
mortgage backed securities. Our principal sources of funds for loans and investing in securities are deposits and, to a lesser
extent, borrowings. We offer a broad range of deposit products, including checking, NOW, savings, and money market accounts
and certificates of deposit. We actively pursue business relationships by utilizing the business contacts of our senior management,
other bank officers and our directors, thereby capitalizing on our knowledge of our local market areas.
FINANCIAL HIGHLIGHTS
●
●
Total assets as of December 31, 2020 were $3.09 billion.
Loans on deferral as of December 31, 2020 were $122.0 million or 5.75% of total loans, excluding PPP balances, in-line
with our expectations. Approximately 59% of total deferrals were from the hotel portfolio while restaurant deferrals
declined to approximately $0.5 million.
Total deposits increased $307.9 million from the prior year.
●
● Demand deposits (noninterest-bearing, NOW, money market) increased to 72.3% of total deposits as of December 31,
2020, compared to 56.3% as of December 31, 2019.
● Cost of deposits declined to 0.92% for the year ended December 31, 2020 compared to 1.43% for the year ended
December 31, 2019.
The Company booked its first Panacea loan customers in the fourth quarter of 2020.
●
● Allowance for credit losses to gross loans (excluding PPP balances) was 1.71% as of December 31, 2020.
RESULTS OF OPERATIONS
Net Income
Net income for the year ended December 31, 2020 was $23.3 million, compared to $33.2 million for the year ended
December 31, 2019. The 29.8% decrease in the net income during the year ended December 31, 2020 compared to the year ended
December 31, 2019 was primarily driven by higher provision for credit losses in 2020. The decline in net income was also driven
by a charge of $4.4 million, net of taxes of salary and benefits expense related to the restructuring of executive management in
2020 and increased staffing in the commercial lending and Panacea Financial divisions along with the modified incentive and
bonus plans and increased costs associated with recruitment in 2020. These decreases were partially offset by an increase in
equity gain from the Company’s mortgage affiliate driven by higher margins on closed loans and materially higher volumes from
refinance activity as well as production from new hires and teams that were on-boarded in 2019. The decline in net income was
also offset by a decline in cost of deposits and an increase in recoveries related to acquired charged-off loans and investment
securities in the current year.
Net Interest Income
Our operating results depend primarily on our net interest income, which is the difference between interest and dividend
income on interest-earning assets such as loans and investments, and interest expense on interest-bearing liabilities such as
deposits and borrowings.
Net interest income was $91.6 million for the year ended December 31, 2020, compared to $83.6 million for the year ended
December 31, 2019. The increase in net interest income was due to higher levels of average earning assets and as a result of
lower costs of funds including deposits and borrowings in 2020. Southern National’s net interest margin for the year ended
December 31, 2020 was 3.35%, compared to 3.39% for the year ended December 31, 2019. Net interest margin was impacted
heavily by the origination of PPP loans in 2020. Total income on interest-earning assets was
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$117.8 million and $120.5 million for the year ended December 31, 2020 and 2019, respectively. The yield on average interest-
earning assets was 4.31% and 4.88% for the year ended December 31, 2020 and 2019, respectively. The decrease was primarily
driven by market conditions. Interest and fees on loans totaled $111.6 million and $112.1 million for the year ended
December 31, 2020 and 2019, respectively. The accretion of the discount on loans acquired in the acquisitions contributed $4.3
million to net interest income during the year ended December 31, 2020, compared to $3.9 million during the year ended
December 31, 2019. The increase in accretion was due to increased acquired loan paydowns and payoffs. Average loans during
the year ended December 31, 2020 were $2.40 billion compared to $2.16 billion during the year ended December 31, 2019.
The following table details average balances of interest-earning assets and interest-bearing liabilities, the amount of interest
earned/paid on such assets and liabilities, and the yield/rate for the periods indicated:
December 31, 2020
Average Balance Sheets and Net Interest
Analysis For the Year Ended
December 31, 2019
December 31, 2018
Average
Balance
Interest
Income/
Average
Yield/
Expense Rate Balance
Interest
Income/
Average
Yield/
Expense Rate Balance
Interest
Income/
Yield/
Expense Rate
(Dollar amounts in thousands)
$ 111,647
4,730
1,402
117,779
$ 2,400,896
217,932
114,275
2,733,103
(20,638)
273,673
$ 2,986,138
$ 112,181
6,224
2,119
120,524
4.65 % $ 2,159,681
241,800
2.17 %
66,582
1.23 %
2,468,063
4.31 %
(11,852)
264,265
$ 2,720,475
5.19 % $ 2,138,845
247,182
2.57 %
59,594
3.18 %
2,445,621
4.88 %
(11,292)
260,348
$ 2,694,677
$ 110,213
6,386
2,308
118,907
5.15 %
2.58 %
3.87 %
4.86 %
$ 481,470
508,260
167,567
645,123
1,802,420
358,087
2,160,507
416,249
24,693
2,601,449
384,689
$ 2,986,138
$
3,505
4,188
490
12,149
20,332
5,807
26,139
0.73 % $ 360,254
439,097
0.82 %
145,855
0.29 %
868,420
1.88 %
1,813,626
1.13 %
188,647
1.62 %
2,002,273
1.21 %
$
2,989
7,745
461
19,407
30,602
6,322
36,924
0.83 % $ 324,797
328,142
1.76 %
159,865
0.32 %
808,718
2.23 %
1,621,521
1.69 %
380,822
3.35 %
2,002,343
1.84 %
$
1,478
3,060
512
13,185
18,235
9,606
27,841
0.46 %
0.93 %
0.32 %
1.63 %
1.12 %
2.52 %
1.39 %
332,924
22,115
2,357,312
363,163
$ 2,720,475
336,380
18,646
2,357,370
337,307
$ 2,694,677
$ 91,640
$ 83,600
$ 91,066
3.10 %
3.35 %
3.04 %
3.39 %
3.47 %
3.72 %
Assets
Interest-earning assets:
Loans, net of deferred fees (1) (2)
Investment securities
Other earning assets
Total earning assets
Allowance for credit losses
Total non-earning assets
Total assets
Liabilities and stockholders'
equity
Interest-bearing liabilities:
NOW and other demand accounts
Money market accounts
Savings accounts
Time deposits
Total interest-bearing deposits
Borrowings
Total interest-bearing liabilities
Noninterest-bearing liabilities:
Demand deposits
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and
stockholders' equity
Net interest income
Interest rate spread
Net interest margin
Includes loan fees in both interest income and the calculation of the yield on loans.
(1)
(2) Calculations include non-accruing loans in average loan amounts outstanding.
44
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The following table summarizes changes in net interest income attributable to changes in the volume of interest-earning assets
and interest-bearing liabilities compared to changes in interest rates. The change in interest, due to both rate and volume, has been
proportionately allocated between rate and volume.
Year Ended
December 31, 2020 vs. 2019
Increase (Decrease)
Due to Change in:
Year Ended
December 31, 2019 vs. 2018
Increase (Decrease)
Due to Change in:
Volume
Rate
Change
Volume
Rate
Change
Net
Net
(in thousands)
$
(6,602)
(468)
(4,950)
$
6,068
(1,026)
4,233
$
(534)
(1,494)
(717)
$
$
1,172
(129)
365
$
796
(33)
(553)
1,968
(162)
(188)
Interest-earning assets:
Loans, net of deferred fees
Investment securities
Other earning assets
Total interest-earning assets
(12,020)
9,275
(2,745)
1,408
210
1,618
Interest-bearing liabilities:
NOW and other demand accounts
Money market accounts
Savings accounts
Time deposits
Total interest-bearing deposits
Borrowings
Total interest-bearing liabilities
808
1,493
62
(4,515)
(2,152)
(1,217)
(3,369)
(293)
(5,049)
(33)
(2,743)
(8,118)
702
(7,416)
515
(3,556)
29
(7,258)
(10,270)
(515)
(10,785)
176
1,304
(50)
1,074
2,504
(9,391)
(6,887)
1,335
3,380
—
5,148
9,863
6,108
15,971
1,511
4,684
(50)
6,222
12,367
(3,283)
9,084
Change in net interest income
$
(8,651)
$ 16,691
$
8,040
$
8,295
$ (15,761)
$
(7,466)
Provision for Credit Losses
The provision for credit losses is a current charge to earnings made in order to adjust the allowance for credit losses to an
appropriate level for inherent probable losses in the loan portfolio based on an evaluation of the loan portfolio, current economic
conditions, changes in the nature and volume of lending, historical loan experience and other known internal and external factors
affecting loan collectability. Our allowance for credit losses is calculated by segmenting the loan portfolio by loan type and
applying risk factors to each segment. The risk factors are determined by considering historical loss data, peer data, as well as
applying management’s judgment.
The Company elected to defer adoption of CECL until the earlier of the termination date of the current national emergency,
declared on March 31, 2020, under the National Emergencies Act in connection with the COVID-19 outbreak, or December 31,
2020. The Company adopted ASU 2016-13 effective January 1, 2020 and implemented as of December 31, 2020, resulting in a
gross cumulative effect adjustment of $8.3 million. The provision for credit losses for the years ended December 31, 2020, 2019
and 2018 was $19.5 million, $350 thousand and $4.2 million, respectively. We had charge-offs totaling $2.3 million during 2020,
$3.3 million during 2019 and $3.1 million during 2018. There were recoveries totaling $685 thousand during 2020, $906
thousand during 2019 and $1.8 million during 2018.
The Financial Condition Section of Management’s Discussion and Analysis provides information on our loan portfolio, past
due loans, nonperforming assets and the allowance for credit losses.
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Table of Contents
Noninterest Income
The following tables present the major categories of noninterest income for the years ended December 31, 2020, 2019 and
2018 (in thousands):
For the Year Ended
December 31,
2019
(dollars in thousands)
Account maintenance and deposit service fees
Income from bank-owned life insurance
Equity gain from mortgage affiliate
Recoveries related to acquired charged-off loans and investment securities
Other
Total noninterest income
(dollars in thousands)
Account maintenance and deposit service fees
Income from bank-owned life insurance
Equity loss from mortgage affiliate
Gain on sales of investment securities
Recoveries related to acquired charged-off loans and investment securities
Other
Total noninterest income
$
$
$
$
2020
6,520
1,559
10,789
6,500
703
25,451
2019
7,159
1,699
1,191
$
$
$
—
1,537
1,000
12,586
$
7,159
1,699
1,191
1,537
1,000
12,586
2018
5,959
1,983
(894)
—
2,610
541
10,199
Change
(639)
(140)
9,598
4,963
(297)
12,865
Change
1,200
(284)
2,085
—
(1,073)
459
2,387
$
$
$
$
Noninterest income increased 102% to $25.5 million for the year ended December 31, 2020, compared to $12.6 million for
the year ended December 31, 2019. The $12.9 million increase was primarily driven by a $9.6 million increase in equity gain
from the Company’s mortgage affiliate and $5.0 million increase in recoveries related to acquired charged-off loans and
investment securities. Equity gain from the Company’s mortgage affiliate increased $9.6 million driven by higher margins on
closed loans and materially higher volumes from refinance activity as well as production from new hires and teams that were on-
boarded in 2019. The increase was also attributable to a recovery related to a previously charged-off acquired loan of
approximately $2.0 million during 2020. These increases were partially offset by a decrease of $639 thousand in account
maintenance and deposit service fees primarily in account service charges and non-sufficient funds fee. Income from bank-owned
life insurance decreased $140 thousand due to death benefits paid in 2019.
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Noninterest Expense
The following tables present the major categories of noninterest expense for the years ended December 31, 2020, 2019 and
2018 (in thousands):
(dollars in thousands)
Salaries and benefits
Occupancy expenses
Furniture and equipment expenses
Amortization of core deposit intangible
Virginia franchise tax expense
Data processing expense
Telephone and communication expense
Net (gain) loss on other real estate owned
Professional fees
Other operating expenses
Total noninterest expenses
(dollars in thousands)
Salaries and benefits
Occupancy expenses
Furniture and equipment expenses
Amortization of core deposit intangible
Virginia franchise tax expense
FDIC assessment
Data processing expense
Telephone and communication expense
Amortization of FDIC indemnification asset
Net (gain) loss on other real estate owned
Professional fees
Other operating expenses
Total noninterest expenses
$
$
$
$
$
For the Year Ended
December 31,
2019
26,261
6,204
2,719
1,418
2,251
2,381
1,615
(38)
3,612
10,169
56,592
$
$
2018
27,706
6,628
2,795
1,445
1,839
$
$
$
2020
36,675
6,142
2,725
1,364
2,457
3,178
1,497
960
4,726
8,016
67,740
2019
26,261
6,204
2,719
1,418
2,251
—
—
2,381
1,615
(38)
3,612
10,169
56,592
$
1,885
2,035
360
1,644
7,423
53,760
$
Change
10,414
(62)
6
(54)
206
797
(118)
998
1,114
(2,153)
11,148
Change
(1,445)
(424)
(76)
(27)
412
—
496
(420)
—
(398)
1,968
2,746
2,832
Noninterest expenses were $67.7 million during the year ended December 31, 2020, compared to $56.6 million during the
year ended December 31, 2019. The 19.7% increase in noninterest expenses was primarily due to an increase in employee
compensation and benefits expense, higher legal and professional fees and higher data processing expense, partially offset by
lower other operating expenses. Employee compensation and benefits expense totaled $36.7 million and $26.3 million for the
year ended December 31, 2020 and 2019, respectively. The increase was associated with a pre-tax management restructuring
expense of $5.6 million in 2020 and increased staffing in the commercial lending and Panacea Financial divisions along with the
modified incentive and bonus plans and increased costs associated with recruitment in 2020. The increase in noninterest expense
during the year ended December 31, 2020 was also attributable to a $1.1 million increase in professional fees driven by higher
consulting and legal services and a $797 thousand increase in data processing expense. We also recorded net loss of $960
thousand on other real estate owned for the year ended December 31, 2020 compared to a net gain of $38 thousand for the year
ended December 31, 2019. The decrease in other operating expenses was driven by a pre-tax nonrecurring loss of $3.2 million
with related legal expense of $502 thousand during 2019 that did not recur, partially offset by increased expenses associated with
our pending name change and rebranding efforts.
FINANCIAL CONDITION
Balance Sheet Overview
Total assets were $3.09 billion as of December 31, 2020 and $2.72 billion as of December 31, 2019. Total loans increased
11.6%, from $2.19 billion at December 31, 2019 to $2.44 billion at December 31, 2020, with loan growth in
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2020 primarily due to PPP loan originations. Excluding PPP loans, loans outstanding decreased $65.0 million, or 3.0%, since
December 31, 2019. Total deposits were $2.43 billion at December 31, 2020 compared to $2.12 billion at December 31, 2019 and
total equity was $390.6 million and $377.2 million at December 31, 2020 and December 31, 2019, respectively.
Loans
Total loans, net of deferred fees were $2.44 billion and $2.19 billion at December 31, 2020 and 2019, respectively. Loan
growth in 2020 was primarily due to PPP loan originations, which totaled $319.4 million at December 31, 2020. Excluding PPP
loans, loans outstanding decreased $65.0 million, or 3.0%, since December 31, 2019. As of December 31, 2020, we had $122.0
million of loans on deferral, or 5.75% of total loans excluding PPP loans. Hotel loans account for 58.9% of all deferrals with
27.1% of the hotel portfolio deferred at December 31, 2020.
As of December 31, 2020 and 2019, substantially all of our loans were to customers located in Virginia and Maryland. We are
not dependent on any single customer or group of customers whose insolvency would have a material adverse effect on
operations.
The following table summarizes the composition of our loans, net of unearned income, at December 31 for the years indicated
(in thousands):
2020
2019
2018
2017
2016
Amount
Percent Amount
Percent Amount
Percent Amount
Percent Amount Percent
Loans secured by real estate:
$
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied
Secured by farmland
Construction and land development
Residential 1-4 family
Multi- family residential
Home equity lines of credit
Total real estate loans
Commercial loans
Paycheck protection program loans
Consumer loans
Total Non-PCD loans
PCD loans
Total loans
Plus (less) deferred costs (fees) on loans
Loans, net of deferred fees
435,078
600,706
11,662
103,264
557,257
107,267
91,606
1,906,840
187,060
319,428
22,290
2,435,618
8,908
2,444,526
17.8 % $
24.6 %
0.5 %
4.2 %
22.8 %
4.4 %
3.7 %
78.0 %
414,479
559,195
17,622
150,750
604,777
82,055
109,006
1,937,884
19.0 % $
25.6 %
0.8 %
6.9 %
27.7 %
3.8 %
5.0 %
88.7 %
407,031
540,698
20,966
146,654
565,083
82,516
128,225
1,891,173
18.7 % $
24.8 %
1.0 %
6.7 %
25.9 %
3.8 %
5.9 %
86.8 %
401,847
440,700
23,038
197,972
483,006
70,892
152,829
1,770,284
19.5 % $ 154,807
279,634
21.4 %
541
1.1 %
91,067
9.6 %
230,810
23.4 %
30,021
3.4 %
29,203
7.4 %
816,083
85.8 %
221,447
—
26,304
2,185,635
10.1 %
— %
1.2 %
100 %
255,441
—
32,347
2,178,961
11.7 %
— %
1.5 %
100 %
253,258
—
39,374
2,062,916
12.3 %
— %
1.9 %
100 %
115,365
—
856
932,304
7.7 %
13.1 %
0.9 %
99.6 %
0.4 %
100.0 %
16.6 %
29.9 %
0.1 %
9.8 %
24.8 %
3.2 %
3.1 %
87.5 %
12.4 %
— %
0.1 %
100 %
(4,030)
$ 2,440,496
412
$ 2,186,047
(137)
$ 2,178,824
(588)
$ 2,062,328
(1,889)
$ 930,415
The following table sets forth the contractual maturity ranges of the construction and land development and commercial loan
portfolios and the amount of those loans with fixed and floating interest rates in each maturity range as of December 31, 2020 (in
thousands):
Construction and land development
Commercial
Total
One Year
or Less
$ 74,442
100,322
$ 174,764
Asset Quality; Past Due Loans and Nonperforming Assets
Floating
After 1 Year
Through 5 Years
Fixed
Rate
$ 10,214
354,880
$ 365,094
$ 7,413
7,161
$ 14,574
Rate
After 5 Years
Fixed
Rate
Floating
Rate
$ 5,048
8,457
$ 13,505
$ 6,147
35,668
$ 41,815
Total
$ 103,264
506,488
$ 609,752
Asset quality remained solid during 2020. The outbreak of COVID-19 and resulting economic instability has had and will
likely continue to have an impact on our asset quality, but it is currently unknown to what extent. We will generally place a loan
on nonaccrual status when it becomes 90 days past due. Loans will also be placed on nonaccrual status in
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cases where we are uncertain whether the borrower can satisfy the contractual terms of the loan agreement. Cash payments
received while a loan is categorized as nonaccrual will be recorded as a reduction of principal as long as doubt exists as to future
collections. We defer COVID-impacted loans to end of the deferral date and track delinquency from end of that new deferral
date. During the third and fourth quarter of 2020, the Company saw a substantial amount of deferred loans return to traditional
loan terms.
We maintain appraisals on loans secured by real estate, particularly those categorized as nonperforming loans and potential
problem loans. In instances where appraisals reflect reduced collateral values, we make an evaluation of the borrower’s overall
financial condition to determine the need, if any, for impairment or write-down to their fair values. If foreclosure occurs, we
record OREO at the lower of our recorded investment in the loan or fair value less our estimated costs to sell.
Our loss and delinquency experience on our loan portfolio has been limited by a number of factors, including our
underwriting standards and the relatively short period of time since the loans were originated. Whether losses and delinquencies
in our portfolio will increase significantly depends upon the value of the real estate securing the loans and economic factors, such
as the overall economy in our market area, including as a result of the impact of COVID-19.
The following table presents a comparison of nonperforming assets as of December 31, for the years indicated (in thousands):
$
$
$
$
Nonaccrual loans
Loans past due 90 days and accruing interest
Total nonperforming loans
Other real estate owned
Total nonperforming assets
Troubled debt restructurings
SBA guaranteed amounts included in nonaccrual
loans
Allowance for credit losses to nonperforming
loans
Allowance for credit losses to total loans
Nonperforming assets excluding SBA guaranteed
loans to total assets
(2)
Included non-covered loans and non-covered assets.
December 31,
December 31,
2019 (1)
December 31,
2018 (1)
December 31,
2017 (1)
December 31,
2016 (1)
2020
14,462
$
—
8,900
$
—
6709
$
—
16,931
$
—
14,462
3,078
17,540
987
3,076
$
$
$
8,900
6,224
15,124
697
4,129
$
$
$
6,709
5,077
11,786
692
3,391
$
$
$
16,931
7,577
24,508
672
4,664
$
$
$
3,795
—
3,795
8,617
12,412
688
2,173
251.32 %
1.52 %
115.30 %
0.47 %
207.63 %
0.57 %
55.50 %
0.46 %
226.88 %
0.95 %
0.47 %
0.41 %
0.28 %
0.77 %
0.92 %
Not included in the table above are $122.0 million of loans that were subject to COVID-related deferrals at December 31,
2020. Some of these loans may become potential problem loans in 2021.
OREO at December 31, 2020 was $3.1 million, compared to $6.2 million at December 31, 2019. The decrease was primarily
driven by sale of properties and write-downs on OREO during 2020.
Loans acquired in a transaction covered under an FDIC loss-share agreement expired on December 31, 2019 and therefore
any references to “non-covered” loans do not apply to any periods after December 31, 2019. Nonaccrual loans were $14.5 million
(excluding $3.1 million of loans fully covered by SBA guarantees) at December 31, 2020, compared to $4.8 million (non-covered
and excluding $4.1 million of loans fully covered by SBA guarantees) at December 31, 2019, an increase of 202%. The ratio of
non-covered nonperforming assets (excluding the SBA guaranteed loans) to total non-covered assets was 0.41% at December 31,
2019 and the ratio of nonperforming assets (excluding the SBA guaranteed loans) to total assets was 0.47% at December 31,
2020, an increase of 6 basis points.
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Table of Contents
At December 31, 2020, our total substandard loans totaled $44.6 million. Included in the total substandard loans were SBA
guarantees of $2.3 million. Special mention loans totaled $30.0 million at December 31, 2020.
As of December 31, 2020, there were seven TDR loans in the amount of $987 thousand primarily due to the economic impact
of COVID-19. There have been no defaults of TDRs modified during the past twelve months.
We identify potential problem loans based on loan portfolio credit quality. We define our potential problem loans as our
classified/criticized loans less total nonperforming loans noted above. At December 31, 2020, our potential problem loans totaled
$30.2 million.
Allowance for Credit Losses
We are very focused on the asset quality of our loan portfolio, both before and after the loan is made. We have established
underwriting standards that we believe are effective in maintaining high credit quality in our loan portfolio. We have experienced
loan officers who take personal responsibility for the loans they underwrite, a standing credit committee that reviews each loan
application carefully, and a requirement that loans over $1.5 million must be approved by the Executive Credit Committee
consisting of the President and CEO, Chief Credit Officer, Chief Credit Risk Officer, Chief SBA Lending Officer, Director of
Small Business and Consumer Lending, and the Commercial Credit Risk Officer. Loans in the amount of $20.0 million to legal
lending limit are approved by the full Board of Directors or two outside directors. Loans up to $500 thousand must be approved
by one regular and one Senior member of our standing Credit Committee, loans in the amount of $500 thousand to $1.5 million
must be approved by one regular, one Senior and one executive member (President and CEO or Chief Credit officer) of our
standing Credit Committee.
Our allowance for credit losses is established through charges to earnings in the form of a provision for credit losses.
Management evaluates the allowance at least quarterly. In addition, on a quarterly basis our board of directors reviews our loan
portfolio, evaluates credit quality, reviews the loan loss provision and the allowance for credit losses and makes changes as may
be required. In evaluating the allowance, management and the board of directors consider the growth, composition and industry
diversification of the loan portfolio, historical loan loss experience, current delinquency levels and all other known factors
affecting loan collectability.
The allowance for credit losses is based on the CECL methodology and represents management’s estimate of an amount
appropriate to provide for expected credit losses in the loan portfolio in the normal course of business. This estimate is based on
historical credit loss information adjusted for current conditions and reasonable and supportable forecasts applied to various loan
types that compose our portfolio, including the effects of known factors such as the economic environment within our market
area will have on net losses. The allowance is also subject to regulatory examinations and determination by the regulatory
agencies as to the appropriate level of the allowance.
Our loan review program is administrated by the Chief Credit Risk Officer who reports the results directly to the Audit
Committee of the Board of Directors. The Bank’s credit policy specifies that “Internal Loan review is responsible for performing
a full scope review and written report of loans with a total dollar commitment amount equal to 30% of commercial loans
outstanding at the previous year-end including Construction and Development, Nonfarm nonresidential (CRE) and commercial
and Industrial. External loan review is responsible for reviewing 50% of the same portfolio at previous year end based on a
judgmental sample including loans internally reviewed, and classified and criticized loans. On a combined basis loan reviews on
at least 80% of the specified portfolio of loans outstanding at prior year end.” In 2020, internal loan review performed loan
reviews on loans and commitments totaling 12.8% of this loan portfolio outstanding as of December 31, 2019. An independent
third party consultant performed loan reviews on 68.74% of this portfolio. In 2020, internal and external loan reviews were
performed on 81.54% of the specified portfolio of loans. In 2020 we plan to have the independent third-party consultant review
loans and commitments totaling at least 50% of the loan portfolio outstanding as of December 31, 2020, and another 30%
reviewed internally. Loan reviews totaling at least 80% of the specified commercial loan portfolio outstanding at December 31,
2020 will be performed. The purpose of loan review by a third-party is to validate management’s assessment of risk of the
individual loans in the portfolio and to determine whether the loan was approved, underwritten and is being monitored in
accordance with the Bank’s credit policy and regulatory guidance. Management’s risk assessment of individual loans
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takes into consideration among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the
borrower’s payment history and current payment status.
The following table sets forth the allowance for credit/loan losses allocated by loan category and the percent of loans in each
category to total loans at the dates indicated (in thousands):
2020
2019
As of December 31,
2018
2017
2016
Allowance
for Credit
Losses
Percent of
Loans by
Category to
Allowance
for Loan
Total Loans Losses
Percent of
Loans by
Category to
Allowance
for Loan
Total Loans Losses
Percent of
Loans by
Category to
Allowance
for Loan
Total Loans Losses
Percent of
Loans by
Category to
Allowance
for Loan
Total Loans Losses
Percent of
Loans by
Category to
Total Loans
$ 19,641
47.2 % $
2,530
49.1 % $
2,471
48.2 % $
2,011
45.4 % $
2,389
49.8 %
1,815
10,480
1,498
517
2,394
36,345
—
36,345
—
$ 36,345
4.2 %
683
6.9 %
821
6.7 %
692
9.6 %
752
26.5 %
20.7 %
0.9 %
0.4 %
100.0 %
1,266
4,518
190
—
9,187
900
10,087
174
$ 10,261
32.7 %
10.1 %
1.2 %
— %
100.0 %
1,106
6,497
224
—
11,119
600
11,719
564
12,283
$
31.8 %
11.7 %
1.5 %
— %
100.0 %
1,586
4,496
612
—
9,397
—
9,397
—
9,397
$
30.8 %
12.3 %
1.9 %
— %
100.0 %
1,279
3,366
78
—
7,864
—
7,864
746
8,610
$
9.8 %
27.9 %
12.4 %
0.1 %
— %
100.0 %
Commercial real estate
(1)
Construction and land
development
Residential 1-4 family
(2)
Commercial loans
Consumer loans
PCD loans
Total
Allowance for acquired
loans
Total allocated
allowance
Unallocated allowance
Total
(1)
(2)
Includes owner and non-owner occupied loans, loans secured by farmland and multi-family residential loans.
Includes home equity lines of credit.
The following table presents an analysis of the allowance for credit losses for the periods indicated (in thousands):
Balance, beginning of period
Provision charged to operations:
Adoption of ASC 326
Total provisions (credits)
Recoveries credited to allowance:
Real estate - commercial (1)
Real estate - construction, land and other
Real estate - residential 1-4 family (2)
Commercial
Consumer
Total recoveries
Loans charged off:
Real estate - commercial (1)
Real estate - construction, land and other
Real estate - residential 1-4 family (2)
Commercial
Consumer
Total loans charged-off
Net charge-offs
Balance, end of period
2020
$ 10,261
8,292
19,450
For the Years Ended December 31,
2018
$ 9,397
2019
$ 12,283
$ 8,610
2017
2016
$ 8,421
—
350
—
4,200
—
8,625
—
4,912
140
—
418
94
33
685
213
—
306
351
36
906
15
—
125
1,626
18
1,784
431
1
17
538
4
991
8
121
10
96
4
239
52
—
1,645
—
400
—
433
1,734
124
2,343
1,658
$ 36,345
742
622
269
3,278
1,314
$ 10,261
842
1,566
290
3,098
7,838
$ 12,283
100
—
369
8,250
110
8,829
4,723
$ 9,397
799
449
22
3,370
322
4,962
2,164
$ 8,610
Net charge-offs to average loans, net of unearned income
0.07 %
0.11 %
0.06 %
0.51 %
0.53 %
(1)
(2)
Includes owner and non-owner occupied loans, loans secured by farmland and multi-family residential loans.
Includes home equity lines of credit.
51
Table of Contents
In 2020, we had loan charge-offs totaling $2.3 million, compared to $3.3 million in 2019.
We believe that the allowance for credit losses at December 31, 2020 is sufficient to absorb probable incurred credit losses in
our loan portfolio based on our assessment of all known factors affecting the collectability of our loan portfolio. Our assessment
involves uncertainty and judgment; therefore, the adequacy of the allowance for credit losses cannot be determined with precision
and may be subject to change in future periods. In addition, bank regulatory authorities, as part of their periodic examination,
may require additional charges to the provision for credit losses in future periods if the results of their reviews warrant additions
to the allowance for credit losses.
Investment Securities
Our investment securities portfolio provides us with required liquidity and investment securities to pledge as collateral to
secure public deposits, certain other deposits, a line of credit for advances from the FHLB of Atlanta, and repurchase agreements.
Our investment securities portfolio is managed by our executive vice chairman and our treasurer, both of whom have
significant experience in this area, with the concurrence of our Asset/Liability Committee. In addition to our executive vice
chairman (who is the chairman of the Asset/Liability Committee) and our Controller, this committee is comprised of outside
directors and other senior officers of the Bank, including but not limited to our executive chairman, our chief executive officer
and our chief financial officer. Investment management is performed in accordance with our investment policy, which is
approved annually by the Asset/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 to
invest in:
● Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”) and
the Federal Home Loan Mortgage Corporation (“FHLMC”) mortgage-backed securities (“MBS”)
SBA guaranteed loan pools
● Collateralized mortgage obligations
● U.S. Treasury securities
●
● Agency securities
● Obligations of states and political subdivisions
●
Pooled trust preferred securities comprised of a minimum of 80% bank collateral with an investment grade rating or
a minimum of 60% bank collateral with a AAA rating at purchase
● Other corporate debt securities rated Aa3/AA- or better at purchase
MBS are securities that have been developed by pooling a number of real estate mortgages and which are principally issued
by agency/government-sponsored entities (“GSEs”) such as the GNMA, FNMA and FHLMC. These securities are deemed to
have high credit ratings, and minimum regular monthly cash flows of principal 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, MBS provide
cash flows from regular principal and interest payments and principal prepayments throughout the lives of the securities. MBS
which are purchased at a premium will generally suffer decreasing net yields as interest rates drop because homeowners tend to
refinance their mortgages. Thus, the premium paid must be amortized over a shorter period. Conversely, MBS purchased at a
discount will obtain higher net yields in a decreasing interest rate environment. As interest rates rise, the opposite will generally
be true. During a period of increasing interest rates, fixed rate MBS do not tend to experience heavy prepayments of principal,
and consequently the average life of these securities will be lengthened. If interest rates begin to fall, prepayments will generally
increase.
Collateralized mortgage obligations (“CMOs”) are bonds that are backed by pools of mortgages. The pools can be GNMA,
FNMA or FHLMC pools or they can be private-label pools. The CMOs are designed so that the mortgage collateral will generate
a cash flow sufficient to provide for the timely repayment of the bonds. The mortgage collateral
52
Table of Contents
pool can be structured to accommodate various desired bond repayment schedules, provided that the collateral cash flow is
adequate to meet scheduled bond payments. This is accomplished 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 call protection to bondholders. In private-label CMOs, losses on underlying mortgages are directed to the
most junior of all classes and then to the classes above in order of increasing seniority, which means that the senior classes have
enough 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 the current tax
position of the Bank. In-state (Virginia) municipal bonds will be favored when they present better relative value than comparable
out-of-state municipal bonds. Both taxable and tax-exempt municipal bonds may be purchased, but only after careful assessment
of the market risk of the security. Appropriate credit evaluation must be performed prior to purchasing municipal bonds.
