Southern National Bancorp of Virginia, Inc. (NASDAQ: SONA) ("Southern National" or the "Company"), and its wholly-owned subsidiary Sonabank (the "Bank"), today announced net income of $4.7 million for the quarter ended June 30, 2020, compared to $9.3 million for the quarter ended June 30, 2019.  Earnings per share for the three months ended June 30, 2020 were $0.19 basic and diluted compared to $0.39 basic and $0.38 diluted for the three months ended June 30, 2019.  

Earnings for the six months ended June 30, 2020 were $4.7 million compared to $15.3 million for the six months ended June 30, 2019.  Earnings per share for the six months ended June 30, 2020 were $0.20 basic and $0.19 diluted compared to $0.64 basic and $0.63 diluted for the six months ended June 30, 2019. 

The Board of Directors also announces and declares a dividend of $0.10 per share payable on August 21, 2020 to shareholders of record on August 10, 2020.  This is Southern National's thirty-fifth consecutive quarterly dividend. 

Commenting on the quarter, President and CEO Dennis J. Zember, Jr. said "I am really proud of what we accomplished in the second quarter of 2020.  Despite the fact that our locations were closed, our bankers worked together to close and process over 3,800 PPP loans and grow core deposits at the fastest pace in our Company's history while steadily moving lower on rates.  We saw a substantial improvement in revenue and pretax pre-provision earnings and held steady on operating expenses.  Our announcement regarding Panacea illustrates our commitment to technology and creativity and promises to drive shareholder value with increased growth rates in earnings per share.  We expect the second half of the year to be centered on managing through the economic impacts of the pandemic and are encouraged with the conversations and diligence we have directed to existing customer relationships."

Highlights for the three and six months ended June 30, 2020 include:

• Originated approx. 3,800 PPP loans totaling $335.6 million.
• Deferred PPP fees (net of expenses) of $10.6 million.
• Increased non-CD deposits to total deposits 71% compared to 59% at 2Q 2019.
• Cost of Deposits declined to 0.95% (over 45% compared to year end 2019 levels).
• Increased contribution from mortgage investment to $4.1 million.
• Increased PTPP income to $16.8 million or 2.27% of average assets (compared to 1.51% for 2019).
• Announced partnership with Tyler Stafford and Panacea that will increase long-term growth in assets and earnings per share focusing on medical professionals.
• Operating efficiency ratio of 49.07% compared to 58.21% in the same quarter of 2019.
• Total assets increased to approximately $3.1 billion at June 30, 2020.
• Tangible book value per share of $11.21 at June 30, 2020 has increased 6.9% since a year ago.

Net Interest Income

Net interest income increased to $22.5 million for the three months ended June 30, 2020 or $1.5 million due to higher levels of average earning assets.  The Company's net interest margin for the current quarter declined to 3.33%, impacted heavily by the origination of PPP loans with net margins of only 0.77%.  Excluding the effects of PPP loans, the Company's net interest margin would have increased to 3.50% compared to 3.40% at the same time in 2019.  While yields on earning assets have fallen due to market conditions, the Company's funding costs have benefited materially for the first half of 2020 and are expected to continue improving for several additional quarters.   Yields on earning assets have fallen from 4.93% to 4.25% when compared to the second quarter of 2019 versus a 67% decline in total cost of funding over the same period.

Commenting on the trends around net interest margin, Mr. Zember stated "Our foremost balance sheet strategy right now is to permanently improve our funding and our funding costs.  In the coming quarters, we are looking to continue growing core deposits at a pace that will allow us to dramatically reduce reliance on brokered and listing service CDs.  As we move through the year and see the funding mix move more towards checking and money market accounts, we will focus even more attention on funding costs.  Strategically, we believe the pathway to our desired funding profile for the Company is a twelve to eighteen month process that will drive material value and profitability long-term."

Noninterest Income

During the three months ended June 30, 2020, Southern National had record non-interest income of $8.4 million compared to $3.2 million for the three months ended June 30, 2019.  Income on account maintenance and deposit service fees declined $299 thousand primarily in account service charges and NSF fees.  Gains on our investment in Southern Trust Mortgage ("STM") increased to $4.2 million compared to $558 thousand in the same quarter in 2019, driven by higher margins on closed loans and materially higher volumes from refinance activity as well as production from new hires and teams that were on boarded in the last half of 2019.   Lastly, the Company experienced a recovery related to a previously charged-off acquired loan of approximately $2 million during the second quarter of 2020.

Noninterest Expense

Noninterest expense was $14.1 million for the three months ended June 30, 2020, impressively similar to the $13.9 million reported for the three months ended June 30, 2019.  The increase in noninterest expense was primarily due to a $385 thousand increase in data processing expense, a $194 thousand increase in employee compensation and benefits, all offset by a $495 thousand decrease in building and leasehold depreciation.

Noninterest expense was $33.9 million for the six months ended June 30, 2020 compared to $30.2 million during the same period in 2019.  Both periods had unusually large non-recurring items including costs associated with the Company's management restructure, settlement of lawsuits and costs associated with the consolidation of several branches.

Loan Portfolio

Loans outstanding grew to $2.51 billion at June 30, 2020 compared to $2.17 billion at the same time in 2019.  Loan production in the second quarter of 2020 centered mostly on PPP which totaled $335.6 million.  Excluding PPP loans, loans outstanding have decreased $10.2 million since December 31, 2019.

