Report of Independent Registered
Public Accounting Firm
To the Plan Administrator and Plan Participants of VBA Defined Contribution
Plan for Sonabank
Opinion on the Financial Statements
We have audited the
accompanying statements of net assets available for benefits of the VBA Defined Contribution Plan for Sonabank (the
“Plan”) as of December 31, 2017 and 2016, and the related statement of changes in net assets available for
benefits for the year ended December 31, 2017, and the related notes and schedules to the financial statements (collectively,
the “financial statements”). In our opinion the financial statements present fairly, in all material respects, the net assets
available for benefits of the Plan as of December 31, 2017 and 2016, and the changes in net assets available for benefits for
the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of
America.
Basis for Opinion
These financial statements are the responsibility
of the Plan's management. Our responsibility is to express an opinion on the Plan'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 Plan 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. The Plan 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 Plan'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 audit 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.
Supplementary Information
The supplemental information in the accompanying
schedule of assets (held at end of year) as of December 31, 2017, has been subjected to audit procedures performed in conjunction
with the audit of the Plan’s financial statements. The supplemental information is presented for the purpose of additional
analysis and is not a required part of the basic financial statements but includes supplemental information required by the Department
of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplemental
information is the responsibility of the Plan's management. Our audit procedures included determining whether the supplemental
information reconciles to the financial statements or the underlying accounting and other records, as applicable and performing
procedures to test the completeness and accuracy of the information presented in the supplemental information. In forming our opinion
on the supplemental information, we evaluated whether the supplemental information, including its form and content, is presented
in conformity with the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement
Income Security Act of 1974. In our opinion, the supplemental information is fairly stated, in all material respects, in relation
to the financial statements as a whole.
/s/ Dixon Hughes Goodman LLP
|
|
We have served as the Plan’s auditor
since 2013.
Asheville, North Carolina
June 29, 2018
Notes to Financial Statements
December 31, 2017 and 2016
The following description of the
VBA Defined Contribution
Plan for Sonabank
(Plan) provides only general information. Participants should refer to the Plan agreement for a more
complete description of the Plan's provisions.
General
The Plan is a defined contribution
plan covering substantially all employees of Sonabank (the “Bank”) the wholly-owned subsidiary of Southern National
Bancorp of Virginia, Inc. (the “Company”). The management of the Company controls and manages the operation and administration
of the Plan. Reliance Trust Company serves as the custodian of the Plan. It is subject to the provisions of the Employee Retirement
Income Security Act of 1974 (ERISA).
Contributions
Each year, participants may contribute up to 100 percent
of pretax annual compensation, as defined in the plan document, subject to Internal Revenue Code (IRC) limitations. Participants
who have attained age 50 before the end of the plan year are eligible to make catch-up contributions. Participants may also contribute
amounts representing distributions from other qualified plans and certain individual retirement accounts. The employer may make
an Employer Base Contribution for each Plan year in such amount, if any, which the employer shall determine. The employer shall
make an Employer Matching Contribution for each Plan year in the amount of a discretionary percentage to be determined by the employer
on a year to year basis. Contributions are subject to certain limitations.
Investment Options
Participants direct the investment of their
accounts into various investment options offered by the Plan. The Plan currently offers employer stock, common collective
trust funds, money market funds and mutual funds as investment options for participants.
Participant Accounts
Each participant’s account is credited with the
participant’s contribution and allocations of the Company’s contributions, and plan earnings (losses), and charged
with benefit payments. Allocations are based on participant earnings or account balances, as defined. The benefit to which a participant
is entitled is the benefit that can be provided from the participant’s vested account.
Vesting
Participants are immediately vested in their contributions
plus actual earnings thereon. Vesting in the Company’s contributions is based on years of service, as defined in the Plan.
Participants are 100 percent vested after two years of credited service.
Notes Receivable from Participants
Participants
may borrow from their fund accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50% of their vested account
balance. The loans are secured by the balance in the participant’s account and bear interest at rates which are commensurate
with local prevailing rates as determined by the plan administrator. At December 31, 2017, outstanding loans bore interest rates
ranging from 3.50% to 4.50%. Principal and interest are paid ratably through payroll deductions.
Payment of Benefits
On termination of service, a participant may elect to
receive an amount equal to the value of the participant’s vested interest in his or her account in a lump sum payment. In-service
hardship withdrawals are permitted from a rollover account. In-service severe hardship withdrawals are permitted from the pre-tax
account.
Forfeitures
At December 31, 2017 and 2016, forfeited nonvested accounts were
$0 and $11,726, respectively. During 2017 the $14,757 of forfeited nonvested accounts were used to reduce employer contributions.
|
2.
|
Summary of Significant Accounting Policies
|
Basis of Accounting
The
financial statements of the Plan are prepared on the accrual basis of accounting in conformity with accounting principles generally
accepted in the United States of America (“GAAP”).
Use of Estimates
The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets, liabilities and
changes therein, and disclosure of contingent assets and liabilities. Accordingly, actual results may differ from those estimates
and assumptions.
Investment Valuation and Income
Recognition
Investments
are reported at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. See Note 3 for discussion of fair value measurements.
Purchases
and sales of securities are recorded on a trade-date basis. Interest income from notes receivable from participants is recorded
when received. Other interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Net appreciation
includes the Plan’s gains and losses on investments bought and sold as well as held during the year.
Notes Receivable from Participants
Notes receivable from participants are measured at their
unpaid principal balance. Delinquent notes receivable from participants are reclassified as distributions based upon the terms
of the Plan document.
Payment of Benefits
Benefits are recorded upon distribution.