Southern National’s corporate bonds consist of pooled trust preferred securities issued by banks, thrifts and insurance
companies as well as senior subordinated notes issued by banks. The collateral pools of these trust preferred securities must be at
least 80% banks or thrifts, if the rating at the time of purchase is A3/A- or better. If the rating is Aaa/AAA, the collateral pool
must be at least 60% banks or thrifts. These securities generally have a long term (25 years or more), allow early redemption by
the issuers, make periodic variable interest payments and mature at face value. Trust preferred securities allow the deferral of
interest payments for up to five years.
We classify our investment securities as either held to maturity or available for sale. Debt investment securities that Southern
National has the positive intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost.
Investment securities classified as available for sale are those debt securities that may be sold in response to changes in interest
rates, liquidity needs or other similar factors. Investment 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) in stockholders’ equity.
Investment securities totaling $40.7 million were in the held to maturity portfolio at December 31, 2020, compared to $72.5
million at December 31, 2019. Investment securities totaling $153.2 million were in the available for sale portfolio at
December 31, 2020, compared to $164.8 million at December 31, 2019. During 2020 and 2019, $38.9 million and $45.1 million,
respectively, of available for sale investment securities and $15.2 million and $15.3 million, respectively, of held to maturity
investment securities were purchased. During 2020, $1.9 million and $1.7 million, respectively, of available for sale investment
securities and held to maturity investment securities were sold. No investment securities were sold during 2019.
During 2020, we sold all the pooled trust preferred investment securities.
We recognized no credit impairment charges related to credit losses during 2020 or 2019.
Investment securities in our portfolio as of December 31, 2020 were as follows:
residential government-sponsored collateralized mortgage obligations in the amount of $30.5 million;
agency residential government-sponsored mortgage-backed securities in the amount of $62.1 million;
corporate bonds in the amount of $15.1 million;
commercial mortgage-backed securities in the amount of $30.2 million;
SBA loan pool securities in the amount of $11.4 million;
callable agency securities in the amount of $11.1 million;
●
●
●
●
●
●
● municipal bonds in the amount of $33.6 million (fair value of $33.8 million) with a taxable equivalent yield of 3.3%
and ratings as follows:
53
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Moody's
Rating
Aaa
Aa1
Aa2
Aa3
A1
A2
Baa1
NA
Total
Amount
(in thousands)
10,855
6,755
3,923
695
2,326
1,003
—
8,260
33,817
$
$
Standard & Poor's
Rating
AAA
AA+
AA
AA-
A+
A
BBB+
NA
Total
Amount
(in thousands)
12,430
$
7,196
5,120
1,831
1,003
822
—
5,415
33,817
$
For additional information regarding investment securities refer to “Item 8. Financial Statements and Supplementary Data,
Note 2-Investment Securities.”
The following table sets forth a summary of the investment securities portfolio as of the dates indicated. Available for sale
investment securities are reported at fair value, and held to maturity investment securities are reported at amortized cost (in
thousands).
2020
December 31,
2019
2018
Available for sale securities:
Residential government-sponsored mortgage-backed securities
Obligations of states and political subdivisions
Corporate securities
Trust preferred securities
Residential government-sponsored collateralized mortgage obligations
Government-sponsored agency securities
Agency commercial mortgage-backed securities
SBA pool securities
Total
Held to maturity investment securities:
Residential government-sponsored mortgage-backed securities
Obligations of states and political subdivisions
Trust preferred securities
Residential government-sponsored collateralized mortgage obligations
Government-sponsored agency securities
Total
54
—
$ 37,060
24,042
15,079
29,416
6,075
30,190
11,371
$ 153,233
$ 25,037
9,594
1,090
5,000
$ 40,721
$ 48,979
17,582
2,012
2,568
36,689
14,822
27,731
14,437
$ 164,820
$ 22,925
15,071
1,938
3,128
29,386
$ 72,448
$ 27,302
18,055
2,008
2,641
43,057
3,125
27,304
19,885
$ 143,377
$
9,699
21,496
2,610
6,001
52,656
$ 92,462
—
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The following table sets forth the amortized cost, fair value, and weighted average yield of our investment securities by
contractual maturity at December 31, 2020. Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment penalties (in thousands).
Obligations of states and political subdivisions
Due after one year through five years
Due after five years through ten years
Due after ten years
Corporate securities
Due after one year through five years
Due after five years through ten years
Due after ten years
Government-sponsored agency securities
Due after one year through five years
Due after ten years
Residential government-sponsored mortgage-backed securities
Due after one year through five years
Due after five years through ten years
Due after ten years
Residential government-sponsored collateralized mortgage obligations
Due after five years through ten years
Due after ten years
Agency commercial mortgage-backed securities
Due less than one year
Due after one year through five years
Due after five years through ten years
SBA pool securities
Due after one year through five years
Due after five years through ten years
Due after ten years
Obligations of states and political subdivisions
Due less than one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Government-sponsored agency securities
Due after ten years
Residential government-sponsored mortgage-backed securities
Due after five years through ten years
Due after ten years
Residential government-sponsored collateralized mortgage obligations
Due after ten years
55
Investment Securities Available for Sale
Amortized
Cost
Weighted
Average
Fair Value
Yield
$
$
$
$
$
2,341
8,253
12,372
22,966
2,000
11,000
2,000
15,000
1,500
4,485
5,985
6,334
1,453
27,655
35,442
8,229
20,451
28,680
5,466
19,455
4,197
29,118
2,486
8,631
12,925
24,042
2,004
11,065
2,010
15,079
1,566
4,509
6,075
6,731
1,509
28,820
37,060
8,451
20,965
29,416
5,523
20,299
4,368
30,190
234
4,622
6,585
11,441
148,632
233
4,697
6,441
11,371
153,233
$
2.70 %
2.84 %
2.10 %
2.42 %
5.77 %
4.67 %
4.50 %
4.79 %
2.00 %
2.09 %
2.07 %
2.46 %
2.06 %
1.99 %
2.08 %
1.40 %
1.39 %
1.39 %
1.91 %
2.23 %
1.74 %
2.10 %
2.61 %
2.30 %
2.21 %
2.26 %
2.29 %
Investment Securities Held to Maturity
Amortized
Cost
Weighted
Average
Fair Value
Yield
1,443
1,963
2,183
4,005
9,594
5,000
5,000
1,503
23,534
25,037
1,090
1,090
40,721
$
$
1,462
2,052
2,231
4,031
9,776
5,163
5,163
1,556
24,208
25,764
1,129
1,129
41,832
1.72 %
2.46 %
3.03 %
5.87 %
3.90 %
3.34 %
3.34 %
2.01 %
1.23 %
1.28 %
1.56 %
1.56 %
2.16 %
Table of Contents
Deposits and Other Borrowings
The market for deposits is competitive. We offer a line of traditional deposit products that currently include noninterest-
bearing and interest-bearing checking (or NOW accounts), commercial checking, money market accounts, savings accounts and
certificates of deposit. We compete for deposits through our banking branches with competitive pricing, advertising and online
banking. We use deposits as a principal source of funding for our lending, purchasing of investment securities and for other
business purposes.
Total deposits increased 14.5% to $2.43 billion at December 31, 2020 from $2.12 billion at December 31, 2019. Noninterest-
bearing demand deposits increased from a year-end 2019 level of $339.2 million to $440.7 million as of December 31, 2020.
Time deposits decreased from $783.0 million to $490.0 million and savings accounts increased from $144.5 million to $183.8
million over the same period. As of December 31, 2020, we had brokered certificates of deposit in the amount of $270 thousand
and brokered money market deposits of $55.2 million. At December 31, 2019, we had brokered certificates of deposit in the
amount of $114.1 million, and we had brokered money market deposits of $24.4 million.
The following table sets forth the average balance and average rate paid on each of the deposit categories for the years ended
December 31, 2020, 2019 and 2018:
Noninterest-bearing demand deposits
Interest-bearing deposits:
Savings accounts
Money market accounts
NOW and other demand accounts
Time deposits
Total interest-bearing deposits
Total deposits
2020
2019
2018
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
$ 416,249
167,567
508,260
481,470
645,123
1,802,420
$ 2,218,669
(in thousands)
$ 332,924
$ 336,380
145,855
0.29 %
439,097
0.82 %
360,254
0.73 %
1.88 %
868,420
1.13 % 1,813,626
$ 2,146,550
0.32 %
1.76 %
0.83 %
2.23 %
1.69 %
159,865
328,142
324,797
808,718
1,621,521
$ 1,957,902
0.32 %
0.93 %
0.46 %
1.63 %
1.12 %
The variety of deposit accounts we offer allows us to be competitive in obtaining funds and in responding to the threat of
disintermediation (the flow of funds away from depository institutions such as banking institutions into direct investment vehicles
such as government and corporate securities). Our ability to attract and maintain 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 $100 thousand and over as of December 31, 2020 (in
thousands):
Within
3 Months
3 to 6
Months
6 to 12
Months
Over 12
Months
Total
$
100,793
$
85,056
$
74,773
$
81,738
$
342,360
We use borrowed funds to support our liquidity needs and to temporarily satisfy our funding needs from increased loan
demand and for other shorter term purposes. We are a member of the FHLB and are authorized to obtain advances from the
FHLB from time to time as needed. The FHLB has a credit program for members with different maturities and interest rates,
which may be fixed or variable. We are required to collateralize our borrowings from the FHLB with our FHLB stock and other
collateral acceptable to the FHLB. At December 31, 2020 and 2019, total FHLB borrowings were $100.0 million and $121.6
million, respectively. At December 31, 2020, we had $689.1 million of unused and available FHLB lines of credit.
Other borrowings can consist of FHLB convertible advances, FHLB overnight advances, other FHLB advances maturing
within one year, federal funds purchased and securities sold under agreements to repurchase (“repo”) that
56
Table of Contents
mature within one year, which are secured transactions with customers. The balance in repo accounts at December 31, 2020 and
2019 was $16.1 million and $12.9 million, respectively.
Other borrowings consist of the following (in thousands):
FHLB convertible advances maturing 3/1/2030
FHLB overnight advances
Short-term FHLB advances maturing 3/10/2020
Short-term FHLB advances maturing 6/27/2019
Short-term FHLB advances maturing 6/18/2019
Short-term FHLB advances maturing 6/12/2019
Short-term FHLB advances maturing 6/11/2019
Total FHLB advances
Securities sold under agreements to repurchase
Total
2020
$ 100,000
—
—
—
—
—
—
100,000
16,065
$ 116,065
December 31,
2019
2018
$
— $
81,000
40,640
—
—
—
—
121,640
12,883
$ 134,523
—
5,500
—
40,000
27,200
10,000
80,640
163,340
18,721
$ 182,061
Weighted average interest rate at year end
3.55 %
1.75 %
2.68 %
For the periods ended December 31, 2020, 2019 and 2018:
Average outstanding balance
Average interest rate during the year
$ 118,099
$ 125,340
$ 324,155
0.89 %
2.30 %
1.91 %
Maximum month-end outstanding balance
$ 273,893
$ 174,739
$ 411,511
Junior Subordinated Debt and Senior Subordinated Notes
The Company has $10.3 million of trust preferred securities that were issued on September 17, 2003 and placed through a
Trust in a pooled underwriting totaling approximately $650 million. The trust issuer invested the total proceeds from the sale of
the trust preferred securities in Floating Rate Junior Subordinated Deferrable Interest Debentures (“Junior Subordinated Debt”).
At December 31, 2020 and 2019, we had $9.7 million and $9.6 million, respectively, of Junior Subordinated Debt outstanding.
The trust preferred securities pay cumulative cash distributions quarterly at a variable rate per annum, reset quarterly, equal to the
three-month LIBOR plus 2.95%. As of December 31, 2020 and 2019, the interest rate was 3.18% and 4.85%, respectively. The
dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax
purposes.
The trust preferred securities may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to
25% of Tier 1 capital after its inclusion. At December 31, 2020, all of the trust preferred securities qualified as Tier 1 capital.
Subject to certain exceptions and limitations, Southern National is permitted to elect from time to time to defer regularly
scheduled interest payments on its outstanding Junior Subordinated Debt relating to its trust preferred securities. If Southern
National defers interest payments on the Junior Subordinated Debt for more than 20 consecutive quarters, Southern National
would be in default under the governing agreements for such notes and the amount due under such agreements would be
immediately due and payable.
On January 20, 2017, Southern National completed the sale of $27.0 million of its fixed-to-floating rate Subordinated Notes
due 2027 (the “SNBV Senior Subordinated Notes”). The SNBV Senior Subordinated Notes will initially bear interest at 5.875%
per annum until January 31, 2022; thereafter, the SNBV Senior Subordinated Notes will be payable at an annual floating rate
equal to three-month LIBOR plus a spread of 3.95% until maturity or early redemption. At December 31, 2020, all of the SNBV
Senior Subordinated Notes qualified as Tier 2 capital.
In 2017, the Company assumed the Senior Subordinated Note Purchase Agreement dated April 22, 2015 with certain
institutional accredited investors, pursuant to which $20.0 million in aggregate principal amount of its 6.50% Fixed-to-
57
Table of Contents
Floating Rate Subordinated Notes due 2025 was sold to the investors. At December 31, 2020, 80% of the Senior Subordinated
Notes qualified as Tier 2 capital. On February 1, 2021, 100% of the notes were redeemed.
On August 25, 2020, Southern National completed the sale of $60.0 million of its fixed-to-floating rate Subordinated Notes
due 2030 (the “SNBV Subordinated Notes”). The SNBV Subordinated Notes will bear interest at an initial rate of 5.40% per
annum, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2021. From and
including September 1, 2025 to, but excluding the maturity date or the date of earlier redemption (the “floating rate period”), the
interest rate will reset quarterly to an annual interest rate equal to the Benchmark Rate, which is expected to be three-month Term
SOFR, plus 531 basis points for each quarterly interest period during the floating rate period, payable quarterly in arrears on
March 1, June 1, September 1, and December 1 of each year, commencing on December 1, 2025. Notwithstanding the foregoing,
in the event that the Benchmark Rate is less than zero, the Benchmark Rate shall be deemed to be zero. At December 31, 2020,
all of the SNBV Subordinated Notes qualified as Tier 2 capital.
Interest Rate Sensitivity and Market Risk
We are engaged primarily in the business of investing funds obtained from deposits and borrowings into interest-earning
loans and investments. Consequently, our earnings depend to a significant extent on our net interest income, which is the
difference between the interest income on loans and other investments and the interest expense on deposits and borrowings. To
the extent that our interest-bearing liabilities do not reprice or mature at the same time as our interest-earning assets, we are
subject to interest rate risk and corresponding fluctuations in net interest income. Our Asset-Liability Committee (“ALCO”)
meets regularly and is responsible for reviewing our interest rate sensitivity position and establishing policies to monitor and limit
exposure to interest rate risk. The policies established by the ALCO are reviewed and approved by our Board of Directors. We
have employed asset/liability management policies that seek to manage our net interest income, without having to incur
unacceptable levels of credit or investment risk.
We use simulation modeling to manage our interest rate risk, and review quarterly interest sensitivity. This approach uses a
model which generates estimates of the change in our economic value of equity (“EVE”) over a range of interest rate scenarios.
EVE is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts using assumptions about
estimated loan prepayment rates, reinvestment rates and deposit decay rates.
The following tables are based on an analysis of our interest rate risk as measured by the estimated change in EVE resulting
from instantaneous and sustained parallel shifts in the yield curve (plus 400 basis points or minus 100 basis points, measured in
100 basis point increments) as of December 31, 2020 and 2019. All changes are within our Asset/Liability Risk Management
Policy guidelines except for the change resulting from the 100 basis point decrease in interest rates at December 31, 2020 and
2019.
Change in Interest Rates
in Basis Points (Rate Shock)
Up 400
Up 300
Up 200
Up 100
Base
Down 100
Sensitivity of Economic Value of Equity
As of December 31, 2020
Economic Value of Equity
$ Change % Change
Economic Value of
Equity as a % of
Equity
Total
Amount
From Base From Base Assets Book Value
(dollar amounts in thousands)
$ 339,057
341,652
342,561
343,842
333,489
282,586
$ 5,568
8,163
9,072
10,353
—
(50,903)
1.67 % 10.98 %
2.45 % 11.06 %
2.72 % 11.09 %
3.10 % 11.13 %
— % 10.80 %
9.15 %
(15.26)%
86.81 %
87.48 %
87.71 %
88.04 %
85.39 %
72.36 %
58
Table of Contents
Change in Interest Rates
in Basis Points (Rate Shock)
Up 400
Up 300
Up 200
Up 100
Base
Down 100
Sensitivity of Economic Value of Equity
As of December 31, 2019
Economic Value of Equity
$ Change % Change
Economic Value of
Equity as a % of
Equity
Total
Amount
From Base From Base Assets Book Value
(dollar amounts in thousands)
$ 323,871
336,822
349,192
363,935
368,973
353,371
$ (45,102)
(32,151)
(19,781)
(5,038)
—
(15,602)
(12.22)% 11.90 %
(8.71)% 12.37 %
(5.36)% 12.83 %
(1.37)% 13.37 %
0.00 % 13.55 %
(4.23)% 12.98 %
85.85 %
89.29 %
92.56 %
96.47 %
97.81 %
93.67 %
Our interest rate sensitivity is also monitored by management through the use of a model that generates estimates of the
change in the net interest income (“NII”) over a range of interest rate scenarios. NII depends upon the relative amounts of
interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. In this regard, the model
assumes that the composition of our interest sensitive assets and liabilities existing at December 31, 2020 and 2019 remains
constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across
the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. All changes are within our
ALM Policy guidelines at December 31, 2020 and 2019.
Sensitivity of Net Interest Income
As of December 31, 2020
Adjusted Net Interest Income
Net Interest Margin
Change in Interest Rates
in Basis Points (Rate Shock)
Up 400
Up 300
Up 200
Up 100
Base
Down 100
Change in Interest Rates
in Basis Points (Rate Shock)
Up 400
Up 300
Up 200
Up 100
Base
Down 100
$ Change
From Base
(dollar amounts in thousands)
$
Percent
% Change
From Base
(0.17)%
(0.12)%
(0.07)%
(0.02)%
— %
(0.04)%
2.89 %
2.94 %
2.99 %
3.04 %
3.06 %
3.02 %
% Change
From Base
(0.33)%
(0.24)%
(0.15)%
(0.06)%
— %
(0.04)%
3.00 %
3.09 %
3.18 %
3.27 %
3.33 %
3.29 %
(4,760)
(3,407)
(2,144)
(709)
—
(1,081)
(8,158)
(5,899)
(3,796)
(1,605)
—
(981)
Sensitivity of Net Interest Income
As of December 31, 2019
Adjusted Net Interest Income
Net Interest Margin
$ Change
From Base
(dollar amounts in thousands)
$
Percent
Amount
$
78,988
80,341
81,604
83,039
83,748
82,667
Amount
$
74,096
76,355
78,458
80,649
82,254
81,273
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in
EVE requires the making of certain assumptions that may or may not reflect the manner in which actual yields and costs respond
to changes in market interest rates. Accordingly, although the EVE tables and NII tables provide an indication of our interest rate
risk exposure at a particular point in time, such measurements are not intended to, and do not, provide a precise forecast of the
effect of changes in market interest rates on our net worth and NII. Sensitivity of EVE and NII are modeled using different
assumptions and approaches.
Liquidity and Funds Management
The objective of our liquidity management is to ensure the ability to meet our financial obligations. These obligations include
the payment of deposits on demand or at maturity, the repayment of borrowings at maturity and the ability to
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fund commitments and other new business opportunities. We obtain funding from a variety of sources, including customer
deposit accounts, customer certificates of deposit and payments on our loans and investments. Historically, our level of core
deposits has been insufficient to fully fund our lending activities. As a result, we have sought funding from additional sources,
including institutional certificates of deposit and the sale of available for sale investment securities. In addition, we maintain lines
of credit with the FHLB of Atlanta, federal funds lines of credit with three correspondent banks and utilize securities sold under
agreements to repurchase and reverse repurchase agreement borrowings from approved securities dealers. For additional
information about borrowings and anticipated principal repayments refer to the discussion about Contractual Obligations below
and “Item 8. Financial Statements and Supplementary Data, Note 9 – Securities Sold Under Agreements To Repurchase And
Other Short-Term Borrowings and Note 10 – Junior Subordinated Debt and Senior Subordinated Notes.”
We prepare a cash flow forecast on a 30, 60 and 90 day basis along with a one and a two year basis. The projections
incorporate expected cash flows on loans, investment securities, and deposits based on data used to prepare our interest rate risk
analyses. To estimate loan growth, the projection incorporates the scheduled loan closings in the Loan Pipeline Report along with
other management estimates.
During the year ended December 31, 2020, we funded our financial obligations with deposits and borrowings from the FHLB
of Atlanta. At December 31, 2020, we had $355.3 million of unfunded lines of credit and undisbursed construction loan funds.
The amount of certificate of deposit accounts maturing in less than one year was $369.7 million as of December 31, 2020.
Management anticipates that funding requirements for these commitments can be met from the normal sources of funds.
On August 25, 2020, Southern National completed the sale of $60.0 million of its fixed-to-floating rate Subordinated
Notes due 2030 (the “SNBV Subordinated Notes”). The SNBV Subordinated Notes will bear interest at an initial rate of 5.40%
per annum, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2021. From
and including September 1, 2025 to, but excluding the maturity date or the date of earlier redemption (the “floating rate period”),
the interest rate will reset quarterly to an annual interest rate equal to the Benchmark rate, which is expected to be three-month
Term SOFR plus 531 basis points, for each quarterly interest period during the floating rate period, payable quarterly in arrears
on March 1, June 1, September 1, and December 1 of each year, commencing on December 1, 2025. Notwithstanding the
foregoing, in the event that the Benchmark rate is less than zero, the Benchmark rate shall be deemed to be zero.
While the Company believes that wholesale funding markets have remained open to us in the economic environment caused
by COVID-19, the rates for short term funding have recently been volatile. If funding costs are elevated for an extended period of
time, it could have an adverse effect on the Company’s net interest margin. If an extended recession causes a large number of the
Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive
sources of funding. As of December 31, 2020, Southern National was not aware of any other known trends, events or
uncertainties that have or are reasonably likely to have a material impact on our liquidity. As of December 31, 2020, Southern
National has no material commitments or long-term debt for capital expenditures.
Capital Resources
Capital management consists of providing equity to support both current and future operations. We and the Bank are subject
to risk-based capital adequacy requirements imposed by the Federal Reserve.
See “Item 1. Business, Supervision and Regulation—Capital Requirements.”
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The following table provides a comparison of the leverage and risk-weighted capital ratios of Sonabank at the periods
indicated to the minimum and well-capitalized required regulatory standards:
Sonabank
Common equity tier 1 capital ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Leverage ratio
Minimum
Required for
Capital
Adequacy
Purposes
To Be Categorized
as Well Capitalized (1)
December 31,
2020
December 31,
2019
Actual Ratio at
7.00 %
8.50 %
10.50 %
4.00 %
6.50 %
8.00 %
10.00 %
5.00 %
15.83 %
15.83 %
17.09 %
11.25 %
14.81 %
14.81 %
15.29 %
12.07 %
(1) Prompt corrective action provisions are not applicable at the bank holding company level.
Impact of Inflation and Changing Prices
The financial statements and related financial data presented in this Annual Report on Form 10-K concerning Southern
National have been prepared in accordance with U.S. GAAP, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to
inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial
companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, changes in
interest rates have a more significant impact on our performance than do the effects of changes in the general rate of inflation and
changes in prices. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods
and services. Many factors impact interest rates, including the FRB, inflation, recession, changes in unemployment, the money
supply, and international disorder and instability in domestic and foreign financial markets. Like most financial institutions,
changes in interest rates can impact our net interest income 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,
as well as the valuation of our assets and liabilities.
Our interest rate risk management is the responsibility of the Bank’s Asset/Liability Management Committee (the
“Asset/Liability Committee”). The Asset/Liability Committee has established policies and limits for management to monitor,
measure and coordinate our sources, uses and pricing of funds. The Asset/Liability Committee makes reports to the board of
directors on a quarterly basis.
Seasonality and Cycles
We do not consider our commercial banking business to be seasonal.
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Contractual Obligations
The following table reflects the contractual maturities of our term liabilities as of December 31, 2020. The amounts shown do not
reflect contractual interest, early withdrawal or prepayment assumptions.
Less Than
One to
Three to More Than
One Year Three Years Five Years Five Years Total
Contractual Obligations
Certificates of deposit (1)
Repurchase agreements
FHLB advances
Junior subordinated debt
Senior subordinated notes
Operating leases
Total
$ 105,008
(in thousands)
$ 15,262
$ 369,743
16,065
100,000
—
—
—
—
—
—
2,542
$ 488,350
3,791
$ 108,799
1,123
$ 16,385
$
—
—
10,310
—
— 107,000
1,376
$ 118,721
$ 490,048
35
—
16,065
— 100,000
10,310
107,000
8,832
$ 732,255
(1) Certificates of deposit give customers rights to early withdrawal. Early withdrawals may be subject to penalties. The penalty
amount depends on the remaining time to maturity at the time of early withdrawal.
Off-Balance Sheet Arrangements
Southern National is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and
guarantees of credit card accounts. These instruments involve elements of credit and funding risk in excess of the amount
recognized in the consolidated balance sheet. Letters of credit are written conditional commitments issued by Southern National
to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loans to customers. We had letters of credit outstanding totaling $15.9 million and $17.7
million as of December 31, 2020 and 2019, respectively.
Our exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to
extend credit and letters of credit is based on the contractual amount of these instruments. We use the same credit policies in
making commitments and conditional obligations as we do for on-balance sheet instruments. Unless noted otherwise, we do not
require collateral or other security to support financial instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments are made predominately for adjustable rate loans, and generally have fixed expiration
dates of up to three months or other termination clauses and usually require payment of a fee. Since many of the commitments
may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. We evaluate each customer’s creditworthiness on a case-by-case basis.
At December 31, 2020 and 2019, we had unfunded lines of credit and undisbursed construction loan funds totaling $355.3
million and $324.8 million, respectively. Virtually all of our unfunded lines of credit and undisbursed construction loan funds are
variable rate.
Allowance For Credit Losses - Off-Balance-Sheet Credit Exposures
The allowance for credit losses on off-balance-sheet credit exposures is a liability account, calculated in accordance with ASC
326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a
contractual obligation to extend credit. No allowance is recognized if we have the unconditional right to cancel the obligation.
Off-balance-sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit
detailed above. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will
occur and the amount expected to be funded over the estimated remaining life of the commitment or other off-balance-sheet
exposure. The likelihood and expected amount of funding are based on historical utilization rates. The amount of the allowance
represents management's best estimate of expected credit losses on
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commitments expected to be funded over the contractual life of the commitment. Estimating credit losses on amounts expected to
be funded uses the same methodology as described for loans in Note 3 - Loans and Allowance, as if such commitments were
funded.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
This information is incorporated herein by reference from “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” of this Annual Report on Form 10-K.
Item 8. Financial Statements and Supplementary Data
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors
Southern National Bancorp of Virginia, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Southern National Bancorp of Virginia, Inc. (the
"Company") as of December 31, 2020 and 2019, the related consolidated statements of income and comprehensive
income, changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 31,
2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, based on our audits and
the report of the other auditors, the financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We did not audit the financial statements of Southern Trust Mortgage, LLC (“STM”) as of and for the year ended
December 31, 2020. STM, an affiliate of the Company, is accounted for as an equity method investment. The
Company’s financial statements for the year ended December 31, 2020 reported an equity gain from mortgage affiliate
totaling $10.8 million, or approximately 36% of the Company’s income before income taxes. STM’s financial
statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for STM, is based solely on the report of the other auditors.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2020, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 16, 2021 expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 1 to the financial statements, the Company changed its method of accounting for credit losses
effective January 1, 2020 due to the adoption of Accounting Standards Codification (ASC) Topic 326, Financial
Instruments – Credit Losses.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud.
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Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits and the report of the other auditors provide
a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial
statements that were communicated or required to be communicated to the audit committee and that: (1) relate to
accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on
the financial statements, taken as a whole, and we are not, by communicating the critical audit matter(s) below, providing
separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Credit Losses
As described in Notes 1 and 3 to the financial statements, the Company’s allowance for credit losses was $36.3 million at
December 31, 2020. As further described in Notes 1 and 3, the Company adopted ASC Topic 326 Financial Instruments
– Credit Losses as of January 1, 2020.
The Company’s allowance for credit losses (“ACL”) is measured on a pooling basis when similar risk characteristics
exist, and by individually evaluating loans that do not share similar risk characteristics. The Company measures the ACL
using a combination of probability of default (PD), probability of attrition (PA), loss given default (LGD), and exposure
at default (EAD), calculated based on the application of historical loss experience, and adjusted for a reasonable and
supportable forecast. Estimates are qualitatively adjusted for risk factors that are not considered within the quantitative
modeling process. Estimating an appropriate allowance requires management to make numerous assumptions about
losses that will occur over the remaining contractual life of loans recorded as of the balance sheet date. The most
significant judgments in the ACL as of December 31, 2020 include the determination of a reasonable and supportable
forecast and the impact of qualitative factors.
We identified the ACL as a critical audit matter. The principal considerations for our determination of the ACL as a
critical audit matter included the high degree of judgment and subjectivity relating to management’s determination of
reasonable and supportable forecasts and the identification and measurement of the qualitative factors. In turn, auditing
management’s judgments regarding credit loss estimates and assumptions, specifically the determination of reasonable
and supportable forecasts and qualitative factors involved a high degree of subjectivity and an increased extent of audit
effort.
The primary procedures we performed to address this critical audit matter included:
●
Tested the design and operating effectiveness of controls relating to management’s determination of the ACL,
including controls relating to the:
o Completeness and accuracy of input into the model used to determine the ACL.
o
o
o
Performance of an independent model validation and appropriate responses to any findings.
The determination of a reasonable and supportable forecast.
The determination of qualitative factors.
● We evaluated management’s application of qualitative adjustments, including testing the accuracy of the
supporting calculations, evaluating whether the qualitative factors appropriately addressed risks that were not
fully accounted for in the quantitative ACL component of the methodology, and evaluating the appropriateness
and level of the qualitative factor adjustments.
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● We evaluated management’s determination of a reasonable and supportable forecast, including testing the
application of the forecast in quantitative ACL calculation. We also utilized our internal specialists to assist us in
testing the application of the forecast to the ACL calculation.
Goodwill Impairment Assessment
As described in Notes 1 and 7 to the financial statements, the Company’s goodwill balance was $101.9 million at
December 31, 2020, which is allocated to the Company’s reporting units. Goodwill is tested for impairment at least
annually at the reporting unit level. The determination of the fair value of the reporting units requires management to
make significant estimates and assumptions in determining the appropriate valuation methodology and key inputs to the
selected methodology.
We identified the Company’s goodwill impairment assessment as a critical audit matter. Management makes estimates
and assumptions for each reporting unit. As a result, auditing the reasonableness of management’s significant estimates
and assumptions involves a higher degree of judgment and subjectivity.
The primary procedures we performed to address this critical audit matter included:
● We tested the design and operating effectiveness of controls relating to management’s goodwill impairment test,
including the evaluation of key assumptions used in the quantitative assessment of the fair value, particularly the
selection of a peer group and the control premium incorporated into the methodologies used to determine fair
value of the reporting units.
● We tested key financial data used within the valuation to supporting evidence.
● We evaluated,
with the assistance of our internal valuation specialists,
appropriateness of valuation
methodologies, the selection of a control premium and of a peer group, and the overall reasonableness of the
estimated fair value of the reporting units.
/s/ Dixon Hughes Goodman LLP
We have served as the Company's auditor since 2013.
Greenville, NC
March 16, 2021
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors
Southern National Bancorp of Virginia, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Southern National Bancorp of Virginia, Inc.’s (the “Company”)’s internal control over financial
reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, Southern National
Bancorp of Virginia, Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the consolidated financial statements of Southern National Bancorp of Virginia, Inc. as of December
31, 2020 and 2019, and for each of the three years in the period ended December 31, 2020, and our report dated March
16, 2021, expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over financial reporting includes 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 reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial
statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ Dixon Hughes Goodman LLP
Greenville, NC
March 16, 2021
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Southern Trust Mortgage, LLC
Virginia Beach, Virginia
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Southern Trust Mortgage, LLC (the Company) as of December 31,
2020 and 2019, and the related statements of operations, changes in membersʹ equity, and cash flows for each of the three
years in the period ended December 31, 2020, and the related notes (collectively, referred to as the financial statements).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at
December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated
or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to
the financial statements and (2) involved our especially challenging, subjective, or complex judgements. We determined
that there are no critical audit matters.
