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, 2018 and 2017, and the
related statement of changes in net assets available for benefits for the year ended December 31, 2018, and the related notes and
schedule 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, 2018 and 2017, and
the changes in net assets available for benefits for the year ended December 31, 2018, 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 audits 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, 2018, 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.
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/s/ Dixon Hughes Goodman LLP
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We have not been able to determine the specific year we began serving consecutively as the auditor of the Plan’s financial statements; however, we are aware that we have been the Plan’s auditor consecutively since at least 2008.
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Asheville, North Carolina
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July 1, 2019
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Notes to Financial Statements
December 31, 2018 and 2017
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).
Plan Restatement and Name Change
On June 23, 2017, the Company acquired
Eastern Virginia Bancshares, Inc. and its wholly owned banking subsidiary EVB. Effective January 1, 2018, the legacy VBA
defined contribution plan for Sonabank (“legacy Sonabank”) merged its plan into EVB’s 401k plan
(“EVB”), VBA defined contribution Plan for Eastern Virginia Bancshares, Inc., as a result of the acquisition,
with the legacy Sonabank Plan not surviving. As of January 1, 2018 the VBA defined contribution Plan for Eastern Virginia
Bankshares, Inc. was restated and its name was changed to the VBA defined contribution plan for Sonabank. EVB is considered
to be the predecessor plan for periods prior to 2018.
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, 2018, outstanding loans bore interest rates
ranging from 3.50% to 5.50%. 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, 2018 and 2017, forfeited nonvested
accounts were $38,498 and $25,945, respectively. During 2018 the $12,188 of forfeited nonvested accounts were used to reduce employer
contributions.
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2.
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Summary of Significant Accounting Policies
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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.
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3.
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Fair Value Measurements
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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:
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Level 1: Observable inputs such as quoted prices in active markets.
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Level 2: Inputs other than quoted prices in active markets that are either directly or indirectly observable.
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Level 3: Unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own
assumptions.
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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, 2018 and 2017.
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, 2018 and 2017:
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Fair Value as of December 31, 2018
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Level 1
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Level 2
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Level 3
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Total
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Mutual funds
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$
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15,836,986
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$
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-
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$
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-
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$
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15,836,986
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Southern National Bancorp of Virginia, Inc. common stock
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1,130,770
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-
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-
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1,130,770
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Money market fund
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39,485
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-
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-
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39,485
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Total
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$
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17,007,241
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$
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-
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$
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-
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17,007,241
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Investments measured at net asset value:
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Common collective trusts:
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Stable value fund*
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3,599,164
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Index funds**
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2,113,523
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Total common collective trusts
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5,712,687
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Total investments
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$
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22,719,928
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Fair Value as of December 31, 2017
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Level 1
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Level 2
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Level 3
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Total
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Mutual funds
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$
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13,130,483
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$
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-
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$
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-
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$
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13,130,483
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Total
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$
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13,130,483
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$
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-
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$
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-
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13,130,483
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Investments measured at net asset value:
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Common collective trusts:
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Stable value fund*
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3,117,310
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Index funds**
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1,998,785
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Total common collective trusts
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5,116,095
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Total investments
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$
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18,246,578
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*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, 2018.
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.
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4.
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Exempt Party-In-Interest Transactions
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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 $28,682 for the year ended
December 31, 2018.
At December 31, 2018 and 2017, the Plan held 85,535
and 0 shares, respectively, of the Company’s common stock. During 2018, 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, 2018, 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.
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7.
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Risks and Uncertainties
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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.
The Plan has evaluated subsequent events through
July 1, 2019, the date the financial statements were available to be issued.