The Company ended the second quarter of 2020 with a concentration in hotels totaling $288.4 million.  The portfolio, prior to the pandemic, had debt weighted average debt coverage of approximately 147% and weighted average loan to value of approximately 68%.  Substantially all of the Company's hotel loans are to national brands and approximately 93% of the portfolio are to limited service hotels, in non-leisure areas with historically lower operating costs. Approximately 76% percent of the hotel loans had been granted a COVID-19 deferral as of June 30, 2020.

Mr. Zember commented about the concentration, saying "During the second quarter, the executive team and our commercial relationship managers reviewed every relationship and portfolio concentration over $5.0 million.  This review covered approximately 65% of the total portfolio and added to our confidence concerning the viability and strength of our customer base.  There is no doubt that our hotel and hospitality customers are suffering with lower occupancy and revenue rates but the improvement in these and other key ratios over the quarter has been very encouraging.  Additionally, the portfolio is heavily oriented around strong, lifetime operators with substantial equity in each project, lower loan-to-values and who are actively and permanently right-sizing their cost structures."

Credit Loss Provision and Asset Quality

The Allowance for Loan Losses (incurred loss model) increase to $23.6 million at June 30, 2020.  The Allowance for Loan Losses to Total Loans now stands at 0.94%, and the Allowance to Loan plus discounts on acquired loan to Total Loans is 1.28%.

As the COVID-19 health crisis unfolded in the Company's markets and businesses experienced disruptions in normal operations, the Company provided certain modifications, including interest only or principal and interest deferments.  Total modified loans or loans with requests for modifications at June 30, 2020 were $707.8 million.

Nonperforming assets, excluding portions guaranteed by the SBA, were 0.47% of total assets at June 30, 2020, compared to 0.40% at December 31, 2019. Total non-accrual loans increased to $14.9 million at June 30, 2020 compared to $8.9 million at December 31, 2019 due to COVID-19 related issues.

Lastly, the Company has participated extensively in the SBA's Payroll Protection Program.  The Company had approved and secured funds for over 3,800 customers totaling $335.6 million. Net deferred PPP fees less direct origination expense is $10.6 million at June 30, 2020.  The Company has secured borrowings from the Federal Reserve's discount window for the full amount of the PPP loans outstanding and does not anticipate any issues with liquidity.  Additionally, the Company has contracted with certain firms with extensive experience in BSA, bank compliance, technology and underwriting to ensure the customer files are well documented and exceed the SBA's requirements for funding and stands ready to assist our customers in the upcoming loan forgiveness process.

Deposits

Total deposits remained flat at $2.15 billion at June 30, 2020 compared to $2.15 billion at the same time in 2019.  However, during the quarter, the Company replaced $76 million of brokered, listing service and higher rate customer CDs with growth in checking, NOW and MMDA balances.  The Company is aggressively building sales and incentive cultures focused on growing and managing core deposits, with the primary attention on commercial and consumer checking accounts.  Management expects continued improvement in the funding mix over the next several quarters with additional reductions in total funding costs.

Stockholders' Equity

Tangible common book value at the end of the second quarter of 2020 was $11.21 per share, an increase of 6.9% since the same time in 2019.  Tangible common equity at June 30, 2020 was $273.2 million, or 9.22% of tangible assets.  Sonabank's capital ratios were especially strong with tier one leverage and total risk based capital ratios estimated at 10.62% and 14.22%, respectively at the end of the second quarter of 2020.  The growth in assets during the quarter was mostly centered around PPP activity which reduced the Company's tangible common equity ratio by 77 bps and the Bank's tier one capital ratio by 134 bps.

About Southern National Bancorp of Virginia, Inc.

As of June 30, 2020, Southern National had $3.07 billion in total assets, $2.51 billion in total loans and $2.15 billion in total deposits. Sonabank, the Company's banking subsidiary provides a range of financial services to individuals and small and medium sized businesses through forty-two full-service branches in Virginia and Maryland and through certain internet and mobile applications.

Non-GAAP Measures

Statements included in this press release include non-GAAP financial measures and should be read along with the accompanying tables. Southern National uses non-GAAP financial measures to analyze its performance. 

Management believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of Southern National and provide meaningful comparison to its peers. Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider Southern National's performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of Southern National.

Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the results or financial condition as reported under GAAP.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that relate to future events or the future performance of Southern National. Forward-looking statements are not guarantees of performance or results. These forward-looking statements are based on the current beliefs and expectations of the respective management of Southern National and Sonabank and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond their respective control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Actual results may differ materially from the anticipated results discussed or implied in these forward-looking statements because of numerous possible uncertainties. Words like "may," "plan," "contemplate," "anticipate," "believe," "intend," "continue," "expect," "project," "predict," "estimate," "could," "should," "would," "will," and similar expressions, should be considered as identifying forward-looking statements, although other phrasing may be used. Such forward-looking statements involve risks and uncertainties and may not be realized due to a variety of factors. Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the reports (such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Registration Statements on Form S-4) filed by Southern National. You should consider such factors and not place undue reliance on such forward-looking statements. No obligation is undertaken by Southern National to update such forward-looking statements to reflect events or circumstances occurring after the issuance of this press release.