/s/ Richey, May & Co., LLP.
We have served as Southern Trust Mortgage, LLC’s auditor since 2014.
Englewood, Colorado
March 12, 2021
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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
ASSETS
Cash and cash equivalents:
Cash and due from financial institutions
Interest-bearing deposits in other financial institutions
Total cash and cash equivalents
Securities available for sale, at fair value
Securities held to maturity, at amortized cost (fair value of $41,832 and $72,666, respectively)
Total loans
Less allowance for credit losses
Net loans
Stock in Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB)
Equity method investment in mortgage affiliate
Preferred investment in mortgage affiliate
Bank premises and equipment, net
Operating lease right-of-use assets
Goodwill
Core deposit intangibles, net
Bank-owned life insurance
Other real estate owned
Deferred tax assets, net
Accrued interest receivable
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits
Interest-bearing deposits:
NOW accounts
Money market accounts
Savings accounts
Time deposits
Total interest-bearing deposits
Total deposits
Securities sold under agreements to repurchase - short term
FHLB advances
Junior subordinated debt - long term
Senior subordinated notes - long term
Operating lease liabilities
Other liabilities
Total liabilities
Commitments and contingencies (See Note 14)
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 5,000,000 shares; no shares issued and outstanding
Common stock, $0.01 par value. Authorized 45,000,000 shares; 24,368,612 and 24,181,534 shares issued and outstanding at
December 31, 2020 and December 31, 2019, respectively
Additional paid in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes to consolidated financial statements.
70
December 31, December 31,
2020
2019
$
$
$
$
8,585
187,600
196,185
153,233
40,721
2,440,496
(36,345)
2,404,151
16,927
12,652
3,305
30,306
7,511
101,954
5,826
65,409
3,078
14,646
19,998
12,771
3,088,673
$
$
7,909
24,019
31,928
164,820
72,448
2,186,047
(10,261)
2,175,786
17,832
5,020
3,305
31,184
8,013
101,954
7,191
63,850
6,224
11,788
8,210
12,617
2,722,170
440,674
$
339,153
714,752
603,318
183,814
490,048
1,991,932
2,432,606
16,065
100,000
9,682
105,647
8,238
25,881
2,698,119
391,172
466,867
144,486
783,040
1,785,565
2,124,718
12,883
121,640
9,632
47,051
8,469
20,536
2,344,929
—
—
243
308,870
77,956
3,485
390,554
3,088,673
$
241
306,755
69,462
783
377,241
2,722,170
Table of Contents
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(dollars in thousands, except per share amounts)
Interest and dividend income:
Interest and fees on loans
Interest and dividends on taxable securities
Interest and dividends on tax exempt securities
Interest and dividends on other earning assets
Total interest and dividend income
Interest expense:
Interest on deposits
Interest on FRB borrowings
Interest on repurchase agreements
Interest on junior subordinated debt
Interest on senior subordinated notes
Interest on other borrowings
Total interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income:
Account maintenance and deposit service fees
Income from bank-owned life insurance
Equity gain (loss) from mortgage affiliate
Realized losses on sales of investment securities
Recoveries related to acquired charged-off loans and investment securities
Other
Total noninterest income
Noninterest expenses:
Salaries and benefits
Occupancy expenses
Furniture and equipment expenses
Amortization of core deposit intangible
Virginia franchise tax expense
Data processing expense
Telephone and communication expense
Net (gain) loss on other real estate owned
Professional fees
Other operating expenses
Total noninterest expenses
Income before income taxes
Income tax expense
Net income
Other comprehensive income:
Unrealized gain (loss) on available for sale securities
Reclassification of loss on sales of investment securities
Accretion of amounts previously recorded upon transfer to held to maturity from available for sale
Net unrealized gain (loss)
Tax effect
Other comprehensive income (loss)
Comprehensive income
Earnings per share, basic
Earnings per share, diluted
See accompanying notes to consolidated financial statements.
71
For the Years Ended December 31,
2018
2019
2020
$ 111,647
4,244
486
1,402
117,779
$ 112,181
5,639
585
2,119
120,524
$
110,213
5,752
634
2,308
118,907
20,332
424
96
426
3,909
952
26,139
91,640
19,450
72,190
6,520
1,559
10,789
(620)
6,500
703
25,451
36,675
6,142
2,725
1,364
2,457
3,178
1,497
960
4,726
8,016
67,740
29,901
6,614
23,287
2,789
620
12
3,421
719
2,702
25,989
0.96
0.96
$
$
$
$
$
$
$
$
$
$
30,602
—
87
589
2,847
2,799
36,924
83,600
350
83,250
7,159
1,699
1,191
—
1,537
1,000
12,586
26,261
6,204
2,719
1,418
2,251
2,381
1,615
(38)
3,612
10,169
56,592
39,244
6,077
33,167
$
4,256
$
—
13
4,269
897
3,372
36,539
1.38
1.36
$
$
$
18,235
—
97
575
2,847
6,087
27,841
91,066
4,200
86,866
5,959
1,983
(894)
—
2,610
541
10,199
27,706
6,628
2,795
1,445
1,839
1,885
2,035
360
1,644
7,423
53,760
43,305
9,614
33,691
(1,548)
—
16
(1,532)
(324)
(1,208)
32,483
1.40
1.39
Table of Contents
SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
(dollars in thousands, except per share amounts)
Common
Additional
Paid in
Stock Capital
$ 304,932
239
$
Accumulated
Other
Retained Comprehensive
Earnings (Loss) Income Total
$ 18,753
$
(1,152) $ 322,772
—
—
—
$
—
—
$
(7,688)
304,932
229
18,982
— 33,691
—
—
442
280
$ 305,654
$ 44,985
— 33,167
—
—
(8,690)
—
669
432
$ 306,755
—
306,755
$ 69,462
(5,056)
64,406
— 23,287
—
—
(9,737)
—
708
(1)
(135)
1,543
$ 308,870
$ 77,956
239
—
—
—
1
—
240
—
—
—
1
—
241
—
241
—
—
—
1
1
—
—
243
—
—
—
—
$
$
$
$
3,372
—
—
(1,208)
(229)
(1,381)
—
—
—
—
322,772
33,691
(1,208)
(7,688)
443
280
(2,589) $ 348,290
33,167
3,372
(8,690)
670
432
$ 377,241
(5,056)
372,185
23,287
2,702
(9,737)
709
—
(135)
1,543
$ 390,554
—
—
—
783
—
783
—
—
—
—
—
—
3,485
2,702
Balance - December 31, 2017
Reclassification adjustment from accumulated other comprehensive income to
retained earnings for adoption of ASU 2018-02
Adjusted beginning balance
Net income
Changes in other comprehensive loss on investment securities (net of tax, $(324))
Dividends on common stock ($0.32 per share)
Issuance of common stock under Stock Incentive Plan
Stock-based compensation expense
Balance - December 31, 2018
Net income
Changes in other comprehensive income on investment securities (net of tax, $897)
Dividends on common stock ($0.36 per share)
Issuance of common stock under Stock Incentive Plan
Stock-based compensation expense
Balance - December 31, 2019
Impact of adoption of ASU 2016-13
Adjusted beginning balance
Net income
Changes in other comprehensive income on investment securities (net of tax, $719)
Dividends on common stock ($0.40 per share)
Issuance of common stock under Stock Incentive Plan
Vesting of restricted stock
Repurchase of restricted stock
Stock-based compensation expense
Balance - December 31, 2020
See accompanying notes to consolidated financial statements.
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SOUTHERN NATIONAL BANCORP OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the Year Ended December 31,
2019
2020
2018
Operating activities:
Net income
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
$
23,287
$
33,167
$
33,691
Depreciation and amortization
Amortization of operating lease right-of-use assets
Accretion of loan discount
Amortization of FDIC indemnification asset
Provision for credit losses
Earnings on bank-owned life insurance
Equity (gain) loss on mortgage affiliate
Stock-based compensation expense
Loss on sales of investment securities
Gain on bank-owned life insurance death benefit
(Gain) loss on other real estate owned
Provision (benefit) for deferred income taxes
Net (increase) decrease in other assets
Net increase (decrease) in other liabilities
Net cash and cash equivalents provided by operating activities
Investing activities:
Proceeds from sales of held to maturity investment securities
Proceeds from sales of available for sale investment securities
Purchases of held to maturity investment securities
Purchases of available for sale investment securities
Proceeds from paydowns, maturities and calls of available for sale investment securities
Proceeds from paydowns, maturities and calls of held to maturity investment securities
Net decrease of FRB and FHLB stock
Net increase in loans
Purchase of bank-owned life insurance
Proceeds from bank-owned life insurance death benefit
Sales of other real estate owned, net of improvements
Proceeds from sales of bank premise and equipment and assets held for sale
Purchases of bank premises and equipment
Net cash and cash equivalents used in investing activities
Financing activities:
Net increase in deposits
Cash dividends paid on common stock
Issuance of common stock under Stock Incentive Plan
Repurchase of restricted stock
Issuance of subordinated notes, net of cost
Net decrease in other borrowings
Net cash and cash equivalents provided by (used in) financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information
Cash payments for:
Interest
Income taxes
Supplemental schedule of noncash investing and financing activities:
Transfer from loans to other real estate owned
See accompanying notes to consolidated financial statements.
73
5,285
2,909
(4,346)
—
19,450
(1,559)
(10,789)
1,543
620
—
960
(1,618)
(11,942)
5,863
29,663
1,660
1,910
(15,197)
(38,938)
50,068
44,738
905
(251,000)
—
—
2,663
—
(1,082)
(204,273)
307,888
(9,737)
709
(135)
58,600
(18,458)
338,867
164,257
31,928
196,185
27,988
7,693
477
$
$
$
$
5,632
2,546
(3,859)
649
350
(1,565)
(1,191)
432
—
(134)
(38)
1,420
(2,203)
1,558
36,764
—
—
(15,260)
(45,135)
26,283
35,006
1,690
(7,059)
—
344
214
—
(1,101)
(5,018)
27,129
(8,690)
670
—
—
(47,538)
(28,429)
3,317
28,611
31,928
36,002
4,897
1,323
$
$
7,403
—
(4,534)
704
4,200
(1,633)
894
280
—
(350)
360
3,121
213
(2,909)
41,440
—
—
—
—
14,360
5,955
7,253
(113,845)
(12,000)
2,278
2,140
2,136
(1,973)
(93,696)
231,671
(7,688)
443
—
—
(169,022)
55,404
3,148
25,463
28,611
26,129
6,672
—
Table of Contents
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Southern National Bancorp of Virginia, Inc. (“Southern National” or “SNBV” or the “Company”) is a corporation that was
formed on July 28, 2004 under the laws of the Commonwealth of Virginia and is the holding company for Sonabank
(“Sonabank” or the “Bank”) a Virginia state-chartered bank which commenced operations on April 14, 2005.
Sonabank provides a range of financial services to individuals and small and medium sized businesses. At December 31,
2020, Sonabank had forty-two full-service branches in Virginia and Maryland and through certain internet and mobile
applications. Thirty-seven full-service retail branches are in Virginia, located in Ashland, Burgess, Callao, Central Garage,
Charlottesville, Chester, Clifton Forge, Colonial Heights, Courtland, Deltaville, Fairfax, Front Royal, Gloucester, Gloucester
Point, Hampton, Hartfield, Heathsville, Kilmarnock, Leesburg, McLean, Mechanicsville (2), Middleburg, Midlothian, New
Market, Newport News, Quinton, Reston, Richmond, South Riding, Surry, Tappahannock (2), Urbanna, Warrenton, Waverly,
and Williamsburg, and five full-service retail branches in Maryland, located in Bethesda, Brandywine, Owings, Rockville, and
Upper Marlboro. We have administrative offices in Warrenton and Glen Allen, Virginia.
The accounting policies and practices of Southern National and its subsidiaries conform to U.S. generally accepted
accounting principles (“U.S. GAAP”) and to general practice within the banking industry. Major policies and practices are
described below:
Principles of Consolidation
The consolidated financial statements include the accounts of Southern National and its subsidiaries Sonabank and EVB
Statutory Trust I (the “Trust”). Significant inter-company accounts and transactions have been eliminated in consolidation.
Southern National consolidates subsidiaries in which it holds, directly or indirectly, more than 50 percent of the voting rights or
where it exercises control. Entities where Southern National holds 20 to 50 percent of the voting rights, or has the ability to
exercise significant influence, or both, are accounted for under the equity method. Southern National owns the Trust which is an
unconsolidated subsidiary and the junior subordinated debt owed to the Trust is reported as a liability of Southern National. In
addition, Sonabank has an interest in one affiliate, Southern Trust Mortgage, LLC (“STM”). Sonabank owns 48.9% and 100% of
STM’s common and preferred stock, respectively. To comply with Regulation S-X, Rule 3-09, audited financial statements of
STM as of and for the year ended December 31, 2020 are being filed with Southern National’s Annual Report on Form 10-K as
Exhibit 99.1.
Investments in Mortgage Affiliate
Sonabank’s investment in STM’s common stock is accounted for using the equity method. Under the equity method, the
carrying value of Sonabank’s investment in STM was originally recorded at cost but is adjusted periodically to record
Sonabank’s proportionate share of STM’s earnings or losses through noninterest income and decreased by the amount of cash
dividends or similar distributions received from STM. Our equity investment in STM as of December 31, 2020 and 2019 was
$12.7 million and $5.0 million, respectively.
Sonabank’s investment in STM’s preferred stock is considered to be a non-marketable equity security that does not have a
readily determinable fair value. Equity securities with no recurring market value data available are reviewed periodically and any
observable market value change are adjusting through net income. Sonabank evaluated this non-marketable equity security for
impairment and recoverability of the recorded investment by considering positive and negative evidence, including the
profitability and asset quality of STM, dividend payment history and recent redemption experience. Impairment is assessed at
each reporting period and if identified, is recognized in noninterest income. Our preferred investment in STM was $3.3 million as
of December 31, 2020 and 2019.
Operating Segments
Operating segments are defined as components of a company about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing
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performance. The Company has determined it has one unconsolidated reportable segment, which consists of the Sonabank's
investment in STM. Sonabank’s share of equity in earnings (losses) from STM for the years ended December 31, 2020, 2019 and
2018 were $10.8 million, $1.2 million and $(894) thousand, respectively.
The chief operating decision maker evaluates segment performance based on STM’s net income (loss). Net income (loss) was
$22.2 million, $2.7 million and $(1.6) million for the years ended December 31, 2020, 2019 and 2018, respectively. The primary
source of revenue for this segment is gains on sale of mortgage loans held for sale, net of direct costs. For the years ended
December 31, 2020, 2019 and 2018, gains on sale of mortgage loans held for sale, net of direct costs were $107.1 million, $45.7
million and $27.2 million, respectively. In evaluating STM’s net income (loss), the chief operating decision maker also assesses
salaries, commissions and benefits, which were $84.1 million, $39.0 million and $24.6 million for the years ended December 31,
2020, 2019 and 2018, respectively.
Also, the chief operating decision maker evaluates segments performance based on STM’s balance sheet. Total mortgage
loans held for sale by STM were $143.4 million and $100.2 million as of December 31, 2020 and 2019, respectively. Warehouse
lines of credit were $136.1 million and $92.1 million as of December 31, 2020 and 2019, respectively. STM’s total members’
equity was $26.4 million and $11.1 million as of December 31, 2020 and 2019.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Estimates
that are particularly susceptible to change in the near term include: the determination of the allowance for credit losses (formerly
the allowance for loan losses), the fair value of investment securities, credit impairment of investment securities, the valuation of
goodwill, other real estate owned (“OREO”) and deferred tax assets.
Investment Securities
Debt securities that Southern National has the positive intent and ability to hold to maturity are classified as held-to-maturity
and carried at amortized cost.
Securities classified as available for sale are those debt securities that may be sold in response to changes 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) in stockholders’ equity.
Premiums and discounts are generally amortized using the interest method with a constant effective yield without anticipating
prepayments, except for mortgage-backed securities where prepayments are anticipated. Premiums on callable securities are
amortized to their earliest call date. Prior to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards
Update (ASU) 2017-08 in 2019, premiums and discounts were recognized in interest income using the interest method over the
terms of the securities without anticipating prepayments, except for mortgage-backed securities where prepayments were
anticipated. Gains and losses on the sale of investment securities are recorded on the settlement date and are determined using the
specific identification method.
Southern National purchases amortizing investment securities in which the underlying assets are residential mortgage loans
subject to prepayments. The actual principal reduction on these assets varies from the expected contractual principal reduction
due to principal prepayments resulting from the borrowers’ election to refinance the underlying mortgage based on market and
other conditions. The purchased premiums and discounts associated with these assets are amortized or accreted to interest income
over the estimated life of the related assets. The estimated life is calculated by projecting future prepayments and the resulting
principal cash flows until maturity. Prepayment rate projections utilize actual prepayment speed experience and available market
information on like-kind instruments. The prepayment rates form the basis for income recognition of premiums and discounts on
the related assets. Changes in prepayment estimates may cause the earnings recognized on these assets to vary over the term that
the assets are held, creating volatility in the
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net interest margin. Prepayment rate assumptions are monitored and updated monthly to reflect actual activity and the most
recent market projections.
Other investments include stock acquired for regulatory purposes. The Bank is a member of the FHLB system. Members are
required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional
amounts. The Bank is also required to own FRB stock with a par value equal to 6% of capital and FHLB stock of 4.25% of
borrowings outstanding. FHLB and FRB stock are carried at cost, classified as a restricted security, and periodically evaluated for
impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Loans
Southern National provides mortgage loans purchased from STM, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by loans secured by real estate throughout its market area. The ability of
Southern National’s debtors to honor their contracts is in varying degrees dependent upon the real estate market conditions and
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-off are reported at
their outstanding unpaid principal balances adjusted for the allowance for credit losses, purchased premiums and discounts and
any deferred loan fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination
fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the
interest method without anticipating prepayments.
Commercial real estate consists of borrowings secured by owner occupied and non-owner occupied commercial real estate.
Repayment of these loans is dependent upon rental income or the subsequent sale of the property for loans secured by non-owner
occupied commercial real estate and by cash flows from business operations for owner occupied commercial real estate. Loans
for which the source of repayment is rental income are primarily 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 by current market conditions for their product or service.
Construction and land development primarily consist of borrowings to purchase and develop raw land into residential and
non-residential properties. Construction loans are extended to individuals as well as corporations for the construction of an
individual or multiple properties and are secured by raw land and the subsequent improvements. Repayment of the loans to real
estate developers is dependent upon the sale or lease of properties to third parties in a timely fashion upon completion. Should
there be delays in construction or a downturn in the market for 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 such as equipment,
accounts receivable, inventory, or any other asset excluding real estate and generally made to finance capital expenditures or
operations. Southern National’s risk exposure is related to deterioration in the value of collateral securing the loan should
foreclosure become necessary. Generally, business assets used or produced in operations do not maintain their value upon
foreclosure which may require Southern National to write-down the value significantly to sell.
Residential real estate loans consist of loans to individuals for the purchase of primary residences with repayment primarily
through wage or other income sources of the individual borrower. Southern National’s loss exposure to these loans is dependent
on local market conditions for residential properties as loan amounts are determined, in part, by the fair value of the property at
origination.
STM is a regional mortgage banking company headquartered in Virginia Beach, Virginia that has mortgage banking
originators in Delaware, Virginia, Maryland, North Carolina and South Carolina. STM only originates retail mortgage products.
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Sonabank has established underwriting guidelines with STM under which it will purchase residential construction,
construction loans that convert to permanent, and permanent loans primarily in its Virginia and Maryland footprint from STM.
These will typically be loans that do not conform to FNMA or FHLMC standards because of size or acreage.
Other consumer loans are comprised of loans to individuals both unsecured and secured and home equity loans secured by
real estate (closed and open-end), with repayment dependent on individual wages and other income. The risk of loss on consumer
loans is elevated as the collateral securing these loans, if any, rapidly depreciate in value or may be worthless and/or difficult to
locate if repossession is necessary. Losses in this portfolio are generally relatively low, however, due to the small individual loan
size and the balance outstanding as a percentage of Southern National’s entire portfolio.
The accrual of interest on all loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured
and in process of collection. In all cases, loans are placed on nonaccrual status or charged-off at an earlier 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 reversed against interest
income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to
accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually 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 not dependent on any single
customer or group of customers whose insolvency would have a material adverse effect on operations.
Southern National has purchased, primarily through acquisitions, individual loans and groups of loans, some of which have
shown evidence of credit deterioration since origination. These purchased loans are recorded at fair value such that there is no
carryover of the seller’s allowance for credit losses. We adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments, on January 1, 2020 which now requires us to record purchased
financial assets with credit deterioration (PCD assets), defined as a more-than-insignificant deterioration in credit quality since
origination or issuance, at the purchase price plus the allowance for credit losses expected at the time of acquisition. Under this
method, there is no credit loss expense affecting net income on acquisition of PCD assets. Changes in estimates of expected
credit losses after acquisition are recognized as credit loss expense (or reversal of credit loss expense) in subsequent periods as
they arise. Any non-credit discount or premium resulting from acquiring a pool of purchased financial assets with credit
deterioration shall be allocated to each individual asset. At the acquisition date, the initial allowance for credit losses determined
on a collective basis shall be allocated to individual assets to appropriately allocate any non-credit discount or premium. The non-
credit discount or premium, after the adjustment for the allowance for credit losses, shall be accreted to interest income using the
interest method based on the effective interest rate determined after the adjustment for credit losses at the adoption date.
A purchased financial asset that does not qualify as a PCD asset is accounted for similar to an originated financial asset.
Generally, this means that an entity recognizes the allowance for credit losses for non-PCD assets through net income at the time
of acquisition. In addition, both the credit discount and non-credit discount or premium resulting from acquiring a pool of
purchased financial assets that do not qualify as PCD assets shall be allocated to each individual asset. This combined discount or
premium shall be accreted to interest income using the effective yield method.
Allowance for Credit Losses (“ACL”)
As further discussed below, we adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments, on January 1, 2020. Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”)
replaced the previous “incurred loss” model for measuring credit losses, which encompassed allowances for current known and
inherent losses within the portfolio, with an “expected loss” model, which encompasses allowances for losses expected to be
incurred over the life of the portfolio. The new current expected credit loss (“CECL”) model requires the measurement of all
expected credit losses for financial assets measured at amortized cost and certain off-balance-sheet credit exposures based on
historical experience, current conditions, and
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reasonable and supportable forecasts. In connection with the adoption of ASC 326, we revised certain accounting policies and
implemented certain accounting policy elections. The revised accounting policies are described below.
Allowance For Credit Losses - Held-to-Maturity Securities
The allowance for credit losses on held-to-maturity securities is a contra-asset valuation account, calculated in accordance
with ASC 326 that is deducted from the amortized cost basis of held-to-maturity securities to present management's best estimate
of the net amount expected to be collected. Held-to-maturity securities are charged-off against the allowance when deemed
uncollectible by management. Adjustments to the allowance are reported in our income statement as a component of credit loss
expense. Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type
with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current
conditions and reasonable and supportable forecasts. Management has made the accounting policy election to exclude accrued
interest receivable on held-to-maturity securities from the estimate of credit losses. Further information regarding our policies
and methodology used to estimate the allowance for credit losses on held-to-maturity securities is presented in Note 2 –
Investment Securities.
Allowance For Credit Losses - Available-for-Sale Securities
For available-for-sale securities in an unrealized loss position, we first assess whether (i) we intend to sell or (ii) it is more
likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative,
any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through
income. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from
credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than
amortized cost, any changes to the rating of the security by a rating agency and any adverse conditions specifically related to the
security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be
collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to
be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit
loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded
through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in
our income statement as a component of credit loss expense. Management has made the accounting policy election to exclude
accrued interest receivable on available-for-sale securities from the estimate of credit losses. Available-for-sale securities are
charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible
by management or when either of the aforementioned criteria regarding intent or requirement to sell is met.
Prior to the adoption of ASU 2016-13, declines in the fair value of held-to-maturity and available-for-sale securities below
their cost that were deemed to be other than temporary were reflected in earnings as realized losses. In estimating other-than-
temporary impairment losses prior to January 1, 2020, management considered, among other things, (i) the length of time and the
extent to which the fair value had been less than cost, (ii) the financial condition and near-term prospects of the issuer and (iii) the
intent and our ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in
fair value.
Allowance for Credit Losses – Loans
The allowance for credit losses on loans is a contra-asset valuation account, calculated in accordance with ASC 326, which is
deducted from the amortized cost basis of loans to present management's best estimate of the net amount expected to be
collected. Loans are charged-off against the allowance when deemed uncollectible by management. Expected recoveries do not
exceed the aggregate of amounts previously charged-off and expected to be charged-off. Adjustments to the allowance are
reported in our income statement as a component of credit loss expense. Management has made the accounting policy election to
exclude accrued interest receivable on loans from the estimate of credit losses. Further information regarding our policies and
methodology used to estimate the allowance for credit losses on loans is presented in Note 3 – Loans and Allowance.
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Prior to the adoption of ASU 2016-13, the allowance for loan losses on loans was a contra-asset valuation account established
through a provision for loan losses charged to expense, which represented management’s best estimate of inherent losses that had
been incurred within the existing portfolio of loans. The allowance for loan losses on loans included allowance allocations
calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC
Topic 450, “Contingencies.”
Allowance For Credit Losses - Off-Balance-Sheet Credit Exposures
The allowance for credit losses on off-balance-sheet credit exposures is a liability account, calculated in accordance with ASC
326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a
contractual obligation to extend credit. No allowance is recognized if we have the unconditional right to cancel the obligation.
The allowance is reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets.
Adjustments to the allowance are reported in our income statement as a component of credit loss expense. Further information
regarding our policies and methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures is
presented in Note 14 – Financial Instruments with Off-Balance-Sheet Risks.
As discussed above, effective January 1, 2020 we adopted the provisions of ASC 326 using the modified retrospective
method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Upon adoption, we recognized
an after-tax cumulative effect reduction to retained earnings totaling $5.1 million, as detailed in the table below. Operating results
for periods after January 1, 2020 are presented in accordance with ASC 326 while prior period amounts continue to be reported in
accordance with previously applicable standards and the accounting policies.
The following table details the impact of the adoption of ASC 326 on the allowance for credit losses as of January 1, 2020 (in
thousands):
Securities Held To Maturity:
Obligations of states and political subdivisions
Total
Loans:
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied (1)
Construction and land development
Commercial loans
Paycheck Protection Program loans
Residential 1-4 family (2)
Other consumer loans
PCD Loans
Unallocated
Total loans
Off-Balance Sheet Exposures
$
$
$
$
$
Pre-Adoption
Allowance
Impact of
Adoption
Post-Adoption
Allowance
— $
— $
(1) $
(1) $
(1) $
(1) $
810 $
1,720
683
5,418
—
1,266
190
—
174
10,261 $
— $
1,704 $
2,706
674
(3,246)
—
4,169
187
2,272
(174)
8,292 $
360 $
2,514 $
4,426
1,357
2,172
—
5,435
377
2,272
—
18,553 $
360 $
After-tax
Cumulative
Effect On
Retained Earnings
—
—
(994)
(1,578)
(393)
1,893
-
(2,431)
(109)
(1,325)
101
(4,836)
(220)
(1)
(2)
Includes loans secured by farmland and multi-family residential loans.
Includes home equity lines of credit.
Transfers of Financial Assets
Transfers 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 Southern National, the transferee obtains
the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange
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the transferred assets, and Southern National does not maintain effective control over the transferred assets through an agreement
to repurchase them before their maturity.
Bank Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related
components are depreciated using the straight-line method with useful lives of 30 years. Leasehold improvements are amortized
on the straight-line method over the shorter of the estimated useful lives of the improvements or the terms of the related leases
including lease renewals only when the Company is reasonably assured of the aggregate term of the lease. Furniture, fixtures and
equipment are depreciated using the straight-line method with useful lives ranging from 3 to 10 years.
Operating Leases
The Company leases certain properties and equipment under operating leases. The Company recognizes a liability to make
lease payments, the operating lease liability, and an asset representing the right to use the underlying asset during the lease term,
the right-of-use asset. In recognizing lease right-of-use assets and related right-of-use liabilities, we account for lease and non-
lease components (such as taxes, insurance, and common area maintenance costs) separately as such amounts are generally
readily determinable under our lease contracts. The operating lease liability is measured at the present value of the remaining
lease payments, discounted at the Company’s incremental borrowing rate at inception. The right-of-use asset is measured at the
amount of the operating lease liability adjusted for the remaining balance of any lease incentives received, any cumulative
prepaid or accrued rent if the lease payments are uneven throughout the lease term, any unamortized initial direct costs, and any
impairment of the right-of-use-asset. Lease expense consists of a single lease cost calculated so that the remaining cost of the
lease is allocated over the remaining lease term on a straight-line basis, variable lease payments not included in the operating
lease liability, and any impairment of the right-of-use asset. Lease renewal options are generally not included in the calculation of
the operating lease liabilities, unless they are not reasonably certain to be exercised. The Company does not recognize short-term
leases on the balance sheet.
Goodwill and Intangible Assets
Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value
of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net
assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a business
combination and determined to have an indefinite useful life are not amortized, but evaluated for impairment on an annual basis
or more frequently if events or circumstances warrant. Intangible assets with definite useful lives are amortized over their
estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our
balance sheet.
In response to the effects of COVID-19, management determined there to be a triggering event in the third quarter of 2020
warranting a goodwill assessment. For the third quarter 2020 assessment, we performed a step one quantitative assessment to
determine if the fair value of all our reporting units was less than its carrying amount. We concluded that the fair value of all our
reporting units exceeded its carrying amount and no impairment was present based on management’s assessment.
Other intangible assets consist of loan servicing rights and core deposit intangible assets arising from whole-bank and branch
acquisitions and are amortized over their estimated useful lives, which range from 6 to 15 years.
Stock Based Compensation
Compensation cost is recognized for stock options issued to employees, based on the fair value of these awards at the date of
grant. A Black-Scholes option-pricing model is utilized to estimate the fair value of stock options. Compensation cost for grants
of restricted shares is accounted for based on the closing price of Southern National’s common stock on the date the restricted
shares are awarded. Compensation cost for stock options and restricted shares is recognized over
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the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is
recognized on a straight-line basis over the requisite service period for the entire award.
Bank-Owned Life Insurance
Southern National has purchased, and acquired through acquisitions, life insurance policies on certain former and current key
executives. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance
sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Other Real Estate Owned (“OREO”)
Real estate acquired through or instead of foreclosure is held for sale and initially recorded at fair value less costs to sell when
acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a direct charge-off is recorded through
expense. Operating costs after acquisition are expensed as incurred.
Impairment of Long-Lived Assets
Premises and equipment, core deposit intangible assets, right of use assets, and other long-term assets are reviewed for
impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired,
the assets are recorded at fair value.
Retirement Plans
Employee 401(k) plan expense is the amount of matching contributions. Supplemental retirement plan expense allocates the
benefits over years of service.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as 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 Restriction
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to Southern
National or by Southern National to shareholders.
Estimates and Uncertainties
Estimates including the carrying value of investment securities, other than temporary impairment of investment securities, the
determination of the allowance for credit losses and the valuation of goodwill and intangible assets involves uncertainties and
matters of significant judgement regarding interest rates, credit risk, repayments and prepayments, and other factors, especially in
the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the
estimates.
Advertising Costs
Advertising costs are expensed as incurred.
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Income Taxes
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying
amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation 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 be sustained in a tax
examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is
greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax
benefit is recorded. We have no unrecognized tax benefits and do not anticipate any increase in unrecognized tax benefits during
the next twelve months. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is our
policy to record such accruals in our income tax accounts; no such accruals exist as of December 31, 2020 and 2019. Southern
National and its subsidiaries file a consolidated U.S. federal tax return; Sonabank files a Maryland state income tax return and
Southern National files a franchise tax return. These returns are subject to examination by taxing authorities for all years after
2017.
Restrictions on Cash
No regulatory reserve or clearing requirements with the FRB were needed at December 31, 2020 and 2019.
Consolidated Statements of Cash Flows
For purposes of reporting cash flows, Southern National defines cash and cash equivalents as cash due from financial
institutions, interest-bearing deposits and federal funds sold in other financial institutions with maturities less than 90 days. Net
cash flows are reported for customer loan and deposit transactions and short-term borrowings.
Earnings Per Share (“EPS”)
Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during
the year. Diluted EPS reflects additional common shares that would have been outstanding if dilutive potential common shares
had been issued, as well as any adjustment to net income that would result from the assumed issuance. Potential common shares
that may be issued by Southern National relate solely to outstanding stock options and warrants and are determined using the
treasury stock method.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive (loss) income. Other comprehensive (loss) income
includes unrealized gains and losses on investment securities available for sale and the non-credit component of other than
temporary impairment of investment securities held-to-maturity which are also recognized as a separate component of equity.