Administrative Expenses
The Plan’s administrative expenses are
paid by either the Plan or the Company, as provided by the Plan document. Certain administrative functions are performed by employees
of the Company. No such employee receives compensation from the Plan.
|
3.
|
Fair Value Measurements
|
Fair value as defined under GAAP is an exit price, representing
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair
value. These tiers include:
|
·
|
Level 1: Observable inputs such as quoted prices in active markets.
|
|
·
|
Level 2: Inputs other than quoted prices in active markets that are either directly or indirectly observable.
|
|
·
|
Level 3: Unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own
assumptions.
|
Assets and liabilities are classified in their entirety
based on the lowest level of input that is significant to the fair value measurement. The Plan’s assessment of the significance
of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities
and their placement within the fair value hierarchy levels.
Following is a description of the valuation methodologies
used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2017 and 2016.
When quoted prices are available in active markets for
identical instruments, investment securities are classified within Level 1 of the fair value hierarchy. Level 1 investments include
mutual funds, money market funds and the Company’s common stock. The fair value of the Plan’s investment in the Company’s
common stock is determined by the closing price reported on NASDAQ.
The common collective trust funds are valued at the closing
net asset value (NAV) of the units held by the Plan at year end based on information provided and certified by the custodians as
the practical expedient to estimate fair value. The practical expedient would not be used if it is determined to be probable that
the funds will sell the investment for an amount different from the reported NAV. Participant transactions (purchases and sales)
may occur daily. The common collective trust funds are not required to be classified within a level of the fair value hierarchy.
The following tables set forth by level within the fair
value hierarchy the Plan’s assets accounted for at fair value on a recurring basis as of December 31, 2017 and 2016:
|
|
Fair Value as of December 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
3,486,409
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,486,409
|
|
Southern National Bancorp of Virginia, Inc. common stock
|
|
|
1,107,336
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,107,336
|
|
Money market fund
|
|
|
53,286
|
|
|
|
-
|
|
|
|
-
|
|
|
|
53,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,647,031
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
4,647,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments measured at net asset value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common collective trusts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stable value fund*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
712,898
|
|
Index funds**
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
356,241
|
|
Total common collective trusts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,069,139
|
|
Total investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,716,170
|
|
|
|
Fair Value as of December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
2,709,443
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,709,443
|
|
Southern National Bancorp of Virginia, Inc. common stock
|
|
|
1,025,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,025,400
|
|
Money market fund
|
|
|
58,515
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,793,358
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
3,793,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments measured at net asset value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common collective trusts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stable value fund*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
538,611
|
|
Index funds**
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
283,203
|
|
Total common collective trusts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
821,814
|
|
Total investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,615,172
|
|
*Represents investment in a common collective trust fund
consisting of equity securities in domestic and foreign corporations and various fixed-income securities. There are no unfunded
commitments. Certain withdrawals for other than normal benefit payments and participant directed transfers may require up to 12
months’ notice.
**Represents investments in index funds that track the
performance of bonds, U.S. stocks in the S&P 500 Index and international stocks. There are no unfunded commitments, and there
are no restrictions on withdrawals.
The plan recognizes transfers between the levels as
of the actual date of the event or change in circumstances that caused the transfer. There were no gross transfers between
the levels for the year ending December 31, 2017.
The preceding methods described may produce a fair value
calculation that may not be indicative of net realizable value or reflective of future values. Furthermore, although the Plan believes
its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions
to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting
date.
|
4.
|
Exempt Party-In-Interest Transactions
|
Certain Plan investments are shares of mutual funds managed
by Reliance Trust Company. Fees paid by the Plan for investment management services were included as a reduction of the return
earned on each fund. Fees paid to the custodian by the plan for administrative services were $13,882 for the year ended December
31, 2017.
At December 31, 2017 and 2016, the Plan held 69,079 and
62,754 shares, respectively, of the Company’s common stock. During 2017, the Plan did not record any dividend income related
to the Company’s common stock.
Although it has not expressed any intent to do so, the Company has
the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA.
In the event of plan termination, participants would become 100 percent vested in their accounts.
The Plan has not obtained a determination letter from
the Internal Revenue Service (the “IRS”) stating that the Plan was in compliance with the applicable requirement of
the IRC. The Plan is relying on the IRS approval of the prototype plan that it is utilizing. The IRS has determined and informed
the document sponsor by a later dated March 31, 2014 that the prototype plan document was designed in accordance with applicable
sections of the IRC. The plan administrator believes that the Plan is currently designed and being operated in compliance with
the applicable requirements of the IRC. Therefore, the plan administrator believes that the Plan was qualified and the related
trust was tax exempt as of the financial statement date.
GAAP requires Plan management to
evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the Plan has taken an uncertain position that
more likely than not would not be sustained upon examination by the IRS. The plan administrator has analyzed the tax positions
taken by the Plan, and has concluded that as of December 31, 2017, there are no uncertain positions taken or expected to be taken
that would require recognition of a liability or disclosure in the financial statements. The Plan is subject to routine audits
by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.
|
7.
|
Risks and Uncertainties
|
The Plan invests in various investment securities. Investment
securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the
level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment
securities will occur in the near term and that such changes could materially affect participants’ account balances and the
amounts reported in the statements of net assets available for benefits.
On June 23, 2017, the Company acquired Eastern Virginia
Bankshares, Inc. (“EVBS”) and its wholly-owned banking subsidiary EVB. On January 11, 2018, the legacy Sonabank Plan
merged its plan assets of $5,828,262 into EVB’s 401(k) Plan as a result of this acquisition, with the legacy Sonabank Plan
not surviving. The EVB 401(k) Plan was renamed VBA Defined Contribution Plan for Sonabank.