Off Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, Southern National has entered into commitments to extend credit, standby letters of credit,
and guarantees of previously sold credit card accounts. The face amount for these items represents the exposure to loss, before
considering customer collateral or ability to repay.
Fair Value Measurements
In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market
prices are not available, fair value is based upon observable market-based parameters. Valuation assumptions may be made to
ensure that financial instruments are recorded at fair value. These assumptions may reflect assumptions
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that market participants would use in pricing an asset or liability, among other things, as well as unobservable parameters. Any
such valuation assumptions are applied consistently over time.
Recent Accounting Pronouncements
New Accounting Standards Adopted:
In August 2018, FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). This ASU adds, eliminates and modifies
certain disclosure requirements for fair value measurements. The amendments in ASU 2018-13 were effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption was permitted. The disclosures
were adopted using the prospective method for certain disclosures and retrospective for a majority of the disclosures. The
Company adopted ASU 2018-13 in the first quarter of 2020 and it did not have a material impact on the Company’s consolidated
financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments, which along with several other subsequent codification updates related to accounting for credit
losses, set forth a “current expected credit loss” ("CECL") model requiring the Company to measure all expected credit losses for
financial instruments recorded at amortized cost held at the reporting date. The estimate was to be based on historical experience,
current conditions and reasonable and supportable forecasts. This replaced the existing incurred loss model and was applicable to
the measurement of credit losses on financial assets measured at amortized cost and applied to some off-balance sheet credit
exposures. The amendments were effective for the Company beginning January 1, 2020. The Company elected to defer adoption
of CECL until the earlier of the termination date of the current national emergency, declared on March 31, 2020, under the
National Emergencies Act in connection with the COVID-19 outbreak, or December 31, 2020. The Company adopted ASU
2016-13 effective January 1, 2020 with cumulative adjustment of $5.1 million to retained earnings and implemented as of
December 31, 2020 with an adjustment between the allowance for credit losses and the incurred loss model. The adoption of this
ASU resulted in an increase of $8.3 million in our allowance for credit losses, including transfers of non-accretable discount on
purchased credit-impaired loans. The increase is a result of changing from an “incurred loss” model, which encompasses
allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses
allowances for losses expected to be incurred over the life of the portfolio. The adoption of this ASU required that we establish an
allowance for expected credit losses for certain debt securities and other financial assets which are not material. We did not elect
the federal banking agencies’ rule providing for an optional three-year phase-in period for the day-one adverse regulatory capital
effects upon adopting the standard.
New Accounting Standards Not Yet Adopted:
In December 2019, FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This ASU
simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach
for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred
tax liabilities for outside basis differences. This ASU also simplifies aspects of the accounting for franchise taxes and enacted
changes in tax laws or rates and clarifies the accounting transactions that result in a step-up in the tax basis of goodwill. ASU
2019-12 is effective for annual periods beginning after December 15, 2020, including interim periods within those annual
periods. Early adoption is permitted. Southern National is currently in the process of evaluating the impact of adopting the new
guidance on its consolidated financial statements and disclosures.
In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference
Rate Reform on Financial Reporting. This ASU provides temporary optional guidance to ease the potential burden in accounting
for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted
accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the
London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. The ASU is intended to help
stakeholders during the global market-wide reference rate transition period. ASU 2020-04 is effective upon issuance and can be
applied through December 31, 2022. Southern National is currently in the process of evaluating the impact of adopting the new
guidance on its consolidated financial statements and disclosures.
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In October 2020, FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable
Fees and Other Costs. This ASU clarifies the accounting for the amortization of purchase premiums for callable debt securities
with multiple call dates. ASU 2020-08 is effective for annual periods beginning after December 15, 2020, including interim
periods within those annual periods. Early adoption is not permitted. Southern National is currently in the process of evaluating
the impact of adopting the new guidance on its consolidated financial statements and disclosures.
In October 2020, FASB issued ASU 2020-10, Codification Improvements. This ASU clarifies various topics in the
Codification, including the addition of existing disclosure requirements to the relevant disclosure sections. ASU 2020-10 is
effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods. Early
adoption is permitted. Southern National is currently in the process of evaluating the impact of adopting the new guidance on its
consolidated financial statements and disclosures.
2. INVESTMENT SECURITIES
The amortized cost and fair value of available for sale investment securities and the related gross unrealized gains and losses
recognized in accumulated other comprehensive income (loss) were as follows (in thousands):
December 31, 2020
Residential government-sponsored mortgage-backed securities
Obligations of states and political subdivisions
Corporate securities
Residential government-sponsored collateralized mortgage obligations
Government-sponsored agency securities
Agency commercial mortgage-backed securities
SBA pool securities
Total
December 31, 2019
Amortized
Cost
Gross Unrealized
Losses
Gains
Fair
Value
$
35,442
22,966
15,000
28,680
5,985
29,118
11,441
$ 148,632
$ 1,618
1,076
81
737
90
1,087
80
$ 4,769
$
$
— $
—
(2)
(1)
—
(15)
(150)
(168)
37,060
24,042
15,079
29,416
6,075
30,190
11,371
$ 153,233
Amortized
Cost
Gross Unrealized
Losses
Gains
Fair
Value
Residential government-sponsored mortgage-backed securities
Obligations of states and political subdivisions
Corporate securities
Trust preferred securities
Residential government-sponsored collateralized mortgage obligations
Government-sponsored agency securities
Agency commercial mortgage-backed securities
SBA pool securities
Total
$
48,540
17,041
2,004
2,530
36,511
14,823
27,557
14,622
$ 163,628
$
455
541
8
283
217
47
192
11
$ 1,754
$
$
84
(16)
$
—
—
(245)
(39)
(48)
(18)
(196)
(562)
48,979
17,582
2,012
2,568
36,689
14,822
27,731
14,437
$ 164,820
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The amortized cost, gross unrecognized gains and losses, allowance for credit losses and fair value of investment securities
held to maturity were as follows (in thousands):
Amortized Gross Unrecognized
Fair
Gains Losses Credit Losses Value
Allowance for
Cost
December 31, 2020
Residential government-sponsored mortgage-backed securities
Obligations of states and political subdivisions
Residential government-sponsored collateralized mortgage obligations
Government-sponsored agency securities
Total
$ 25,037
$
9,594
1,090
5,000
$
729
183
39
163
$ 40,721
$ 1,114
$
(2) $
—
—
—
(2) $
— $ 25,764
9,776
(1)
1,129
—
—
5,163
(1) $ 41,832
December 31, 2019
Residential government-sponsored mortgage-backed securities
Obligations of states and political subdivisions
Trust preferred securities
Residential government-sponsored collateralized mortgage obligations
Government-sponsored agency securities
Total
Amortized
Cost
Gross Unrecognized
Losses
Gains
Fair
Value
$ 22,925
$
15,071
1,938
3,128
29,386
$ 72,448
$
62
165
99
10
108
444
$
$
(52)
(1)
(2)
(9)
(162)
(226)
$ 22,935
15,235
2,035
3,129
29,332
$ 72,666
During 2020 and 2019, $38.9 million and $45.1 million, respectively, of available for sale investment securities and $15.2
million and $15.3 million, respectively, of held to maturity investment securities were purchased. During 2020, $1.9 million and
$1.7 million, respectively, of available for sale investment securities and held to maturity investment securities were sold. No
investment securities were sold during 2019. Realized losses on sales of investment securities of $620 thousand were recorded for
the year ended December 31, 2020.
The fair value and carrying amount of debt investment securities as of December 31, 2020, by contractual maturity were as
follows (in thousands). Investment securities not due at a single maturity date are shown separately.
Available for Sale
Held to Maturity
Due in one to five years
Due in five to ten years
Due after ten years
Residential government-sponsored mortgage-backed securities
Residential government-sponsored collateralized mortgage obligations
Agency commercial mortgage-backed securities
SBA pool securities
Total
Amortized
Cost
$
5,841
19,253
18,857
35,442
28,680
29,118
11,441
$ 148,632
Fair Value
6,057
$
19,696
19,443
37,060
29,416
30,190
11,371
$ 153,233
Amortized
Cost
3,406
2,183
9,005
25,037
1,090
—
—
$
40,721
Fair Value
3,513
$
2,231
9,195
25,764
1,129
—
—
41,832
$
$
Investment securities with a carrying amount of approximately $125.3 million and $120.5 million at December 31, 2020 and
2019, respectively, were pledged to secure public deposits, certain other deposits, a line of credit for advances from the FHLB of
Atlanta, and repurchase agreements.
Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with
each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current
conditions and reasonable and supportable forecasts. With regard to U.S. Treasury and residential mortgage-backed securities
issued by the U.S. government, or agencies thereof, it is expected that the securities will not be settled at prices less than the
amortized cost bases of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S.
government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued
by States and political subdivisions and other held-to-maturity securities, management considers (i) issuer bond ratings, (ii)
historical loss rates for given bond ratings, (iii) whether issuers continue to make timely principal and interest payments under the
contractual terms of the securities and (iv) internal
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forecasts. As of December 31, 2020, Southern National has $1 thousand as allowance for credit losses on held-to-maturity
securities.
The following tables present information regarding investment securities available for sale and held to maturity in a
continuous unrealized loss position as of December 31, 2020 and 2019 by duration of time in a loss position (in thousands):
December 31, 2020
Less than 12 months
12 Months or More
Available for Sale
Corporate securities
Residential government-sponsored collateralized mortgage
obligations
Agency commercial mortgage-backed securities
SBA pool securities
Total
December 31, 2020
Held to Maturity
Residential government-sponsored mortgage-backed
securities
Total
Fair
value
998
$
Unrealized Fair
value
(2) $ — $
Losses
$
Unrealized
Losses
954
2,170
—
$
$ 4,122
—
—
(1)
(15)
— 8,119
(18) $ 8,119
$
Total
Unrealized
Losses
Fair
value
— $
998
$
(2)
—
—
954
2,170
(150)
8,119
(150) $ 12,241
$
(1)
(15)
(150)
(168)
Less than 12 months
12 Months or More
Total
Fair
value
Unrecognized Fair Unrecognized Fair Unrecognized
Losses
value
Losses
value
Losses
$ 331
$ 331
$
$
(1) $ 126
(1) $ 126
$
$
(1) $ 457
(1) $ 457
$
$
(2)
(2)
December 31, 2019
Less than 12 months
12 Months or More
Available for Sale
Residential government-sponsored mortgage-backed securities
Trust preferred securities
Residential government-sponsored collateralized mortgage
obligations
Government-sponsored agency securities
Agency commercial mortgage-backed securities
SBA pool securities
Total
December 31, 2019
Held to Maturity
Residential government-sponsored mortgage-backed
securities
Obligations of states and political subdivisions
Trust preferred securities
Residential government-sponsored collateralized
mortgage obligations
Government-sponsored agency securities
Total
Fair
value
$ 2,686
Unrealized Fair
value
Losses
Unrealized
Losses
Fair
value
$
—
(7) $ 1,758
795
—
$
(9) $ 4,444
795
(245)
$
Total
Unrealized
Losses
4,253
4,924
2,833
1,148
$ 15,844
$
—
3,133
(25)
(48)
(6)
3,126
9,420
(2)
(88) $ 18,232
$
(14)
7,386
—
4,924
(12)
5,959
10,568
(194)
(474) $ 34,076
$
(16)
(245)
(39)
(48)
(18)
(196)
(562)
Less than 12 months
12 Months or More
Fair
value
Unrecognized Fair
value
Losses
Unrecognized Fair
value
Losses
Total
Unrecognized
Losses
$ 14,978
2,011
$
—
1,162
—
$
$ 18,151
(41) $ 1,402
(1)
—
$
—
53
(11) $ 16,380
2,011
—
53
(2)
(3)
571
— 20,833
(45) $ 22,859
$
1,733
(6)
(162)
20,833
(181) $ 41,010
$
$
(52)
(1)
(2)
(9)
(162)
(226)
During 2020, we sold all of the pooled trust preferred investment securities.
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Changes in accumulated other comprehensive income (loss) by component for the years ended December 31, 2020, 2019 and
2018 are shown in the table below. All amounts are net of tax (in thousands).
For the year ended December 31, 2020
Beginning balance
Current period other comprehensive income
Ending balance
For the year ended December 31, 2019
Beginning balance
Current period other comprehensive income
Ending balance
For the year ended December 31, 2018
Beginning balance
Amounts reclassified from accumulated other comprehensive loss due to the
adoption of ASU 2018-02
Subtotal
Current period other comprehensive (loss) income
Ending balance
Unrealized Holding
Gains on
Available for Sale
Held to Maturity
Securities
$
$
943
2,693
3,636
$
$
(160) $
9
(151) $
Unrealized Holding
Gains (Losses) on
Available for Sale
Held to Maturity
Securities
$
$
(2,419) $
3,362
943
$
(170) $
10
(160) $
Total
783
2,702
3,485
Total
(2,589)
3,372
783
Unrealized Holding
Losses on
Available for Sale
Held to Maturity
Securities
Total
$
$
(999) $
(153) $
(1,152)
(199)
(1,198)
(1,221)
(2,419) $
(30)
(183)
13
(170) $
(229)
(1,381)
(1,208)
(2,589)
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3. LOANS AND ALLOWANCE
Loans, net of deferred fees, consist of the following at year end (in thousands):
Loans secured by real estate:
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied
Secured by farmland
Construction and land loans
Residential 1-4 family
Multi- family residential
Home equity lines of credit
Total real estate loans
Commercial loans
Paycheck Protection Program loans
Consumer loans
Total Non-PCD loans
PCD loans
Plus (less) deferred costs (fees) on loans
Total loans
Loans secured by real estate:
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied
Secured by farmland
Construction and land loans
Residential 1-4 family
Multi- family residential
Home equity lines of credit
Total real estate loans
Commercial loans
Paycheck Protection Program loans
Consumer loans
Subtotal
Plus deferred costs on loans
Total loans
December 31, 2020
$
$
$
$
435,078
600,706
11,662
103,264
557,257
107,267
91,606
1,906,840
187,060
319,428
22,290
2,435,618
8,908
(4,030)
2,440,496
December 31, 2019
414,479
559,195
17,622
150,750
604,777
82,055
109,006
1,937,884
221,447
—
26,304
2,185,635
412
2,186,047
Accounting policy related to the allowance for credit losses is considered a critical policy given the level of estimation,
judgment, and uncertainty in the levels of the allowance required to account for the inherent probable losses in the loan portfolio
and the material effect such estimation, judgment, and uncertainty can have on the consolidated financial results.
Accrued Interest Receivable
Accrued interest receivable on loans totaled $16.4 million and $6.8 million at December 31, 2020 and 2019, respectively and
is included in accrued interest receivable in the consolidated balance sheets.
COVID-19 Loan Deferments
The Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected
by the Coronavirus was published by banking regulators in April 2020 to clarify expectations around loan modifications and the
determination of TDRs for borrowers experiencing COVID-19-related financial difficulty.
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Southern National applied this regulatory guidance during its troubled debt restructurings (“TDR”) identification process for
short-term loan forbearance agreements as a result of COVID-19 and in most cases is not recording these as TDRs.
Certain borrowers are currently unable to meet their contractual payment obligations because of the adverse effects of
COVID-19. To help mitigate these effects, loan customers may apply for a deferral of payments, or portions thereof, for up to 90
days. After 90 days, customers may apply for an additional deferral, and a small proportion of our customers have requested such
an additional deferral. In the absence of other intervening factors, such short-term modifications made on a good faith basis are
not categorized as TDR, nor are loans granted payment deferrals related to COVID-19 reported as past due or placed on non-
accrual status (provided the loans were not past due or on non-accrual status prior to the deferral). We implemented deferral
arrangements for TDRs in accordance with the CARES Act and bank regulatory guidance. At December 31, 2020, there were 44
loans in COVID-19 related deferment with an aggregate outstanding balance of $122.0 million and were current as of December
31, 2019.
Accretion
Accretable discount on the acquired loans totaled $6.2 million and $11.2 million at December 31, 2020 and 2019,
respectively. Accretion associated with the acquired loans held for investment of $4.3 million, $3.9 million and $4.5 million was
recognized during the twelve months ended December 31, 2020, 2019 and 2018, respectively.
Impaired Loans
Prior to the adoption of ASC 326 on January 1, 2020, loans were reported as impaired when, based on then current
information and events, it was probable we would be unable to collect all amounts due in accordance with the original contractual
terms of the loan agreement, including scheduled principal and interest payments. Impairment was evaluated in total for smaller-
balance loans of a similar nature and on an individual loan basis for other loans. If a loan was impaired, a specific valuation
allowance was allocated, if necessary, so that the loan was reported net, at the present value of estimated future cash flows using
the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral. Interest payments on
impaired loans were typically applied to principal unless collectability of the principal amount was reasonably assured, in which
case interest was recognized on a cash basis. Impaired loans, or portions thereof, were charged off when deemed uncollectible.
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Impaired loans for the portfolio as of December 31, 2019 were as follows (in thousands):
December 31, 2019
With no related allowance recorded
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied (2)
Construction and land development
Commercial loans
Residential 1-4 family (3)
Other consumer loans
Total
With an allowance recorded
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied (2)
Construction and land development
Commercial loans
Residential 1-4 family (3)
Other consumer loans
Total
Grand total
Recorded
Investment (1)
Total Loans
Unpaid
Principal
Balance
Related
Allowance
$
$
$
$
$
$
6,890
3,120
345
5,049
1,021
$
8,530
3,363
747
8,490
2,719
—
$
16,425
—
$
23,849
— $
176
—
2,498
2,841
39
5,554
21,979
$
$
— $
281
—
2,533
3,243
39
6,096
29,945
$
$
—
—
—
—
—
—
—
—
1
—
957
92
1
1,051
1,051
(1) Recorded investment is after cumulative prior charge offs of $1.5 million as of December 31, 2019. These loans also have aggregate
SBA guarantees of $4.4 million as of December 31, 2019.
Includes loans secured by farmland and multi-family residential loans.
Includes home equity lines of credit.
(2)
(3)
The following tables present the average recorded investment and interest income recognized for impaired loans recognized
by class of loans for the years ended December 31, 2019 and 2018 (in thousands):
Year Ended December 31, 2019
With no related allowance recorded
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied (1)
Construction and land development
Commercial loans
Residential 1-4 family (2)
Other consumer loans
Total
With an allowance recorded
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied (1)
Construction and land development
Commercial loans
Residential 1-4 family (2)
Other consumer loans
Total
Grand total
90
Total Loans
Average
Recorded
Investment Recognized
Interest
Income
$
$
$
$
$
$
7,387
3,205
398
5,254
1,061
—
$
17,305
— $
182
—
3,027
2,944
39
6,192
23,497
$
$
453
191
57
214
149
—
1,064
—
19
—
176
111
—
306
1,370
Table of Contents
For the Year Ended December 31, 2018
With no related allowance recorded
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied (1)
Construction and land development
Commercial loans
Paycheck Protection Program Loans
Residential 1-4 family (2)
Other consumer loans
Total
With an allowance recorded
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied (1)
Construction and land development
Commercial loans
Paycheck Protection Program loans
Residential 1-4 family (2)
Other consumer loans
Total
Grand total
Total Loans
Average
Recorded
Investment
Interest
Income
Recognized
$
$
$
$
$
2,780
169
—
3,319
—
1,582
—
7,850
—
—
—
2,530
—
1,422
—
3,952
11,802
$
$
$
$
$
179
22
—
92
—
125
—
418
—
—
—
200
—
67
—
267
685
(1)
(2)
Includes loans secured by farmland and multi-family residential loans.
Includes home equity lines of credit.
Non-Accrual and Past Due Loans
Loans are considered past due if the required principal and interest payments have not been received as of the date such
payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet
payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a
borrower may be unable to meet payment obligations for each class of loans, we consider the borrower’s debt service capacity
through the analysis of current financial information, if available, and/or current information with regards to our collateral
position. Regulatory provisions would typically require the placement of a loan on non-accrual status if (i) principal or interest
has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full
payment of principal and interest is not expected. Loans may be placed on non-accrual status regardless of whether or not such
loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on
non-accrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be
returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal
and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six
months) of repayment performance by the borrower.
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The following tables present the aging of the recorded investment in past due loans by class of loans as of December 31, 2020
and 2019 (in thousands):
December 31, 2020
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied (1)
Construction and land development
Commercial loans
Paycheck Protection Program loans
Residential 1-4 family (2)
Other consumer loans
Total Non-PCD loans
PCD loans
Total
30 - 59 60 - 89
Days
Past Due
Days
Past Due
$ — $ — $
—
39
33
—
388
4
464
—
464
—
23
64
—
1,545
207
1,839
—
$ 1,839
$
$
90
Days
or More
Loans Not
Past Due
Total
Past Due
— $ — $
—
—
62
—
97
—
—
—
— 1,933
211
—
2,303
—
—
—
— $ 2,303
435,078
719,635
103,202
186,963
319,428
646,930
22,079
2,433,315
8,908
$ 2,442,223
30 - 59 60 - 89
December 31, 2019
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied (1)
Construction and land development
Commercial loans
Residential 1-4 family (2)
Other consumer loans
Total
Days
Past Due
813
$
936
746
234
4,060
107
$ 6,896
90
Days
or More
Days
Past Due
$ — $ — $
— —
Total
Past Due
813
936
— 1,021
296
—
— — 4,060
— —
107
$ — $ 7,233
$
275
62
337
Nonaccrual
Loans (3)
Loans Not
Past Due
$
$
— $
—
—
413,666
657,936
149,729
214,814
707,199
26,158
$ 2,169,502
6,337
2,524
39
8,900
Total
Loans (4)
$
435,078
719,635
103,264
187,060
319,428
648,863
22,290
2,435,618
8,908
$ 2,444,526
$
Total
Loans
414,479
658,872
150,750
221,447
713,783
26,304
$ 2,185,635
Includes loans secured by farmland and multi-family residential loans.
Includes home equity lines of credit.
(1)
(2)
(3) Nonaccrual loans include SBA guaranteed amounts totaling $4.1 million at December 31, 2019.
(4)
Includes $122.0 million of loans that were subject to deferrals at December 31, 2020.
The amortized cost, by class, of loans and leases on nonaccrual status, and loans and leases greater than 90 days past due and
still accruing at December 31, 2020, were as follows (in thousands):
December 31, 2020
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied (1)
Commercial loans
Residential 1-4 family (2)
Other consumer loans
Total Non-PCD loans
PCD loans
Total
90
Days
or More
Loans Not
Past Due
Total
Nonaccrual
Loans (3)
$
$
2,641
1,098
2,104
2,035
9
7,887
1,853
9,740
$
$
— $
4,481
228
13
—
4,722
—
4,722
$
2,641
5,579
2,332
2,048
9
12,609
1,853
14,462
Includes loans secured by farmland and multi-family residential loans.
Includes home equity lines of credit.
(1)
(2)
(3) Nonaccrual loans include SBA guaranteed amounts totaling $3.1 million at December 31, 2020.
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The following table presents year-end non-accrual loans as of December 31, 2020, segregated by class of loans (in
thousands):
December 31, 2020
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied (1)
Commercial loans
Residential 1-4 family (2)
Other consumer loans
Total non-PCD loans
PCD loans
Total non-accrual loans
Total
Non-Accrual (3)
Non-Accrual With
No Credit
Loss Allowance (4)
$
$
2,641
5,579
2,332
2,048
9
12,609
1,853
14,462
$
$
2,641
5,579
582
687
9
9,498
—
9,498
Includes loans secured by farmland and multi-family residential loans.
Includes home equity lines of credit.
(1)
(2)
(3) Nonaccrual loans include SBA guaranteed amounts totaling $3.1 million at December 31, 2020.
(4) Nonaccrual loans with no credit loss allowance include SBA guaranteed amounts totaling $1.7 million at December 31, 2020.
The following table presents non-accrual loans as of December 31, 2020 by class and year of origination (in thousands):
Revolving
Loans
Revolving Converted
$
Commercial real estate - owner
occupied
Commercial real estate - non-
owner occupied (1)
Construction and land development
Commercial loans
Paycheck Protection Program loans
Residential 1-4 family (2)
Other consumer loans
Total non-PCD non-accruals
PCD loans
Total non-accrual loans
$
2020
2019
2018
2017
2016
Prior
Loans
To Term Total (3)
— $
— $
— $
— $
— $
2,641 $
— $
— $
2,641
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
— $
1,098
—
107
—
151
—
1,356
1,853
3,209 $
4,481
—
—
—
—
—
4,481
—
4,481 $
—
—
2,225
—
1,374
9
6,249
—
6,249 $
—
—
—
—
523
—
523
—
523 $
5,579
—
—
—
2,332
—
—
—
2,048
—
9
—
— 12,609
—
1,853
— $ 14,462
Includes loans secured by farmland and multi-family residential loans.
Includes home equity lines of credit.
(1)
(2)
(3) Nonaccrual loans include SBA guaranteed amounts totaling $3.1 million at December 31, 2020.
Had non-accrual loans performed in accordance with their original contract terms, we would have recognized additional
interest income, net of tax, of approximately $630 thousand in 2020.
Troubled Debt Restructurings
A modification is classified as a TDR if both of the following exist: (1) the borrower is experiencing financial difficulty and
(2) the Bank has granted a concession to the borrower. The Bank determines that a borrower may be
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experiencing financial difficulty if the borrower is currently delinquent on any of its debt, or if the Bank is concerned that the
borrower may not be able to perform in accordance with the current terms of the loan agreement in the foreseeable future. Many
aspects of the borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty,
particularly as it relates to commercial borrowers due to the complex nature of the loan structure, business/industry risk and
borrower/guarantor structures. Concessions may include the reduction of an interest rate at a rate lower than current market rates
for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, or principal forgiveness. When
evaluating whether a concession has been granted, the Bank also considers whether the borrower has provided additional
collateral or guarantors and whether such additions adequately compensate the Bank for the restructured terms, or if the revised
terms are consistent with those currently being offered to new loan customers. The assessments of whether a borrower is
experiencing (or is likely to experience) financial difficulty and whether a concession has been granted is subjective in nature and
management’s judgment is required when determining whether a modification is a TDR.
Although each occurrence is unique to the borrower and is evaluated separately, for all portfolio segments, TDRs are typically
modified through reduction in interest rates, reductions in payments, changing the payment terms from principal and interest to
interest only, and/or extensions in term maturity.
For the year ended December 31, 2020, there were seven TDR loans in the amount of $987 thousand primarily due to the
economic impact of COVID-19. There have been no defaults of TDRs modified during the past twelve months.
Credit Quality Indicators
Through its system of internal controls, Southern National evaluates and segments loan portfolio credit quality on a quarterly
basis using regulatory definitions for Special Mention, Substandard and Doubtful. Special Mention loans are considered to be
criticized. Substandard and Doubtful loans are considered to be classified. Southern National had no loans classified Doubtful at
December 31, 2020 or 2019.
Special Mention loans are loans that have a potential weakness that deserve management’s close attention. If left uncorrected,
these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit
position.
Substandard loans may be inadequately protected by the current net worth and paying capacity of the obligor or of the
collateral pledged if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the
debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not
corrected.
Doubtful loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable. Southern National had no loans classified Doubtful at December 31, 2020 or 2019.
In monitoring credit quality trends in the context of assessing the appropriate level of the allowance for credit losses on loans,
we monitor portfolio credit quality by the weighted-average risk grade of each class of loan.
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The following table present weighted-average risk grades for all loans, by class and year of origination/renewal as of
December 31, 2020 (in thousands):
2020
2019
2018
2017
2016
Prior
Loans
To Term
Total
Revolving
Loans
Revolving Converted
Commercial real estate - owner occupied
Not Rated
Pass
Special Mention
Substandard
Weighted average risk grade
Commercial real estate - nonowner occupied (1)
Not Rated
Pass
Special Mention
Substandard
Weighted average risk grade
Construction and land development
Not Rated
Pass
Special Mention
Substandard
Weighted average risk grade
Commercial loans
Not Rated
Pass
Special Mention
Substandard
Weighted average risk grade
Paycheck Protection Program loans
Not Rated
Pass
Special Mention
Substandard
Weighted average risk grade
Residential 1-4 family (2)
Not Rated
Pass
Special Mention
Substandard
Weighted average risk grade
Other consumer loans
Not Rated
Pass
Special Mention
Substandard
Weighted average risk grade
PCD
Not Rated
Pass
Special Mention
Substandard
Weighted average risk grade
Total
Weighted average risk grade
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
— $
22,473
—
2,007
24,480 $
3.70
— $
73,178
—
73,178 $
3.55
7,666 $
20,805
—
—
28,471 $
3.34
— $
11,372
—
13
11,385 $
3.30
— $
319,428
—
—
319,428 $
2.00
52,416 $
15,497
—
—
67,913 $
3.33
3,811 $
585
—
—
4,396 $
3.63
— $
—
—
—
— $
— $
43,484
—
—
43,484 $
3.41
— $
32,275
—
—
32,275 $
3.78
8,332 $
19,231
—
—
27,563 $
3.90
— $
18,852
—
—
18,852 $
3.66
— $
—
—
—
— $
— $
41,006
—
—
41,006 $
3.62
— $
101,150
—
—
101,150 $
3.32
56 $
14,473
—
—
14,529 $
3.68
— $
13,569
—
1,350
14,919 $
3.69
— $
—
—
—
— $
— $
46,847
149
—
46,996 $
3.64
— $
96,427
1,035
1,069
98,531 $
3.59
746 $
11,726
—
—
12,472 $
4.00
1,919 $
14,335
—
107
16,361 $
3.62
— $
—
—
—
— $
— $
61,758
1,692
2,449
65,899 $
3.70
— $
141,460
221
4,481
146,162 $
3.70
385 $
4,804
—
—
5,189 $
3.97
— $
3,405
—
66
3,471 $
3.97
— $
—
—
—
— $
— $
188,074
11,822
3,011
202,907 $
3.55
362 $
224,554
12,890
18,783
256,589 $
3.90
2,026 $
12,174
—
—
14,200 $
3.41
— $
24,568
—
4,093
28,661 $
4.06
— $
—
—
—
— $
— $
3,608
—
—
3,608 $
3.30
— $
11,406
—
300
11,706 $
3.79
— $
799
—
—
799 $
4.00
— $
87,118
—
987
88,105 $
3.66
— $
—
—
—
— $
— $
6,698
—
—
6,698 $
4.00
— $
44
—
—
44 $
3.00
— $
41
—
—
41 $
4.00
— $
5,306
—
—
5,306 $
3.94
— $
—
—
—
— $
N/A
N/A
N/A
N/A
N/A
N/A
N/A
104,378 $
14,654
—
—
119,032 $
3.59
1,921 $
244
—
—
2,165 $
3.28
— $
—
—
—
— $
68,889 $
18,557
—
—
87,446 $
3.44
1,803 $
—
—
—
1,803 $
N/A
— $
—
—
—
— $
62,047 $
9,809
52
151
72,059 $
3.41
943 $
—
—
—
943 $
N/A
35,767 $
10,033
—
—
45,800 $
3.57
6,458 $
—
—
—
6,458 $
N/A
— $
—
—
1,825
1,825 $
6.00
249,187 $
3.64
— $
400
—
—
400 $
4.00
273,379 $
3.71
96,827 $
64,106
48
2,118
163,099 $
3.92
2,767 $
62
115
10
2,954 $
4.72
1,176 $
2,997
1,448
1,031
6,652 $
4.63
675,062 $
3.99
75,214 $
13,810
277
719
90,020 $
3.55
3,534 $
37
—
—
3,571 $
4.00
31 $
—
—
—
31 $
2,729 $
521
201
43
3,494 $
4.18
— $
—
—
—
— $
N/A
— $
—
—
—
— $
N/A
197,840 $
3.65
N/A
15,583 $
3.98
—
413,948
13,663
7,467
435,078
3.59
362
680,494
14,146
24,633
719,635
3.70
19,211
84,053
—
—
103,264
3.67
1,919
178,525
—
6,616
187,060
3.71
—
319,428
—
—
319,428
N/A
498,267
146,987
578
3,031
648,863
3.68
21,237
928
115
10
22,290
3.76
1,207
3,397
1,448
2,856
8,908
4.92
2,444,526
3.39
N/A
529,251 $
2.47
N/A
243,371 $
3.63
N/A
260,853 $
3.45
(1)
(2)
Includes loans secured by farmland and multi-family residential loans.
Includes home equity lines of credit.
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As of December 31, 2019, the risk category of loans by class of loans is as follows (in thousands):
Total Loans
December 31, 2019
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied (1)
Construction and land development
Commercial loans
Residential 1-4 family (2)
Other consumer loans
Total loans
Special
Mention
$ 3,821
4,193
—
3,432
666
122
$ 12,234
Substandard (3)
3,975
$
176
690
4,462
1,194
—
$
10,497
$
Pass
406,683
654,503
150,060
213,553
711,923
26,182
$ 2,162,904
$
Total
414,479
658,872
150,750
221,447
713,783
26,304
$ 2,185,635
(1)
(2)
(3)
Includes loans secured by farmland and multi-family residential loans.
Includes home equity lines of credit.
Includes SBA guarantees of $4.1 million as of December 31, 2019.
Revolving loans that converted to term during 2020 were as follows (in thousands):
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied (1)
Construction and land development
Commercial loans
Paycheck Protection Program loans
Residential 1-4 family (2)
Other consumer loans
Total loans
(1)
(2)
Includes loans secured by farmland and multi-family residential loans.
Includes home equity lines of credit.
$
$
Total
6,536
44
—
330
—
731
—
7,641
The amount of foreclosed residential real estate property held at December 31, 2020 and 2019 was $1.0 million and $1.4
million, respectively. The recorded investment in consumer mortgage loans collateralized by residential real estate property that
are in the process of foreclosure was $1.4 million and $1.9 million at December 31, 2020 and 2019, respectively.
Allowance For Credit Losses – Loans
The allowance for credit losses on loans is a contra-asset valuation account, calculated in accordance with ASC 326 that is
deducted from the amortized cost basis of loans to present the net amount expected to be collected. The amount of the allowance
represents management's best estimate of current expected credit losses on loans considering available information, from internal
and external sources, relevant to assessing collectability over the loans' contractual terms, adjusted for expected prepayments
when appropriate. The contractual term excludes expected extensions, renewals and modifications unless (i) management has a
reasonable expectation that a trouble debt restructuring will be executed with an individual borrower or (ii) such extension or
renewal options are not unconditionally cancellable by us and, in such cases, the borrower is likely to meet applicable conditions
and likely to request extension or renewal. Relevant available information includes historical credit loss experience, current
conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation
of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk
characteristics, environmental conditions or other relevant factors. The allowance for credit losses is measured on a collective
basis for portfolios of loans when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated for
expected credit losses on an individual basis and excluded from the collective evaluation. Expected credit losses for collateral
dependent loans, including loans where the borrower is experiencing financial difficulty but foreclosure is not probable, are based
on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
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Credit loss expense related to loans reflects the totality of actions taken on all loans for a particular period including any
necessary increases or decreases in the allowance related to changes in credit loss expectations associated with specific loans or
pools of loans. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any
credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information
available, the ultimate appropriateness of the allowance is dependent upon a variety of factors beyond our control, including the
performance of our loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan
classifications.
In calculating the allowance for credit losses, most loans are segmented into pools based upon similar characteristics and risk
profiles. Common characteristics and risk profiles include the type/purpose of loan, underlying collateral, geographical similarity
and historical/expected credit loss patterns. In developing these loan pools for the purposes of modeling expected credit losses,
we also analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic
conditions and scenarios as well as other portfolio stress factors. For allowance modeling purposes, our loan pools include (i)
commercial real estate - owner occupied, (ii) commercial real estate - non-owner occupied, (iii) construction and land
development, (iv) commercial, (v) agricultural loans, (vi) residential 1-4 family and (vii) consumer loans. We periodically
reassess each pool to ensure the loans within the pool continue to share similar characteristics and risk profiles and to determine
whether further segmentation is necessary.
For each loan pool, we measure expected credit losses over the life of each loan utilizing a combination of inputs: (i)
probability of default (“PD”), which is the likelihood that loan will stop performing/default, (ii) probability of attrition (“PA”),
which is the likelihood that a loan will pay-off prior to maturity, (iii) loss given default (“LGD”), which is the expected loss rate
for loans in default and (iv) exposure at default (“EAD”), which is the estimated outstanding principal balance of the loans upon
default, including the expected funding of unfunded commitments outstanding as of the measurement date. Inputs are pool-
specific, though not necessarily solely reliant on internally-sourced data. Internal data is supplemented by, but not replaced by,
peer data when required, primarily to determine the PD input. The various pool-specific inputs may be adjusted for current
macroeconomic assumptions, as further discussed below, and other factors such as differences in underwriting standards,
portfolio mix, or when historical asset terms do not reflect the contractual terms of the financial assets being evaluated as of the
measurement date. Each time we measure expected credit losses, we assess the relevancy of historical information and consider
any necessary adjustments to address any differences in current asset-specific characteristics.
Significant macroeconomic variables utilized in our allowance models include, among other things, (i) VA Gross Domestic
Product, (ii) VA House Price Index, and (iii) VA unemployment rates. The macroeconomic variables utilized as inputs in forecast
modeling were subjected to a variety of analysis procedures and were selected primarily based on statistical relevancy and
correlation to historical credit losses, where historical credit losses may be fully internally-sourced or supplemented with peer
data.
PDs were estimated by analyzing the relationship between the historical performance of each loan pool and historical
economic trends over a complete economic cycle. Again, historical performance data is either fully internally-sourced or
supplemented with peer data where necessary. PDs are adjusted to reflect the current impact of certain macroeconomic variables
as well as their expected changes over a reasonable and supportable forecast period. We have determined that we are reasonably
able to forecast the macroeconomic variables used in our forecast modeling processes with an acceptable degree of confidence
for a total of four quarters. This forecast period is followed by an additional eight quarter reversion process whereby the
forecasted macroeconomic variables are reverted to their historical mean on a straight-line basis. By reverting these economic
inputs to their historical mean and considering loan/borrower specific attributes, our allowance models are intended to yield a
measurement of expected credit losses that reflects average historical loss rates (which may be supplemented by peer data) for
periods subsequent to the initial twelve-quarters consisting of the forecast and reversion periods. The LGD is linked to PD based
on benchmark historical loss averages for each loan pool. That is, LGD is dynamic with PD; as PD increases, so will LGD, and
vice versa. In this context, “benchmark” refers to the use of third-party data, and “historical loss averages” refers to the fraction
of defaulted balance that tends to be lost. By nature of its connection to PD, LGD is by extension adjusted to reflect the current
impact of certain macroeconomic variables as well as their expected changes over the four-quarter forecast period and eight-
quarter reversion process, which management considers to be both reasonable and supportable. This same forecast/reversion
period is used for all macroeconomic variables used in all of our economic forecast models. PA and EAD are estimated using
either a Discounted Cash Flow or Remaining
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Life model, both of which use various timing inputs to estimate the loan balance that remains at various future points in time, and
thus also at the time of a default event.
Management qualitatively adjusts allowance model results for risk factors that are not considered within our quantitative
modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These qualitative
factor (“Q-Factor”) adjustments may increase or decrease management's estimate of expected credit losses by a calculated
percentage or amount based upon the estimated level of risk. The various risks that may be considered in making Q-Factor
adjustments include, among other things, the impact of (i) changes in lending policies and procedures, including changes in
underwriting standards and practices for collections, write-offs, and recoveries, (ii) actual and expected changes in international,
national, regional, and local economic and business conditions and developments that affect the collectability of the loan pools,
(iii) changes in the nature and volume of the loan pools and in the terms of the underlying loans, (iv) changes in the experience,
ability, and depth of our lending management and staff, (v) changes in volume and severity of past due financial assets, the
volume of non-accrual assets, and the volume and severity of adversely classified or graded assets, (vi) changes in the quality of
our credit review function, (vii) changes in the value of the underlying collateral for loans that are non-collateral dependent, (viii)
the existence, growth, and effect of any concentrations of credit and (ix) other factors such as the regulatory, legal and
technological environments; competition; and events such as natural disasters or health pandemics.
In some cases, management may determine that an individual loan exhibits unique risk characteristics which differentiate the
loan from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual
basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by
analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic
conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based
upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided
substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the
collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the
collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of
real estate collateral supporting collateral dependent loans is evaluated by our internal appraisal services using a methodology
that is consistent with the Uniform Standards of Professional Appraisal Practice. The fair value of collateral supporting collateral
dependent construction loans is based on an “as is” valuation.
The following table presents details of the allowance for credit losses on loans segregated by loan portfolio segment as of
December 31, 2020, calculated in accordance with the CECL methodology described above (in thousands).
Commercial Commercial
December 31, 2020
Modeled expected credit losses
Q-factor and other qualitative
adjustments
Specific allocations
Total
Real Estate
Owner
Occupied
2,565
$
Real Estate Construction
Non-owner
Occupied (1) Development
1,297
$
and Land
4,666
$
Paycheck
Commercial Protection
1-4 Family
Loans
544
Program Residential (2)
5,113
$
— $
Other
Consumer
Loans
306
$
PCD
Loans
Total
$ — $ 14,491
4,134
—
8,276
—
$
516
2
1,815
$
6,699
$ 12,942
917
37
1,498
$
—
—
— $
5,330
37
10,480
$
194
17
517
— 19,367
2,487
$ 36,345
2,394
$ 2,394
$
$
(1)
(2)
Includes loans secured by farmland and multi-family residential loans.
Includes home equity lines of credit.
No allowance for credit losses has been recognized for PPP loans as such loans are fully guaranteed by the SBA.
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Activity in the allowance for credit losses by class of loan for the year ended December 31, 2020 and allowance for loan
losses by class of loan for the years ended December 31, 2019 and 2018 is summarized below (in thousands):
Commercial Commercial
Year Ended December 31, 2020
Allowance for credit losses:
Beginning balance
Adoption of ASC 326
Balance
Provision (credits)
Charge offs
Recoveries
Ending balance
Year Ended December 31, 2019
Allowance for loan losses:
Beginning balance
Provision (recovery) for non-
purchased loans
Provision for purchase credit
impaired loans
Total Provision (recovery)
Charge offs
Recoveries
Ending balance
Year ended December 31, 2018
Allowance for loan losses:
Beginning balance
Provision (recovery) for non-
purchased loans
Provision for purchase credit
impaired loans
Provision (recovery)
Charge offs
Recoveries
Ending balance
Real Estate
Owner
Real Estate
Non-owner
Occupied Occupied (1) Development
Construction
and Land
Commercial
Loans
1-4 Family
Residential (2)
Other
Consumer
Loans
PCD
Loans
Unallocated
Total
$
$
$
$
$
$
810
1,704
2,514
4,232
(52)
5
6,699
$
$
1,720
2,706
4,426
8,381
—
135
$ 12,942
$
$
683
674
1,357
458
—
—
$
1,815
5,418
(3,246)
2,172
966
(1,734)
94
1,498
$
$
1,266
4,169
5,435
5,060
(433)
418
10,480
$
$
190
187
377
231
(124)
33
517
$ — $
2,272
2,272
122
—
—
$
$ 2,394
174
(174)
$ 10,261
8,292
— 18,553
— 19,450
(2,343)
—
—
685
— $ 36,345
802
$
1,669
$
821
$
7,097
$
1,106
$
224
$ — $
564
$ 12,283
587
—
587
(782)
203
810
$
904
(138)
(1,708)
596
—
904
(863)
10
1,720
$
—
(138)
—
—
$
683
300
(1,408)
(622)
351
5,418
$
—
596
(742)
306
1,266
$
199
—
199
(269)
36
190
—
—
—
—
—
$ — $
50
(390)
—
(390)
300
350
(3,278)
906
$ 10,261
—
—
174
690
$
1,321
$
692
$
4,496
$
1,586
$
612
$ — $
— $ 9,397
497
—
497
(400)
15
802
$
348
129
1,941
237
—
348
—
—
$
1,669
—
129
—
—
$
821
600
2,541
(1,566)
1,626
7,097
$
—
237
(842)
125
1,106
$
(116)
—
(116)
(290)
18
224
—
564
3,600
—
—
—
—
$ — $
—
564
—
—
564
600
4,200
(3,098)
1,784
$ 12,283
(1)
(2)
Includes loans secured by farmland and multi-family residential loans.
Includes home equity lines of credit.
Generally, a commercial loan, or a portion thereof, is charged-off when it is determined, through the analysis of any available
current financial information with regards to the borrower, that the borrower is incapable of servicing unsecured debt, there is
little or no prospect for near term improvement and no realistic strengthening action of significance is pending or, in the case of
secured debt, when it is determined, through analysis of current information with regards to our collateral position, that amounts
due from the borrower are in excess of the calculated current fair value of the collateral. Losses on installment loans are
recognized in accordance with regulatory guidelines. All other consumer loan losses are recognized when delinquency exceeds
120 cumulative days.
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The following table presents loans that were evaluated for expected credit losses on an individual basis and the related
specific allocations, by loan portfolio segment as of December 31, 2020 (in thousands):
December 31, 2020
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied (1)
Construction and land development
Commercial loans
Paycheck Protection Program loans
Residential 1-4 family (2)
Other consumer loans
Total non-PCD loans
PCD loans
Total loans
(1)
(2)
(3)
Includes loans secured by farmland and multi-family residential loans.
Includes home equity lines of credit.
Includes SBA guarantees of $2.5 million as of December 31, 2020.
Loan
Balance (3)
Specific
Allocations
$
$
23,397 $
8,536
77
5,515
—
2,399
17
39,941
8,908
48,849 $
—
—
2
37
—
37
17
93
2,394
2,487
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio
segment and based on impairment method as of December 31, 2019 (in thousands):
December 31, 2019
Ending allowance balance
attributable to loans:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total ending allowance
Loans:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total ending loan balances
Commercial Commercial
Real Estate
Owner
Occupied
Real Estate Construction
Non-owner
Occupied (1) Development
and Land
Commercial
Loans
Paycheck
Protection
Program Residential (2)
1-4 Family
Other
Consumer
Loans
Unallocated
Total
$
$
— $
— $
— $
957
810
810
$
1,720
1,720
$
683
683
$
4,461
5,418
$
6,890
$
3,120
$
345
$
7,544
407,589
$ 414,479
655,752
$ 658,872
150,405
$ 150,750
213,903
$ 221,447
$
$
$
$
— $
85
—
— $
1,181
1,266
$
$
— $
— $
1,042
190
190
$
174
174
$
9,219
10,261
— $
1,443
$
— $
— $
19,342
—
712,340
— $ 713,783
26,304
$ 26,304
$
— 2,166,293
— $ 2,185,635
(1)
(2)
Includes loans secured by farmland and multi-family residential loans.
Includes home equity lines of credit.
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Purchased Loans
The following table presents the carrying amount of purchased impaired and non-impaired loans from the acquisitions as of
December 31, 2019 (in thousands):
Commercial real estate (1)
Construction and land development
Commercial loans
Residential 1-4 family (2)
Other consumer loans
Total
Purchased
Impaired
Loans
December 31, 2019
Purchased
Non-impaired
Loans
$
$
$
3,978
26
2,354
2,841
—
$
9,199
307,289
21,111
34,729
232,887
15,153
611,169
$
$
Total
311,267
21,137
37,083
235,728
15,153
620,368
(1)
(2)
Includes owner occupied and non-owner occupied as well as loans secured by farmland and multi-family residential loans.
Includes home equity lines of credit.
Changes in the carrying amount and accretable yield for purchased impaired and non-impaired loans from the acquisitions
were as follows for the years ended December 31, 2019 (in thousands):
December 31, 2019
Balance at beginning of the period
Accretion
Payments received
Balance at end of the period
4. FAIR VALUE
$
$
Accretable
Yield
Purchased Impaired
Carrying
Amount
of Loans
$ 11,449
72
(2,322)
9,199
174
(72)
—
$
102
Accretable
Discount
13,474
(3,549)
Purchased Non-impaired
Carrying
Amount
of Loans
$ 795,759
3,549
(188,139)
$ 611,169
—
9,925
$
$
ASC 820 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to
measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to
access as of the measurement date
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by
observable market data
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that
market participants would use in pricing an asset or liability
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The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the
general classification of such instruments pursuant to the valuation hierarchy:
Assets Measured on a Recurring Basis:
Investment Securities Available for Sale
Where quoted prices are available in an active market, investment securities are classified within Level 1 of the valuation
hierarchy. Level 1 investment securities include highly liquid government bonds and mortgage products. If quoted market prices
are not available, then fair values are estimated by using pricing models, quoted prices of investment securities with similar
characteristics or discounted cash flow. Level 2 investment securities include U.S. agency securities, mortgage-backed securities,
obligations of states and political subdivisions and certain corporate, asset-backed and other securities. In certain cases where
there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of
the valuation hierarchy. Currently, a majority of Southern National’s available for sale debt investment securities are considered
to be Level 2 investment securities, except for a few corporate securities that are classified as Level 3 investment securities.
Assets measured at fair value on a recurring basis are summarized below:
(dollars in thousands)
Available for sale securities
Residential government-sponsored mortgage-backed securities
Obligations of states and political subdivisions
Corporate securities
Residential government-sponsored collateralized mortgage
obligations
Government-sponsored agency securities
Agency commercial mortgage-backed securities
SBA pool securities
Total
Total at
December 31, 2020
$
$
37,060
24,042
15,079
29,416
6,075
30,190
11,371
153,233
(dollars in thousands)
Available for sale securities
Residential government-sponsored mortgage-backed securities
Obligations of states and political subdivisions
Corporate securities
Trust preferred securities
Residential government-sponsored collateralized mortgage
obligations
Government-sponsored agency securities
Agency commercial mortgage-backed securities
SBA pool securities
Total
Total at
December 31, 2019
$
$
48,979
17,582
2,012
2,568
36,689
14,822
27,731
14,437
164,820
Fair Value Measurements Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Other
Significant
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
— $
—
—
37,060
24,042
14,079
29,416
—
6,075
—
30,190
—
—
11,371
— $ 152,233
$
$
—
—
1,000
—
—
—
—
1,000
Fair Value Measurements Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Other
Significant
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
— $
—
—
—
48,979
17,582
1,012
2,568
36,689
—
14,822
—
27,731
—
—
14,437
— $ 163,820
$
$
—
—
1,000
—
—
—
—
—
1,000
$
$
$
$
No corporate securities that are classified as Level 3 above were purchased or sold during 2020 or 2019. These corporate
securities did not have a material impact on the income statement for the year ended December 31, 2020 or 2019.
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Assets and Liabilities Measured on a Non-recurring Basis:
Loans
We may be required to measure certain financial assets at fair value on a nonrecurring basis. These adjustments to fair value
usually result from the application of lower of amortized cost or fair value accounting or write-downs of individual assets due to
impairment.
Following the adoption of ASC 326, the population of loans measured at fair value on a non-recurring basis has greatly
diminished and is limited to collateral-dependent loans evaluated individually. These collateral-dependent loans are deemed to be
at fair value if there is an associated allowance for credit losses or if a charge-off has been recorded in the previous 12 months.
Collateral values are determined using appraisals or other third-party value estimates of the subject property discounted based on
estimated selling costs, generally between 5% and 10%, and immaterial adjustments for other external factors that may impact
the marketability of the collateral. The weighted average discount for estimated selling costs applied was 6%.
Prior to the adoption of ASC 326, we measured the impairment for impaired loans considering the fair value of the loan’s
collateral (if the loan was collateral dependent). Fair value of the loan’s collateral was determined by an independent appraisal or
evaluation less estimated costs related to selling the collateral. In some cases appraised value was net of costs to sell. Estimated
selling costs ranged from 5% to 10% of collateral valuation at December 31, 2019. Fair value was classified as Level 3 in the fair
value hierarchy. Loans identified as impaired totaled $22.0 million (including SBA guarantees of $4.4 million) with a $1.1
million allocation made to the allowance for loan losses at December 31, 2019.
Other Real Estate Owned
OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or evaluation
less cost to sell. In some cases appraised value is net of costs to sell. Selling costs have been in the range from 5% to 10% of
collateral valuation at December 31, 2020 and 2019. Fair value is classified as Level 3 in the fair value hierarchy. OREO is
further evaluated quarterly for any additional impairment. At December 31, 2020 and 2019, the total amount of OREO was $3.1
million and $6.2 million, respectively.
Assets measured at fair value on a non-recurring basis are summarized below:
(dollars in thousands)
Collateral dependent loans
Other real estate owned:
Commercial real estate - non-owner occupied (1)
Construction and land development
Residential 1-4 family (2)
Fair Value Measurements Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
— $
— $
47,001
Total at
December 31, 2020
$
47,001
$
865
1,221
992
—
—
—
—
—
—
865
1,221
992
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(dollars in thousands)
Impaired loans:
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied (1)
Construction and land development
Commercial loans
Residential 1-4 family (2)
Consumer
Other real estate owned:
Commercial real estate - non-owner occupied (1)
Construction and land development
Residential 1-4 family (2)
Fair Value Measurements Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total at
December 31, 2019
$
$
6,890
3,296
345
7,547
3,862
39
1,984
2,874
1,366
— $
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
6,890
3,296
345
7,547
3,862
39
1,984
2,874
1,366
(1)
(2)
Includes loans secured by farmland and multi-family residential loans.
Includes home equity lines of credit.
Fair Value of Financial Instruments
The carrying amount, estimated fair values and fair value hierarchy levels (previously defined) of financial instruments were
as follows (in thousands) for the periods indicated:
Fair Value
Hierarchy Level
December 31, 2020
Fair
Value
Carrying
Amount
December 31, 2019
Fair
Value
Carrying
Amount
Financial assets:
Cash and cash equivalents
Securities available for sale
Securities held to maturity
Stock in Federal Reserve Bank and Federal Home
Loan Bank
Equity investment in mortgage affiliate
Preferred investment in mortgage affiliate
Net loans
Accrued interest receivable
Financial liabilities:
Demand deposits and NOW accounts
Money market and savings accounts
Time deposits
Securities sold under agreements to repurchase
FHLB advances
Junior subordinated debt
Senior subordinated notes
Accrued interest payable
Level 1
$
Level 2 & Level 3
196,185
153,233
40,721
$
196,185
153,233
41,832
$
31,928
164,820
72,448
$
31,928
164,820
72,666
Level 2
Level 2
Level 3
Level 3
Level 3
Level 2
Level 2
Level 2
Level 3
Level 1
Level 1
Level 2
Level 2
Level 2
16,927
12,652
3,305
2,404,151
17,405
$ 1,155,426
787,132
490,048
16,065
100,000
9,682
105,647
3,057
16,927
12,652
3,305
2,435,612
17,405
$ 1,155,426
787,132
495,022
16,065
100,000
8,863
109,276
3,057
17,832
5,020
3,305
2,175,786
8,210
17,832
5,020
3,305
2,180,487
8,210
$
$
730,325
611,353
783,040
12,883
121,640
9,632
47,051
4,907
730,325
611,353
786,420
12,883
121,640
9,206
48,156
4,907
Carrying amount is the estimated fair value for cash and cash equivalents (including federal funds sold), accrued interest
receivable and payable, demand deposits, savings accounts, money market accounts and FHLB advances and securities sold
under agreements to repurchase.
The investment in common stock of our mortgage affiliate is accounted for using the equity method. Under the equity
method, the carrying value of Southern National’s investment in STM was originally recorded at cost but is adjusted periodically
to record Southern National’s proportionate share of STM’s earnings or losses through noninterest income and decreased by the
amount of cash dividends or similar distributions received from STM. The investment in
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preferred stock of our mortgage affiliate is considered to be a non-marketable equity security that does not have a readily
determinable fair value. Non-marketable equity securities with no recurring market value data available are reviewed periodically
and any observable market value change is adjusted through noninterest income. Southern National evaluates its investments in
this non-marketable equity security for impairment and recoverability of the recorded investment by considering positive and
negative evidence, including the profitability and asset quality of STM, dividend payment history and recent redemption
experience. Impairment is assessed at each reporting period and if identified, is recognized in noninterest income. No impairment
was recorded for the year ended December 31, 2020 and 2019.
Fair value of long-term debt is based on current rates for similar financing. Carrying amount of Federal Reserve Bank and
Federal Home Loan Bank stock is a reasonable estimate of fair value as these securities are not readily marketable and are based
on the ultimate recoverability of the par value. The fair value of off-balance-sheet items is not considered material. Fair value of
net loans, time deposits, junior subordinated debt, and senior subordinated notes are measured using the exit-price notion.
5. BANK PREMISES AND EQUIPMENT
Bank premises and equipment as of December 31, 2020 and 2019 were as follows (in thousands):
Land
Land improvements
Building and improvements
Leasehold improvements
Furniture and equipment
Construction in progress
Less accumulated depreciation and amortization
Bank premises and equipment, net
2020
2019
$
$
8,139
1,558
23,164
3,001
8,962
1,441
46,265
15,959
30,306
$
$
8,139
1,558
23,164
2,933
8,789
719
45,302
14,118
31,184
Depreciation and amortization expense related to bank premises and equipment for 2020, 2019 and 2018 was $2.0 million, $2.3
million and $3.3 million, respectively.
6. LEASES
The Company leases certain premises and equipment under operating leases. In recognizing lease right-of-use assets and
related liabilities, we account for lease and non-lease components (such as taxes, insurance, and common area maintenance costs)
separately as such amounts are generally readily determinable under our lease contracts. At December 31, 2020 and 2019, the
Company had operating lease liabilities totaling $8.2 million and $8.5 million, respectively, and right-of-use assets totaling $7.5
million and $8.0 million, respectively, related to these leases. Operating lease liabilities and right-of-use assets are reflected in
our consolidated balance sheets. We do not currently have any financing leases. For the year ended December 31, 2020 and 2019,
our net operating lease cost was $2.9 million and $2.5 million, respectively, and were reflected in occupancy expenses on our
income statements.
The following table presents supplemental cash flow and other information related to our operating leases:
(in thousands except for percent and period data)
Supplemental cash flow information:
Cash paid for amounts included in the measurement of lease liabilities
Other information:
Weighted-average remaining lease term - operating leases, in years
Weighted-average discount rate - operating leases
December 31, 2020
December 31, 2019
For the Year Ended
$
5,062
$
4,883
4.8
2.5 %
5.7
2.8 %
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The following table summarizes the maturity of remaining lease liabilities:
(dollars in thousands)
Lease payments due:
Less than one year
One to three years
Three to five years
More than five years
Total lease payments
Less: imputed interest
Lease liabilities
As of
December 31, 2020
$
$
2,542
3,791
1,123
1,376
8,832
(594)
8,238
As of December 31, 2020 and 2019, the Company did not have any operating leases that have not yet commenced that will
create additional lease liabilities and right-of-use assets for the Company.
7. GOODWILL AND INTANGIBLE ASSETS
Goodwill
Southern National has recorded $101.9 million of goodwill at December 31, 2020 and 2019. Goodwill is primarily related to
the acquisition of other banks.
Goodwill is evaluated for impairment on an annual basis or more frequently if events or circumstances warrant. Our annual
assessment occurs during the third calendar quarter. In response to the effects of COVID-19, management determined there to be
a triggering event in the third quarter of 2020 warranting a goodwill assessment. For the third quarter 2020 assessment, we
performed a step one quantitative assessment to determine if the fair value of all our reporting units was less than its carrying
amount. We concluded that the fair value of all our reporting units exceeded their carrying amounts and no impairment was
present based on management’s assessment. No impairment was indicated in 2020, 2019 or 2018.
Intangible Assets
Intangible assets were as follows at year end (in thousands):
Amortizable core deposit intangibles
Amortizable core deposit intangibles
December 31, 2020
Gross Carrying Accumulated Net Carrying
Value
$
17,503
Amortization
$
(11,677) $
Value
5,826
December 31, 2019
Gross Carrying Accumulated Net Carrying
Value
$
17,503
Amortization
$
(10,312) $
Value
7,191
Estimated amortization expense of intangibles for the years ended December 31 were as follows (in thousands):
2021
2022
2023
2024
2025
Total
$ 1,364
1,325
1,269
1,266
602
$ 5,826
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8. DEPOSITS
The aggregate amount of time deposits in denominations of $250 thousand or more at December 31, 2020 and 2019 was
$165.7 million and $163.2 million, respectively.
At December 31, 2020, the scheduled maturities of time deposits are as follows (in thousands):
2021
2022
2023
2024
2025
2026
Total
$
$
369,743
77,081
27,927
10,662
4,600
35
490,048
The following table sets forth the maturities of certificates of deposit of $250 thousand and over as of December 31, 2020 (in
thousands):
Within
3 Months
3 to 6
Months
6 to 12
Months
Over 12
Months
Total
$
36,234
$
38,192
$
39,515
$
51,807
$
165,748
As of December 31, 2020, we had brokered certificates of deposit in the amount of $270 thousand and brokered money
market deposits of $55.2 million. At December 31, 2019, we had brokered certificates of deposit in the amount of $114.1 million,
and we had brokered money market deposits of $24.4 million.
For our deposit agreements with certain customers, we hold the collateral in a segregated custodial account. We are 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.
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
Other borrowings can consist of FHLB convertible advances, FHLB of Atlanta overnight advances, FHLB advances maturing
within one year, federal funds purchased and securities sold under agreements to repurchase (“repo”) that mature within one year,
which are secured transactions with customers. The balance in repo accounts at December 31, 2020 and 2019 was $16.0 million
and $12.9 million, respectively.
At December 31, 2020 and 2019, we have pledged callable agency securities, residential government-sponsored mortgage-
backed securities and collateralized mortgage obligations with a carrying value of $31.1 million and $22.0 million, respectively,
to customers who require collateral for overnight repurchase agreements and deposits.
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Other borrowings consist of the following (in thousands):
FHLB collateral advances maturing 3/1/2030
FHLB overnight advances
Short-term FHLB advances maturing 3/10/2020
Total FHLB advances
Securities sold under agreements to repurchase
Total
December 31,
2020
2019
$
$
100,000
—
—
100,000
16,065
116,065
$
$
—
81,000
40,640
121,640
12,883
134,523
Weighted average interest rate at year end
3.55 %
1.75 %
Each FHLB advance is payable at its maturity date, with a prepayment penalty for fixed rate advances paid off earlier than
maturity. Residential 1-4 family mortgage loans in the amount of approximately $390.7 million and $376.3 million were pledged
as collateral for FHLB advances as of December 31, 2020 and 2019, respectively. HELOCs in the amount of approximately
$37.2 million and $46.9 million were pledged as collateral for FHLB advances at December 31, 2020 and 2019, respectively.
Commercial mortgage loans in the amount of approximately $189.0 million and $76.6 million were pledged as collateral for
FHLB advances as of December 31, 2020 and 2019, respectively. Investment securities in the amount of $6.4 million and $17.6
million were pledged as collateral for FHLB advances at December 31, 2020 and 2019, respectively. At December 31, 2020,
Sonabank had available collateral to borrow an additional $689.1 million from the FHLB.
10. JUNIOR SUBORDINATED DEBT AND SENIOR SUBORDINATED NOTES
In 2017, the Company assumed $10.3 million of trust preferred securities that were issued on September 17, 2003 and placed
through a trust in a pooled underwriting totaling approximately $650 million. The trust issuer invested the total proceeds from the
sale of the trust preferred securities in Floating Rate Junior Subordinated Deferrable Interest Debentures (“Junior Subordinated
Debt”). At December 31, 2020 and 2019, we had $9.7 million and $9.6 million, respectively, of Junior Subordinated Debt
outstanding. The trust preferred securities pay cumulative cash distributions quarterly at a variable rate per annum, reset
quarterly, equal to the three-month LIBOR plus 2.95%. As of December 31, 2020 and 2019, the interest rate was 3.18% and
4.85%, respectively. The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are
deductible for income tax purposes.
The trust preferred securities may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to
25% of Tier 1 capital after its inclusion. At December 31, 2020, all of the trust preferred securities qualified as Tier 1 capital.
On January 20, 2017, Southern National completed the sale of $27.0 million of its fixed-to-floating rate Subordinated
Notes due 2027 (the “SNBV Senior Subordinated Notes”). The SNBV Senior Subordinated Notes will initially bear interest at
5.875% per annum until January 31, 2022; thereafter, the SNBV Senior Subordinated Notes will be payable at an annual floating
rate equal to three-month LIBOR plus a spread of 3.95% until maturity or early redemption. At December 31, 2020, all of the
SNBV Senior Subordinated Notes qualified as Tier 2 capital.
In 2017, the Company assumed the Senior Subordinated Note Purchase Agreement dated April 22, 2015 with certain
institutional accredited investors, pursuant to which $20.0 million in aggregate principal amount of its 6.50% Fixed-to-Floating
Rate Subordinated Notes due 2025 was sold to the investors. At December 31, 2020, 80% of the Senior Subordinated
Notes qualified as Tier 2 capital. On February 1, 2021, 100% of the notes were redeemed.
On August 25, 2020, Southern National completed the sale of $60.0 million of its fixed-to-floating rate Subordinated
Notes due 2030 (the “SNBV Subordinated Notes”). The SNBV Subordinated Notes will bear interest at an initial rate of 5.40%
per annum, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2021. From
and including September 1, 2025 to, but excluding the maturity date or the date of earlier redemption (the
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“floating rate period”), the interest rate will reset quarterly to an annual interest rate equal to the Benchmark rate, which is
expected to be three-month Term SOFR, plus 531 basis points, for each quarterly interest period during the floating rate period,
payable quarterly in arrears on March 1, June 1, September 1, and December 1 of each year, commencing on December 1, 2025.
Notwithstanding the foregoing, in the event that the Benchmark rate is less than zero, the Benchmark rate shall be deemed to be
zero. At December 31, 2020, all of the SNBV Subordinated Notes qualified as Tier 2 capital.
At December 31, 2020, the remaining unamortized debt issuance costs related to the Subordinated Notes totaled $1.9 million.
11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes. Net deferred tax assets at December 31, 2020 and 2019 consist
primarily of the following (in thousands):
Deferred tax assets:
Allowance for credit losses
Unearned loan fees and other
Other real estate owned write-downs
Lease liability
Other than temporary impairment charge
Purchase accounting
Federal AMT credit carryforward
Federal low income housing credit carryforward
Deferred compensation
Depreciation
Other
Total deferred tax assets
Deferred tax liabilities:
Right-of-use assets
Net unrealized gain on investment securities available for sale
Purchase accounting
Total deferred tax liabilities
Net deferred tax assets
2020
2019
$
8,028
2,583
567
1,779
—
—
1,137
444
1,734
274
1,012
17,558
1,576
916
420
2,912
14,646
$
2,235
1,064
748
1,829
229
949
1,137
3,226
1,573
218
511
13,719
1,731
200
—
1,931
11,788
$
$
No valuation allowance was deemed necessary on deferred tax assets in 2020 or 2019. Management believes that the
realization of the deferred tax assets is more likely than not based on the expectation that Southern National will generate the
necessary taxable income in future periods.
We have no unrecognized tax benefits and do not anticipate any increase in unrecognized tax benefits during the next
twelve months. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is our policy
to record such accruals in our income tax accounts; no such accruals existed as of December 31, 2020, 2019 or 2018. Southern
National and its subsidiaries file a consolidated U.S. federal income tax return, and Southern National files a Virginia state
income tax return. Sonabank files a Maryland and an Arkansas state income tax return. These returns are subject to examination
by taxing authorities for all years after 2016.
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The provision for income taxes consists of the following for the years ended December 31, 2020, 2019 and 2018 (in
thousands):
Current tax expense
Federal
State
Total current tax expense
Deferred tax expense (benefit)
Federal
State
Total deferred tax expense (benefit)
Total income tax expense
2020
2019
2018
$
$
7,825
407
8,232
(1,496)
(122)
(1,618)
6,614
$
$
4,429
228
4,657
1,350
70
1,420
6,077
$
$
6,244
249
6,493
2,692
429
3,121
9,614
The income tax expense differed from the amount of income tax determined by applying the U.S. Federal income tax rate of
21% to pretax income for the years ended December 31, 2020, 2019 and 2018 due to the following (in thousands):
Computed expected tax expense at statutory rate
Increase (decrease) in tax expense resulting from:
Remeasurement of deferred tax assets and liabilities
Low income housing tax credits, net of amortization
Income from bank-owned life insurance
Other, net
Income tax expense
2020
6,279
$
2019
8,241
$
2018
9,094
$
(31)
225
(327)
468
6,614
(1,659)
(255)
(357)
107
6,077
$
$
1,130
(502)
(416)
308
9,614
$
During 2018, the Company determined that certain net operating loss carryforwards were impaired due to Section 382
limitations. During 2019, the Company completed its formal assessment of the Section 382 limitation and rebooked $1.2 million
deferred tax asset stemming from a $5.5 million acquired net operating loss carryforward that was written off in the fourth quarter
of 2018. Additionally, the Company remeasured the depreciation deferred tax liability by $0.6 million, net, to reflect a 2018
adjustment to the assets held for sale not previously included.
12. EMPLOYEE BENEFITS
Southern National has a 401(k) plan that allows employees to make pre-tax contributions for retirement. The 401(k) plan
provides for discretionary matching contributions by Southern National. Expense for 2020, 2019 and 2018 was $795 thousand,
$704 thousand and $784 thousand, respectively.
The Bank maintains a deferred compensation plan in the form of Supplemental Executive Retirement Plan (“SERP”) for four
(4) former executives. Under the plan, the Bank pays each participant, or their beneficiary, compensation deferred plus accrued
interest for a period of 15 to 17 years after their retirement or age 62 depending on the terms and conditions of each plan. A
liability is accrued for the obligations under these plans.
The expense incurred for the deferred compensation plans in 2020, 2019 and 2018 was $1.3 million, $1.2 million and $1.2
million, respectively. The deferred compensation plan liability was $8.0 million and $7.3 million as of December 31, 2020 and
2019, respectively.
13. STOCK-BASED COMPENSATION
At the June 21, 2017 Annual Meeting of Stockholders of Southern National, the 2017 Equity Compensation Plan (the “2017
Plan”) was approved as recommended by the Board of Directors. The 2017 Plan replaced the 2010 Plan and has a maximum
number of 750,000 shares reserved for issuance. The purpose of the 2017 Plan is to promote the success of the
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Company by providing greater incentives to employees, non-employee directors, consultants and advisors to associate their
personal interests with the long-term financial success of the Company, including its subsidiaries, and with growth in stockholder
value, consistent with the Company’s risk management practices. Because the 2017 Plan was approved, shares under the 2004
stock-option plan and 2010 Plan are no longer awarded.
A summary of the activity in the stock option plan for 2020 follows:
Options outstanding, beginning of period
Forfeited
Exercised
Options outstanding, end of period
Exercisable at end of period
Shares
555,750
(11,700)
(93,250)
450,800
Price
$ 10.02
10.91
7.60
$ 10.50
437,700
$ 10.37
3.8
3.7
$
$
727
726
Weighted
Average
Weighted
Average
Remaining
Exercise Contractual
Aggregate
Intrinsic
Value
(in thousands)
3,518
$
Term
4.3
Stock-based compensation expense associated with stock options was $118 thousand, $62 thousand and $122 thousand for
the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, we do not have any unrecognized
compensation expense associated with the stock options.
A summary of the activity in the restricted stock plan for 2020 follows:
Weighted Weighted
Unvested restricted stock outstanding, beginning of period
Granted
Vested
Unvested restricted stock outstanding, end of period
Shares
86,500
102,500
(92,700)
96,300
Average
Grant-Date
Fair Value
Per Share
$
14.85
14.56
15.22
14.17
$
Average
Remaining
Contractual
Term
3.8
3.8
Restricted stock compensation expense totaled $1.4 million, $370 thousand and $158 thousand for the years ended December 31,
2020, 2019 and 2018, respectively. As of December 31, 2020, unrecognized compensation expense associated with restricted
stock was $1.2 million, which is expected to be recognized over a weighted average period of 3.9 years.
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Financial Instruments with off-balance sheet risk
Southern National is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and
guarantees of credit card accounts. These instruments involve elements of credit and funding risk in excess of the amount
recognized in the consolidated balance sheet. Letters of credit are written conditional commitments issued by Southern National
to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loans to customers. We had letters of credit outstanding totaling $15.9 million and $17.7
million as of December 31, 2020 and 2019, respectively.
Our exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to
extend credit and letters of credit is based on the contractual amount of these instruments. We use the same credit policies in
making commitments and conditional obligations as we do for on-balance sheet instruments. Unless noted otherwise, we do not
require collateral or other security to support financial instruments with credit risk.
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Allowance For Credit Losses - Off-Balance-Sheet Credit Exposures
The allowance for credit losses on off-balance-sheet credit exposures is a liability account, calculated in accordance with ASC
326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a
contractual obligation to extend credit. No allowance is recognized if we have the unconditional right to cancel the obligation.
Off-balance-sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit
detailed above. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will
occur and the amount expected to be funded over the estimated remaining life of the commitment or other off-balance-sheet
exposure. The likelihood and expected amount of funding are based on historical utilization rates. The amount of the allowance
represents management's best estimate of expected credit losses on commitments expected to be funded over the contractual life
of the commitment. Estimating credit losses on amounts expected to be funded uses the same methodology as described for loans
in Note 3 - Loans and Allowance, as if such commitments were funded.
The following table details activity in the allowance for credit losses on off-balance-sheet credit exposures:
Balance as of January 1
Impact of adopting ASU 2016-13
Credit loss expense
Balance as of December 31,
Commitments
2020
—
360
380
740
$
$
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments are made predominately for adjustable rate loans, and generally have fixed expiration
dates of up to three months or other termination clauses and usually require payment of a fee. Since many of the commitments
may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. We evaluate each customer’s creditworthiness on a case-by-case basis.
At December 31, 2020 and 2019, we had unfunded lines of credit and undisbursed construction loan funds totaling $355.3
million and $324.8 million, respectively. Virtually all of our unfunded lines of credit and undisbursed construction loan funds are
variable rate.
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15. EARNINGS PER SHARE
The following is a reconciliation of the denominators of the basic and diluted EPS computations for 2020, 2019 and 2018
(amounts in thousands, except per share data):
For the year ended December 31, 2020
Basic EPS
Effect of dilutive stock options and unvested restricted stock
Diluted EPS
For the year ended December 31, 2019
Basic EPS
Effect of dilutive stock options and unvested restricted stock
Diluted EPS
For the year ended December 31, 2018
Basic EPS
Effect of dilutive stock options and unvested restricted stock
Diluted EPS
Weighted
Average
Shares
(Denominator)
Income
(Numerator)
Per Share
Amount
$
$
$
$
$
$
23,287
—
23,287
33,167
—
33,167
33,691
—
33,691
24,239
124
24,363
24,050
275
24,325
24,012
261
24,273
$
$
$
$
$
$
0.96
—
0.96
1.38
(0.02)
1.36
1.40
(0.01)
1.39
The Company had 226,300 anti-dilutive options as of December 31, 2020 and did not have any anti-dilutive options as of
December 31, 2019 and 2018.
16. REGULATORY MATTERS
Southern National and its subsidiary bank are subject to various regulatory capital requirements administered by 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 effect on our financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action (“PCA”), we must meet specific capital
guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors. At December 31, 2020 and 2019, the most recent regulatory notifications
categorized the Bank as well capitalized under regulatory framework for PCA.
Quantitative measures established by regulation to ensure capital adequacy require Southern National to maintain minimum
amounts and ratios of Total and Tier I capital (as defined in the regulations) to average assets (as defined). Management believes,
as of December 31, 2020, that Southern National meets all capital adequacy requirements to which it is subject.
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The following table provides a comparison of the leverage and risk-weighted capital ratios of Sonabank at the periods
indicated to the minimum and well-capitalized required regulatory standards:
December 31, 2020
Sonabank
Common equity tier 1 capital ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Leverage ratio
December 31, 2019
Sonabank
Common equity tier 1 capital ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Leverage ratio
Actual
Required
For Capital
Adequacy Purposes
Amount
Ratio Amount
Ratio
To Be Categorized as
Well Capitalized (1)
Ratio
Amount
$ 334,540
334,540
361,073
334,540
15.83 % $ 95,078
15.83 % 126,770
17.09 % 169,027
11.25 % 124,046
4.50 % $
6.00 %
8.00 %
4.00 %
137,334
169,027
211,284
105,642
6.50 %
8.00 %
10.00 %
5.00 %
$ 313,354
313,354
323,615
313,354
14.81 % $ 95,229
14.81 % 126,972
15.29 % 169,296
12.07 % 103,838
4.50 % $
6.00 %
8.00 %
4.00 %
137,553
169,296
211,619
105,810
6.50 %
8.00 %
10.00 %
5.00 %
(1) Prompt corrective action provisions are not applicable at the bank holding company level.
Sonabank is required to meet minimum capital requirements set forth by regulatory authorities. Bank regulatory agencies
have approved regulatory capital guidelines (“Basel III”) aimed at strengthening existing capital requirements for banking
organizations. The Basel III Capital Rules require Sonabank to maintain (i) a minimum ratio of Common Equity Tier 1 capital to
risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer”, (ii) a minimum ratio of Tier 1 capital to risk-
weighted assets of at least 6.0%, plus the capital conservation buffer, (iii) a minimum ratio of Total capital to risk-weighted assets
of at least 8.0%, plus the capital conservation buffer and (iv) a minimum leverage ratio of 4.0%. Failure to meet minimum capital
requirements may result in certain actions by regulators which could have a direct material effect on the consolidated financial
statements.
Sonabank remains well-capitalized under Basel III capital requirements. Sonabank had capital conservation buffer of 9.09%
at December 31, 2020, which exceeded the 2.50% minimum requirement below which the regulators may impose limits on
distributions.
Southern 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 current year’s net profits, combined with the retained
net profits of the preceding two years, subject to the capital requirements described above.
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17. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information of Southern National Bancorp of Virginia, Inc. follows (in thousands):
CONDENSED BALANCE SHEETS
DECEMBER 31,
ASSETS
Cash
Investment in subsidiaries
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Junior subordinated debt - long term
Senior subordinated notes - long term
Other liabilities
Total liabilities
Stockholders' equity:
Common stock
Additional paid in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
2020
2019
$
$
$
$
59,318
446,116
2,060
507,494
9,682
105,647
1,611
116,940
243
308,870
77,956
3,485
390,554
507,494
$
$
$
$
2,707
423,591
8,128
434,426
9,632
47,051
502
57,185
241
306,755
69,462
783
377,241
434,426
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
Income:
Cash dividends received from subsidiaries
Total income
Expenses:
Interest on junior subordinated debt
Interest on senior subordinated notes
Other operating expenses
Total expenses
Income (loss) before income tax benefit and equity in undistributed net income of
subsidiaries
Income tax benefit
Equity in undistributed net income of subsidiaries
Net income
2020
2019
2018
$
2,500
2,500
$ 13,300
13,300
$
426
3,909
841
5,176
589
2,847
726
4,162
8,000
8,000
575
2,847
765
4,187
(2,676)
(1,084)
24,879
$ 23,287
9,138
(862)
23,167
$ 33,167
3,813
(872)
29,006
$ 33,691
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CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
Operating activities:
Net income
Adjustments to reconcile net income to net cash and cash equivalents (used in)
provided by operating activities:
Equity in undistributed net income of subsidiaries
Other, net
Net cash and cash equivalents provided by (used in) in operating activities
Investing activities:
Dividend from subsidiaries
Net cash and cash equivalents provided by investing activities
Financing activities:
Issuance of subordinated notes, net of cost
Issuance of common stock under Stock Incentive Plan
Cash dividends paid on common stock
Net cash and cash equivalents provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
18. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
2020
2019
2018
$ 23,287
$ 33,167
$
33,691
(27,379)
8,766
4,674
(36,467)
(666)
(3,966)
(37,006)
(582)
(3,897)
2,500
2,500
13,300
13,300
58,600
574
(9,737)
49,437
56,611
2,707
$ 59,318
$
—
670
(8,690)
(8,020)
1,314
1,393
2,707
$
8,000
8,000
—
443
(7,688)
(7,245)
(3,142)
4,535
1,393
The following is a summary of the accumulated other comprehensive income (loss) balances, net of tax (in thousands):
Unrealized gain on investment securities available for sale
Reclassification of loss on sales of investment securities
Unrecognized gain on investment securities held to maturity for which
other than temporary impairment charges have been taken
Unrealized gain (loss) on investment securities available for sale
transferred to held to maturity
Total
19. RELATED PARTY TRANSACTIONS
Balance at
December 31, 2019
943
$
—
Current Period
Change
$
2,203
490
Balance at
December 31, 2020
3,146
$
490
311
—
$
(471)
783
$
9
2,702
$
311
(462)
3,485
Sonabank has entered into loan transactions with STM. The following table summarizes the changes in the loan amount
outstanding with STM during the periods indicated (in thousands):
Balance at January 1,
Principal advances
Principal paid
Balance at December 31,
2020
26,760
441,044
(437,033)
30,771
$
$
2019
24,168
298,639
(296,047)
26,760
$
$
We purchased loans in an aggregate amount of $80.6 million and $152.2 million during 2020 and 2019, respectively, from
STM.
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During the year, officers, directors, principal shareholders, and their affiliates (related parties) were customers of and had
transactions with the Company. Loan activity to related parties is as follows (in thousands):
Balance at January 1,
Principal advances
Principal paid
Balance at December 31,
2020
$ 22,670
4,459
(4,420)
$ 22,709
Sonabank has also entered into deposit transactions with its related parties including STM. The aggregate amount of these
deposit accounts were $25.2 million and $20.1 million as of December 31, 2020 and 2019, respectively.
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
Interest
Income
Net Interest
Income
Income
Earnings Per Share
Before Taxes Income Basic Diluted
Net
2020
First quarter
Second quarter
Third quarter
Fourth quarter
2019
First quarter
Second quarter
Third quarter
Fourth quarter
(dollars in thousands, except per share amounts)
$
$
$ 28,481
28,672
28,707
31,920
$ 20,515
22,473
22,998
25,654
$ 30,303
30,393
30,474
29,354
$ 20,952
20,964
21,015
20,669
33
5,897
12,005
11,966
$
27
4,709
9,588
8,963
$ — $ —
0.19
0.39
0.37
0.19
0.40
0.37
7,524
10,263
11,225
10,232
$ 6,020
9,319
8,864
8,964
$ 0.25
0.39
0.37
0.37
$ 0.25
0.38
0.36
0.37
21. LOW INCOME HOUSING TAX CREDITS
The general purpose of housing equity funds is to encourage and assist participants in investing in low-income residential rental
properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income
housing, deliver Federal Low Income Housing Credits to investors, allocate tax losses and other possible tax benefits to investors,
and to preserve and protect project assets. The investments in these funds were recorded as other assets on the consolidated
balance sheets and were carried at $5.1 million and $6.0 million at December 31, 2020 and 2019, respectively. These investments
and related tax benefits have expected terms through 2034, with the majority maturing by 2027. Tax credits, net of amortization
recognized related to these investments during the years ended December 31, 2020 and 2019 were $(225) thousand and $255
thousand, respectively. Total projected tax credits to be received for 2020 are $405 thousand, which is based on the most recent
quarterly estimates received from the funds. Additional capital calls expected for the funds totaled $2.9 million and $3.8 million
at December 31, 2020 and 2019, respectively.
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Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this Annual Report on Form 10-K,
under the supervision and with the participation of management, including our chief executive officer and chief financial officer,
we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d -15(e) under the Securities Exchange Act of 1934) utilizing the framework established in “Internal
Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based upon that evaluation, our chief executive officer and chief financial officer have concluded that these controls and
procedures are effective as of the end of the period covered by this Annual Report on Form 10-K.
Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to
be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and
communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
(b) Management’s Report on Internal Control Over Financial Reporting. Management of Southern National is responsible for
establishing and maintaining adequate internal control over financial reporting for Southern National (“we” and “our”), as that
term is defined in Exchange Act Rules 13a-15(f). Southern National conducted an evaluation of the effectiveness of our internal
control over Southern National’s financial reporting as of December 31, 2020 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 of December 31, 2020.
Dixon Hughes Goodman LLP, an independent registered public accounting firm, has audited the consolidated financial
statements included in this Annual Report and has issued a report on the effectiveness of our internal control over financial
reporting, which report is included in "Part II - Item 8. Financial Statements and Supplementary Data" of this Report.
(c) Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial
reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
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Table of Contents
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information under the captions "Election of Directors,” "Continuing Directors and Executive Officers," "Corporate
Governance — Committees of the Board of Directors— Audit Committee,” "Corporate Governance — Director Nominations
Process" and "Corporate Governance — Code of Ethics" in Southern National’s definitive Proxy Statement for its 2021 Annual
Meeting of Shareholders to be filed with the SEC within 120 days after December 31, 2020 pursuant to Regulation 14A under the
Exchange Act (the "2021 Proxy Statement"), is incorporated herein by reference in response to this item.
Item 11. Executive Compensation
The information under the captions "Executive Compensation and Other Matters," "Director Compensation" and "Compensation
Committee Report on Executive Compensation" in the 2021 Proxy Statement is incorporated herein by reference in response to
this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information under the caption "Beneficial Ownership of Common Stock by Management of the Company and Principal
Stockholders" in the 2021 Proxy Statement is incorporated herein by reference in response to this item.
The information required by this Item concerning securities authorized for issuance under equity compensation plans is
incorporated herein by reference to Part II, Item 5 of this Annual Report on Form 10-K.
Item 13. Certain Relationships, Related Transactions and Director Independence
The information under the captions "Corporate Governance — Director Independence" and "Certain Relationships and Related
Party Transactions" in the 2021 Proxy Statement is incorporated herein by reference in response to this item.
Item 14. Principal Accounting Fees and Services
The information under the caption "Fees and Services of Independent Registered Public Accounting Firm" in the 2021 Proxy
Statement is incorporated herein by reference in response to this item.
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Table of Contents
PART IV
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this report:
(a)(1) Financial Statements
The following consolidated financial statements and reports of independent registered public accounting firm
are in Part II, Item 8:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2020 and 2019
Consolidated Statements of Income and Comprehensive Income - Years ended December 31, 2020, 2019 and
2018
Consolidated Statements of Changes in Stockholders’ Equity - Years ended December 31, 2020, 2019 and
2018
Consolidated Statements of Cash Flows -Years ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All schedules are omitted since they are not required, are not applicable, or the required information is shown
in the consolidated financial statements or notes thereto.
(a)(3) Exhibits
The following are filed or furnished, as noted below, as part of this Annual Report on Form 10-K and this list
includes the Exhibit Index.
Exhibit No.
Description
3.1
3.2
3.3
3.4
4.1
Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to Southern National’s Registration
Statement on Form S-1 (Registration No. 333-136285) filed on August 4, 2006)
Certificate of Amendment to the Articles of Incorporation dated January 31, 2005 (incorporated herein by
reference to Exhibit 3.2 to Southern National’s Registration Statement on Form S-1 (Registration No. 333-
136285) filed on August 4, 2006)
Certificate of Amendment to the Articles of Incorporation dated April 13, 2006 (incorporated herein by reference
to Exhibit 3.3 to Southern National’s Registration Statement on Form S-1 (Registration No. 333-136285) filed on
August 4, 2006)
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to Southern National’s Current Report
on Form 8-K filed on October 22, 2020)
Specimen Stock Certificate of Southern National (incorporated herein by reference to Exhibit 4.1 to Southern
National’s Registration Statement on Form S-1 (Registration No. 333-136285))
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Table of Contents
Exhibit No.
4.2
4.3
4.4
Description
Form of Warrant Agreement (incorporated herein by reference to Exhibit 4.2 to Southern National’s Registration
Statement on Form S-1 (Registration No. 333-136285))
Form of Amendment to Warrant Agreement (incorporated herein by reference to Exhibit 4.3 to Southern
National’s Registration Statement on Form S-1 (Registration No. 333-136285))
Form of 5.875% Fixed-to-Floating Rate Subordinated Notes due January 31, 2027 (incorporated herein by
reference to Exhibit 10.1 to Southern National’s Current Report on Form 8-K filed on January 24, 2017)
4.5*
Description of Registrant’s Securities
Certain instruments relating to long-term debt as to which the total amount of securities authorized there under does not exceed
10% of the total assets of Southern National Bancorp of Virginia, Inc. have been omitted in accordance with Item 601(b)(4)(iii)
of Regulation S-K. The registrant will furnish a copy of any such instrument to the Securities and Exchange Commission upon its
request.
4.6
4.7
4.8
10.1+
10.2+
10.3+
10.4+
10.5+
10.6+
Subordinated Indenture, dated as of August 25, 2020, between Southern National Bancorp of Virginia, Inc. and
Wilmington Trust, National Association (incorporated herein by reference to Exhibit 4.1 to Southern National’s
Current Report on Form 8-K filed on August 25, 2020)
First Supplemental Indenture, dated as of August 25, 2020, between Southern National Bancorp of Virginia, Inc.
and Wilmington Trust, National Association (incorporated herein by reference to Exhibit 4.2 to Southern
National’s Current Report on Form 8-K filed on August 25, 2020)
Form of 5.40% Fixed-to-Floating Rate Subordinated Notes due 2030 (included in Exhibit 4.7)
Form of Southern National Bancorp of Virginia, Inc. Incentive Stock Option Agreement (incorporated herein by
reference to Exhibit 10.3 to Southern National’s Registration Statement on Form S-1/A filed on October 29, 2009
(Registration No. 333-162467))
Supplemental Executive Retirement Plan for Georgia Derrico (incorporated herein by reference to Exhibit 10.4 to
Southern National’s Registration Statement on Form S-1/A filed on October 29, 2009 (Registration No. 333-
162467))
Supplemental Executive Retirement Plan for Rod Porter (incorporated herein by reference to Exhibit 10.5 to
Southern National’s Registration Statement on Form S-1/A filed on October 29, 2009 (Registration No. 333-
162467))
Southern National Bancorp of Virginia, Inc. 2010 Stock Awards and Incentive Plan (incorporated herein by
reference to Exhibit 4.2 to Southern National’s Registration Statement on Form S-8 (Registration No. 333-
166511))
Southern National Bancorp of Virginia, Inc. 2017 Equity Compensation Plan (incorporated herein by reference to
Appendix A of Southern National’s Definitive Proxy Statement on Schedule 14A filed with the Securities and
Exchange Commission on May 11, 2017)
Form of Southern National Bancorp of Virginia, Inc. Incentive Stock Option Agreement (incorporated herein by
reference to Exhibit 4.3 to Southern National’s Registration Statement on Form S-8 (Registration No. 333-
166511))
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Exhibit No.
10.7+
Description
Southern National Bancorp of Virginia, Inc. Supplemental Executive Retirement Plan (incorporated herein by
reference to Exhibit 10.9 to Southern National’s Current Report on Form 8-K filed on June 26, 2017)
10.8+
10.9+
10.10+
10.11+
10.12+
10.13+
10.14+
10.15+
10.16+
10.17+
21.0*
23.1*
31.1*
31.2*
32.1**
Southern National Bancorp of Virginia, Inc. Executive Severance Plan (incorporated herein by reference to
Exhibit 10.10 to Southern National’s Current Report on Form 8-K filed on June 26, 2017)
Form of Subordinated Note Purchase Agreement, dated January 20, 2017 (incorporated herein by reference to
Exhibit 10.1 to Southern National’s Current Report on Form 8-K filed on January 24, 2017)
Employment Agreement, dated as of February 28, 2019, by and between George C. Sheflett and Southern
National Bancorp of Virginia, Inc. (incorporated herein by reference to Exhibit 10.1 to Southern National’s
Quarterly Report on Form 10-Q filed on May 9, 2019)
Supplemental Executive Retirement Plan, dated as of April 2, 2018, by and between Sonabank and Georgia S.
Derrico (incorporated herein by reference to Exhibit 10.3 to Southern National’s Current report on Form 8-K
filed April 24, 2019)
Supplemental Executive Retirement Plan, dated as of April 2, 2018, by and between Sonabank and R. Roderick
Porter (incorporated herein by reference to Exhibit 10.4 to Southern National’s Current report on Form 8-K filed
April 24, 2019)
Supplemental Executive Retirement Plan, dated as of April 2, 2018, by and between Sonabank and Joe A.
Shearin (incorporated herein by reference to Exhibit 10.5 to Southern National’s Current report on Form 8-K
filed April 24, 2019)
Separation Agreement, dated as of February 20, 2020, by and between Joe A. Shearin and Southern National
Bancorp of Virginia, Inc. (incorporated herein by reference to Exhibit 10.1 to Southern National’s Quarterly
Report on Form 10-Q filed on May 8, 2020)
Employment Agreement, dated as of February 20, 2020, by and between Dennis J. Zember, Jr. and Southern
National Bancorp of Virginia, Inc. (incorporated herein by reference to Exhibit 10.2 to Southern National’s
Quarterly Report on Form 10-Q filed on May 8, 2020)
Separation Agreement, dated as of March 30, 2020, by and between Georgia S. Derrico and Southern National
Bancorp of Virginia, Inc. (incorporated herein by reference to Exhibit 10.3 to Southern National’s Quarterly
Report on Form 10-Q filed on May 8, 2020)
Separation Agreement, dated as of March 30, 2020, by and between R. Roderick Porter and Southern National
Bancorp of Virginia, Inc. (incorporated herein by reference to Exhibit 10.4 to Southern National’s Quarterly
Report on Form 10-Q filed on May 8, 2020)
Subsidiaries of the Registrant
Consent of Dixon Hughes Goodman LLP
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
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Table of Contents
Exhibit No.
99.1**
101
104
Description
Financial Statements of Southern Trust Mortgage, LLC. for the years ended December 31, 2020, 2019 and 2018
together with Independent Auditor’s Reports thereon; a mortgage affiliate of the company.
The following materials from Southern National Bancorp of Virginia, Inc.’s Annual Report on Form 10-K for the
year ended December 31, 2020, formatted in Extensible Business Reporting Language (Inline XBRL), filed
herewith: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income and Comprehensive Income,
(iii) Consolidated Statements of Changes in Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows,
and (v) Notes to Consolidated Financial Statements.
The cover page from Southern National Bancorp of Virginia, Inc.’s Annual Report on Form 10-K for the year
ended December 31, 2020, formatted in Inline XBRL.
+ Management contract or compensatory plan or arrangement
* Filed herewith
** Furnished herewith
Item 16. - Form 10-K Summary
None.
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Southern National Bancorp of Virginia, Inc. will furnish, upon written request, a copy of any exhibit listed above upon the
payment of a reasonable fee covering the expense of furnishing the copy. Requests should be directed to:
Matthew Switzer, Executive Vice President and Chief Financial Officer
Southern National Bancorp of Virginia, Inc.
10900 Nuckols Road, Suite 325
Glen Allen, Virginia 23060
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Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Southern National Bancorp of Virginia, Inc.
By:
/s/ Dennis J. Zember, Jr.
Dennis J. Zember, Jr.
President and Chief Executive Officer
Date: March 16, 2021
By:
/s/ Matthew Switzer
Matthew Switzer
Executive Vice President and Chief Financial Officer
Date: March 16, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 16, 2021
Signature
Title
/s/ Dennis J. Zember, Jr.
Dennis J. Zember, Jr.
/s/ John F. Biagas
John F. Biagas
/s/ Robert Y. Clagett
Robert Y. Clagett
/s/ W. Rand Cook
W. Rand Cook
/s/ Deborah Diaz
Deborah Diaz
/s/ F. L. Garrett, III
F. L. Garrett, III
/s/ W. Bruce Jennings
W. Bruce Jennings
/s/ Eric A. Johnson
Eric A. Johnson
/s/ Charles A. Kabbash
Charles A. Kabbash
President and Chief Executive Officer, Director
Director
Director
Director
Director
Director
Director
Director
Director
125
Exhibit 4.5
DESCRIPTION OF THE REGISTRANT’S SECURITIES REGISTERED
PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
As of March 5, 2021, Southern National Bancorp of Virginia, Inc. (“SONA”) has one class of
securities, our common stock, registered under Section 12 of the Securities Exchange Act of 1934, as
amended.
DESCRIPTION OF COMMON STOCK
The following description of the terms and provisions of our common stock is qualified in its entirety
by reference to our amended Articles of Incorporation, Amended and Restated Bylaws or Virginia law
applicable to us. For a more thorough understanding of the terms of our capital stock, you should refer to
our amended Articles of Incorporation and Amended and Restated Bylaws, which are included as exhibits to
this Annual Report on Form 10-K.
General
We are authorized to issue 50,000,000 shares of capital stock of which 45,000,000 are shares of
common stock and 5,000,000 are shares of preferred stock, par value $0.01 per share. As of March 5, 2021,
there were 24,438,545 shares of common stock outstanding held by 1,347 holders of record and no shares of
preferred stock issued and outstanding.
Common Stock
General. Each share of SONA common stock has the same relative rights as, and is identical in all
respects to, each other share of SONA common stock. SONA’s common stock is traded on the NASDAQ
Global Market under the symbol “SONA.”
Dividends. SONA’s shareholders are entitled to receive dividends or distributions that its board of
directors may declare out of funds legally available for those payments. The payment of distributions by
SONA is subject to the restrictions of Virginia law applicable to the declaration of distributions by a
corporation. A Virginia corporation generally may not authorize and make distributions if, after giving
effect to the distribution, it would be unable to meet its debts as they become due in the usual course of
business or if the corporation’s total assets would be less than the sum of its total liabilities plus the amount
that would be needed, if it were dissolved at that time, to satisfy the preferential rights of shareholders
whose rights are superior to the rights of those receiving the distribution. In addition, the payment of
distributions to shareholders is subject to any prior rights of outstanding preferred stock.
As a bank holding company, SONA’s ability to pay dividends is affected by the ability of Sonabank, its
bank subsidiary, to pay dividends to the holding company. The ability of Sonabank, as well as SONA, to
pay dividends in the future is, and could be further, influenced by bank regulatory requirements and capital
guidelines.
Liquidation Rights. In the event of any liquidation, dissolution or winding up of SONA, the holders of
shares of its common stock will be entitled to receive, after payment of all debts and liabilities of SONA and
after satisfaction of all liquidation preferences applicable to any preferred stock, all remaining assets of
SONA available for distribution in cash or in kind.
Voting Rights. The holders of SONA common stock are entitled to one vote per share and, in general,
a majority of votes cast with respect to a matter is sufficient to authorize action upon routine matters.
Holders of SONA common stock are not entitled to cumulative voting rights. Directors are
elected by a plurality of the votes cast, and shareholders do not have the right to cumulate their votes in the
election of directors.
Directors and Classes of Directors. SONA’s board of directors is divided into three classes with
directors serving staggered three-year terms. Any newly created directorships or any decrease in
directorships are apportioned among the classes as evenly as possible. Under SONA’s articles of
incorporation, directors may be removed for cause upon the affirmative vote of not less than 75% of the
outstanding shares entitled to vote generally in an election of directors. Cause for removal exists only if a
director whose removal is proposed has been either declared incompetent by an order of a court, convicted
of a felony or of an offense punishable by imprisonment for a term of more than one year, or deemed liable
by a court for gross negligence or misconduct in the performance of such director’s duties to SONA.
No Preemptive Rights; Redemption and Assessment. Holders of shares of SONA will not be entitled
to preemptive rights with respect to any shares that may be issued. SONA common stock is not subject to
redemption or any sinking fund and the outstanding shares are fully paid and nonassessable.
Anti-Takeover Effects of Certain Provisions in Our Amended Articles of Incorporation and Amended
and Restated Bylaws and Virginia Law
Subject to the application of the Virginia Stock Corporation Act (VSCA), the affirmative vote of the
holders of more than two thirds of all votes entitled to be cast is generally required with respect to a merger,
exchange offer or the sale of all or substantially all of our assets. Under the VSCA and our amended Articles
of Incorporation, any action required or permitted to be taken by our shareholders may be taken without a
meeting and without a shareholder vote if a written consent is signed by the holders of the shares of
outstanding stock having not less than the minimum number of votes that would be necessary to authorize
such action at a meeting of shareholders at which all shares entitled to vote on such matter were present and
voted.
Virginia law provides for certain restrictions on extraordinary corporate transactions that may
discourage the acquisition of control of Virginia corporations. We elected to “opt out” of those protective
provisions.
The provisions described below, to the extent applicable, will have the general effect of discouraging,
or rendering more difficult, unfriendly takeover or acquisition attempts. Consequently, such provisions
would be beneficial to current management in an unfriendly takeover attempt, but could have an adverse
effect on shareholders who might wish to participate in such a transaction. However, we believe that such
provisions are advantageous to our shareholders in that they will permit management and our shareholders
to carefully consider and understand a proposed acquisition, lead to higher offering prices, and require a
higher level of shareholder participation in the decision if the transaction is not approved by our board of
directors.
Staggered Board and Removal of Directors
One class of our three classes of directors is elected annually. Directors serve for three-year terms.
There is no cumulative voting for directors provided for in the amended Articles of Incorporation. As
permitted by Virginia law, our amended Articles of Incorporation provide that where a corporation’s
directors are elected in classes that a director, or the entire board of directors, only may be removed for
cause by the affirmative vote of not less than 75% of the shares entitled to vote generally in an election of
directors. The provisions contained in our amended Articles of Incorporation relating to election of directors
in staggered three-year classes and the supermajority vote required to remove a director tend to discourage
attempts by third parties to acquire us because of the extra time and expense involved and a greater
possibility of failure. This also can affect the price that a potential purchaser would be willing to
2
pay for our common stock, thereby reducing the amount a shareholder would receive in, for example, a
tender offer for our common stock.
Special Shareholder Meetings
Our amended Articles of Incorporation also restrict the manner in which special meetings may be
called. Under the VSCA, a corporation is permitted to provide for calling of special meetings either in its
bylaws or articles of incorporation. Our amended Articles of Incorporation specify that special meetings
may be called by our Chairman of the Board or President or by the affirmative vote of three-fourths of the
board of directors or by holders of record of not less than 40% of our then outstanding voting shares.
Evaluation of Change in Control Offers
Our amended Articles of Incorporation also provide that when evaluating any offer that may result in a
change in control of our company, the board of directors may consider, consistent with the exercise of its
fiduciary duties and in connection with the exercise of its judgment in determining what is in the best
interests of our company and our shareholders, not only the price or other consideration being offered, but
also all other relevant factors including, without limitation, the financial and management resources and
future prospects of the other party, the possible effect on our business and the business of our subsidiaries
and on our employees, customers, suppliers and creditors and those of our subsidiaries, the effects on the
ability of our company to fulfill its corporate objectives as a holding company and on the ability of
Sonabank to fulfill its objectives as a bank, and the effects on the communities in which our facilities are
located.
Blank Check Preferred Stock
In addition to common stock, our amended Articles of Incorporation permit the board of directors to
issue up to 5,000,000 shares of “blank check” preferred stock. Among other things, the board of directors in
issuing a series of preferred stock has the power to determine voting powers, if any, of such series. Such
issuance of preferred stock having voting rights could dilute the voting and ownership interest of existing
shareholders. Such issuance may have the effect of discouraging unilateral attempts by third parties to obtain
control of our company, since the issuance of additional shares of capital stock could be used to dilute the
voting power of, or increase the cost to, any person seeking to obtain control of us. This may occur by virtue
of the fact that the preferred stock may be issued in a series having rights in excess of one vote per share or
having the right to vote separately by class respecting some matters.
Transfer Agent and Registrar
The transfer agent for SONA’s common stock is Computershare Inc., 250 Royall Street, Canton,
Massachusetts 02021.
3
Subsidiaries of Southern National Bancorp of Virginia, Inc.
Exhibit 21.0
Subsidiary
State of Incorporation
Sonabank
Eastern Virginia Statutory Trust I
Virginia
Connecticut
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-237909) and
Forms S-8 (Nos. 333-218976, 333-189730, 333-166511, and 333-138636) of our reports dated March 16, 2021, with
respect to the consolidated financial statements of Southern National Bancorp of Virginia, Inc. (the “Company”) as
of December 31, 2020 and 2019, and the related consolidated statements of income and comprehensive income,
changes in stockholders’ equity and cash flows for each of the years in the three year period ended December 31,
2020, and the effectiveness of internal control over financial reporting as of December 31, 2020, which reports
appear in the Company’s 2020 Annual Report on Form 10-K.
/s/ Dixon Hughes Goodman LLP
Greenville, NC
March 16, 2021
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-237909) and
Forms S-8 (Nos. 333-218976, 333-189730, 333-166511, and 333-138636) to the use of our reports dated March 12,
2021, with respect to the consolidated financial statements of Southern Trust Mortgage, LLC included in this Annual
Report (Form 10-K) for the years ended December 31, 2020, 2019, and 2018.
/s/ Richey, May and Co., LLP
Englewood, Colorado
March 12, 2021
Exhibit 31.1
CERTIFICATIONS
I, Dennis J. Zember, Jr., certify that:
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 a material fact necessary to make
the statements made, in light of the circumstances under which such statements 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, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial 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 to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 16, 2021
/s/ Dennis J. Zember, Jr.
Dennis J. Zember, Jr.,
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
I, Matthew Switzer, certify that:
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 a material fact necessary to make
the statements made, in light of the circumstances under which such statements 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, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial 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 to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 16, 2021 /s/ Matthew Switzer
Matthew Switzer,
Executive Vice President and Chief Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Southern National Bancorp of Virginia, Inc. (“Southern National”) on Form 10-K
for the period ending December 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), the undersigned Chief Executive Officer and Chief Financial Officer of Southern National hereby certify,
pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, 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, in all material respects, the financial condition and
results of operations of Southern National as of and for the periods covered in the Report.
Exhibit 32.1
/s/ Dennis J. Zember, Jr.
Dennis J. Zember, Jr.
President and Chief Executive Officer
/s/ Matthew Switzer
Matthew Switzer
Executive Vice President and Chief Financial Officer
March 16, 2021
Exhibit 99.1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND
FINANCIAL STATEMENTS FOR
SOUTHERN TRUST MORTGAGE, LLC
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
Assurance | Tax | Advisory
SOUTHERN TRUST MORTGAGE, LLC
TABLE OF CONTENTS
INDEPENDENT AUDITORS’ REPORT
FINANCIAL STATEMENTS
Balance Sheets
Statements of Operations
Statements of Changes in Membersʹ Equity
Statements of Cash Flows
Notes to Financial Statements
Page
1‐2
3
4
5
6‐7
8‐31
9605 S. Kingston Ct. Suite 200
Englewood, CO 80112
303‐721‐6131
www.richeymay.com
Assurance | Tax | Advisory
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Southern Trust Mortgage, LLC
Virginia Beach, Virginia
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Southern Trust Mortgage, LLC (the Company) as of
December 31, 2020 and 2019, and the related statements of operations, changes in membersʹ equity, and
cash flows for each of the three years in the period ended December 31, 2020, and the related notes
(collectively, referred to as the financial statements). In our opinion, the financial statements present fairly,
in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the
results of its operations and its cash flows for each of the three years in the period ended December 31,
2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s financial statements based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the financial statements are free
of material misstatement, whether due to error or fraud. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we
are required to obtain an understanding of internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that
were communicated or required to be communicated to the audit committee and that: (1) relate to accounts
or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgements. We determined that there are no critical audit matters.
Richey, May & Co., LLP.
We have served as Southern Trust Mortgage, LLC’s auditor since 2014.
Englewood, Colorado
March 12, 2021
SOUTHERN TRUST MORTGAGE, LLC
BALANCE SHEETS
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Restricted cash
Escrow cash
Mortgage loans held for sale, at fair value
Accounts receivable and advances
Derivative assets
Prepaid expenses and other current assets
Loans eligible for repurchase from GNMA
Total current assets
OTHER ASSETS
Property and equipment, net
Mortgage servicing rights, net
Mortgage loans held for investment, net
Real estate owned
Due from related parties
Deposits and other assets
Total other assets
TOTAL ASSETS
LIABILITIES AND MEMBERSʹ EQUITY
LIABILITIES
Accounts payable and accrued expenses
Customer deposits and loan escrows
Warehouse lines of credit
Operating line of credit, related party
Derivative liabilities
Note payable, current portion
Liability for loans eligible for repurchase from GNMA
Loan indemnification reserve
Total current liabilities
Note payable, net of current portion
Total liabilities
COMMITMENTS AND CONTINGENCIES (Note O)
MEMBERSʹ EQUITY
Preferred interests, $1 par value; 3,304,656 shares authorized, issued and outstanding
Common interests, $0.057 par value; 8,783,212 shares authorized, issued and outstanding
Additional paid‐in capital
Retained earnings
Total membersʹ equity
TOTAL LIABILITIES AND MEMBERSʹ EQUITY
December 31,
2020
2019
$
$
$
16,100,165
1,581,252
669,144
143,434,684
1,020,842
10,199,245
499,014
2,338,905
175,843,251
921,652
1,694,970
2,081,000
32,900
174,400
159,986
5,064,908
180,908,159
7,395,761
1,148,034
136,087,177
—
2,496,602
2,051,145
2,338,905
1,325,068
152,842,692
1,647,243
154,489,935
6,867,905
360,458
313,183
100,223,953
733,905
1,932,676
589,023
—
111,021,103
784,371
6,750
3,308,201
122,900
393,339
172,645
4,788,206
115,809,309
3,527,203
4,743,419
92,052,015
3,734,308
74,922
—
—
593,287
104,725,154
—
104,725,154
3,304,656
3,304,656
500,000
344,575
22,268,993
26,418,224
180,908,159
$
500,000
344,575
6,934,924
11,084,155
115,809,309
$
$
$
$
The accompanying notes are an integral part of these financial statements.
3
SOUTHERN TRUST MORTGAGE, LLC
STATEMENTS OF OPERATIONS
REVENUE
Gain on sale of mortgage loans held for sale, net of direct
costs of $6,528,911, $4,918,604 and $2,873,463, respectively
$
Loan origination fees
Interest income
Interest expense
Loan servicing fees, net of direct costs of $315,922,$133,809
and $182,345, respectively
Gain on sale of mortgage servicing rights
Other income
Total revenue
EXPENSES
Salaries, commissions and benefits
Occupancy, equipment and communication
General and administrative
Provision for loan losses
Depreciation and amortization
Loss on sale of real estate owned
Amortization and deletions of mortgage servicing rights
Total expenses
NET INCOME (LOSS)
Years Ended December 31,
2020
2019
2018
107,063,928
9,341,728
4,184,292
(5,045,267)
$ 45,726,642
4,871,817
3,989,638
(5,215,135)
$ 27,166,592
2,693,451
2,597,127
(2,992,447)
382,754
—
139,317
116,066,752
32,235
337,865
53,595
49,796,657
119,041
—
92,000
29,675,764
84,080,099
3,519,608
4,866,432
897,309
275,692
31,607
167,947
93,838,694
22,228,058
39,032,347
3,353,159
3,895,578
551,322
224,550
3,600
51,590
47,112,146
$ 2,684,511
24,557,526
2,914,415
3,227,331
131,557
194,005
—
230,995
31,255,829
$ (1,580,065)
$
The accompanying notes are an integral part of these financial statements.
4
SOUTHERN TRUST MORTGAGE, LLC
STATEMENTS OF CHANGES IN MEMBERSʹ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
Balance, December 31, 2017
Preferred dividends
Member distributions
Net loss
Balance, December 31, 2018
Preferred dividends
Member distributions
Net income
Balance, December 31, 2019
Preferred dividends
Member distributions
Net income
Balance, December 31, 2020
Preferred Interests
Amount
Shares
$3,304,656
3,304,656
—
—
—
—
—
—
3,304,656
3,304,656
—
—
—
—
—
—
3,304,656
3,304,656
—
—
—
—
—
—
$3,304,656
3,304,656
Common Interests
Amount
Shares
$500,000
8,783,212
—
—
—
—
—
—
500,000
8,783,212
—
—
—
—
—
—
500,000
8,783,212
—
—
—
—
—
—
$500,000
8,783,212
Additional
Paid‐In
Capital
$ 344,575
—
—
—
344,575
—
—
—
344,575
—
—
—
$ 344,575
Retained
Earnings
$ 6,540,436
(248,892)
(67,554)
(1,580,065)
4,643,925
(249,312)
(144,200)
2,684,511
6,934,924
(247,039)
(6,646,950)
22,228,058
$ 22,268,993
Totals
$ 10,689,667
(248,892)
(67,554)
(1,580,065)
8,793,156
(249,312)
(144,200)
2,684,511
11,084,155
(247,039)
(6,646,950)
22,228,058
$ 26,418,224
The accompanying notes are an integral part of these financial statements.
5
SOUTHERN TRUST MORTGAGE, LLC
STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
Non‐cash items‐
Provision for loan losses
Depreciation and amortization
Amortization and deletions of mortgage servicing rights
Gain on sale of mortgage loans held for sale, net of direct costs
Gain on sale of mortgage servicing rights
Loss on sale of real estate owned
Loss on sale of mortgage loans held for investment
(Increase) decrease in‐
Escrow cash
Proceeds from sale and principal payments on mortgage loans held for sale
Originations and purchases of mortgage loans held for sale
Mortgage loans held for investment, net
Accounts receivable and advances
Derivative assets
Prepaid expenses and other current assets
Deposits and other assets
Due from related parties
Increase (decrease) in‐
Accounts payable and accrued expenses
Customer deposits and loan escrows
Derivative liabilities
Loan indemnification reserve
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment
Proceeds from sale of mortgage servicing rights
Proceeds from sale of real estate owned
Proceeds from sale of mortgage loans held for investment
Net cash provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under warehouse lines of credit
Net borrowings (repayments) under operating line of credit, related party
Borrowings under note payable
Preferred dividends
Member distributions
Net cash provided by (used in) financing activities
The accompanying notes are an integral part of these financial statements.
Years Ended December 31,
2020
2019
2018
$
22,228,058
$
2,684,511
$
(1,580,065)
897,309
275,692
167,947
(107,063,928)
—
31,607
7,809
(355,961)
2,454,696,861
(2,392,699,831)
(698,356)
(286,937)
(8,266,569)
90,009
12,659
218,939
551,322
224,550
51,590
(45,726,642)
(337,865)
3,600
116,867
(72,972)
1,419,984,689
(1,410,062,230)
(1,456,528)
(196,024)
(475,733)
(208,221)
(8,232)
46,019
3,906,866
(3,595,385)
2,421,680
(183,882)
1,465,591
1,438,541
(478,516)
(465,205)
(28,195,413)
(32,920,888)
(412,973)
—
58,393
1,836,102
1,481,522
44,035,162
(3,734,308)
3,698,388
(185,347)
(6,646,950)
37,166,945
(204,349)
566,157
—
1,765,519
2,127,327
32,588,987
68,204
—
(187,037)
(144,200)
32,325,954
131,557
194,005
230,995
(27,166,592)
—
—
13,536
(33,149)
898,918,782
(871,675,334)
(423,636)
103,964
(320,392)
156,922
(13,732)
(439,358)
(167)
2,409,450
477,657
(244,619)
739,824
(161,158)
—
—
375,519
214,361
(3,165,139)
372,242
—
(248,892)
(67,554)
(3,109,343)
6
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
10,453,054
1,532,393
(2,155,158)
Years Ended December 31,
2020
2019
2018
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR
SUPPLEMENTAL INFORMATION
Cash paid for interest
Preferred dividends payable
NON‐CASH OPERATING AND INVESTING ACTIVITIES
The Company increased retained mortgage servicing rights in connection with loan sales.
The Company recognized loans eligible for repurchase from GNMA and the related liability.
7,228,363
17,681,417
4,996,763
61,692
1,856,167
2,338,905
$
$
$
$
$
$
$
$
$
$
5,695,970
7,228,363
5,165,733
62,275
$
$
$
7,851,128
5,695,970
2,966,787
62,066
15,094
$
32,218
— $
—
The Company made a reclassification between loan indemnification reserve and accounts payable and accrued expenses totaling $100,000 during
the year ended December 31, 2020.
The Company sold certain mortgage servicing rights for a sales price of $629,063, which was comprised of cash proceeds of $566,157 and a receivable of
$62,906 during the year ended December 31, 2019.
The accompanying notes are an integral part of these financial statements.
7
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Southern Trust Mortgage, LLC (the Company) was incorporated in the Commonwealth of Virginia.
The Company is primarily engaged in the business of originating, selling and servicing residential
mortgage loans through its retail origination channel. The Company maintains its corporate office in
Virginia Beach, Virginia, with branch offices in multiple states. The Company is approved as a Title II,
non‐supervised direct endorsement mortgagee with the United States Department of Housing and
Urban Development (HUD). In addition, the Company is an approved issuer with the Government
National Mortgage Association (GNMA), as well as an approved seller and servicer with the Federal
National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC).
Basis of Accounting
The financial statements of the Company are prepared on the accrual basis of accounting.
Basis of Presentation
The accompanying financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America (GAAP) as codified in the Financial Accounting
Standards Board’s (FASB) Accounting Standards Codification (ASC).
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
Consolidation, Variable Interest Entities
The Company sells mortgage loans to FNMA and FHLMC, which are government‐sponsored
enterprises. The Company may also issue GNMA securities by pooling eligible mortgage loans
through a custodian and assigning rights to the mortgage loans to GNMA. FNMA, FHLMC and
GNMA (the Agencies) provide credit enhancements for mortgage loans through certain guarantee
provisions. These securitizations involve variable interest entities (VIEs) as the trusts or similar
vehicles, by design, that either (1) lack sufficient equity to permit the entity to finance its activities
without additional subordinated financial support from other parties, or (2) have equity investors that
do not have the ability to make significant decisions relating to the entity’s operations through voting
rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive
the residual returns of the entity.
8
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Consolidation, Variable Interest Entities (Continued)
The primary beneficiary of a VIE (i.e., the party that has a controlling financial interest) is required to
consolidate the assets and liabilities of the VIE. The primary beneficiary is the party that has both
(1) the power to direct the activities of an entity that most significantly impact the VIE’s economic
performance; and (2) through its interests in the VIE, the obligation to absorb losses or the right to
receive benefits from the VIE that could potentially be significant to the VIE. The Company may retain
the right to service mortgage loans sold or securitized by the Agencies. Due to the significant influence
of the Agencies over the VIEs that hold the assets from mortgage loan securitizations, principally
through their rights and responsibilities as master servicer, the Company is not the primary beneficiary
of the VIEs and therefore the VIEs are not consolidated.
The Company performs on‐going reassessments of (1) whether entities previously evaluated under the
majority voting‐interest framework have become VIEs, based on certain events, and therefore become
subject to the VIE consolidation framework; and (2) whether changes in the facts and circumstances
regarding the Company’s involvement with a VIE cause the Company’s consolidation determination
to change.
Cash and Cash Equivalents
For cash flow purposes, the Company considers cash and temporary investments with original
maturities of three months or less, to be cash and cash equivalents. The Company has diversified its
credit risk for cash by maintaining deposits in several financial institutions, which may at times exceed
amounts covered by insurance from the Federal Deposit Insurance Corporation. The Company
evaluates the creditworthiness of these financial institutions in determining the risk associated with
these balances. The Company has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk related to cash and cash equivalents.
Restricted Cash
The Company maintains certain cash balances that are restricted under warehouse agreements and
broker margin accounts associated with its derivative instruments.
Mortgage Loans Held for Sale and Revenue Recognition
Mortgage loans held for sale are carried at fair value under the fair value option with changes in fair
value recorded in gain on sale of mortgage loans held for sale on the statements of operations. The fair
value of mortgage loans held for sale committed to investors is calculated using observable market
information such as the investor purchase commitment, assignment of trade or other mandatory
delivery commitment prices. The Company bases loans committed to Agency investors based on the
Agency’s quoted mortgage backed security (MBS) prices. The fair value of mortgage loans held for sale
not committed to investors is based on quoted best execution secondary market prices. If no such
quoted price exists, the fair value is determined using quoted prices for a similar asset or assets, such
as MBS prices, adjusted for the specific attributes of that loan, which would be used by other market
participants.
9
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage Loans Held for Sale and Revenue Recognition (Continued)
Gains and losses from the sale of mortgage loans held for sale are recognized based upon the
difference between the sales proceeds and carrying value of the related loans upon sale and are
recorded in gain on sale of mortgage loans held for sale on the statements of operations. Sales proceeds
reflect the cash received from investors through the sale of the loan and servicing release premium. If
the related mortgage servicing right (MSR) is sold servicing retained, the MSR addition is recorded in
gain on sale of mortgage loans held for sale on the statements of operations. Gain on sale of mortgage
loans held for sale also includes the unrealized gains and losses associated with the changes in the fair
value of mortgage loans held for sale and the realized and unrealized gains and losses from derivative
instruments.
Mortgage loans held for sale are considered sold when the Company surrenders control over the
financial assets. Control is considered to have been surrendered when the transferred assets have been
isolated from the Company, beyond the reach of the Company and its creditors; the purchaser obtains
the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange
the transferred assets; and the Company does not maintain effective control over the transferred assets
through either an agreement that both entitles and obligates the Company to repurchase or redeem the
transferred assets before their maturity or the ability to unilaterally cause the holder to return specific
assets. The Company typically considers the above criteria to have been met upon acceptance and
receipt of sales proceeds from the purchaser.
Mortgage Loans Held for Investment, Net
Mortgage loans held for investment for which management has the intent and ability to hold for the
foreseeable future or to maturity are carried at amortized cost reduced by a valuation allowance for
estimated credit losses. Mortgage loans transferred from the held for sale category are transferred at
the lower of cost or fair value, which becomes the new cost basis in the loans.
Loan Origination Fees
Loan origination fees represent revenue earned from originating mortgage loans. Loan origination fees
generally represent a flat per‐loan fee amount based on a percentage of the original principal loan
balance and are recognized as revenue at the time the mortgage loans are funded. Loan origination
expenses are charged to operations as incurred.
Interest Income
Interest income on mortgage loans held for sale is recognized for the period from loan funding to sale
based upon the principal balance outstanding and contractual interest rates. Revenue recognition is
discontinued when loans become 90 days delinquent, or when, in management’s opinion, the recovery
of principal and interest becomes doubtful and the mortgage loans held for sale are put on nonaccrual
status.
10
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
FASB ASC 606, Revenue from Contracts with Customers (ASC 606), establishes principles for reporting
information about the nature, amount, timing and uncertainty of revenue and cash flows arising from
the entity’s contracts to provide goods or services to customers. The core principle requires an entity to
recognize revenue to depict the transfer of goods or services to customers in an amount that reflects
the consideration that it expects to be entitled to receive in exchange for those goods or services
recognized as performance obligations are satisfied. The majority of the Company’s revenue
generating transactions are not subject to ASC 606, including revenue generated from financial
instruments, such as the Company’s mortgage loans and derivatives, as well as revenue related to the
Company’s mortgage servicing activities.
Loan Servicing Fees and Expenses
Loan servicing fees represent revenue earned for servicing loans for various investors. Loan servicing
fees are based on a contractual percentage of the outstanding unpaid principal balance and are
recognized into revenue as the related mortgage payments are received. Loan servicing expenses are
charged to operations as incurred.
Servicing Advances
Servicing advances represent escrows advanced by the Company on behalf of borrowers and investors
to cover delinquent balances for property taxes, insurance premiums and other out‐of‐ pocket costs.
Servicing advances are made in accordance with the servicing agreements and are recoverable upon
collection of future borrower payments, sale of loan collateral, reimbursement by investor, or mortgage
insurance claims. The Company periodically reviews servicing advances for collectability and
establishes a valuation allowance for estimated uncollectible amounts. No allowance has been
recorded as of December 31, 2020 and 2019, as management has determined that all amounts are fully
collectible.
11
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment, Net
Property and equipment is recorded at cost and depreciated or amortized using the straight line
method over the estimated useful lives of the assets. The following is a summary of property and
equipment at December 31:
Property and equipment, at cost
Equipment
Furniture and fixtures
Software
Leasehold improvements
Total property and equipment, at cost
Accumulated depreciation and
amortization
Equipment
Furniture and fixtures
Software
Leasehold improvements
Total accumulated depreciation and
amortization
Total property and equipment, net
Useful lives
(years)
2020
2019
3‐7
3‐7
3‐5
(a)
$ 1,234,632
878,603
180,187
105,065
$ 1,010,207
715,241
180,187
79,879
2,398,487
1,985,514
(801,417)
(507,803)
(122,075)
(45,540)
(608,190)
(430,232)
(121,747)
(40,974)
(1,476,835)
921,652
$
(1,201,143)
784,371
$
(a) Amortized over the shorter of the related lease term or the estimated useful life of the assets.
The Company periodically assesses property and equipment for impairment whenever events or
circumstances indicate the carrying amount of an asset may exceed its fair value. If property and
equipment is considered impaired, the impairment losses will be recorded on the statements of
operations. The Company did not recognize any impairment losses during the years ended
December 31, 2020, 2019 and 2018.
12
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Derivative Instruments
The Company holds and issues derivative financial instruments such as interest rate lock commitments
(IRLCs) and forward sale commitments. IRLCs are subject to price risk primarily related to fluctuations
in market interest rates. To hedge the interest rate risk on mandatory IRLCs, the Company uses
forward sale commitments, such as to‐be‐announced securities or mandatory delivery commitments
with investors. Management expects these forward sale commitments to experience changes in fair
value opposite to the changes in fair value of the IRLCs, thereby reducing earnings volatility. Forward
sale commitments are also used to hedge the interest rate risk on mortgage loans held for sale that are
not committed to investors and still subject to price risk. If the mandatory delivery commitments are
not fulfilled, the Company pays a pair‐off fee. Best effort forward sale commitments are also executed
with investors, whereby certain loans are locked with a borrower and simultaneously committed to an
investor at a fixed price. If the best effort IRLC does not fund, the Company has no obligation to fulfill
the investor commitment.
The Company considers various factors and strategies in determining what portion of the IRLCs and
uncommitted mortgage loans held for sale to economically hedge. FASB ASC 815‐25, Derivatives and
Hedging, requires that all derivative instruments be recognized as assets or liabilities on the balance
sheets at their fair value. Changes in the fair value of the derivative instruments and gains and losses
resulting from pairing‐out of forward sale commitments are recognized in gain on sale of mortgage
loans held for sale on the statements of operations in the period in which they occur. The Company
accounts for all derivative instruments as free‐standing derivative instruments and does not designate
any for hedge accounting.
Mortgage Servicing Rights and Revenue Recognition
FASB ASC 860‐50, Transfers and Servicing, requires that MSRs be initially recorded at fair value at the
time the underlying loans are sold. To determine the fair value of the MSR created, the Company uses
a valuation model, along with currently available market information including rate sheets from
aggregators, that calculates the net present value of future cash flows. The valuation model
incorporates assumptions that market participants would use in estimating future net servicing
revenue, including the estimated discount rate, estimated prepayment speeds, the cost of servicing,
estimated delinquencies, contractual service fees, ancillary income and late fees, float value, the
inflation rate, and default rates. The credit quality and stated interest rates of the forward loans
underlying the MSRs affects the assumptions used in the cash flow models. MSRs are not actively
traded in open markets; accordingly, considerable judgment is required to estimate their fair value,
and changes in these estimates could materially change the estimated fair value. The Company
receives a monthly fixed servicing fee based on the outstanding principal balances of the mortgage
loans, which is collected from investors.
13
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage Servicing Rights and Revenue Recognition (Continued)
After initially recording the MSRs at fair value, the Company subsequently amortizes the MSRs over
the estimated economic life of the related mortgage loans in proportion to the estimated future net
servicing revenue. The net capitalized cost of MSRs is periodically evaluated to determine if the
amortized cost of MSRs is in excess of their estimated fair value. For this purpose, the Company
stratifies its MSRs based on loan term, interest rate and product type, with estimates of remaining loan
lives and prepayment rates being incorporated into the model. When impairment is identified due to
the MSR asset’s amortized book value exceeding its fair value, management records a valuation
allowance. Valuation allowances are recorded as a reduction to the MSRs on the balance sheets.
Any impairment of the amortized cost of MSRs is assessed based on their fair value at each reporting
date using estimated prepayment speeds of the underlying mortgage loans serviced and stratification
based on risk characteristics of the underlying loans (predominantly interest rates). As interest rates
decrease, mortgage refinancing activity may increase, resulting in higher prepayment speeds of the
loans underlying MSRs, which may result in a reduction of the MSRs’ fair value. Such fair value
adjustment may require an additional valuation allowance being charged to earnings, to the extent that
the amortized cost of the MSR exceeds the estimated fair value from stratification. Conversely, as
mortgage interest rates rise, prepayment speeds are usually slower and the value of the MSR asset
generally increases, requiring less valuation allowance. If it is later determined that all or a portion of
the temporary impairment no longer exists for a stratification, the valuation allowance is reduced
through a recovery to earnings. An other‐than‐temporary impairment (i.e. recoverability is considered
remote when considering interest rates and loan pay‐off activity) is recognized as a write‐down of the
MSR asset and the related valuation allowance. A direct write‐down permanently reduces the carrying
value of the MSR asset and valuation allowance, precluding subsequent recoveries.
The key unobservable inputs used in determining the fair value of MSRs when they are initially
recorded were as follows for the year ended December 31, 2020:
Discount rates
Annual prepayment speeds
Average cost of servicing
Inputs
11.00% ‐ 11.26%
15.39% ‐ 21.40%
$85
The Company’s MSR portfolio was de minimus at December 31, 2019, therefore, certain disclosures
pertaining to 2019 were omitted from the notes to the financial statements.
14
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Sale of Mortgage Servicing Rights
A transfer of servicing rights related to loans previously sold qualifies as a sale at the date on which
title passes, if substantially all risks and rewards of ownership have irrevocably passed to the
transferee and any protection provisions retained by the transferor are minor and can be reasonably
estimated. In addition, if a sale is recognized and only minor protection provisions exist, a liability
should be accrued for the estimated obligation associated with those provisions.
Loans in Forbearance and Eligible for Repurchase from GNMA
When the Company has the unilateral right to repurchase GNMA pool loans it has previously sold
(generally loans that are more than 90 days past due) and the Company has determined there is more
than a trivial benefit to repurchase the loans, the Company records its right to the loan on its balance
sheets as an asset and corresponding liability. The recognition of previously sold mortgage loans does
not impact the accounting for the previously recognized MSRs. At December 31, 2020, delinquent or
defaulted mortgage loans currently in GNMA pools that the Company has recognized on its balance
sheets totaled $2,338,905. The Company had no delinquent or defaulted mortgage loans in GNMA
pools at December 31, 2019. Loans with borrowers that have entered into a forbearance plan under the
Coronavirus Aid, Relief, and Economic Security Act (CARES Act) have an unpaid principal balance of
approximately $7,041,000 or 1.36% of the MSR portfolio at December 31, 2020, of which approximately
$2,339,000 and 0.45% of the MSR portfolio is greater than 90 days delinquent. There were no actual
repurchases of GNMA delinquent or defaulted mortgage loans during the year ended December 31,
2020. The Company repurchased $503,131 and $750,392 of GNMA delinquent or defaulted mortgage
loans during the years ended December 31, 2019 and 2018, respectively, with the intention to modify
their terms and include the loans in new GNMA pools.
Real Estate Owned
Real estate owned is initially recorded at the estimated fair value at the date of foreclosure of the
underlying delinquent mortgage loan, which becomes the new cost basis in the real estate owned. The
fair value of real estate owned is determined, when possible, using observable market data, including
recent real estate appraisals and broker price opinions. Costs incurred in managing and maintaining
foreclosed real estate and subsequent declines in fair value are charged to operations as incurred and
are included in general and administrative on the statements of operations. The Company periodically
assesses real estate owned for impairment whenever events or circumstances indicate the carrying
amount of the assets may exceed their fair value. If real estate owned is considered impaired, the
impairment losses will be recorded on the statements of operations.
15
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan Indemnification Reserve
Loans sold to investors by the Company and which met investor and Agency underwriting guidelines
at the time of sale may be subject to repurchase in the event of specific default by the borrower or
subsequent discovery that underwriting standards were not met. The Company may, upon mutual
agreement, indemnify the investor against future losses on such loans. The Company has established a
reserve for potential losses related to these representations and warranties. In assessing the adequacy
of the reserve, management evaluates various factors including actual write‐offs during the period,
historical loss experience, known delinquent and other problem loans, and economic trends and
conditions in the industry. Actual losses incurred are reflected as write‐offs against the loan
indemnification reserve.
The activity in the loan indemnification reserve for mortgage loans held for sale is as follows for
the years ended December 31:
Balance, beginning of year
Provision for loan losses
Reclassification of provision
Loans written‐off, net of recoveries
Balance, end of year
2020
2019
2018
$
593,287
815,663
100,000
(183,882)
$
532,071
526,421
—
(465,205)
1,325,068
$
593,287
$
645,761
130,929
—
(244,619)
532,071
$
$
Because of the uncertainty in the various estimates underlying the loan indemnification reserve, there
is a range of losses in excess of the recorded loan indemnification reserve that is reasonably possible.
The estimate of the range of possible loss for representations and warranties does not represent a
probable loss and is based on current available information, significant judgment, and a number of
assumptions that are subject to change.
Valuation Allowance on Mortgage Loans Held for Investment, Net
The Company periodically evaluates the carrying value of mortgage loans held for investment in
excess of fair value and establishes a valuation allowance for potential losses. In assessing the
adequacy of the valuation allowance, management evaluates various factors on a loan level basis,
including the probability of not being able to collect payments based on the contractual terms of the
mortgage, the estimated fair value of the underlying collateral and probable losses inherent to the loan
portfolio. Additions to and recovery of the valuation allowance are reflected in the provision for loan
losses on the statements of operations.
16
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Valuation Allowance on Mortgage Loans Held for Investment, Net (Continued)
The activity in the valuation allowance for mortgage loans held for investment is as follows for
the years ended December 31:
Balance, beginning of year
Provision for loan losses
Loans written‐off, net of recoveries
Balance, end of year
2020
2019
2018
$
$
$
59,184
81,646
(51,395)
$
44,900
24,901
(10,617)
48,845
628
(4,573)
89,435
$
59,184
$
44,900
Because of the uncertainty in the various estimates underlying the valuation allowance, there is a range
of losses in excess of the recorded valuation allowance that is reasonably possible. The estimate of the
range of possible loss does not represent a probable loss and is based on current available information,
significant judgment and a number of assumptions that are subject to change.
Escrow and Fiduciary Funds
The Company maintains segregated bank accounts for escrow balances in trust for investors for
mortgagors. The balances of these accounts amounted to $2,178,678 and $19,845 at December 31, 2020
and 2019, respectively, and are excluded from the balance sheets.
Advertising and Marketing
Advertising and marketing is expensed as incurred and amounted to $1,220,661, $1,221,637 and
$905,831 for the years ended December 31, 2020, 2019 and 2018, respectively, and are included in
general and administrative on the statements of operations.
Income Taxes
The Company has elected to be taxed as a partnership under the Internal Revenue Code. Accordingly,
no federal income tax provision and state income taxes, to the extent possible, have been recorded in
the financial statements, as all items of income and expense generated by the Company are reported on
the members’ income tax returns. The Company has no federal or state tax examinations in process as
of December 31, 2020.
Risks and Uncertainties
In the normal course of business, companies in the mortgage banking industry encounter certain
economic and regulatory risks. Economic risks include interest rate risk and credit risk. The Company
is subject to interest rate risk to the extent that in a rising interest rate environment, the Company may
experience a decrease in loan production, as well as decreases in the value of mortgage loans held for
sale not committed to investors and commitments to originate loans, which may negatively impact the
Company’s operations. Credit risk is the risk of default that may result from the borrowers’ inability or
unwillingness to make contractually required payments during the period in which loans are being
held for sale or serviced by the Company.
17
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Risks and Uncertainties (Continued)
The Company sells loans to investors without recourse. As such, the investors have assumed the risk
of loss or default by the borrower. However, the Company is usually required by these investors to
make certain standard representations and warranties relating to credit information,
loan
documentation and collateral. To the extent that the Company does not comply with such
representations, or there are early payment defaults, the Company may be required to repurchase the
loans or indemnify these investors for any losses from borrower defaults. In addition, if loans pay‐off
within a specified time frame, the Company may be required to refund a portion of the sales proceeds
to the investors.
The Company’s business requires substantial cash to support its operating activities. As a result, the
Company is dependent on its warehouse lines of credit, and other financing facilities in order to
finance its continued operations. If the Company’s principal lenders decided to terminate or not to
renew any of these financing facilities with the Company, the loss of borrowing capacity could have a
material adverse impact on the Company’s financial statements unless the Company found a suitable
alternative source.
The recent global outbreak of COVID‐19 has disrupted economic markets, and the prolonged
economic impact is uncertain. The operational and financial performance of the Company depends on
future developments, including the duration and spread of the outbreak, and such uncertainty may
have an adverse impact on the Company’s financial performance.
Recently Issued Accounting Pronouncements
Future Adoption of New Accounting Pronouncements
In February 2016, FASB issued Accounting Standards Update (ASU) No. 2016‐02, Leases (ASU 2016‐ 02),
which requires recognition of right‐of‐use assets and lease liabilities by lessees for all leases with a term
greater than 12 months and to provide enhanced disclosures. ASU 2016‐02 is effective for fiscal years
beginning after December 15, 2021, with early adoption permitted.
Adoption of Recent Accounting Pronouncements
In May 2014, the FASB issued new revenue recognition guidance that supersedes most industry‐
specific guidance but does exclude financial instruments. The Company adopted the guidance
beginning January 1, 2018 and concluded that its revenue streams are not within the scope of the
standard because the standard does not apply to revenue on contracts accounted for under the
transfers and servicing of financial assets or financial instrument standards. Therefore, the revenue
recognition for these contracts remained unchanged.
In January 2016, the FASB issued an ASU that amends the guidance on the classification and
measurement of financial instruments. Among other things, the ASU amends certain disclosure
requirements associated with the fair value of financial instruments. This Company adopted the
guidance beginning January 1, 2018. The adoption did not have a significant impact on the Company’s
financial statements.
18
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements (Continued)
Adoption of Recent Accounting Pronouncements (Continued)
In June 2016, the FASB issued ASU 2016‐13, Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments, as amended, which amends the guidance for
recognizing credit losses on financial instruments measured at amortized cost including receivables.
The ASU requires measurement and recognition of expected versus incurred credit losses using a
lifetime credit loss measurement approach. Significantly all of the Company’s financial assets are
measured at fair value and are therefore not subject to the guidance; however, the Company
determined that receivables and GNMA early buyout loans are within the scope of the ASU. GNMA
early buyout loans are insured by the FHA or guaranteed by the Department of Veterans Affairs (VA)
which limits the Company’s exposure to potential credit‐ related losses to an immaterial amount.
Further, the estimated credit‐related losses of the Company’s receivables are also immaterial due to the
short‐term nature of the assets. Servicing advances are generally expected to be fully reimbursed under
the terms of the servicing agreements. The Company adopted the guidance beginning January 1, 2020.
The adoption did not have a significant impact on the Company’s financial statements.
In August 2018, the FASB issued an ASU that further removes, modifies or adds certain disclosure
requirements for fair value measurements. The Company adopted the guidance beginning January 1,
2020. The adoption did not have a significant impact on the Company’s financial statements.
B. MORTGAGE LOANS HELD FOR SALE, AT FAIR VALUE
Mortgage loans held for sale are as follows at December 31:
Mortgage loans held for sale
Mortgage loans held for sale
(greater than 90 days outstanding)
Fair value adjustment
2020
$136,912,023
2019
$ 96,137,616
—
6,522,661
$143,434,684
669,026
3,417,311
$100,223,953
19
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
C. MORTGAGE LOANS HELD FOR INVESTMENT, NET
The following summarizes mortgage loans held for investment, net at December 31:
Mortgage loans held for investment
Valuation allowance
2020
2019
$2,170,435
(89,435)
$3,367,385
(59,184)
$2,081,000
$3,308,201
D. ACCOUNTS RECEIVABLE AND ADVANCES
The following summarizes accounts receivable and advances at December 31:
Loan sales receivable
Due from borrower
Servicing advances
MSR co‐issue receivable
2020
2019
$ 149,347
43,885
99,570
728,040
$1,020,842
$364,407
118,483
54,888
196,127
$733,905
The Company periodically evaluates the carrying value of accounts receivable and advance balances
with delinquent balances written‐off based on specific credit evaluations and circumstances of the
debtor. No allowance for doubtful accounts has been established at December 31, 2020 and 2019, as
management has determined that all amounts are fully collectible.
The Company issued two notes receivable to an employee totaling $218,000 during the year ended
December 31, 2019. The notes receivable bear interest at 5.00% per annum with principal and unpaid
interest payable on the fifth anniversary of each note receivable. The Company will forgive 20% of the
principal and interest every 12 months after the effective date of each note receivable, provided the
employee meets certain conditions related to continued employment and minimum annual loan
origination. The notes receivable totaled $174,400 and $218,000 at December 31, 2020 and 2019,
respectively, which are included in due from related parties on the balance sheets.
E. DERIVATIVE INSTRUMENTS
The Company enters into IRLCs to originate residential mortgage loans held for sale, at specified
interest rates and within a specified period of time (generally between 30 and 90 days), with borrowers
who have applied for a loan and have met certain credit and underwriting criteria. The IRLCs are
adjusted for estimated costs to originate the loan as well as the probability that the mortgage loan will
fund within the terms of the IRLC (the pullthrough rate). Estimated costs to originate include loan
officer commissions and overrides. The pullthrough rate is estimated on changes in market conditions,
loan stage, and actual borrower behavior using a historical analysis of IRLC closing rates. The
Company obtains an analysis from an independent third party on a monthly basis to support the
reasonableness of the pullthrough estimate.
20
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
E. DERIVATIVE INSTRUMENTS (Continued)
The key unobservable inputs used in determining the fair value of IRLCs are as follows for the years
ended December 31:
Pullthrough rates
Average cost to originate
2020
2019
2018
81.92% ‐ 88.35%
1.20%
86.60% ‐ 88.98%
1.20%
87.50% ‐ 89.67%
1.15%
The following summarizes derivative instruments at December 31:
IRLCs:
Mandatory
Best efforts
MBSs
Total
2020
Notional
Amount
Fair
Value
2019
Notional
Amount
Fair
Value
$ 9,945,416
253,829
(2,496,602)
$ 7,702,643
$254,186,000 (b) $ 1,702,564
230,112
$ 27,329,000 (b)
(74,922)
$326,000,000
$ 1,857,754
$ 60,814,000 (b)
$ 25,413,000 (b)
$ 71,000,000
(b) Pullthrough rate adjusted
The notional amounts of mortgage loans held for sale not committed to investors amounted to
approximately $105,819,000 and $17,514,000 at December 31, 2020 and 2019, respectively.
The Company has exposure to credit loss in the event of contractual non‐performance by its trading
counterparties in derivative instruments that the Company uses in its rate risk management activities.
The Company manages this credit risk by selecting only counterparties that the Company believes to
be financially strong, spreading the risk among multiple counterparties, by placing contractual limits
on the amount of unsecured credit extended to any single counterparty and by entering into netting
agreements with counterparties, as appropriate.
21
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
F. MORTGAGE SERVICING RIGHTS
The following summarizes the activity of MSRs for the years ended December 31:
2020
2019
2018
Balance, beginning of year
$
Additions due to loans sold servicing retained
6,750
1,856,167
$ 303,194
15,094
— (259,948)
(19,787)
(31,803)
$ 501,971
32,218
—
(33,061)
(197,934)
(17,151)
(150,796)
$ 1,694,970
$
6,750
$ 303,194
Deletions due to sale of MSRs
Deletions due to loan payoffs
Amortization expense
Balance, end of year
At December 31, 2020 and 2019, the unpaid principal balance of mortgage loans serviced approximated
$517,842,000 and $4,476,000, respectively. Conforming conventional loans serviced by the Company
are sold to FNMA and FHLMC on a non‐recourse basis, whereby foreclosure losses are generally the
responsibility of FNMA and FHLMC, and not the Company. The government loans serviced by the
Company are secured through GNMA, whereby the Company is insured against loss by the Federal
Housing Administration or partially guaranteed against loss by the VA.
The key unobservable inputs used in determining the fair value of the Company’s MSRs are as follows
at December 31, 2020:
Discount rates
Annual prepayment speeds
Average cost of servicing
Inputs
11.00% ‐ 11.24%
15.52% ‐ 21.40%
$85
The hypothetical effect of an adverse change in these key unobservable inputs would result in a
decrease in fair value as follows at December 31, 2020:
Discount rates:
Effect on value ‐ 1% adverse change
Effect on value ‐ 2% adverse change
Prepayment speeds:
Effect on value ‐ 5% adverse change
Effect on value ‐ 10% adverse change
Cost of servicing:
Effect on value ‐ 5% adverse change
Effect on value ‐ 10% adverse change
Amounts
$ (139,594)
$ (270,488)
$ (153,468)
$ (299,990)
$ (28,738)
$ (57,477)
22
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
F. MORTGAGE SERVICING RIGHTS (Continued)
These sensitivities are hypothetical and should be used with caution. As the table demonstrates, the
Company’s methodology for estimating the fair value of MSRs is highly sensitive to changes in key
unobservable inputs. For example, actual prepayment experience may differ and any difference may
have a material effect on MSR fair value. Changes in fair value resulting from changes in inputs
generally cannot be extrapolated because the relationship of the change in input to the change in fair
value may not be linear. Also, in this table, the effect of a variation in a particular input on the fair
value of the MSRs is calculated without changing any other input; in reality, changes in one factor may
be associated with changes in another (for example, decreases in market interest rates may indicate
higher prepayments; however, this may be partially offset by lower prepayments due to other factors
such as a borrower’s diminished opportunity to refinance), which may magnify or counteract the
sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and inputs
made as of a particular point in time. Those inputs may not be appropriate if they are applied to a
different point in time.
Sale of Mortgage Servicing Rights
During the year ended December 31, 2019, the Company sold the majority of its MSR portfolio with an
unpaid principal balance of approximately $75,280,000 for a net sales price of $597,813, which includes
the gross sales prices of $629,063 less $31,250 for transactional expenses. The Company recognized a
gain on sale of $337,865 which is recorded in gain on sale of mortgage servicing rights on the
statements of operations. In addition, the Company recorded a receivable totaling $62,906, at
December 31, 2019, related to the sale, which is due when all of the complete mortgage files have been
received by the purchaser. The Company performed temporary sub‐servicing activities with respect to
the underlying loans through the established transfer date, for which the Company earned a fee and is
also entitled to certain other ancillary income amounts.
23
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
G. WAREHOUSE LINES OF CREDIT AGREEMENTS
The Company has the following warehouse lines of credit (WHLOC) agreements with various
financial institutions at December 31:
Facility
Type
WHLOC
Maturity
Line Amount
Interest Rate
N/A
$
10,000,000
WHLOC*
January 2022
$
40,000,000
WHLOC
N/A
$
90,000,000
WHLOC
August 2021
$
50,000,000
WHLOC
June 2021
$
75,000,000
LIBOR plus
2.75%, with a
floor rate of
3.25%
LIBOR plus
2.25%, with a
floor rate of
3.25%
LIBOR plus
2.90%, with a
floor rate of
3.25%
LIBOR plus
2.75% ‐ 3.25%,
with a LIBOR
floor rate of
1.00%
LIBOR plus
2.65%, with a
LIBOR floor rate
of 0.50%
Restricted
Cash
Outstanding Balance
2019
2020
$ 100,000
$
— $
—
—
30,757,899
23,007,825
586,643
58,664,259
25,123,038
—
25,009,964
14,776,973
—
21,655,055
29,144,179
$ 686,643
$
136,087,177
$
92,052,015
* The WHLOC is with a related party.
As of December 31, 2020 and 2019, the Company had mortgage loans held for sale pledged as collateral
under the above WHLOC agreements, with the lines being personally guaranteed by the members.
The above agreements also contain covenants which include certain financial requirements, including
maintenance of minimum tangible net worth, minimum liquid assets, maximum debt to net worth
ratio, positive net income, and minimum fidelity bond and errors and omissions coverage, as defined
in the agreements. The Company was in compliance with all significant debt covenants at
December 31, 2020. The Company intends to renew the WHLOCs when they mature.
H. OPERATING LINE OF CREDIT AGREEMENT, RELATED PARTY
The Company had a $7 million revolving line of credit agreement with a related party, which matured
and was fully repaid in May 2020. The line of credit was payable on demand, bore interest at the Prime
rate plus 0.50%, with a floor rate of 3.75%, and was personally guaranteed by a member of the
Company. The outstanding balance under the operating line of credit totaled $3,734,308 at
December 31, 2019.
24
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
I. NOTE PAYABLE
In April 2020, the Company was approved by the U.S. Small Business Administration (SBA) under the
CARES Act for a Paycheck Protection Program (PPP) loan and received proceeds totaling
$3,698,388. Interest is at 1.00% per annum and matures in April 2022. The note has a deferral period of
15 months beginning on the date of the note, during which interest accrues but no payments are due.
The outstanding balance under the note payable totaled $3,698,388 at December 31, 2020. The
Company intends to use the entire PPP loan amount for qualifying expenses and to apply for
forgiveness of the loan in accordance with the terms of the CARES Act.
Future minimum payments under the note payable are as follows at December 31, 2020:
Year Ending December 31,
Amounts
2021
2022
$
$
2,051,145
1,647,243
3,698,388
J. RELATED PARTY TRANSACTIONS
A related party financial institution is a member of the Company with common membership shares
and preferred membership shares.
During the years ended December 2020, 2019 and 2018, the Company sold 225, 287 and 304 loans,
respectively, servicing released with unpaid principal balances of $58,916,783, $158,200,197 and
$131,718,723, respectively, to the related party financial institution. Premiums received on the loans
amounted to $1,096,796, $2,633,141 and $2,306,708, during the years ended December 31, 2020, 2019
and 2018, respectively, and are included in gain on sale of mortgage loans held for sale on the
statements of operations. The Company also paid origination expenses to the related party financial
institution totaling $3,100, $9,603 and $7,402 during the years ended December 31, 2020, 2019 and 2018,
respectively, which is included in gain on sale of mortgage loans held for sale, direct costs on the
statements of operations.
The Company has a warehouse line of credit agreement and an operating line of credit agreement with
the same related party financial institution (Notes G and H, respectively). Pursuant to which, the
Company paid $996,728, $1,332,480 and $1,069,282 in interest expense and other fees during the years
ended December 31, 2020, 2019 and 2018, respectively, which are included in interest expense on the
statements of operations.
The Company paid $16,371, $27,154 and $36,224 in marketing expenses to the related party financial
institution during the years ended December 31, 2020, 2019 and 2018, respectively, which is included in
general and administrative on the statements of operations.
25
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
J. RELATED PARTY TRANSACTIONS (Continued)
The Company has receivables due from various employees totaling $174,400 and $393,339 at
December 31, 2020 and 2019, respectively, which are included in due from related parties on the
balance sheets.
K. COMMON INTERESTS
At December 31, 2020 and 2019, the Company has 8,783,212 common shares issued and outstanding
with certain members. Common shares with voting rights are held by a member that is an officer of the
Company and a financial institution member. On the fifteenth day of January, April, June and
September, the members with common shares receive distributions in aggregate amounts equal to no
less than 40% of the Company’s available cash, as reasonably determined by the Board of Directors, for
the fiscal year through the end of the immediately preceding full calendar month less any amounts
previously distributed during such fiscal year, in proportion to their respective common shares. The
Board of Directors is authorized to make additional distributions from time to time to the members in
proportion to their respective common shares. Profits and losses of the Company shall be allocated
first to the preferred members and second to the common members.
L. PREFERRED INTERESTS
At December 31, 2020 and 2019, the Company has 3,304,656 preferred shares issued and outstanding.
Members with preferred shares are entitled to receive, if and when declared, cash payments at the rate
of $0.075 per share per annum, made in equal quarterly installments on the fifteenth day of January,
April, July and October. Such preferred dividend payments are cumulative and totaled $247,039,
$249,312 and $248,892 during the years ended December 31, 2020, 2019 and 2018, respectively, with
$61,692 and $62,275 recorded in accounts payable and accrued expenses on the balance sheets at
December 31, 2020 and 2019, respectively. Holders of preferred membership shares are not entitled to
voting rights.
M. PROFIT INTEREST UNITS
During the year ended December 31, 2020, members transferred 518,210 units to an officer of the
Company as common profits interest membership shares (profit interest units). The transfer was based
on loan production volume from the preceding year. The profit interest units entitle the officer to
participate in future profits, losses, distributions and appreciation of the Company. The profit interest
units do not require initial investment and do not have voting rights. During the year ended
December 31, 2020, profit interest unit distributions totaled $308,615.
N. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) qualified retirement plan covering substantially all employees. Employees
may contribute amounts subject to certain Internal Revenue Service and plan limitations. The
Company may make discretionary matching and non‐elective contributions. The Company made no
contributions to the plan for the years ended December 31, 2020, 2019 and 2018.
26
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
O. COMMITMENTS AND CONTINGENCIES
Commitments to Extend Credit
The Company enters into IRLCs with customers who have applied for residential mortgage loans and
meet certain credit and underwriting criteria. These commitments expose the Company to market risk
if interest rates change and the underlying loan is not economically hedged or committed to an
investor. The Company is also exposed to credit loss if the loan is originated and not sold to an
investor and the mortgagor does not perform. The collateral upon extension of credit typically consists
of a first deed of trust in the mortgagor’s residential property. Commitments to originate loans do not
necessarily reflect future cash requirements as some commitments are expected to expire without
being drawn upon. Total commitments to originate loans approximated $321,058,000 and $97,692,000
at December 31, 2020 and 2019, respectively.
Regulatory Contingencies
The Company is subject to periodic audits and examinations, both formal and informal in nature, from
various federal and state agencies, including those made as part of regulatory oversight of mortgage
origination, servicing and financing activities. Such audits and examinations could result in additional
actions, penalties or fines by state or federal governmental bodies, regulators or the courts.
Operating Leases
The Company leases office space and equipment under various operating lease arrangements, which
expire through May 2025. Total rent expense under all operating leases amounted to $2,477,219,
$2,419,495 and $2,087,331 for the years ended December 31, 2020, 2019 and 2018, respectively, and are
included in occupancy, equipment and communication on the statements of operations.
Future minimum rental payments under long‐term operating leases are as follows at December 31,
2020:
Year Ending December 31,
2021
2022
2023
2024
2025
Amounts
$ 1,634,130
941,993
583,258
408,689
90,844
$ 3,658,914
27
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
O. COMMITMENTS AND CONTINGENCIES (Continued)
Legal
The Company operates in a highly regulated industry and may be involved in various legal and
regulatory proceedings, lawsuits and other claims arising in the ordinary course of its business. The
amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the
inherent uncertainties of litigation, management currently believes that the ultimate disposition of any
such proceedings and exposure will not have, individually or taken together, a material adverse effect
on the financial condition, results of operations, or cash flows of the Company. However, actual
outcomes may differ from those expected and could have a material effect on the Company’s financial
position, results of its operations or cash flows in a future period. The Company accrues for losses
when they are probable to occur, and such losses are reasonably estimable. Legal costs are expensed as
incurred and are included in general and administrative on the statements of operations.
Regulatory Net Worth Requirements
In accordance with the regulatory requirements of HUD,
direct
endorsement mortgagees, the Company is required to maintain a minimum net worth (as defined by
HUD) of $2,500,000. At December 31, 2020, the Company exceeded the regulatory net worth
requirement.
governing non‐supervised,
In accordance with the regulatory requirements of GNMA, governing issuers of GNMA securities, the
Company is required to maintain a minimum net worth (as defined by GNMA) of $4,808,820. At
December 31, 2020, the Company exceeded the regulatory net worth requirement.
Self‐Insurance Plan
The Company has engaged an insurance company to provided administrative services for the
Company’s self‐funded insurance plan. The Company pays the qualifying medical claims expense for
all participating individuals. The Company has a stop loss policy with the insurance company
whereby they are reimbursed for all qualifying medical expenses incurred by individual employees
above $1,665,736 in the aggregate. In addition, the Company is reimbursed for all aggregate medical
expenses incurred by all participating individuals above $100,000 per the stop loss agreement. The
Company has accrued for expenses related to incurred but not reported claims totaling $187,000 and
$197,000 for the years ended December 31, 2020 and 2019.
P. FAIR VALUE MEASUREMENTS
FASB ASC 820, Fair Value Measurements and Disclosures (ASC 820), defines fair value as the price that
would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction
between market participants at the measurement date and in the principal or most advantageous
market for that asset or liability. The fair value should be calculated based on assumptions that market
participants would use in pricing the asset or liability, not assumptions specific to the entity.
28
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
P. FAIR VALUE MEASUREMENTS (Continued)
ASC 820 specifies a hierarchy of valuation techniques based upon whether the inputs to those
valuation techniques reflect assumptions other market participants would use based upon the market
data obtained from independent sources (observable inputs). In accordance with ASC 820, the
following summarizes the fair value hierarchy:
Level 1 Inputs – Unadjusted quoted market prices for identical assets and liabilities in an active market
that the Company has the ability to access.
Level 2 Inputs – Inputs other than the quoted market prices in active markets that are observable either
directly or indirectly.
Level 3 Inputs – Inputs based on prices or valuation techniques that are both unobservable and
significant to the overall fair value measurements.
ASC 820 requires the use of observable market data, when available, in making fair value
measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the
level within which the fair value measurement is categorized is based on the lowest level input that is
significant to the fair value measurements. Valuation techniques used need to maximize the use of
observable inputs and minimize the use of unobservable inputs.
While the Company believes its valuation methods are appropriate and consistent with those used by
other market participants, the use of different methods or assumptions to estimate the fair value of
certain financial statement items could result in a different estimate of fair value at the reporting date.
The significant unobservable inputs used in the fair value measurement may result in significantly
different fair value measurements if any of those inputs were to change in isolation. Generally, a
change in the assumptions used in the fair value measurement would be accompanied by a
directionally opposite change in other assumptions. Those estimated values may differ significantly
from the values that would have been used had a readily available market for such items existed, or
had such items been liquidated, and those differences could be material to the financial statements.
The following is a description of the valuation methodologies used for assets and liabilities measured
at fair value. There have been no changes in the methodologies used at December 31, 2020 and 2019.
Mortgage loans held for sale (MLHFS) – The fair value of mortgage loans held for sale based on Level 2
inputs is determined, when possible, using either quoted secondary‐market prices or investor
commitments. If no such quoted price exists, the fair value of a loan is determined using quoted prices
for a similar asset or assets, adjusted for the specific attributes of that loan, which would be used by
other market participants.
Mortgage loans held for investment – The fair value of mortgage loans held for investment is determined
based on observable market information, including pricing from actual market transactions or broker
quotations.
29
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
P. FAIR VALUE MEASUREMENTS (Continued)
Derivative instruments – The fair value of IRLCs is based on valuation models incorporating market
pricing for instruments with similar characteristics, commonly referred to as best execution pricing, or
investor commitment prices for best effort IRLCs. The valuation models used to value the IRLCs have
unobservable inputs, such as an estimate of the fair value of the servicing rights expected to be
recorded upon sale of the loans, estimated costs to originate the loans, and pullthrough, and are
therefore classified as Level 3 within the fair value hierarchy.
The fair value of forward sale commitments is based on observable market pricing for similar
instruments and are therefore classified as Level 2 within the fair value hierarchy.
Mortgage servicing rights – The fair value of MSRs is difficult to determine because MSRs are not
actively traded in observable stand‐alone markets. The Company uses a discounted cash flow
approach to estimate the fair value of MSRs. This approach consists of projecting net servicing cash
flows discounted at a rate that management believes market participants would use in their
determinations of fair value. The key unobservable inputs used in the estimation of the fair value of
MSRs include prepayment speeds, discount rates, default rates, cost to service, contractual servicing
fees, escrow earnings and ancillary income.
Real estate owned – Real estate owned is initially recorded at the estimated fair value at the date of
foreclosure on the delinquent mortgage loans, which becomes the new cost basis in the real estate
owned. The fair value of real estate owned is determined, when possible, using observable market
data, including recent real estate appraisals and broker price opinions. Subsequent declines in fair
value are credited to a valuation allowance.
Assets and Liabilities Measured at Fair Value
The following are the major categories of assets and liabilities measured at fair value on a recurring
basis as of December 31, 2020:
Description
Level 1
Level 2
Level 3
Total
MLHFS
Derivative instruments
Total
$
$
— $ 143,434,684
—
(2,496,602)
— $ 140,938,082
$
10,199,245
$ 10,199,245
— $ 143,434,684
7,702,643
$ 151,137,327
The following are the major categories of assets and liabilities measured at fair value on a recurring
basis as of December 31, 2019:
Description
Level 1
Level 2
Level 3
Total
MLHFS
Derivative instruments
Total
$
$
— $ 100,223,953
—
(74,922)
— $ 100,149,031
$
— $ 100,223,953
1,857,754
$ 102,081,707
1,932,676
$ 1,932,676
The Company does not have any impaired assets or liabilities that are recorded at fair value on a non‐
recurring basis as of December 31, 2020 and 2019.
30
SOUTHERN TRUST MORTGAGE, LLC
NOTES TO FINANCIAL STATEMENTS
P. FAIR VALUE MEASUREMENTS (Continued)
Assets and Liabilities Measured at Fair Value (Continued)
The following are the changes in fair value of Level 1 and Level 2 assets and liabilities measured at fair
value on a recurring basis for the years ended December 31:
Financial Instrument
2020
2019
2018
Mortgage loans held for sale
Derivative liabilities
Total
$
$
3,105,350
(2,421,680)
$ 1,087,360
478,516
$
262,785
(477,657)
683,670
$ 1,565,876
$ (214,872)
Level 3 Purchases, Issuances and Transfers
The following is a summary of the Company’s purchases, issuances, and transfers of assets, as
applicable, which are measured at fair value on a recurring and non‐recurring basis using Level 3
inputs during the year ended December 31, 2020:
Issuances (c)
Transfers out of Level 3 (d)
MSRs
IRLCs
$ 68,946,475
— $112,297,249
$1,856,167
$
(c) Issuances of Level 3 MSRs represent current year additions from mortgage loans sold servicing
retained. Issuances of Level 3 IRLCs represent the lock‐date fair value of IRLCs issued to
borrowers during the year, net of the estimated pullthrough rate and costs to originate.
(d) IRLCs transferred out of Level 3 represent IRLCs that were funded and transferred to mortgage
loans held for sale, at fair value.
Fair Value of Other Financial Instruments
Due to their short‐term nature, the carrying value of cash and cash equivalents, restricted cash, escrow
cash, short‐term receivables, short‐term payables, note payable, and warehouse and operating lines of
credit approximate their fair value at December 31, 2020.
Q. SUBSEQUENT EVENTS
Management has evaluated subsequent events through March 12, 2021, the date on which the financial
statements were available to be issued.
31